Ems (ELMG) 10-Q 2007 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2007

Commission file number 0-6072

EMS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Georgia	58-1035424
(State or other jurisdiction of incorporation or organization)	(IRS Employer ID Number)
660 Engineering Drive, Norcross, Georgia	30092
(Address of principal executive offices)	(Zip Code)

(770) 263-9200

Registrant’s Telephone Number, Including Area Code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filero Accelerated filerþ Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on November 2, 2007:

Class	Number of Shares
Common Stock, $.10 par Value	15,453,367

AVAILABLE INFORMATION

EMS Technologies, Inc. makes available free of charge, on or through its website atwww.ems-t.com, its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission. Information contained on the Company’s website is not part of this report.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION	2
ITEM 1. Financial Statements	2
Consolidated Statements of Operations	2
Consolidated Balance Sheets	3
Consolidated Statements of Cash Flows	5
Notes to Consolidated Financial Statements	6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	24
ITEM 4. Controls and Procedures	25
PART II – OTHER INFORMATION	26
ITEM 1A. Risk Factors	26
ITEM 6. Exhibits	26
SIGNATURES	27
EX-10.1 SUMMARY OF COMPENSATION ARRANGEMENTS
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32 SECTION 906 CERTIFICATION OF THE CEO AND CFO

PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements

EMS Technologies, Inc. and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)

	Quarters Ended						Nine Months Ended
	Sep 29			Sep 30			Sep 29			Sep 30
	2007			2006			2007			2006
Product net sales	$	63,034			54,276			181,372			161,540
Service net sales		10,111			10,385			30,494			27,212
Net sales		73,145			64,661			211,866			188,752
Product cost of sales		38,096			34,062			111,683			101,949
Service cost of sales		5,478			6,635			18,767			17,799
Cost of sales		43,574			40,697			130,450			119,748
Selling, general and administrative expenses		19,526			17,124			55,276			48,567
Research and development expenses		4,803			4,100			13,840			11,954
Operating income		5,242			2,740			12,300			8,483
Interest income		1,341			628			4,197			1,590
Interest expense		(476	)		(411	)		(1,476	)		(1,452	)
Foreign exchange loss		(236	)		(143	)		(712	)		(798	)
Earnings from continuing operations before income taxes		5,871			2,814			14,309			7,823
Income tax expense (benefit)		265			(2,676	)		2,249			(1,172	)
Earnings from continuing operations		5,606			5,490			12,060			8,995
Discontinued operations (note 2):
Earnings (loss) from discontinued operations before income taxes		11			368			(555	)		(802	)
Income tax expense (benefit)		—			286			(102	)		721
Earnings (loss) from discontinued operations		11			82			(453	)		(1,523	)
Net earnings	$	5,617			5,572			11,607			7,472
Net earnings (loss) per share:
Basic:
From continuing operations	$	0.37			0.36			0.79			0.62
From discontinued operations		—			0.01			(0.03	)		(0.10	)
Net earnings	$	0.37			0.37			0.76			0.52
Diluted:
From continuing operations	$	0.36			0.36			0.78			0.62
From discontinued operations		—			0.01			(0.03	)		(0.10	)
Net earnings	$	0.36			0.37			0.75			0.52
Weighted average number of shares (note 3):
Basic		15,343			15,226			15,318			14,426
Diluted		15,477			15,263			15,416			14,481

See accompanying notes to interim consolidated financial statements.

2

EMS Technologies, Inc. and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(in thousands)

	Sep 29		Dec 31
	2007		2006
ASSETS
Current assets:
Cash and cash equivalents	$	123,931		109,431
Restricted cash		81		162
Trade accounts receivable, net (note 5)		81,105		93,720
Inventories, net (note 6)		29,779		26,042
Deferred income taxes		1,963		1,963
Other current assets		6,565		7,697
Total current assets		243,424		239,015
Property, plant and equipment:
Land		1,150		1,150
Buildings and leasehold improvements		15,853		15,361
Machinery and equipment		83,743		72,569
Furniture and fixtures		9,284		7,763
Total property, plant and equipment		110,030		96,843
Less accumulated depreciation and amortization		72,014		65,108
Net property, plant and equipment		38,016		31,735
Deferred income taxes – non-current		6,282		6,282
Intangible assets, net		6,305		2,084
Goodwill		9,982		9,982
Other assets		7,996		2,586
Total assets	$	312,005		291,684

See accompanying notes to interim consolidated financial statements.

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EMS Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited), continued
(in thousands, except share data)

	Sep 29		Dec 31
	2007		2006
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term debt	$	2,848		3,102
Accounts payable		23,292		29,285
Billings in excess of contract costs		7,464		7,899
Accrued compensation costs		10,162		8,042
Accrued retirement costs		2,098		2,666
Deferred service revenue		7,673		6,289
Other current liabilities (note 8)		5,290		5,162
Total current liabilities		58,827		62,445
Long-term debt, excluding current installments		10,854		11,755
Other liabilities		7,047		4,401
Total liabilities		76,728		78,601
Shareholders’ equity:
Preferred stock of $1.00 par value per share
Authorized 10,000,000 shares; none issued		—		—
Common stock of $.10 par value per share
Authorized 75,000,000 shares, issued and outstanding 15,410,000 in 2007 and 15,327,000 in 2006		1,541		1,533
Additional paid-in capital		135,441		133,050
Accumulated other comprehensive income — foreign currency translation adjustment		12,450		4,262
Retained earnings		85,845		74,238
Total shareholders’ equity		235,277		213,083
Total liabilities and shareholders’ equity	$	312,005		291,684

See accompanying notes to interim consolidated financial statements.

4

EMS Technologies, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Nine Months Ended
	Sep 29			Sep 30
	2007			2006
Cash flows from operating activities:
Net earnings	$	11,607			7,472
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and other intangibles amortization		6,847			6,546
Loss (gain) on sale of assets		38			(330	)
Loss from discontinued operations		453			1,523
Stock-based compensation expense		1,220			529
Deferred income taxes		—			(3,520	)
Changes in operating assets and liabilities, exclusive of acquisitions:
Trade accounts receivable		15,223			(2,243	)
Inventories		(1,860	)		(3,708	)
Accounts payable		(5,871	)		(4,348	)
Billings in excess of contract costs		(934	)		626
Income taxes payable		988			952
Accrued compensation and retirement costs		884			(738	)
Accrued costs, deferred revenue, and other		1,882			1,359
Net cash provided by operating activities in continuing operations		30,477			4,120
Net cash (used in) provided by operating activities in discontinued operations		(3,048	)		7,186
Net cash provided by operating activities		27,429			11,306
Cash flows from investing activities:
Purchase of property, plant and equipment		(10,448	)		(5,428	)
Payments for acquisitions		(5,000	)		(188	)
Proceeds from sale of assets		845			9,631
Net cash (used in) provided by investing activities in continuing operations		(14,603	)		4,015
Net cash used in investing activities in discontinued operations		—			(332	)
Net cash (used in) provided by investing activities		(14,603	)		3,683
Cash flows from financing activities:
Net decrease in revolving debt		(427	)		(26,745	)
Repayment of term debt		(826	)		(1,056	)
Change in restricted cash		81			2,459
Proceeds from stock offering, net of expenses		—			58,736
Proceeds from exercise of stock options		1,179			1,388
Net cash provided by financing activities in continuing operations		7			34,782
Net change in cash and cash equivalents		12,833			49,771
Effect of exchange rates on cash and cash equivalents		1,667			1,095
Cash and cash equivalents at beginning of period		109,431			12,795
Cash and cash equivalents at end of period	$	123,931			63,661

See accompanying notes to interim consolidated financial statements.

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EMS Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 29, 2007 and September 30, 2006

1. Basis of Presentation

EMS Technologies, Inc. (“EMS”) designs, manufactures and markets products to satellite and wireless communications markets for both commercial and defense applications. EMS’s products are focused on the needs of the mobile information user, with an increasing emphasis on broadband applications for high-data-rate, high-capacity wireless communications.

The consolidated financial statements include the accounts of EMS Technologies, Inc. and its wholly-owned subsidiaries, LXE Inc. and EMS Technologies Canada, Ltd. (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company has accounted for its Space & Technology/Montreal (“S&T/Montreal”), Satellite Networks (“SatNet”) and EMS Wireless divisions as discontinued operations in the accompanying consolidated financial statements.

Following is a summary of the Company’s significant accounting policies:

—Management’s Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and reporting of revenue and expenses during the period. Actual future results could differ from those estimates.

—Cash Equivalents

The Company considers all highly liquid debt instruments with initial or remaining terms of three months or less to be cash equivalents. Cash equivalents at September 29, 2007 and December 31, 2006 included investments of $100.8 million and $91.4 million, respectively, in a government obligations money market fund, in other money market instruments, and in interest-bearing deposits.

—Effect of New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”.  This Statement defines fair value, establishes a framework for measuring fair value and requires expanded disclosure about fair value measurements.  SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those years.  The Company is in the process of evaluating the impact of SFAS No. 157 on its 2008 consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115”.  SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value.  Unrealized gains and losses on items for which the fair value option has been elected are

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reported in earnings.  SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value.  SFAS No. 159 is effective at the beginning of fiscal years beginning after November 15, 2007.  The Company’s adoption of SFAS No. 159 is not expected to have a material impact on its 2008 consolidated financial statements.

2. Discontinued Operations

In 2005 and 2006, we disposed of our S&T/Montreal, SatNet, and EMS Wireless divisions, which have been reported as discontinued operations and their net assets classified as assets held for sale through their dates of disposition. The sales agreements for each of these disposals contained standard indemnification provisions for various contingencies that could not be resolved before the dates of closing and for various representations and warranties provided by the Company and the purchasers. The Company accrues for a liability related to a contingency, representation or warranty when management considers that the liability is both probable and can be reasonably estimated. Management believes that it is reasonably possible, but not probable, that an additional accrual for these purposes may be made, relating to the repair of certain products manufactured by one of the disposed divisions. Although at present the Company cannot reasonably estimate the range of this potential liability, management believes that such liability is not likely to exceed $3 million. No accrual has been recorded for this potential liability as of September 29, 2007.

At September 29, 2007, the Company had recorded a long-term liability related to the 2005 sale of S&T/Montreal. This liability represents the Company’s estimated loss under a previous agreement to acquire a sub-license from the purchaser of S&T/Montreal for $8 million, to be paid over a six-year period, and which entitles the Company to receive a portion of the satellite service revenues from a specific market territory over the same period.

In the third quarter of 2007, discontinued operations had a negligible net effect on the Company’s net earnings. For the first nine months of 2007, discontinued operations reported a loss of $555,000 from expenses (primarily in the first quarter of the year) for legal, audit, and other outside services, as well as the effect of additional costs incurred to settle various contingent items.

The results of these discontinued operations for the third quarter and first nine months of 2007 and 2006 were as follows (in thousands):

	Quarters Ended					Nine Months Ended
	Sep 29		Sep 30			Sep 29			Sep 30
	2007		2006			2007			2006
Net sales	$	—		11,463			—			40,804
Expenses		—		10,510			—			39,992
Gain (loss) on the sale of assets		11		(585	)		(555	)		(1,614	)
Earnings (loss) before income taxes		11		368			(555	)		(802	)
Income tax expense (benefit)		—		286			(102	)		721
Earnings (loss) from discontinued operations	$	11		82			(453	)		(1,523	)

3. Earnings Per Share

Following is a reconciliation of the denominators for basic and diluted earnings per share calculations (in thousands):

	Quarters Ended				Nine Months Ended
	Sep 29		Sep 30		Sep 29		Sep 30
	2007		2006		2007		2006
Basic-weighted average common shares outstanding		15,343		15,226		15,318		14,426
Incremental share-based payment		134		37		98		55
Diluted-weighted average common shares outstanding		15,477		15,263		15,416		14,481

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4. Comprehensive Income

Following is a summary of comprehensive income (in thousands):

	Quarters Ended					Nine Months Ended
	Sep 29		Sep 30			Sep 29		Sep 30
	2007		2006			2007		2006
Net earnings	$	5,617		5,572			11,607		7,472
Other comprehensive income (loss):
Reclassification due to sale of discontinued operations		—		—			—		2,008
Foreign currency translation adjustment		3,532		(89	)		8,188		3,589
Comprehensive income	$	9,149		5,483			19,795		13,069

5. Trade Accounts Receivable

Trade accounts receivable include the following (in thousands):

	Sep 29			Dec 31
	2007			2006
Amounts billed	$	61,958			71,327
Unbilled revenues under long-term contracts (1)		20,914			23,134
Allowance for doubtful accounts		(1,767	)		(741	)
Trade accounts receivable, net	$	81,105			93,720
(1) Unbilled revenues under long-term contracts are usually billed and collected within one year.

In the first quarter of 2007, the Company determined that the timing of future deliverables under a significant contract of our Defense & Space Systems division would be extended beyond the next twelve months. As a result, the Company has reclassified $3.0 million of unbilled revenues under long-term contracts from current to long-term assets as of September 29, 2007.

6. Inventories

Inventories include the following (in thousands):

	Sep 29		Dec 31
	2007		2006
Parts and materials	$	18,505		17,318
Work-in-process		4,303		4,124
Finished goods		6,971		4,600
Inventories, net	$	29,779		26,042

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7. Interim Segment Disclosures

The Company is organized into three reportable segments: Defense & Space Systems (“D&SS”), LXE and SATCOM. Each segment is separately managed and comprises a range of products and services that share distinct operating characteristics. The Company evaluates each segment primarily upon operating profit.

The D&SS segment manufactures custom-designed, highly engineered hardware for use in space, airborne, and terrestrial applications for communications, radar, surveillance, precision tracking and electronic countermeasures. Orders typically involve development and production schedules that can extend a year or more, and most revenues are recognized under percentage-of-completion long-term contract accounting. Hardware is sold to prime contractors or systems integrators rather than to end-users.

The LXE segment manufactures mobile terminals and wireless data collection equipment for supply chain execution. The manufacturing cycle for each order is generally just a few days, and revenues are recognized upon shipment of hardware. Hardware is marketed to end-users and to third parties that incorporate their products and services with the Company’s hardware for delivery to end-users.

The SATCOM segment principally manufactures antennas and other hardware for satellite communications systems. The manufacturing cycle for each order is generally just a few days, and revenues are recognized upon shipment of hardware. Hardware is marketed to third parties that incorporate their products and services with the Company’s hardware for delivery to end-users. SATCOM also derives a portion of its net sales from performance on longer-term development contracts. Net sales on these contracts are accounted for using percentage-of-completion accounting.

Following is a summary of the Company’s interim segment data (in thousands):

	Quarters Ended						Nine Months Ended
	Sep 29			Sep 30			Sep 29			Sep 30
	2007			2006			2007			2006
Net sales:
Defense & Space Systems	$	15,698			13,666			44,133			37,027
LXE		33,399			33,003			103,449			99,728
SATCOM		24,048			17,992			64,284			51,997
Total	$	73,145			64,661			211,866			188,752
Operating income (loss):
Defense & Space Systems	$	1,445			1,022			3,248			1,754
LXE		1,742			2,412			4,777			7,159
SATCOM		3,527			1,122			7,715			3,976
Corporate		(1,472	)		(1,816	)		(3,440	)		(4,406	)
Total	$	5,242			2,740			12,300			8,483
Net earnings (loss) from continuing operations:
Defense & Space Systems	$	870			555			1,922			882
LXE		1,040			1,460			2,913			4,252
SATCOM		3,509			1,237			7,610			3,657
Other		2			(130	)		(93	)		(347	)
Corporate		185			2,368			(292	)		551
Total	$	5,606			5,490			12,060			8,995

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8. Warranty Liability

The Company generally provides a limited warranty for each of its products. The basic warranty periods vary from one to five years, depending upon the type of product. For certain products, customers can purchase warranty coverage for specified additional periods.

The Company records a liability for the estimated costs to be incurred under warranties, which is included in other current liabilities on the Company’s consolidated balance sheets. The amount of this liability is based upon historical, as well as expected, rates of warranty claims. The warranty liability is periodically reviewed for adequacy and adjusted as necessary. Following is a reconciliation of the aggregate product warranty liability (in thousands):

	Quarters Ended						Nine Months Ended
	Sep 29			Sep 30			Sep 29			Sep 30
	2007			2006			2007			2006
Balance at beginning of the period	$	2,246			2,154			2,051			1,894
Accruals for warranties issued during the period		925			321			2,157			1,399
Settlements made during the period		(671	)		(361	)		(1,708	)		(1,179	)
Balance at end of period	$	2,500			2,114			2,500			2,114

9. Revolving Credit Facilities

At September 29, 2007, the Company had no borrowings under either its U.S. or Canadian revolving credit facilities, having paid off the previous borrowings under these facilities with a portion of the $58.7 million net proceeds from a public stock offering in February 2006. The Company presently has a $47.5 million maximum borrowing capacity under its U.S. revolving credit facility and a $14.2 million maximum borrowing capacity under its Canadian revolving credit facility. The credit agreements mature in December 2007.

The Company has $7.5 million of standby letters of credit to satisfy performance guarantee requirements under certain customer contracts outstanding under the revolving credit agreement. While these obligations are not normally called, they could be called by the beneficiaries at any time before the expiration date should we fail to meet certain contractual requirements. The Company has an additional $70,000 of standby letters of credit outstanding under another Canadian bank as a contract performance guarantee. As collateral for these standby letters of credit, the Company has deposited $81,000 at a Canadian bank, which is classified as restricted cash on the Company’s consolidated balance sheet; this cash will become available in the first quarter of 2010 when the underlying letters of credit expire or are settled. After deducting outstanding letters of credit, at September 29, 2007 the Company had $45.7 million available for borrowing in the U.S. and $8.5 million available for borrowing in Canada under the respective revolving credit agreements.

At September 29, 2007, the Company was in compliance with all covenants under the revolving credit agreements, including: (1) a required minimum consolidated net worth, (2) a maximum ratio of total funded debt to historical earnings before interest, taxes, depreciation, and amortization (EBITDA) and (3) a minimum ratio of historical EBITDA less capital expenditures and taxes paid to specified fixed charges, mainly interest and scheduled principal repayments under all debt agreements.

10. Stock-Based Compensation

The Company has granted non-qualified stock options to key employees and directors under several stock option plans. At September 29, 2007, there were options exercisable under all plans for approximately 682,000 shares of stock, and there were approximately 2,018,000 shares available for future option grants. Upon exercise of an option, the Company’s policy is to issue new shares.

Also from these plans, the Company occasionally makes grants of nonvested stock to selected personnel. These grants are valued on the date of grant at the intrinsic value of the underlying stock. Typically, the only restriction related to these grants is a service condition. The Company expenses the value of a nonvested grant on a straight-

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line basis over the related service period. During 2006 and 2007, the Company has granted 43,000 nonvested shares.

For all grants of stock options and nonvested shares, the Company recognized share-based, pre-tax charges to income in the third quarter and first nine months of $514,000 and $1,220,000 in 2007 and $323,000 and $529,000 in 2006, respectively. The related tax benefits for the third quarter and first nine months were $92,000 and $220,000 in 2007 and $97,000 and $159,000 in 2006, respectively.

11. Income Taxes

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”) on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. As a result of the adoption of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits. Upon adoption on January 1, 2007, the Company had $2,560,000 of unrecognized tax benefits. At September 29, 2007, the Company had $2,657,000 of unrecognized tax benefits, $2,070,000 of which would affect the Company’s effective tax rate if recognized.

The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of September 29, 2007, the Company had approximately $163,000 of accrued interest related to uncertain tax positions.

The Company or one of its subsidiaries files income tax returns in the U.S. Federal jurisdiction, and various states and foreign jurisdictions. The Company is generally no longer subject to U.S. Federal, state and local, or non-US income tax examination by tax authorities for years before 2001.

12. Litigation

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

13. Acquisition

On July 26, 2007, the Company acquired DSpace Pty. Ltd. (“DSpace”), of Adelaide, Australia, for a total purchase price of $5.0 million with $3.2 million in cash paid at closing, and $1.8 million of cash deposited in escrow which is payable to the seller eighteen months following the date of acquisition, barring no claims against the seller. An additional $620,000 is due if certain performance criteria are met by DSpace within the same eighteen month period.

The majority of the cost to acquire DSpace was allocated to intangible assets. This allocation is preliminary and subject to change as better information is obtained by the Company.

DSpace is now an operating entity of the Company’s SATCOM division, and is being included in the Company’s results of operations from the acquisition date. No pro forma financial statements have been included, as this acquisition is not significant to the Company’s consolidated financial statements.

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ITEM 2. Management‘s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes included in Item 1 of Part 1 of this quarterly report and the audited consolidated financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2006.

We are a leading innovator in the design, manufacture, and marketing of wireless communications solutions addressing the enterprise mobility, communications-on-the-move and in-flight connectivity markets for both commercial and government end-users. We focus on the needs of the mobile information user and the increasing demand for wireless broadband communications. Our products enable communications across a variety of coverage areas, ranging from global to regional to within a single facility. Our continuing operations include the following three segments:

• Defense & Space Systems — Highly engineered hardware for satellites and defense electronics applications;

• LXE — Rugged mobile computer terminals and related equipment for wireless local area networks; and

• SATCOM — Satellite communications antennas and terminals for aircraft and ground-based vehicles, and satellite ground stations for search and rescue operations.

Following is a summary of significant factors affecting the Company in the third quarter and first nine months of 2007:

For continuing operations:

• Consolidated net sales reached an all-time high of $73.1 million and $211.9 million for continuing operations in the third quarter and first nine months of 2007, respectively, due to record net sales recorded at our SATCOM, LXE and D&SS divisions for those periods.

• Increased operating income was recorded for each of our three divisions for the third quarter and the first nine months of 2007, and in total continuing operations were nearly double that reported in the third quarter of 2006, and nearly 50% higher than that reported in the first nine months of 2006.

For discontinued operations:

• The financial results for discontinued operations now reflect only the resolution of various contingencies under the asset-sale agreements, and discontinued operations had no material net effect on the third quarter results.

Description of Net Sales, Costs and Expenses

Net sales

The amount of net sales reported in a given period is the most significant factor affecting our operating income. We sell our products through established networks of value-added-resellers and systems integrators who incorporate our products into the systems they sell to end users. We also sell directly to end users.

We recognize product-related net sales under most of our customer agreements when we ship units or complete the installation of our products, unless multiple deliverables are involved (mainly experienced at our SATCOM division), in which case we recognize revenue in accordance with FASB Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” If the customer agreement is in the form of a long-term contract (mainly in our Defense & Space Systems division and to a lesser degree SATCOM), we recognize revenue under the percentage-of-completion method, using the ratio of cost-incurred-to-date to total-estimated-cost-at-completion as the measure of performance.

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In addition to product sales, we also generate service sales from product-related service contracts and repair services for our D&SS, LXE and SATCOM divisions, and engineering services projects for D&SS. Revenue from product-related service contracts is recognized ratably over the life of the contract. Revenue from contracts for engineering services are recognized using the percentage-completion method for fixed price contracts, or as costs are incurred for cost-type contracts. Revenue from repair services is recognized as services are rendered.

Cost of sales

For our LXE and D&SS products, we conduct most of our manufacturing efforts in our Atlanta-area facilities. We manufacture all SATCOM products at our facility in Ottawa, Canada.

Product-related cost of sales includes the cost of materials, payroll and benefits for direct and indirect manufacturing labor, engineering and design costs, outside costs such as subcontracts, consulting or travel related to specific contracts, and manufacturing overhead expenses such as depreciation, utilities and facilities maintenance.

Through our three divisions, we sell a wide range of advanced wireless communications products into markets with varying competitive conditions; as a result, cost of sales, as a percentage of net sales, varies with each product. As a result, the mix of products sold in a given period is a significant factor affecting our operating income. In recent years, the cost-of-sales percentage has generally been lower for LXE and SATCOM products, as compared with products from our Defense & Space Systems division.

The cost-of-sales percentage is principally a function of competitive conditions, but our SATCOM division is also directly affected by changes in foreign currency exchange rates. SATCOM derives most of its net sales from contracts denominated in U.S. dollars, but the Canada-based SATCOM division incurs most of its costs in Canadian dollars. As the U.S. dollar weakens against the Canadian dollar, our reported manufacturing costs may increase relative to our net sales, which increases the cost-of-sales percentage.

Cost of sales for product-related service contracts are based on labor and non-labor costs recognized as incurred to fulfill obligations under the Company’s service contracts. Cost of sales for long-term engineering services contracts are based on labor and non-labor costs to complete the contractual deliverables.

Selling, general and administrative expenses

Selling, general and administrative (“SG&A”) expenses include salaries, commissions, bonuses and related overhead costs for our personnel engaged in sales, administration, finance, information systems and legal functions. Also included in SG&A are the costs of engaging outside professional services for consultation on legal, accounting, tax and management information system matters, auditing and tax compliance, and general corporate expenditures to other outside suppliers and service providers.

Research and development expenses

Research and development (“R&D”) expenses represent the cost of our development efforts, net of reimbursement under specific customer-funded R&D agreements. R&D expenses include salaries of engineers and technicians and related overhead expenses, the cost of materials utilized in research, and additional engineering or consulting services provided by independent companies. R&D costs are expensed as they are incurred. We also often incur significant development costs to meet the requirements of customer contracts in our Defense & Space Systems and SATCOM divisions, and we report these costs in the consolidated statements of operations as cost of sales.

Interest income

Interest income includes interest income from investments in short-term marketable securities and money-market instruments.

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Interest expense

We incur interest expense principally related to mortgages on certain facilities. We do not presently incur interest related to our revolving credit facilities because in February 2006, the Company repaid all of its borrowings under these facilities from the proceeds of a public stock offering.

Foreign exchange gains and losses

We recognize foreign exchange gains and losses, mainly in our SATCOM and LXE divisions, related to assets or liabilities that are denominated in a currency different from the local functional currency. For our Canada-based SATCOM division, most trade receivables relate to contracts denominated in U.S. dollars; when the U.S. dollar weakens against the Canadian dollar, the value of SATCOM’s trade receivables decreases and foreign exchange losses result. For our LXE division’s international subsidiaries, most trade payables are in U.S. dollars and relate to their purchases of hardware from LXE’s U.S. operations for sale in Europe and Asia; when the U.S. dollar weakens against the Euro or other international currency, the value of the LXE subsidiaries’ trade payables decreases and foreign exchange gains result.

We regularly assess the Company’s exposures to changes in foreign exchange rates and as a result, we may enter into forward currency contracts to reduce those exposures. The notional amount of each forward currency contract is based on the amount of exposure for assets or liabilities subject to changes in foreign currency exchange rates. We mark these contracts to market in our consolidated statements of operations.

Income taxes

Typically, the main factor affecting our effective income tax rate each year is the relative proportion of taxable income that we expect to earn in Canada, where the effective rate is substantially lower than in the U.S., or other locations. The lower effective rate in Canada results mainly from tax benefits for research-related expenditures.

Discontinued operations

In 2005 and 2006, we disposed of our S&T/Montreal, SatNet, and EMS Wireless divisions, which have been reported as discontinued operations, and their net assets were classified as assets held for sale through their dates of disposition. In 2007 and going forward, the only activity reported under discontinued operations relates to the resolution of various contingencies, representations or warranties under standard indemnification provisions in the sales agreements. The Company accrues for a liability related to a contingency, representation or warranty when management considers that the liability is both probable and can be reasonably estimated. Management believes that it is reasonably possible, but not probable, that additional accruals for these purposes may be made, in particular, for the cost of repair of certain products manufactured by one of the disposed divisions. At present, the Company cannot reasonably estimate the range of cost for this potential liability or whether such liability would be material, but management believes that the potential liability is not likely to exceed $3 million. No accrual has been recorded for this potential liability as of September 29, 2007.

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Results of Operations

	Quarters Ended						Nine Months Ended
	Sep 29			Sep 30			Sep 29			Sep 30
	2007			2006			2007			2006
Product net sales		86.2	%		83.9	%		85.6	%		85.6	%
Service net sales		13.8			16.1			14.4			14.4
Net sales		100.0			100.0			100.0			100.0
Product cost of sales, as a percentage of product net sales		60.4			62.8			61.6			63.1
Service cost of sales, as a percentage of service net sales		54.2			63.9			61.5			65.4
Cost of sales		59.6			62.9			61.6			63.4
Selling, general and administrative expenses		26.7			26.5			26.1			25.7
Research and development expenses		6.5			6.4			6.5			6.4
Operating income		7.2			4.2			5.8			4.5
Interest income		1.8			1.0			2.0			0.8
Interest expense		(0.7	)		(0.6	)		(0.7	)		(0.8	)
Foreign exchange loss		(0.3	)		(0.2	)		(0.3	)		(0.4	)
Earnings from continuing operations before income taxes		8.0			4.4			6.8			4.1
Income tax expense (benefit)		0.3			(4.1	)		1.1			(0.7	)
Earnings from continuing operations		7.7			8.5			5.7			4.8
Discontinued operations:
Earnings (loss) from discontinued operations before income taxes		—			0.6			(0.3	)		(0.4	)
Income tax expense (benefit)		—			0.5			(0.1	)		0.4
Earnings (loss) from discontinued operations		—			0.1			(0.2	)		(0.8	)
Net earnings		7.7	%		8.6	%		5.5	%		4.0	%

Three Months ended September 29, 2007 and September 30, 2006:

Net sales increased by 13.1% to $73.1 million from $64.7 million, for the third quarter of 2007 as compared with the same period in 2006. Each of the three divisions contributed to the growth in net sales, with the largest increase reported by our SATCOM division. SATCOM’s 33.7% growth in net sales was mainly due to continued high levels of aeronautical product sales, especially for the corporate jet market. D&SS’ quarterly net sales increase was mainly due to increased activity on U.S. military programs, and a new commercial satellite program. LXE’s net sales were higher due to an increase in net sales from international markets.

Product net sales increased by 16.1% to $63.0 million in the third quarter of 2007 as compared with the third quarter of 2006, resulting from higher product sales at SATCOM and higher revenues recognized on long-term contracts at D&SS. SATCOM’s 37.5% growth in product net sales was mainly due to continued strong sales of aeronautical products, especially for the corporate jet market. Service net sales decreased by 2.6% to $10.1 million in the third quarter of 2007 as compared with the same period of 2006, mainly due to the completion of a significant military communications research project by our D&SS division that began in 2006. As a percentage of total net sales, both total product net sales and total service net sales remained relatively unchanged in the third quarter of 2007 as compared with the third quarter of 2006.

Overall cost of sales, as a percentage of consolidated net sales, decreased for the third quarter of 2007 as compared with the same period of 2006 mainly due to a higher proportion of total net sales generated from SATCOM, which generally has a lower cost of sales percentage than our other divisions, and lower cost-of-sales percentages recorded by each of our three divisions. Product cost of sales, as a percentage of its respective net sales, decreased in the third quarter of 2007 as compared with the same period of 2006, due to SATCOM’s lower material costs and more favorable product mix, and improved program execution by our D&SS division. Service cost of sales, as a percentage of its respective net sales, decreased in the third quarter of 2007 as compared with the same period of 2006, due to lower repair rates experienced under existing maintenance contracts by our SATCOM division.

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SG&A, as a percentage of consolidated net sales, was relatively unchanged for the third quarter of 2007 as compared with the third quarter of 2006. The $2.4 million increase in actual expenses mainly related to the cost of selling and marketing efforts, the effect of changes in foreign exchange rates on the reported costs of our LXE and SATCOM divisions, and an increase of approximately $485,000 in the allowance for doubtful accounts at our SATCOM division.

R&D expenses increased by $703,000 mainly due to additional internal development programs for next-generation products at our SATCOM division, and the effect of changes in foreign exchange rates on their reported costs.

Interest income increased by $713,000 as a result of additional interest income earned from higher average investment balances. The higher investment balances in 2007 were primarily due to the net $48.9 million received from the sale of the Company’s EMS Wireless division, which closed in the December 2006.

The Company’s provision for income taxes for the third quarter of 2007 was reduced by approximately $600,000 related to a reduction in the Company’s estimated full year effective income tax rate to 18% during the quarter. The income tax provided in the third quarter of 2006 included a $3.5 million benefit for an increase in estimated research and development credits available in the U.S. The decrease in the full year effective tax rate in 2007 was based mainly upon a higher expected proportion of profits to be earned in Canada, where we have a much lower effective tax rate than in the U.S. or other locations, and to a higher expected U.S. Federal tax credit for current year qualifying research and development costs. The lower effective tax rate in Canada is due to research-related tax benefits and lower statutory rates. The overall effective rate is subject to change during the remainder of the year, as actual results and revised forecasts may change management’s expectations for the taxable income associated with various tax jurisdictions.

Nine Months ended September 29, 2007 and September 30, 2006:

Net sales increased by 12.2% to $211.9 million from $188.8 million, for the first nine months of 2007 as compared with the same period in 2006, as net sales grew in each of the Company’s three divisions. SATCOM and D&SS recorded the largest growth in net sales, with increases of 23.6% and 19.2%, respectively. These increases were mainly the result of strong sales of high-speed-data aeronautical products by our SATCOM division, and increased activity on U.S. military programs, and a new commercial satellite program by our D&SS division. LXE’s net sales were higher due to an increase in net sales from international markets.

Product net sales increased by $19.8 million to $181.4 million in the first nine months of 2007 as compared with the first nine months of 2006. This increase was mainly due to the strong growth in orders for high-speed-data aeronautical products recorded by our SATCOM division, and higher revenues recognized on long-term contracts at D&SS. SATCOM’s 25.2% increase in product net sales was mainly due to continued strong sales of their aeronautical products. Service net sales increased by $3.3 million to $30.5 million in the first nine months of 2007 as compared with the same period of 2006. This increase was mainly due to increased activity on a significant military communications research project by our D&SS division. As a percentage of total net sales, both total product net sales and total service net sales remained relatively unchanged in the first nine months of 2007 as compared with the first nine months of 2006.

Overall cost of sales, as a percentage of consolidated net sales, decreased for the first nine months of 2007 as compared with the same period of 2006 mainly due to a higher proportion of total net sales generated from SATCOM, which generally has a lower cost of sales percentage than our other divisions, and lower cost-of-sales percentages recorded by each of our three divisions. Product cost of sales, as a percentage of its respective net sales, decreased in the first nine months of 2007 as compared with the same period of 2006 due to SATCOM’s lower material costs and more favorable product mix, and improved program execution by our D&SS division. Service cost of sales, as a percentage of its respective net sales, decreased in the first nine months of 2007 as compared with the same period of 2006, due to lower repair rates experienced under existing maintenance contracts by our SATCOM division.

SG&A, as a percentage of consolidated net sales, was relatively unchanged for the first nine months of 2007 as compared with the same period of 2006. The $6.7 million increase in actual expenses mainly related to sales-related

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efforts, such as selling and marketing, to support the growth in net sales, the effect of changes in foreign exchange rates on the reported costs of our LXE and SATCOM divisions, and an increase of approximately $1.1 million in the allowance for doubtful accounts at our SATCOM division.

R&D expenses increased by $1.9 million mainly due to additional internal development programs for new product introductions by our LXE division, and next-generation products at our SATCOM division. R&D expenses also increased due to the effect of changes in foreign exchange rates on the reported costs of our SATCOM division.

Interest income increased by $2.6 million as a result of additional interest income earned from higher average investment balances. This was primarily due to the net $48.9 million received from the sale of the Company’s EMS Wireless division, which closed in December 2006.

The Company’s effective rate for the nine months of 2007 was 16%, as compared with the pro forma effective rate of 30% for 2006, less the benefit of a $3.5 million increase in estimated research and development credits available in the U.S. This decrease in the effective income tax rate in 2007 was based mainly upon a higher expected proportion of profits to be earned in Canada, where we have a much lower effective rate than in the U.S. or other locations, and to a higher expected U.S. Federal tax credit for current year qualifying research and development costs. The lower effective tax rate in Canada is due to research-related tax benefits and lower statutory rates. The overall effective rate is subject to change during the remainder of the year, as actual results and revised forecasts may change management’s expectations for the taxable income associated with various tax jurisdictions.

Net Sales, Cost of Sales, and Operating Income (Loss) by Segment

Our segment net sales, cost of sales as a percentage of respective segment net sales, and segment operating income (loss) were as follows (in thousands):

													Percentage Increase
	Quarters Ended						Nine Months Ended						(Decrease)
	Sep 29			Sep 30			Sep 29			Sep 30			Three			Nine
(in thousands, except percentages)	2007			2006			2007			2006			Months			Months
Net sales:
Defense & Space Systems	$	15,698			13,666			44,133			37,027			14.9	%		19.2
LXE		33,399			33,003			103,449			99,728			1.2			3.7
SATCOM		24,048			17,992			64,284			51,997			33.7			23.6
Total	$	73,145			64,661			211,866			188,752			13.1	%		12.2
Cost of sales percentage:
Defense & Space Systems		73.7	%		78.4			76.0			78.8			(4.7	)		(2.8	)
LXE		56.6			58.3			58.1			59.1			(1.7	)		(1.0	)
SATCOM		53.9			58.7			57.0			59.6			(4.8	)		(2.6	)
Total		59.6	%		62.9			61.6			63.4			(3.3	)		(1.8	)
Operating income (loss):
Defense & Space Systems	$	1,445			1,022			3,248			1,754			41.4	%		85.2
LXE		1,742			2,412			4,777			7,159			(27.8	)		(33.3	)
SATCOM		3,527			1,122			7,715			3,976			214.3			94.0
Corporate and other		(1,472	)		(1,816	)		(3,440	)		(4,406	)		(18.9	)		(21.9	)
Total	$	5,242			2,740			12,300			8,483			91.3	%		45.0

Defense & Space Systems:A new quarterly sales record was set in the third quarter of 2007, as D&SS reported net sales of $15.7 million. This was a 14.9% increase compared with the third quarter of 2006. Net sales were strong for the first nine months of 2007 and were 19.2% higher than the same period in 2006. This growth in net sales for

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the third quarter and first nine months of 2007 was mainly due to increased activity on U.S. military programs, and a new commercial satellite program. Strong orders in the third quarter of 2007 for long-term defense contracts resulted in an increase in backlog for the fourth consecutive quarter, totaling $62.5 million at September 29, 2007.

Cost of sales as a percentage of net sales decreased in the third quarter and first nine months of 2007 relative to the same periods in 2006, mainly due to improved program execution.

LXE:Net sales in the third quarter and first nine months of 2007 were somewhat higher than the same periods of 2006 mainly due to an increased number of terminals shipped to the international market. This increase was mainly attributed to the continued investment in international sales and marketing efforts in Europe, Asia, the Middle East and Australia, and the strengthening of international currencies versus the U.S. dollar. This increase was significantly offset by a decline in net sales in the Americas’ market.

Cost of sales, as a percentage of net sales, decreased for the third quarter and the first nine months of 2007 as compared with the same periods of 2006 mainly due to a more favorable product mix.

SG&A expenses increased by $1.3 million in the third quarter and $3.8 million in the first nine months of 2007 as compared with the same periods of 2006 due to expenditures to expand marketing and distribution in international markets, the effect of changes in foreign exchange rates, and to upgrade LXE’s enterprise resource planning system.

SATCOM:Net sales in the third quarter of 2007 increased by 33.7% as compared with the third quarter of 2006, mainly due to continued strong sales of aeronautical products, especially in the corporate jet market. Net sales in the first nine months of 2007 increased by 23.6% as compared with the corresponding period of 2006, as a result of strong orders of new high-speed-data aeronautical products from both commercial and military markets, and revenue recognized on a major emergency management project begun at the end of 2006.

Cost of sales, as a percentage of net sales, decreased for the third quarter and first nine months of 2007 as compared with the corresponding periods of 2006. The decrease was mainly due to lower material costs for U.S. based goods resulting from the stronger Canadian dollar, and a more favorable product mix.

SG&A expenditures increased by approximately $812,000 in the third quarter and $2.6 million in the first nine months of 2007, as compared with the same periods of 2006. This was mainly due to higher selling and marketing expenses to support the growth in net sales, and an increase in the allowance for doubtful accounts in 2007. Increases of approximately $575,000, and $485,000 in the allowance for doubtful accounts were recorded in the first quarter and third quarter, respectively, of 2007 to reflect the risk related to for certain distributors.

Discontinued Operations

In 2005 and 2006, we disposed of our S&T/Montreal, SatNet, and EMS Wireless divisions, which have been reported as discontinued operations, and their net assets were classified as assets held for sale through their dates of disposition. In 2007 and going forward, the only activity reported under discontinued operations relates to the resolution of various contingencies, representations, or warranties under standard indemnification provisions in the sales agreements. The Company accrues for a liability related to a contingency, representation or warranty when management considers that the liability is both probable and can be reasonably estimated.

For the first nine months of 2007, discontinued operations reported a loss before income taxes of $555,000 from expenses for legal, audit, and other outside services, as well as the effect of additional costs incurred to settle various contingent items.

Liquidity and Capital Resources

During the first nine months of 2007, cash flow from continuing operating activities increased to $30.5 million mainly due to significant collections of receivables by our D&SS and LXE divisions, and the net earnings reported by each of our three division. The $3.0 million of net cash used in operating activities in discontinued operations was mainly for payments of working capital adjustments in accordance with the terms of the sales agreements for our former SatNet and EMS Wireless divisions.

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During the first nine months of 2006, continuing financing activities generated over $34.0 million in positive cash flow. This was mainly due to the $58.7 million in net proceeds received from the Company’s public stock offering of 3,795,000 shares, offset by the repayment of all of the Company’s borrowings under its U.S. and Canadian revolving credit facilities of $27 million. The $5.5 million and $3.2 million in cash received in the first nine months of 2006 from the sale of our SatNet and S&T/Montreal divisions, respectively, has been included in cash flows from investing activities.

The Company invested the remaining proceeds from its stock offering along with the proceeds received in 2006 from the sale of its SatNet and EMS Wireless divisions in a government obligations money-market fund, in other money-market instruments, and in interest-bearing deposits. These investments are all highly liquid and include debt instruments with an initial or remaining term of less than three months. These funds are intended to be used, along with the available credit facility borrowings, to pursue strategic opportunities in markets and products.

At September 29, 2007, the Company had a $47.5 million borrowing capacity under its U.S. revolving credit facility and a $14.2 million borrowing capacity under its Canadian revolving credit facility. The Company had $7.5 million of outstanding letters of credit at the end of the third quarter 2007, and a total of $54.2 million available for borrowing under these revolving credit facilities. The Company’s revolving credit facilities mature in December 2007, and the Company expects to arrange for new credit facilities in early 2008.

The Company expects that capital expenditures in 2007 will be in the range of $12 million to $14 million. These expenditures will be used primarily to purchase equipment that increases or enhances capacity and productivity.

Management believes that existing cash and cash equivalent balances, and cash provided from operations will provide sufficient liquidity to meet the operating and capital expenditure needs for existing operations during the next 12 months.

Off-Balance Sheet Arrangements

The Company has $7.5 million of standby letters of credit outstanding under its revolving credit facilities to satisfy performance guarantee requirements under certain customer contracts. While these obligations are not normally called, they could be called by the beneficiaries at any time before the expiration date, if we fail to meet certain contractual requirements. The Company has an additional $70,000 of standby letters of credit outstanding under another Canadian bank as a contract performance guarantee. As collateral for these standby letters of credit, the Company has deposited $81,000 at a Canadian bank, which is classified as restricted cash on the Company’s consolidated balance sheet. This cash will become available to the Company in the first quarter of 2010 when the underlying letters of credit expire or are settled. After deducting the outstanding letters of credit, at September 29, 2007 the Company had $45.7 million available for borrowing in the U.S. and $8.5 million available for borrowing in Canada under the respective revolving credit agreements.

The sales agreements for the disposal of the S&T/Montreal, SatNet, and EMS Wireless divisions contain standard indemnification provisions for various contingencies that could not be resolved before the dates of closing and for various representations and warranties by the Company and the purchasers. The Company accrues for a liability related to a contingency, representation or warranty when management considers that the liability is both probable and can be reasonably estimated.

Commitments and Contractual Obligations

As of September 29, 2007, the Company’s material contractual cash commitments and material other commercial commitments have not changed significantly from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2006, except the effects of adopting FIN 48. Upon adoption on January 1, 2007, the Company had $2,560,000 of unrecognized tax benefits. At September 29, 2007, the Company had $2,657,000 of unrecognized tax benefits, $2,070,000 of which would affect the Company’s effective tax rate if recognized. The Company can not predict whether these unrecognized tax benefits will result in actual payments, or the timing of such payments.

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Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which often requires the judgment of management in the selection and application of certain accounting principles and methods. We consider the following accounting policies to be critical to understanding our consolidated financial statements, because the application of these policies requires significant judgment on the part of management, and as a result, actual future developments may be different from those expected at the time that we make these critical judgments.

Revenue recognition on long-term contracts

Revenue recognition for fixed-price, long-term contracts is a critical accounting policy involving significant management estimates by the Defense & Space Systems and SATCOM divisions. Long-term contracts use the ratio of cost-incurred-to-date to total-estimated-cost-at-completion as the measure of performance that determines how much revenue should be recognized (“percentage-of-completion” method of accounting). Cost incurred and estimates of cost to complete include overhead expenses, which are applied at a budgeted rate; the budgeted overhead rate has historically been closely comparable with the periodic actual overhead rate, but any budget-versus-actual rate variance during an accounting period is expensed in that period, with no effect on revenues recognized.

The determination of total estimated cost relies on engineering estimates of the cost to complete the contract, with allowances for identifiable risks and uncertainties. If changes in engineering estimates result in an expected cost overrun (i.e., the estimated cost to complete exceeds the revenue to be recognized on the remainder of the contract), then revenue recognized-to-date will be adjusted downward, so that the revenue to be recognized on the remainder of the contract will equal the estimated cost to complete. Engineering estimates are frequently reviewed and updated; however, unforeseen problems can occur to substantially reduce the rate of future revenue recognition in relation to costs incurred.

Billings under a long-term contract are often subject to the accomplishment of contractual milestones or specified billing arrangements that are not directly related to the rate of costs being incurred under a contract. As a result, revenue recognized under percentage-of-completion for any particular period may vary from billings for the same period. As of September 29, 2007, the Company had recognized a cumulative total of $24.7 million in revenues from continuing operations under percentage-of-completion accounting, but which revenues were unbilled as of that date due to the billing milestones specified in the respective customer contracts.

Net sales under cost-reimbursement contracts in the Defense & Space Systems segment are recorded as costs are incurred and include an estimate of fees earned under specific contract terms. Costs incurred include overhead, which is applied at the division’s customer-approved rates. Fixed fees are earned ratably over the life of a contract. Incentive fees are based upon achievement of objective criteria for technical product performance or delivery milestones, although such fees may also be based upon subjective criteria (for example, the customer’s qualitative assessment of the Company’s project management). In all cases related to incentive fee arrangements, the Company does not record revenue until the fee has been earned under the terms of the contract.

Net sales under all other contracts in the D&SS and SATCOM segments, as well as the LXE division, are recognized when units are shipped or services are performed, unless multiple deliverables are involved or software is not incidental to a product as a whole (both mainly experienced at our SATCOM division), in which case we recognize revenue in accordance with either FASB EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” or Statement of Position No. 97-2, “Software Revenue Recognition” as applicable. Net sales are reported net of sales tax collected.

Inventory valuation

Management assesses inventory valuation based upon an analysis of the aging of the inventory and assumptions that management has developed concerning how the value of inventory for specific products, markets or applications may decrease over time. Inventory write-downs are accounted for as adjustments to the related inventory’s cost basis, and reserves are reduced only upon subsequent sale, disposal or usage of the inventory, rather than upon any subsequent improvement in the inventory aging.

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Evaluation of long-lived assets for impairment

All long-lived assets on the consolidated balance sheet are periodically reviewed for impairment. If an indication of impairment arises, we test recoverability by estimating the cash flows expected to result from the long-lived assets under several different scenarios, including the potential sale of assets, as well as continued holding of the assets under several different kinds of business conditions.

Evaluation of contingencies related to discontinued operations

In November 2005, March 2006, and December 2006, we completed transactions to sell our discontinued operations, comprising the former S&T/Montreal, SatNet and EMS Wireless divisions, respectively. The sales agreements obligated the purchasers and us to make cash adjustments if working capital or net receivables, as of closing, varied from contractual benchmarks. We also may receive additional cash or incur additional costs depending upon the outcome of certain contingencies in the sales contracts. We evaluate these contingencies and accrue a liability when we believe an unfavorable outcome is probable and can be estimated. As of September 29, 2007, we had accrued certain amounts related to the expected resolution of these contingencies. Such accruals could vary from the actual amounts ultimately paid. The most significant accrued cost is a $2.1 million liability for the estimated loss under a sub-license agreement with one of the purchasers, which we released from a corporate guarantee as part of the sales agreement.

Establishment of reserves for deferred income tax assets

It had been management’s expectation until 2005 that our Canadian operations would generate enough research-related tax benefits each year to offset any Canadian federal tax liability for any given year. We had reserved the vast majority of net deferred tax assets associated with these research-related tax benefits (totaling approximately $38.0 million at the end of 2006), because the extent to which these deferred income tax assets were to be realized in the future was uncertain.

With the disposal of unprofitable operations beginning in 2005 and the profitability of continuing operations in
Canada, the Company reassessed the valuation of its research-related deferred tax assets in Canada. The Company concluded in both 2005 and 2006 that future pre-tax profitability in Canada was expected to increase, and qualified research in Canada was expected to decrease. As a result of these factors, the Company expects to utilize at least a portion of its research-related deferred tax assets, and, therefore, the reserve for deferred tax assets was reduced by $400,000 and $1.7 million in 2005 and 2006, respectively. The reserve for Canadian deferred tax assets may be reduced further – resulting in an income tax benefit to future consolidated statements of operations – if profitability expectations for the future continue to increase and if qualified research in Canada is not expected to increase by an offsetting amount.

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Forward-Looking Statements

The Company has included forward-looking statements in management’s discussion and analysis of financial condition and results of operations. All statements, other than statements of historical fact, included in this report that address activities, events or developments that we expect or anticipate will or may occur in the future, or that necessarily depend upon future events, including such matters as our expectations with respect to future financial performance, future capital expenditures, business strategy, competitive strengths, goals, expansion, market and industry developments and the growth of our businesses and operations, are forward-looking statements. Actual results could differ materially from those suggested in any forward-looking statements as a result of a variety of factors. Such factors include, but are not limited to:

• economic conditions in the U.S. and abroad and their effect on capital spending in the Company’s principal markets;

• difficulty predicting the timing of receipt of major customer orders, and the effect of customer timing decisions on the Company’s quarterly results;

• successful completion of technological development programs by the Company and the effects of technology that may be developed by, and patent rights that may be held or obtained by, competitors;

• U.S. defense budget pressures on near-term spending priorities;

• uncertainties inherent in the process of converting contract awards into firm contractual orders in the future;

• volatility of foreign exchange rates relative to the U.S. dollar and their effect on purchasing power by international customers, and the cost structure of the Company’s non-U.S. operations, as well as the potential for realizing foreign exchange gains and losses associated with non-U.S. assets or liabilities held by the Company;

• successful resolution of technical problems, proposed scope changes, or proposed funding changes that may be encountered on contracts;

• changes in the Company’s consolidated effective income tax rate caused by the extent to which actual taxable earnings in the U.S., Canada and other taxing jurisdictions may vary from expected taxable earnings;

• successful transition of products from development stages to an efficient manufacturing environment;

• changes in the rate at which the Company’s products are returned for repair or replacement under warranty;

• customer response to new products and services, and general conditions in the Company’s target markets (such as logistics, and space-based communications), and whether these responses and conditions develop according to our expectations;

• the success of certain of the Company’s customers in marketing our line of high-speed commercial airline communications products as a complementary offering with their own lines of avionics products;

• the availability of financing for satellite data communications systems;

• development of successful working relationships with local business and government personnel in connection with distribution and manufacture of products in foreign countries;

• the demand growth for various mobile and high-speed data communications services;

• the Company’s ability to attract and retain qualified personnel, particularly those with key technical skills;

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• the availability of sufficient additional credit or other financing, on acceptable terms, to support any large acquisitions that we believe would contribute to our growth and profitability;

• the ability to negotiate successfully with potential acquisition candidates, finance acquisitions, or effectively integrate the acquired businesses, products or technologies into the Company’s existing businesses and products, and the risk that any such acquisitions do not perform as expected or are otherwise dilutive to our earnings;

• the potential effects, on cash and results of discontinued operations, of final resolution of potential liabilities under warranties and representations made by the Company, and obligations assumed by purchasers, in connection with the Company’s dispositions of discontinued operations;

• the availability, capabilities and performance of suppliers of basic materials, electronic components and sophisticated subsystems on which the Company must rely in order to perform according to contract requirements, or to introduce new products on the desired schedule; and

• uncertainties associated with U.S. export controls and the export license process, which restrict the Company’s ability to hold technical discussions with customers, suppliers and internal engineering resources and can reduce the Company’s ability to obtain sales from foreign customers or to perform contracts with the desired level of efficiency or profitability.

Additional information concerning these and other potential risk factors is included in Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Effect of New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”.  This Statement defines fair value, establishes a framework for measuring fair value and requires expanded disclosure about fair value measurements.  SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those years.  The Company is in the process of evaluating the impact of SFAS No. 157 on its 2008 consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115”.  SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value.  Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings.  SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value.  SFAS No. 159 is effective at the beginning of fiscal years beginning after November 15, 2007.  The Company’s adoption of SFAS No. 159 is not expected to have a material impact on its 2008 consolidated financial statements.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

As of September 29, 2007, the Company had the following market risk sensitive instrument (in thousands):

Revolving credit loan with a bank in the United Kingdom, matures in April 2008, interest payable monthly at a variable rate (6.75% at the end of the quarter) $ 1,656

A 1% increase in the interest rates for our market-sensitive debt obligations would have increased interest expense by $4,000 for the quarter based on the average outstanding borrowings under these obligations.

As of September 29, 2007, the Company also had intercompany accounts that eliminate in consolidation but that are considered market risk sensitive instruments. Short-term due to (from) the parent, payable (receivable) by international subsidiaries arising from purchase of the parent’s products for sale were as follows:

	Exchange Rate	$U.S.
	($U.S. per unit of	in thousands
	local currency)	(reporting currency)
Australia	0.8855 /Dollar		$ 1,109
Belgium	1.4218 /Euro		1,040
Germany	1.4218 /Euro		846
France	1.4218 /Euro		732
Italy	1.4218 /Euro		678
Netherlands	1.4218 /Euro		520
United Kingdom	2.0388 /Pound		65
Sweden	0.1544 /Krona		20
Canada	1.0037 /Dollar		(138	)
Total short-term due to parent			$ 4,872

The Company has foreign currency risks associated with forward contracts as follows (in thousands, except average contract rate):

		Average		($U.S.)
	Notional	Contract		Fair
	Amount	Rate		Value
Foreign currency forward contracts
U.S. dollars (sell for Canadian dollars)	23,900  USD		1.0531	$	1,436
British pounds (buy with Canadian dollars)	1,000  GBP		2.1466		(115	)
Euros (sell for U.S. dollars)	2,250  EUR		1.3848		(99	)
Australian dollars (sell for U.S. dollars)	1,250  AUD		0.8137		(79	)
				$	1,143
Embedded derivatives
Qualifying for U.S. dollar contracts at Canadian subsidiary	11,626  USD		1.0037	$	(18	)

The Company enters into foreign currency forward contracts in order to mitigate the risks associated with currency fluctuations on future cash flows.

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ITEM 4. Controls and Procedures

The Company has established and maintains disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15e). The objective of these controls and procedures is to ensure that information relating to the Company, including its consolidated subsidiaries, and required to be filed by it in reports under the Securities Exchange Act, as amended, is effectively communicated to the Company’s CEO and CFO, and is recorded, processed, summarized and reported on a timely basis.

The CEO and CFO have evaluated the Company’s disclosure controls and procedures as of the end of the period covered in this report. Based upon this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls over financial reporting and procedures are adequate to accomplish their objective and are functioning effectively.

During the third quarter of 2007, there were no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rule 13a – 15(f) under the Exchange Act).

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PART II

OTHER INFORMATION

ITEM 1A. Risk Factors

In addition to the other information set forth in this report, carefully consider the factors discussed in Part I, Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 6. Exhibits

The following exhibits are filed as part of this report:

3.1 Second Amended and Restated Articles of Incorporation of EMS Technologies, Inc. effective March 22, 1999 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 3, 2004).

3.2 Bylaws of EMS Technologies, Inc., as amended through August 3, 2007 (incorporated by reference to Exhibit 3.2 to the Company’s Report on Form 8-K dated August 3, 2007).

10.1  Summary of compensation arrangements with non-employee members of the Board of Directors, as revised August 3, 2007.*

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

32    Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

* Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EMS TECHNOLOGIES, INC.
By:	/s/ Paul B. DomorskiPaul B. Domorski	Date: November 8, 2007
	President, Chief Executive Officer and Director (Principal Executive Officer)
By:	/s/ Don T. ScartzDon T. Scartz	Date: November 8, 2007
	Executive Vice President, Chief Financial
	Officer and Treasurer (Principal Financial Officer)

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