Good day and welcome to this Ultralife Corporation Fourth Quarter Earnings Release Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Jody Burfening. Please go ahead.

Thank you, Patricia, and good morning, everyone. This is Jody Burfening of Lippert/Heilshorn & Associates. Thank you for joining us for the Ultralife Corporation's earnings conference call for the fourth quarter of fiscal 2008. The earnings press release was issued earlier this morning and if anyone has not yet received a copy, I invite you to visit the Ultralife website at www.ultralifecorp.com where you will find the release under Investor News in the Investor Relations section. In a minute, I'll turn the call over to John Kavazanjian, Ultralife's President and CEO, who along with Bob Fishback, Ultralife's Chief Financial Officer, will provide their formal remarks. Management will then take questions until 11 o'clock Eastern Time. Before turning the call over to John, I'd like to remind everyone that some statements made during this conference call contain forward-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties. These include worsening global economic conditions, increased competitive environment, pricing pressures, disruptions related to restructuring delays. The company cautions investors not to place undue reliance on forward-looking statements, which reflect the company's analysis only as of today's date. The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. A more detailed description of such uncertainties is contained in the company's filings with the Securities and Exchange Commission such as the company's Annual Report on Form 10-K for the period ending December 31, 2007. In addition, on today's call, management will refer to certain non-GAAP financial measures that management considers to be useful metrics that differ from GAAP. These non-GAAP measures should be considered as supplemental to corresponding GAAP figures. With that, I would now like to turn the call over to John. Good morning, John.

Thank you, Jody. Good morning and welcome to the Ultralife Corporation conference call for the fourth quarter of 2008. Joining me today are Bob Fishback, our Chief Financial Officer; Julius Cirin, our Vice President of Corporate Marketing and Technology and Bill Schmitz, our Chief Operating Officer. Today we reported revenue of $49.2 million for the fourth quarter of 2008. These results are in line with our preannouncement of two weeks ago. Operating profit was a loss of $300,000 and adjusted EBITDA of positive $2.7 million. Revenue of $20 million for Non-Rechargeable Products was fueled by robust demand in most sectors. The only weakness was in automotive telematics where shipments to customers ceased in December due to extended holiday plant shutdowns. Gross margin was up to 18% in the Non-Rechargeable segment, but was still impacted by the flow through of increased material costs and the product transition at our China operation. We expect to continue growth in this segment and continued improvement in gross margin in the first half of 2009. Rechargeable Products revenue was an all-time high of $15.4 million. Revenue was fueled by strong international demand, increased demand from existing programs. Margins were 20% as we were still faced with high costs, particularly for rechargeable cells. We also made a strategic decision to make a lower margin sale of our smart chargers to an international military customer. By changing over this customer's infrastructure for battery charging will benefit from future sales of our product with attractive margins. The customer will realize a lower total cost of ownership. Material costs have started to decline and price adjustments we have made will start to improve margins in this segment in the first half of 2009. In our Communications Systems business, revenue came in at $9.4 million versus an average of about…

Thank you, John, and good morning. Earlier this morning, we released our fourth quarter and full year results for the fiscal period ended December 31, 2008. Consolidated revenues totaled $49.2 million for the fourth quarter, a 34% increase over revenues of $36.8 million in the same period a year ago. The $12.4 million increase resulted from strong growth in sales of batteries and chargers in the Rechargeable Products segment in addition to higher shipments of BA-5390 batteries and in the Non-Rechargeable segment. Partially offsetting these increases were lower shipments of advanced communication systems and a modest decline in battery sales to automotive telematics customers. Revenues in our Design and Installation Services segment reflected the inclusion of full quarter results for Stationary Power Services, acquired in mid-November 2007 in addition to incremental sales from US Energy Systems acquired in November 2008. Gross profit amounted to $9.8 million in the fourth quarter of 2008, an increase of $4 million from 2007. As a percentage of total revenues, validated gross margins were just under 20% in 2008 compared with 15.6% in last year's fourth quarter. The improvement in the overall gross margin was primarily led by the Communications System segment, which reached 27% compared with 15% last year. In our Rechargeable Products segment, a better product mix resulted in gross margins of 20% in the quarter, up from 17% last year. Non-Rechargeable Product margins were 18% compared with 16% a year ago due to increased overhead absorption on higher volumes. Margins in the Design and Installation Services segment were 12.5% in the fourth quarter of 2008, much lower than our target as we've continued to invest in developing this new business and integrate the operations. Operating expenses for the quarter totaled $10 million compared with $8.4 million in 2007, an increase of $1.6…

Thank you, Bob. Patricia, now I would like to turn it back to you to open it up for questions please.

Thank you. Today's question and answer session will be conducted electronically. (Operator Instructions). Our first question comes from James McIlree with Collins Stewart.

Hey, John, for the quarter, the Rechargeable revenues doubled for a specific contract, did I hear that correctly?

No, no. They doubled across a whole bunch of areas. International sales were very strong and domestic projects that we do both in defense and commercial were strong as well. I think the point we made was that one specific contract, which was, I don't know, a couple of million dollars, Bill?

$5 million.

$5 million of it. So yes, I guess it was a percentage, about a third of it were for chargers that we took less in our customary margin because we had an opportunity to change over somebody's charging infrastructure.

Right, okay. And so is that $15 million a good run rate going forward or is it more likely to be kind of the 10 million-ish per quarter going forward?

It's a good base going forward.

Okay. And then secondly, on the, I'm going to call it McDowell for lack... just because of out of habit, but on the McDonald stuff, it seems like $10 million a quarter without the big contracts should be a good number, is that correct?

I would say it's in the right range, 8 to 7 to 10. Could be a little more sometimes, could be a little less. The problem we face now is it's such a big part of our business for some of these programs is really kind of the lumpiness of it and stuff that can move from quarter-to-quarter either in or out. I mean you saw how huge our shipments were in the second and third quarter. I think we are pretty clear that wasn't going to continue that way. But yes, I mean the non-big systems part of the business runs anywhere from $7 million to $10 million a quarter, fairly consistent.

Okay. And the satellite on the move projects that you are chasing, are these formalized programs of record or are they urgent operational needs that you are responding to?

Programs of record. What you are going to see is again, I can only tell you what we were told from the subcontractors we work with, or the primes we work with, I should say. And that's that these are getting put into IDIQ [indefinite delivery/indefinite quantity] multi-year contracts. And those contracts will then service vehicle programs of record.

Okay. So it's part of... make up something, the MRAP ATV or the --

LAV or something like that.

Yes, okay. Okay, I get that. That's great. I think that's it. Thank you.

Okay.

Our next question comes from Ted Kundtz with Needham.

Good morning, Ted, are you there? Ted Kundtz - Needham & Company: -- goals that you put out there for this year. I'm trying to get a sense of --

Ted, we missed the first part of your question. Can you start again? Ted Kundtz - Needham & Company: Okay, sure. I'm just trying to get a sense of what kind of visibility you really have for the targeted revenues that you've given us here of $250 million. How much of that is really... I don't... hate to say in backlog, because it's probably not really fully backlogged, but I'm trying to get your degree of comfort on the visibility. And then how much has to be kind of booked and you are kind of hoping will be booked throughout the year.

Let me see if I can build it up for you. In the Non-Rechargeable battery segment, a big chunk of that's our 9-volt, which is very consistent. I mean it just hasn't varied very much. We have a very good track record and very close to the customers for that. So we are pretty confident about that. That only really books 30 to 60 days out because we have conditioned people for that. We just can't (ph) respond fast enough. In the military area, U.S military area, we are in very good shape there. We are actually booked out for the... the first half of the year is booked. We are actually not happy with the lead times we are giving them. We are trying to up our capacity on at least a temporary basis. We have the capacity of just move people over to just make more cells and get back on faster, because we don't like the lead times we are giving people. So that... we are half booked in that area I guess is the short answer way to say that, and with demand still coming at us. In the automotive sector, I don't know. We have really backed off. We have been... the forecast from the people we are working with is backed off and we've kind of backed that off in a very conservative way because who knows? I just... we just... we don't know. I mean it's going to be down, so we are projecting I think a very... fairly conservatively right now. Ted Kundtz - Needham & Company: Okay. What was auto last year?

We had about $12 million. Ted Kundtz - Needham & Company: Okay. And this year you are really backing it way down.

We are backing it way down. Ted Kundtz - Needham & Company: Yes.

We would have expected that to grow this year to maybe $14 million let's say or $15 million. And we are taking last year's number and cutting it in half. So -- Ted Kundtz - Needham & Company: Okay.

So we have really backed off there. Ted Kundtz - Needham & Company: Okay.

But... so I would call it more of an opportunity than anything, it sounds kind of funny to say that, but yes. And then in our other businesses, we've seen very little impact economically because we don't sell in consumer products; we are in industrial products. And so it we have a pretty good track record of predicting what we're going to sell in those different segments, whether it be medical or safety and security or things like that. Ted Kundtz - Needham & Company: Okay.

So are we booked all the way out in Non-Rechargeable? No. But pretty well actually based on the past. Rechargeable segment, we are in very good shape, we have good bookings. But typically, those go for three months to three, four months out. So yes, it is February and you do have the year. But there are several procurements, as we mentioned, that we've been down selected for that's used generally between and one other person that decisions will be made in the next several months. Business that we've had, the customers that we've had that will really have a chance at the core business for. And we win our share of those and we are gong to be in really good shape there and we are pretty optimistic of the segments. Ted Kundtz - Needham & Company: Okay.

In communications accessories, we have this business that just, as Jim pointed out, the non-systems business that really just moves right along. But there are... the rest of our business is tied to programs of record that we know are getting fielded. It's just what happens with those programs is the orders come in, the orders come and go and it gets delayed and then when it comes, it's hurry up, ship fast. And so we kind of went through that last year with a big pull ins into second and third quarter of what we did there. But those programs are there and needed with a big shift of troop movements (ph) Iraq to Afghanistan, they are getting ready to move vehicles in there too. And they're not going to move them from Iraq; it's not going to happen. So we are pretty... we are in pretty solid shape there on our core business, but yes, there is a big piece of business in the advanced communications systems that still has to be booked. Ted Kundtz - Needham & Company: Okay. Is your target in that sector like $110 million, $115 million this year?

Where we are in that segment?

It's less than that. Right now the target is less than that; it's probably in the range of 80. Ted Kundtz - Needham & Company: Okay.

I think we said we would be down about 60 in that segment year-to-year and then maybe a little more up, so 80, 90 maybe. Ted Kundtz - Needham & Company: Okay.

And again, we don't... we have a budget with plans, but there is variability on all of these and we try to kind of diversify that out.

Yes, we risk out a little.

And in standby power, we are... that will probably be about 10% of our business here, but that's not a huge growth rate we are running now. We have a lot of repetitive customers. And we usually are scheduled out pretty well on that. We are probably scheduling in the second quarter, late second quarter right now. So we're probably booked pretty well through the second quarter for that business. Again, it's a customer base, so I think we're in pretty good shape there. Ted Kundtz - Needham & Company: Terrific. Does the stimulus package help you guys at all? Is there anything in that that directly pertains to you?

We believe so. We think that there is really going to be a lot of funding for research that will come through, agencies we work with, either Department of Energy or Defense. A lot of projects that they've wanted to work on, we think now are getting funded through this. But we have to see, you have to work through them to see. And in standby power, things like broadband build out, a lot... when we do standby power, cable is a big part of our... cable and telco a big part of our offering there and a big part of our customer base. So that's going to be important. A lot of the work that's being done in alternative energy. We've had long plans to move lithium ion batteries and solar and wind charging into those kinds of installations. This is only going to... it'll only accelerate those efforts we think and the efforts there. So there is... we think there is a lot of opportunity there. Some of those opportunities are going to come through the states, the way the funding runs. Some are them are going to come through the federal government. And again, they say, we are going to do this right away. But by the time the bill is passed and money gets passed down, we're probably 60, 90 days away from seeing really where the impact is going to be. But we're getting ourselves positioned to be able to execute on some of these. So, yes. Ted Kundtz - Needham & Company: Okay. And just a last question for either one of you, I guess. It's really kind of the gross margin trends. You alluded to them and you thought they would likely be increasing this year was the town, you got some higher costs than last year's and you think you can start passing that along, it sounded like. And is that a correct assumption, just kind of overall? We don't need to go through each group, but --

Yes, we are starting to see material costs come down. That really started... we started seeing that in the beginning of the fourth quarter... end of the third quarter, beginning of the fourth quarter. And I think we said on our last conference call, we are starting to see it. But we turn our inventory four, six times, we FIFO. So we really can't see the impact of that until we get through our FIFO system, which is kind of beginning of this year. And they haven't totally come down, so we've taken some pricing actions. GSA prices and actions were able to be taken in the beginning of October. So that helped us there. But with most of our contract customers, most of that stuff couldn't happen until we got into the new year, so. And then we have a couple of contracts that are March and July effected. So as we said through the first half of the year is where we are going to start to see the impact of that. Ted Kundtz - Needham & Company: Okay. Would your goal for the year be at least 200 basis points improvement in gross margins?

I think we've been very clear that we would like to get our gross margins up. Yes, we need to get our gross margins up above 25... between 25% and 30%. Ted Kundtz - Needham & Company: But that's the goal, that's the longer term goal. I just didn't... given where we are now, what's the year goal?

We did 22.4% in 2008, I think. Yes, our expectation is we could improve gross margins at least 200 basis around 2008 (ph). Ted Kundtz - Needham & Company: Okay, terrific. Thanks a lot.

(Operator Instructions). Our next question comes from Richard Baxter with Ardour Capital

All right, great, thank you. Just a question on the Stationary Power, some of the growth strategy. Is there expectations for steady growth for the year, or any seasonality to this? And I guess, following that, any expectations or milestones we can watch to follow the expansion here?

I think what you've... the milestones are the ones we are looking for, which is steady growth through the year. We don't see any seasonality really in that business. And as we grow that business through the year, steadily improving gross margins, we did a lot to kind of get that business immediately structured as an integrated operation in the fourth quarter. And we moved around resources, changed over managements and stuff like that. And so getting the contracts in place for our parts, so we've taken advantage of our larger base, as I said, buying direct from... we buy from rather than going to distributors. The big opportunity for us I think you should start seeing that improve the gross margins and also utilization of the service force and increasing penetration and service. Increasing penetration and service percentage will take a little time to get, but once you get it, it's more lasting. So I think you should watch steady increase in both sales and margins in that business.

Okay, thank you.

Our next question comes from Steve Sanders with Stephens Incorporated.

Good morning everyone.

Hey Steve.

Good morning.

Just at kind of a high level, I think at the Analyst Day, you talked about '09 being roughly as far as the McDowell-related businesses, probably 20% to 25% commercial. And then I think you said recently about 10% backup power and then I guess the balance would be split among various military programs and services. Can you just revisit that mix today versus a couple of months ago? Is that still in the ballpark?

Yes, I think that really is in the ballpark. We'll be about a third communications products, we'll be about 10% standby power services and then the remainder will be about half military and half commercial battery programs. It doesn't look a whole lot different.

Okay. And then what is a rough run rate going into '09 on the backup power business? How do we think about Stationary and US Energy in terms of the run rate today?

Well I think we were at 4.4 million last quarter, that's with US Energy only being there for half a quarter. US Energy was not profitable as an operation. They were close to around breakeven. And the real efficiencies we are going to get there are we have consolidated all of our back office operations there and taken a large number of people who were doing back office operation out, did that in the fourth quarter and we have a wider service offering now. So I would expect kind of $5 million, $5 million to $6 million quarter business we have going into this year.

Okay. Okay. And then generally, where is the lumpiness in that business? I know you've given us some good color on the margins, and it looks like you have some good market share opportunities given your broader geographic footprint. But where do we see the lumpiness there quarter-to-quarter?

Well because it's project... the lumpiness occurs because it's a project-based business. I mean we can have a $1 million installation for somebody that can be completed at the end of the quarter. But if there are acceptance criteria that says it has to operate for 30 days, we don't recognize revenue until that happens. So the lumpiness comes in because it is really project-based. And some of the... I won't say all of them, it just depends how the contract structured, sometimes the contract is the batteries are bought outright, but then the service doesn't get paid for them. Sometimes the entire project doesn't get recognized until then. Depends how it's structured. And that's the only thing that causes lumpiness. Believe me, this is a service business and we seek to fully utilize our people every day, every hour. So the pace of operations is pretty steady. It just has to come into play with contracts and revenue recognition.

Okay. And then within auto telematics, I know you've taken what sounds like a pretty conservative view on the revenue side. What are you doing or what have you done to improve the margin profile for that product, so hopefully as we see the top line rebound sometime over the next year, the margins are better?

Yes, we have one particular large customer who we've had a design that we've wanted to redesign for more than a few years. And we know... as I said before, a tough economic times --

Okay. And so that's done essentially?

That's done in qualification and we'll have that second half of the year, we'll get the benefit of that. Are you still there?

I lost you after you started to answer the question.

I am sorry, I said that's done and by the second half of the year, we'll get the benefit of that.

Okay. Okay.

It's in qualification testing right now. And as you know, in that market, there is pretty extensive qualification work that has to be done.

All right. And then I know you don't want to provide quarterly guidance. You've given us some detail on the spares order, and I guess that's expected by the end of the quarter. But generally, based on what you see in terms of backlog and visible orders like spares, how do we think roughly about the first half revenue versus the second half, 40:60? Is it more back half loaded than that? What would be kind of some rough guidelines at this point?

Again, Steve, the problem for us is the way things can move quarter-to-quarter on us, but our operating assumption... all I can tell you is our operating assumption is that that will grow pretty steadily every quarter. We don't have any peaks built in or anything. But the problem is that customer demands for early deliveries or contract delays can cause those peaks to happen. But right now, our operating... we believe the demand is a steady growth through the year.

Okay. And then final question, it sound like you've done quite a bit of work on the product side. And I assume the manufacturing side for your China business. Can you just provide a little bit more color there, and what you're expecting out of that business in 2009?

Yes, we pretty much... I mean we've pretty much stopped... I don't want to say we stopped, but we pretty much froze the work we were doing there mid year, really stepped back. We are trying an evolutionary approach. We're trying to evolve the processes and evolve the product development there and we just decided that that was taking too long. And in the third quarter, we froze the work that was going on there and we've taken our... what we'd have is we had development teams back here in upstate New York; actually mostly a couple of Chinese members actually leading this effort with the people in China. We took them and we've now moved them there and our director of R&D, Mr. Shu Long Jang (ph) is now running that factory. He's moved there with his family and he's running that factory. So we just started from scratch on the product side in the beginning of the fourth quarter. We're still producing the old products, but we're not trying to tweak them or anything. And we will be introducing this quarter a whole new product line out of that facility. We decided instead of an evolutionary approach to just stop, build out the old product and instead of a product evolution, do a product transition. That's what we're doing.

Okay. And the focus markets there, applications and markets?

The focus markets there are safety, security, meter reading or automated meter reading, it's a big one. There is a huge opportunity in China itself in AMR because they have their own stimulus package, part of it is rural electrification and utilities, and they are bringing meters to that business. The big product... the products we make in China, primary products we make there are our thionyl chloride products, half AA and AA thionyl chloride products, some of our lower end manganese dioxide products with capital (ph) from the U.S.; they make products there. And then we've moved our thin cell, our volume production of our thin cells moved to China and we now have, with the cost structure we have there, because it's mostly manual building the thin cells. Doing them in China gives us a real opportunity. With the cost structure, we have there we have several major opportunities in the area of thin cells.

Okay, okay. And then I apologize, one more just on the M&A outlook in the standby power business, what kind of deal flow you are seeing, what would make sense for you guys to add there just whatever color you can provide on that.

I think if there is opportunities to do acquisitions there, we have our eyes open. Right now, we think we have enough of an infrastructure that we can pretty much organically grow additionally cities. But right now, we have some filling in to do. We have some customers now covering the Southern United States who are asking us to do other cities. I mean I'll give you an example, US Energy was in Chicago also. They're primarily a Southwest company, but they were in Chicago. And that's because one of their large customers asked them to be there. US Energy also has a small office in Northern California. So we don't have to buy somebody in Northern California to expand that; we already have a footprint there. Another question is where else are our customers? Right now, we can be a little more customer-driven, and that enables us to grow without adding a lot of sales, without having to sell new customers as customers asking us to go to additional cities. We can do that organically.

Okay. And final, final, Bob, CapEx outlook for the year? Looks like it was a little bit higher in the fourth quarter, but how should we be thinking about that for '09?

Yes, I would say right now, we are probably looking in the range of $5 million to $6 million in 2009, a little bit higher than 2008 as we are looking to make some incremental investments in China in some infrastructure there, so.

Okay. Thanks very much.

All right, Steve.

(Operator Instructions). It appears there are no questions at this time.

Okay. Well, I want to thank everybody for participating. I would like to say that even in these tough economic times, we really believe Ultralife is positioned well for the coming year. In defense, our focus on the agile and mobile force and our international distribution really is expanding and broadening our opportunities. In the commercial markets, we are really seeing traction with our SmartCircuit products. They give us an edge as people try to deploy advanced portable power systems. And in services, as Richard asked, deploying green technology is widening, and we're building the channel we think that's going to be able to design, install and service those kinds of alternative energy systems along with the backup systems that we are doing all along on a national basis. And we look forward to sharing our progress with you again and participating with you again next quarter. Thank you.

This concludes today's Ultralife Corporation conference call. Thank you for joining us and have a wonderful day.