##### Table of Contents



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
  o
    
    Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
 for
the transition period from  to
 Commission file number 0-20852
 ULTRALIFE BATTERIES, INC.
  Delaware
    
    16-1387013(State or other jurisdiction
    
    (I.R.S. Employer Identification No.)of incorporation or organization)
 2000 Technology Parkway, Newark, New York 14513
 
  
  þ o
  o þ o
 o þ




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##### 



PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets -
September 29, 2007 and December 31, 2006
    
    
    3Condensed Consolidated Statements of Operations -
Three- and nine-month periods ended September 29, 2007
and September 30, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows -
Nine-month periods ended September 29, 2007 and September 30, 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    27Item 3. Quantitative and Qualitative Disclosures
About Market Risk
    
    
    39Item 4. Controls and Procedures
    
    
    39PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    41Item 6. Exhibits
    
    
    42Signatures
    
    
    43Index to Exhibits
    
    
    44EX-10.1EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



September 29,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    927
    
    
    $
    720Trade accounts receivable (less allowance for doubtful accounts
of $457 at September 29, 2007 and $447 at December 31, 2006)
    
    
    23,794
    
    
    
    24,197Inventories
    
    
    29,931
    
    
    
    27,360Due from insurance company
    
    
    148
    
    
    
    780Deferred tax asset  current
    
    
    92
    
    
    
    75Prepaid expenses and other current assets
    
    
    1,975
    
    
    
    2,748Total current assets
    
    
    56,867
    
    
    
    55,880Property, plant and equipment, net
    
    
    19,623
    
    
    
    19,396Other assets:Goodwill
    
    
    15,474
    
    
    
    13,344Intangible assets, net
    
    
    7,251
    
    
    
    9,072Security deposit
    
    
    73
    
    
    
    6622,798
    
    
    
    22,482Total Assets
    
    $
    99,288
    
    
    $
    97,758LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of debt and capital lease obligations
    
    $
    12,789
    
    
    $
    12,246Accounts payable
    
    
    13,331
    
    
    
    15,925Other current liabilities
    
    
    9,175
    
    
    
    9,639Total current liabilities
    
    
    35,295
    
    
    
    37,810Long-term liabilities:Debt and capital lease obligations
    
    
    20,324
    
    
    
    20,043Other long-term liabilities
    
    
    469
    
    
    
    316Total long-term liabilities
    
    
    20,793
    
    
    
    20,359Commitments and contingencies (Note 11)Shareholders equity:Preferred stock, par value $0.10 per share, authorized 1,000,000 shares;
none issued and outstanding
    
    
    
    
    
    
    Common stock, par value $0.10 per share, authorized 40,000,000 shares;
issued - 15,991,687 at September 29, 2007 and 15,853,306 at December 31, 2006
    
    
    1,591
    
    
    
    1,578Capital in excess of par value
    
    
    136,725
    
    
    
    134,736Accumulated other comprehensive income (loss)
    
    
    154
    
    
    
    (321
    )Accumulated deficit
    
    
    (92,892
    )
    
    
    (94,026
    )45,578
    
    
    
    41,967Less Treasury stock, at cost  727,250 shares outstanding
    
    
    2,378
    
    
    
    2,378Total shareholders equity
    
    
    43,200
    
    
    
    39,589Total Liabilities and Shareholders Equity
    
    $
    99,288
    
    
    $
    97,758
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Three-Month Periods Ended
    
    
    Nine-Month Periods EndedSeptember 29,
    
    
    September 30,
    
    
    September 29,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    33,291
    
    
    $
    23,725
    
    
    $
    100,807
    
    
    $
    63,437Cost of products sold
    
    
    26,369
    
    
    
    19,744
    
    
    
    77,767
    
    
    
    51,109Gross margin
    
    
    6,922
    
    
    
    3,981
    
    
    
    23,040
    
    
    
    12,328Operating expenses:Research and development (including $255, $278, $764
and $278, respectively, of amortization of
intangible assets)
    
    
    1,547
    
    
    
    1,517
    
    
    
    4,849
    
    
    
    3,361Selling, general, and administrative (including $294,
$234, $866
and $234, respectively, of amortization of
intangible assets)
    
    
    5,177
    
    
    
    4,601
    
    
    
    15,685
    
    
    
    10,415Total operating expenses
    
    
    6,724
    
    
    
    6,118
    
    
    
    20,534
    
    
    
    13,776Operating income (loss)
    
    
    198
    
    
    
    (2,137
    )
    
    
    2,506
    
    
    
    (1,448
    )Other income (expense):Interest income
    
    
    12
    
    
    
    19
    
    
    
    44
    
    
    
    104Interest expense
    
    
    (509
    )
    
    
    (451
    )
    
    
    (1,770
    )
    
    
    (863
    )Gain on insurance settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191Miscellaneous
    
    
    171
    
    
    
    39
    
    
    
    354
    
    
    
    186Income (loss) before income taxes
    
    
    (128
    )
    
    
    (2,530
    )
    
    
    1,134
    
    
    
    (1,830
    )Income tax provision (benefit)-current
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    20Income tax provision (benefit)-deferred
    
    
    
    
    
    
    (828
    )
    
    
    
    
    
    
    (401
    )Total income taxes
    
    
    
    
    
    
    (832
    )
    
    
    
    
    
    
    (381
    )Net income (loss)
    
    $
    (128
    )
    
    $
    (1,698
    )
    
    $
    1,134
    
    
    $
    (1,449
    )Earnings (loss) per share  basic
    
    $
    (0.01
    )
    
    $
    (0.11
    )
    
    $
    0.08
    
    
    $
    (0.10
    )Earnings (loss) per share  diluted
    
    $
    (0.01
    )
    
    $
    (0.11
    )
    
    $
    0.07
    
    
    $
    (0.10
    )Weighted average shares outstanding  basic
    
    
    15,160
    
    
    
    14,987
    
    
    
    15,120
    
    
    
    14,867Weighted average shares outstanding  diluted
    
    
    15,160
    
    
    
    14,987
    
    
    
    15,346
    
    
    
    14,867
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Nine-Month Periods EndedSeptember 29,
    
    
    September 30,2007
    
    
    2006OPERATING ACTIVITIESNet income (loss)
    
    $
    1,134
    
    
    $
    (1,449
    )Adjustments to reconcile net income (loss)
to net cash provided by operating activities:Depreciation and amortization of financing fees
    
    
    2,871
    
    
    
    2,747Amortization of intangible assets
    
    
    1,630
    
    
    
    512Loss on asset disposal
    
    
    6
    
    
    
    124Gain on insurance settlement
    
    
    
    
    
    
    (191
    )Foreign exchange (gain) loss
    
    
    (295
    )
    
    
    (186
    )Non-cash stock-based compensation
    
    
    1,532
    
    
    
    975Changes in deferred income taxes
    
    
    
    
    
    
    (401
    )Changes in operating assets and liabilities, net of effects from acquisitions:Accounts receivable
    
    
    871
    
    
    
    (3,147
    )Inventories
    
    
    (2,394
    )
    
    
    2,743Prepaid expenses and other current assets
    
    
    816
    
    
    
    304Insurance receivable relating to fires
    
    
    664
    
    
    
    602Income taxes payable
    
    
    
    
    
    
    19Accounts payable and other liabilities
    
    
    (2,671
    )
    
    
    1,355Net cash provided by operating activities
    
    
    4,164
    
    
    
    4,007INVESTING ACTIVITIESPurchase of property and equipment
    
    
    (1,706
    )
    
    
    (1,030
    )Payments for acquired companies, net of cash acquired
    
    
    (2,457
    )
    
    
    (7,008
    )Net cash used in investing activities
    
    
    (4,163
    )
    
    
    (8,038
    )FINANCING ACTIVITIESNet change in revolving credit facilities
    
    
    1,355
    
    
    
    2,475Proceeds from issuance of common stock
    
    
    470
    
    
    
    1,076Principal payments on debt and capital lease obligations
    
    
    (1,849
    )
    
    
    (1,510
    )Net cash provided by (used in) in financing activities
    
    
    (24
    )
    
    
    2,041Effect of exchange rate changes on cash
    
    
    230
    
    
    
    121Change in cash and cash equivalents
    
    
    207
    
    
    
    (1,869
    )Cash and cash equivalents at beginning of period
    
    
    720
    
    
    
    3,214Cash and cash equivalents at end of period
    
    $
    927
    
    
    $
    1,345SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for income taxes
    
    $
    
    
    
    $
    5Cash paid for interest
    
    $
    1,683
    
    
    $
    626Noncash investing and financing activities:Issuance of common stock and stock warrants for purchase of ABLE
    
    $
    
    
    
    $
    1,526Issuance of convertible note payable for purchase of McDowell
    
    $
    
    
    
    $
    20,000Purchase of property and equipment via capital lease payable
    
    $
    410
    
    
    $
    
  5




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1.
    
    BASIS OF PRESENTATIONThe accompanying unaudited condensed consolidated financial statements of Ultralife
Batteries, Inc. and our subsidiaries have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the instructions to Article 10
of Regulation S-X. Accordingly, they do not include all of the information and footnotes for
complete financial statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals and adjustments) considered necessary for a fair presentation of the
condensed consolidated financial statements have been included. Results for interim periods
should not be considered indicative of results to be expected for a full year. Reference should
be made to the consolidated financial statements contained in our Form 10-K for the twelve-month
period ended December 31, 2006.The year-end condensed balance sheet data was derived from audited financial statements,
but does not include all disclosures required by accounting principles generally accepted in the
United States of America.Our monthly closing schedule is a weekly-based cycle as opposed to a calendar month-based
cycle. While the actual dates for the quarter-ends will change slightly each year, we believe
that there are not any material differences when making quarterly comparisons.Certain items previously reported in specific financial statement captions have been
reclassified to conform to the current presentation.2.
    
    ACQUISITIONSWe have accounted for the following acquisitions in accordance with the purchase method of
accounting provisions of Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, whereby the purchase price paid to effect an acquisition is allocated to the
acquired tangible and intangible assets and liabilities at fair value.2007 AcquisitionsInnovative Solutions Consulting, Inc.On September 28, 2007, we finalized the acquisition of all of the issued and outstanding shares of common stock of Innovative Solutions Consulting, Inc. (ISC), a provider of a full
range of engineering and technical services for communication electronic systems to government
agencies and prime contractors.The initial cash purchase price was $943 (net of $57 in cash acquired), with up to $2,000
in additional cash consideration contingent on the achievement of certain sales milestones. The
additional cash consideration is payable in up to three annual payments and subject to possible
adjustments as set forth in the Stock Purchase Agreement. The contingent payments will be
recorded as an addition to the purchase price when the performance milestones are attained. The
initial $943 cash payment was financed through a combination of cash on hand and borrowings
through the revolver component of our credit facility with our primary lending banks. We
incurred $13 in acquisition related costs, which are included in the initial cost of the
investment of $956, with a potential total cost of the investment of $2,956 assuming the
earn-out of all contingent consideration.
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The results of operations of ISC and the estimated fair value of assets acquired and
liabilities assumed are included in our consolidated financial statements beginning on the
acquisition date. The estimated excess of the purchase price over the net tangible and
intangible assets acquired of $271 (including $57 in cash) was recorded as goodwill in the
amount of $742. We are in the process of completing the valuations of certain tangible and
intangible assets acquired with the new business. The final allocation of the excess of the
purchase price over the net assets acquired is subject to revision based upon our final review
of valuation assumptions. The acquired goodwill will be assigned to the communications
accessories segment and is expected to be fully deductible for income tax purposes.The following table represents the preliminary allocation of the purchase price to assets
acquired and liabilities assumed at the acquisition date:
 ASSETSCurrent assets:Cash
    
    $
    57Trade accounts receivables, net
    
    
    535Inventories
    
    
    117Prepaid expenses and other current assets
    
    
    175Total current assets
    
    
    884Property, plant and equipment, net
    
    
    787Goodwill
    
    
    742Total assets acquired
    
    
    2,413LIABILITIESCurrent liabilities:Current portion of long-term debt
    
    
    720Accounts payable
    
    
    333Other current liabilities
    
    
    159Total current liabilities
    
    
    1,212Long-term liabilities:Debt
    
    
    188Total liabilities assumed
    
    
    1,400Total Purchase Price
    
    $
    1,013
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Three-Month Periods Ended
    
    Nine-Month Periods Ended(in thousands, except per
    
    September 29,
    
    September 30,
    
    September 29,
    
    September 30,share data)
    
    2007
    
    2006
    
    2007
    
    2006Revenues
    
    $
    34,271
    
    
    $
    24,468
    
    
    $
    102,909
    
    
    $
    65,999Net Income (Loss)
    
    $
    (107
    )
    
    $
    (1,925
    )
    
    $
    784
    
    
    $
    (3,126
    )Earnings (Loss) per
share  Basic
    
    $
    (0.01
    )
    
    $
    (0.13
    )
    
    $
    0.05
    
    
    $
    (0.21
    )Earnings (Loss) per
share  Diluted
    
    $
    (0.01
    )
    
    $
    (0.13
    )
    
    $
    0.05
    
    
    $
    (0.21
    )
 2006 Acquisitions
 ABLE New Energy Co., Ltd.
   Risk-free interest rate
    
    
    4.31
    %Volatility factor
    
    
    61.25
    %Dividends
    
    
    0.00
    %Weighted average expected life (years)
    
    
    2.50
   8




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##### Table of Contents



ASSETSCurrent assets:Cash and cash equivalents
    
    $
    104Trade accounts receivables, net
    
    
    318Inventories
    
    
    737Prepaid expenses and other current expenses
    
    
    73Total current assets
    
    
    1,232Property, plant and equipment, net
    
    
    740Goodwill
    
    
    1,567Intangible assets:Trademarks
    
    
    90Patents and technology
    
    
    390Customer relationships
    
    
    820Distributor relationships
    
    
    300Non-compete agreements
    
    
    40Total assets acquired
    
    
    5,179LIABILITIESCurrent liabilities:Accounts payable
    
    
    1,085Other current liabilities
    
    
    110Total current liabilities
    
    
    1,195Long-term liabilities:Other long-term liabilities
    
    
    65Deferred tax liability
    
    
    84Total liabilities assumed
    
    
    1,344Total Purchase Price
    
    $
    3,835
  McDowell Research, Ltd.
   9




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10




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ASSETSCurrent assets:Trade accounts receivables, net
    
    $
    3,532Inventories
    
    
    5,155Prepaid inventory and other current expenses
    
    
    10Total current assets
    
    
    8,697Property, plant and equipment, net
    
    
    397Goodwill
    
    
    13,075Intangible assets:Trademarks
    
    
    3,000Patents and technology
    
    
    3,201Customer relationships
    
    
    1,990Non-compete agreements
    
    
    166Total assets acquired
    
    
    30,526LIABILITIESCurrent liabilities:Current portion of long-term debt
    
    
    46Accounts payable
    
    
    1,787Other current liabilities
    
    
    208Total current liabilities
    
    
    2,041Long-term liabilities:Debt
    
    
    37Total liabilities assumed
    
    
    2,078Total Purchase Price
    
    $
    28,448
   11




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Non-Rechargeable
    
    Rechargeable
    
    CommunicationsProducts
    
    Products
    
    Accessories
    
    TotalBalance at December 31, 2006
    
    $
    1,239
    
    
    $
    2,421
    
    
    $
    9,684
    
    
    $
    13,344Acquisition of ISC
    
    
    
    
    
    
    
    
    
    
    742
    
    
    
    742Adjustments to purchase price
allocation
    
    
    328
    
    
    
    194
    
    
    
    776
    
    
    
    1,298Effect of foreign currency
translations
    
    
    90
    
    
    
    
    
    
    
    
    
    
    
    90Balance at September 29, 2007
    
    $
    1,657
    
    
    $
    2,615
    
    
    $
    11,202
    
    
    $
    15,474
  Non-Rechargeable
    
    Rechargeable
    
    CommunicationsProducts
    
    Products
    
    Accessories
    
    TotalBalance at December 31, 2005
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Acquisition of ABLE
    
    
    516
    
    
    
    
    
    
    
    
    
    
    
    516Acquisition of McDowell
    
    
    
    
    
    
    2,256
    
    
    
    9,023
    
    
    
    11,279Adjustments to purchase price
allocation
    
    
    718
    
    
    
    
    
    
    
    
    
    
    
    718Balance at September 30, 2006
    
    $
    1,234
    
    
    $
    2,256
    
    
    $
    9,023
    
    
    $
    12,513
   September 29, 2007AccumulatedGross Assets
    
    Amortization
    
    NetTrademarks
    
    $
    3,096
    
    
    $
    
    
    
    $
    3,096Patents and technology
    
    
    3,617
    
    
    
    1,392
    
    
    
    2,225Customer relationships
    
    
    2,865
    
    
    
    1,236
    
    
    
    1,629Distributor relationships
    
    
    320
    
    
    
    105
    
    
    
    215Non-compete agreements
    
    
    209
    
    
    
    123
    
    
    
    86Total intangible assets
    
    $
    10,107
    
    
    $
    2,856
    
    
    $
    7,251
 12




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December 31, 2006AccumulatedGross Assets
    
    
    Amortization
    
    
    NetTrademarks
    
    $
    3,090
    
    
    $
    
    
    
    $
    3,090Patents and technology
    
    
    3,737
    
    
    
    619
    
    
    
    3,118Customer relationships
    
    
    2,940
    
    
    
    476
    
    
    
    2,464Distributor relationships
    
    
    300
    
    
    
    55
    
    
    
    245Non-compete agreements
    
    
    204
    
    
    
    49
    
    
    
    155Total intangible assets
    
    $
    10,271
    
    
    $
    1,199
    
    
    $
    9,072
       Three-Month Periods
    
    
    Nine-Month PeriodsEnded
    
    
    EndedSeptember 29,
    
    
    September 30,
    
    
    September 29,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net Income (a)
    
    $
    (128
    )
    
    $
    (1,698
    )
    
    $
    1,134
    
    
    $
    (1,449
    )Average Shares Outstanding  Basic (b)
    
    
    15,160
    
    
    
    14,987
    
    
    
    15,120
    
    
    
    14,867Effect of Dilutive Securities:Stock Options / Warrants
    
    
    
    
    
    
    
    
    
    
    215
    
    
    
    Restricted Stock
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    Convertible Note Payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average Shares Outstanding  Diluted (c)
    
    
    15,160
    
    
    
    14,987
    
    
    
    15,346
    
    
    
    14,867EPS  Basic (a/b)
    
    $
    (0.01
    )
    
    $
    (0.11
    )
    
    $
    0.08
    
    
    $
    (0.10
    )EPS  Diluted (a/c)
    
    $
    (0.01
    )
    
    $
    (0.11
    )
    
    $
    0.07
    
    
    $
    (0.10
    )
  13




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Nine-Month
    
    Nine-MonthPeriod Ended
    
    Period EndedSeptember 29,
    
    September 30,2007
    
    2006Risk-free interest rate
    
    
    4.63
    %
    
    
    4.91
    %Volatility factor
    
    
    57.17
    %
    
    
    60.20
    %Dividends
    
    
    0.00
    %
    
    
    0.00
    %Weighted average expected life (years)
    
    
    3.75
    
    
    
    3.64
   15




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##### Table of Contents



WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateNumber
    
    Exercise Price
    
    Contractual
    
    Intrinsicof Shares
    
    Per Share
    
    Term
    
    ValueShares under option at January 1, 2007
    
    
    1,815,471
    
    
    $
    11.03Options granted
    
    
    241,500
    
    
    
    10.23Options exercised
    
    
    (109,433
    )
    
    
    4.41Options forfeited
    
    
    (78,300
    )
    
    
    9.80Options expired
    
    
    (16,500
    )
    
    
    14.82Shares under option at September 29, 2007
    
    
    1,852,738
    
    
    $
    11.34
    
    
    4.45 years
    
    $
    4,489Vested and expected to vest as of
September 29, 2007
    
    
    1,778,963
    
    
    $
    11.36
    
    
    4.39 years
    
    $
    4,333Options exercisable at September 29, 2007
    
    
    1,093,344
    
    
    $
    11.88
    
    
    3.56 years
    
    $
    2,731
     Nine-Month Period
    
    
    Nine-Month PeriodEnded
    
    
    EndedSeptember 29, 2007
    
    
    September 30, 2006Number of shares awarded
    
    
    28,948
    
    
    
    26,668Weighted average fair value per share
    
    $
    10.57
    
    
    $
    10.30Aggregate total value
    
    $
    305,980
    
    
    $
    274,787
  Weighted AverageNumber of Shares
    
    
    Grant Date Fair ValueUnvested at December 31, 2006
    
    
    72,334
    
    
    $
    10.50Granted
    
    
    28,948
    
    
    
    10.57Vested
    
    
    (20,571
    )
    
    
    10.40Forfeited
    
    
    
    
    
    
    Unvested at September 29, 2007
    
    
    80,711
    
    
    $
    10.56
 16




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Three-Month Periods
    
    
    Nine-Month PeriodsEnded
    
    
    EndedSeptember 29,
    
    
    September 30,
    
    
    September 29,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    (128
    )
    
    $
    (1,698
    )
    
    $
    1,134
    
    
    $
    (1,449
    )Foreign currency translation adjustments
    
    
    167
    
    
    
    117
    
    
    
    507
    
    
    
    487Change in fair value of derivatives, net of tax
    
    
    (19
    )
    
    
    (35
    )
    
    
    (32

    )
    
    
    (3
    )Total comprehensive income
    
    $
    20
    
    
    $
    (1,616
    )
    
    $
    1,609
    
    
    $
    (965
    )
   September 29, 2007
    
    
    December 31, 2006Raw materials
    
    $
    19,903
    
    $
    
    14,964Work in process
    
    6,366
    
    
    
    9,061Finished goods
    
    6,246
    
    
    
    4,54132,515
    
    
    
    28,566Less: Reserve for obsolescence
    
    
    
    2,584
    
    
    
    1,206$
    
    29,931
    
    $
    
    27,3608. PROPERTY, PLANT AND EQUIPMENTMajor classes of property, plant and equipment consisted of the following:September 29, 2007
    
    December 31, 2006Land
    
    $
    
    123

    
    $
    
    123Buildings and leasehold improvements
    
    
    
    5,019

    
    
    
    4,336Machinery and equipment
    
    
    
    42,052
    
    
    
    40,485Furniture and fixtures
    
    
    
    1,326
    
    
    
    982Computer hardware and software
    
    
    
    2,358

    
    
    
    2,127Construction in progress
    
    
    
    1,735

    
    
    
    1,30052,613
    
    
    
    49,353Less: Accumulated depreciation
    
    

    
    32,990
    
    
    
    29,957$

    
    19,623
    
    $

    
    19,396
  17




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Balance at December 31, 2006
    
    $
    522Accruals for warranties issued
    
    131Settlements made
    
    (215)Balance at September 29, 2007
    
    $
    438
  20




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Three-Month Period Ended September 29, 2007
 Non-Rechargeable
    
    
    Rechargeable
    
    
    Communications
    
    
    TechnologyProducts
    
    
    Products
    
    
    Accessories
    
    
    Contracts
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    22,819
    
    
    $
    3,252
    
    
    $
    6,733
    
    
    $
    487
    
    
    $
    
    
    
    $
    33,291Segment contribution
    
    
    4,360
    
    
    
    703
    
    
    
    1,637
    
    
    
    222
    
    
    
    (6,724
    )
    
    
    198Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (497
    )
    
    
    (497
    )Miscellaneous
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171
    
    
    
    171Income taxes-current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income taxes-deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (128
    )Total assets
    
    $
    50,725
    
    
    $
    17,770
    

    
    $
    26,440
    

    
    $
    88
    

    
$
    4,265
    

    
    $
    99,288
 Three-Month Period Ended September 30, 2006
 Non-Rechargeable
    
    
    Rechargeable
    
    
    Communications
    
    
    TechnologyProducts
    
    
    Products
    
    
    Accessories
    
    
    Contracts
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    16,998
    
    
    $
    3,463
    
    
    $
    3,046
    
    
    $
    218
    
    
    $
    
    
    
    $
    23,725Segment contribution
    
    
    2,400
    
    
    
    397
    
    
    
    1,104
    
    
    
    80
    
    
    
    (6,118
    )
    
    
    (2,137
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (432
    )
    
    
    (432
    )Miscellaneous
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    39Income taxes-current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4Income taxes-deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    828
    
    
    
    828Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,698
    )Total assets
    
    $
    47,748
    
    
    $
    7,602
    
    
    $
    27,526
    
    
    $
    120
    
    
    $
    29,236
    
    
    $
    112,232
 Nine-Month Period Ended September 29, 2007
 Non-Rechargeable
    
    
    Rechargeable
    
    
    Communications
    
    
    TechnologyProducts
    
    
    Products
    
    
    Accessories
    
    
    Contracts
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    63,785
    
    
    $
    13,342
    
    
    $
    22,912
    
    
    $
    768
    
    
    $
    
    
    
    $
    100,807Segment contribution
    
    
    15,109
    
    
    
    3,008
    
    
    
    4,608
    
    
    
    315
    
    
    
    (20,534
    )
    
    
    2,506Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,726
    )
    
    
    (1,726
    )Miscellaneous
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    354
    
    
    
    354Income taxes-current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income taxes-deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,134Total assets
    
$
    50,725
    

    
$
    17,770
    

    
$
    26,440
    

    
$
    88
    

    
$
    4,265
    

    
    $
    99,288
 23




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Nine-Month Period Ended September 30, 2006
 Non-Rechargeable
    
    
    Rechargeable
    
    
    Communications
    
    
    TechnologyProducts
    
    
    Products
    
    
    Accessories
    
    
    Contracts
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    51,101
    
    
    $
    8,676
    
    
    $
    3,046
    
    
    $
    614
    
    
    $
    
    
    
    $
    63,437Segment contribution
    
    
    9,280
    
    
    
    1,882
    
    
    
    1,104
    
    
    
    62
    
    
    
    (13,776
    )
    
    
    (1,448
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (759
    )
    
    
    (759
    )Miscellaneous
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    377
    
    
    
    377Income taxes-current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    (20
    )Income taxes-deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (401
    )
    
    
    (401
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,449
    )Total assets
    
    $
    47,748
    
    
    $
    7,602
    
    
    $
    27,526
    
    
    $
    120
    
    
    $
    29,236
    
    
    $
    112,232
       24




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General
   27




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Results of Operations
 Three-month periods ended September 29, 2007 and September 30, 2006
 Revenues.
 28




---



##### Table of Contents



Cost of Products Sold.
 Operating Expenses.
 Other Income (Expense).
 Income Taxes.
  29




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Net Income (Loss).
 Nine-month periods ended September 29, 2007 and September 30, 2006
 Revenues.
 Cost of Products Sold.
 Operating Expenses.
 30




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Other Income (Expense).
 Income Taxes.
  Net Income (Loss).
 Adjusted EBITDA
  31




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##### Table of Contents




    
    Adjusted EBITDA (1) does not reflect our cash expenditures or future requirements
for capital expenditures or contractual commitments; (2) does not reflect changes in,
or cash requirements for, our working capital needs; (3) does not reflect the
interest expense, or the cash requirements necessary to service interest or principal
payments, on our debt; (4) does not reflect income taxes or the cash requirements for
any tax payments; and (5) does not reflect all of the costs associated with operating
our business;
    
    although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized often will have to be replaced in the future, and Adjusted
EBITDA does not reflect any cash requirements for such replacements;
    
    while stock-based compensation is a component of cost of products sold and
operating expenses, the impact on our consolidated financial statements compared to
other companies can vary significantly due to such factors as assumed life of the
stock-based awards and assumed volatility of our common stock; and
    
    other companies may calculate Adjusted EBITDA differently than we do, limiting its
usefulness as a comparative measure.
 32




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Three-Month Period Ended
    
    
    Nine-Month Period EndedSeptember 29,
    
    
    September 30,
    
    
    September 29,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    (128
    )
    
    $
    (1,698
    )
    
    $
    1,134
    
    
    $
    (1,449
    )Add: interest expense, net
    
    
    497
    
    
    
    432
    
    
    
    1,726
    
    
    
    759Less: income tax benefit
    
    
    
    
    
    
    (832
    )
    
    
    
    
    
    
    (381
    )Add: depreciation expense
    
    
    955
    
    
    
    930
    
    
    
    2,871
    
    
    
    2,747Add: amortization expense
    
    
    549
    
    
    
    512
    
    
    
    1,630
    
    
    
    512Add: stock-based
compensation
expense
    
    
    501
    
    
    
    409
    
    
    
    1,532
    
    
    
    975Adjusted EBITDA
    
    $
    2,374
    
    
    $
    (247
    )
    
    $
    8,893
    
    
    $
    3,163
 Liquidity and Capital Resources
     33




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34




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35




---



##### Table of Contents



Outlook
  Recent Accounting Pronouncements and Developments
  
 36




---



##### Table of Contents



37




---



##### Table of Contents



Critical Accounting Policies
   38




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##### Table of Contents



a)
    
    Ineffective information systems and related control processes
surrounding such systems;b)
    
    Inadequate controls and supporting documentation for inventory
valuations;c)
    
    Lack of routine and complete reconciliations of general ledger
accounts to detailed supporting documentation; andd)
    
    Levels of staffing that would promote sufficient segregation of
duties and assure a sufficient level of expertise in manufacturing accounting
and proper application of generally accepted accounting principles.
 39




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PART II OTHER INFORMATION
 
    41




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##### Table of Contents



10.1
    
    Stock Purchase Agreement by and among Innovative Solutions Consulting, Inc.,
Michele A. Aloisio, Marc DeLaVergne, Thomas R. Knowlton, Kenneth J. Wood, W. Michael
Cooper, and the Registrant, dated September 12, 200731.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 42




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ULTRALIFE BATTERIES, INC.
                    (Registrant)Date: November 7, 2007
    By:
    /s/ John D. KavazanjianJohn D. KavazanjianPresident and Chief Executive OfficerDate: November 7, 2007
    By:
    /s/ Robert W. FishbackRobert W. FishbackVice President - Finance and Chief
      Financial Officer 43




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10.1
    
    Stock Purchase Agreement by and among Innovative Solutions Consulting, Inc.,
Michele A. Aloisio, Marc DeLaVergne, Thomas R. Knowlton, Kenneth J. Wood, W. Michael
Cooper, and the Registrant, dated September 12, 200731.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 44