Item 2. Management's Discussion and Analysis or Plan of Operation.

Except for historical information contained herein, this "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, as amended. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Important assumptions and other factors that could cause actual results to differ materially from those in the forward-looking statements, include but are not limited to: competition in the Company's existing and potential future product lines of business; the Company's ability to obtain financing on acceptable terms if and when needed; uncertainty as to the Company's future profitability, uncertainty as to the future profitability of acquired businesses or product lines, uncertainty as to any future expansion of the Company. Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements and the failure of such assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. The Company assumes no obligation to update these forward looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.

Results of Operations
Three and Six Months Ended June 30, 2008 vs. Three and Six Months Ended June 30, 2007

Revenue

Revenue for the three and six month period ended June 30, 2008 was approximately $4,269,000 and $8,312,000 respectively as compared to $3,071,000 and $6,883,000 respectively for the three and six month periods ended June 30, 2007, an increase of 39.0% and 20.8% respectively. We attribute the increase to an increase in selling effort for all of our products. The proceeds received during the latter half of 2007, as a result of the sale of our common stock, has allowed us to hire additional personnel, and enabled our key personnel to focus their efforts on selling into our targeted market segments.

Gross Profit

The Company generated gross profits of approximately $1,152,000 and $2,369,000 respectively resulting in gross profit margins of 27.0 % and 28.5% respectively for the three and six months ended June 30, 2008 as compared to gross profits of approximately $1,171,000 and $2,427,000 respectively resulting in gross profit margins of 38% and 35.3% respectively for the three and six months ended June 30, 2007. The decrease in gross profit is primarily attributable to an increase in engineering and production personnel to support our increased orders, the expansion of our First Nano laboratory and new product development costs in the Nanomaterials, Energy and Semiconductor fields.

Selling, General and Administrative Expenses

Selling and shipping expenses for the three months ended June 30, 2008 and 2007 were approximately $204,000 and $148,000 respectively, representing a 37.5% increase versus the prior period. This increase is primarily attributable to an increase in sales commissions earned during the current period for sales that were concluded through efforts by our outside sales representatives.

Selling and shipping expenses for the six months ended June 30, 2008 were approximately $385,000 compared to $427,000 for the six months ended June 30, 2007. This decrease of 9.8% is primarily attributable to the Company's reduced attendance at trade shows and overall reduction in sales commission expense during the six month period.

The Company incurred approximately $883,000 of general and administrative expenses during the three months ended June 30, 2008, compared to the approximately $805,000 incurred during the three months ended June 30, 2007. This represents an increase of 9.7% or approximately $80,000 which is primarily attributable to the costs associated with employee recruitment efforts, costs associated with the new facility purchased earlier this year, increased payroll and benefit costs, general insurance, stock-based compensation and investor relations costs which were partially offset with a decrease in legal fees.

The Company incurred approximately $1,915,000 of general and administrative expenses during the six months ended June 30, 2008, compared to the approximately $1,578,000 of general and administrative expenses incurred in the six months ended June 30, 2007, representing an increase of approximately $337,000 or 21.4%. $168,000 of this increase can be attributed to additional contributions required as a result of the findings of a forensic audit performed on the Manufacturing Industry Workers' Compensation Self-Insurance Trust Fund (the "Fund") of which the Company was a member from January 2000 through March 2006. The Company is no longer a member of the Fund. The Fund was established to enable the participating employers to self insure their workers' compensation liability exposure as provided for under the Workers' Compensation Laws of the State of New York. Under the terms of the agreement, the Company is jointly and severally liable for the expenses and obligations of the Fund and for the workers' compensation liability of all participating employers incurred while a member. The Company was advised that certain adjustments were necessary to comply with New York State Workers' Compensation Board regulatory guidelines for Group Self Insurance Trusts. The contributions previously charged have not been adequate to cover Fund expenses including future claims. As a result, the Company was advised that additional contributions of approximately $168,000 are required, which the Company expensed in full during this period. There may be additional contributions necessary as a result of any outstanding residual liability for any given contribution year. The Company is accruing an additional $5,000 per quarter for this potential liability. Additionally, the Company incurred increased costs to support our continued sales growth.

Operating Income

As a result of the foregoing factors, operating income was approximately $65,000 and $68,000 for the three and six months ended June 30, 2008 respectively. This represents a decrease of 70.2% and 83.9% compared to operating income of $218,000 and $423,000 respectively for the three and six month periods ended June 30, 2007.

Interest Expense, Net

Interest income for the three and six months ended June 30, 2008 was approximately $22,000 and $60,000 respectively, compared to $0 for the three and six months ended June 30, 2007. This is a result of the temporary investment of certain net capital proceeds from the sale of the Company's common stock in 2007. Interest expense for the three and six months ended June 30, 2008 was $64,000 and $104,000 respectively, compared to approximately $52,000 and $106,000 for the three and six months ended June 30, 2007. The primary source of this interest expense is from the mortgages on the three buildings that we own. The increase for the three months ended June 30, 2008 compared to the three months ended June 30, 2007 is attributable to the interest on the mortgage on the building we purchased in February, 2008. As a result of equipment purchases, the Company has utilized $160,000 of its Revolving Credit Facility and converted it into term loans.

Other Income

Other income during the three months ended June 30, 2008 was approximately $6,000 compared to approximately $34,000 for the three months ended June 30, 2007. This was primarily the result of the receipt of $28,000 in 2007 which was previously written off as uncollectible in 2004.

Other income during the six months ended June 30, 2008 was approximately $14,000 compared to approximately $39,000 for the corresponding period one year ago.

Income Taxes

For the three and six months ended June 30, 2008, the Company recorded a current income tax expense of approximately $92,000 and $138,000 respectively, that was reduced by the realization of the deferred tax benefits of approximately $70,000 and $128,000.

Net Income

The Company reported net income of approximately $7,000 for the three month period ended June 30, 2008 compared to net income of $165,000 for the same period, in 2007. This decrease was primarily attributable to approximately $200,000 of expenses incurred from an increase in the number of engineering and production personnel employed by the Company in response to both the increased orders received for the Company's products and the costs associated with the Company's expansion growth and new product development in the Nanomaterials, Energy, Solar and Semiconductor fields.

For the six month period ended June 30, 2008, the Company reported net income of approximately $26,000 compared to net income of $261,000 for the six months ended June 30, 2007. As previously discussed, the decreased net income in 2008 versus 2007 is attributable to the hiring of additional personnel and associated costs related to our increased order levels, expansion and product development as well as the audit assessment of $168,000 for workers' compensation contributions for the years 2000 through 2006.

Liquidity and Capital Resources

As of June 30, 2008, the Company had aggregate working capital of approximately $9,814,000 and cash and cash equivalents of $3,168,000 compared to $10,314,000 and $5,110,000 at December 31, 2007, a decrease of $500,000 and $1,942,000 respectively. The decrease in cash and cash equivalents was primarily the result of funding the uncompleted contracts, increased by approximately $1,398,000, an increase in accounts receivable of approximately $746,000 partially offset by an increase in accounts payable of $670,000.

Accounts receivable, net as of June 30, 2008 was $2,498,000 compared to $1,769,000 as of December 31, 2007. This increase is attributable to the timing of shipments and customer payments.

As of June 30, 2008 the Company's backlog was approximately $4,017,000, a decrease of $1,070,000 or 21.0% compared to $5,087,000 at December 31, 2007. Timing for completion of the backlog varies depending on the product mix, however, there is generally a one to six month lag in the completion and shipping of backlogged product. Backlog from quarter to quarter can vary based on the timing of order placements and shipments.

On April 22, 2008, the Company entered into a three year Modified and Restated Revolving Credit Agreement with Capital One, N.A., successor by merger to North Fork Bank pursuant to which the bank has agreed to make revolving loans to the Company of up to $5 million until May 1, 2011, at which time it will be subject to renewal. The loan agreement amends and supersedes the Company's previous $2 million revolving credit facility with the Bank. Interest on the unpaid principal balance on this facility accrues at either (i) the LIBOR rate plus 2.00% or (ii) the bank's prime rate minus .25%. Borrowings are collateralized by the Company's assets.

On June 30, 2008, the Company entered into a Consolidation, Extension and Modification Agreement and Consolidated and Restated Mortgage note each with Capital One, N.A. The agreement consolidated various notes and mortgages relating to the property and building in Saugerties, New York into a single note in the principal sum of $805,000 of which approximately $17,000 represented additional borrowings incurred by the Company. Principal and interest payments are to be made in equal consecutive monthly installments of $5,903.27 commencing on August 1, 2008 and continuing for 119 months, with a final balloon payment being due on July 1, 2018 equal to the remaining unpaid principal on the maturity date. The principal sum bears interest at a fixed annual rate of 6.20%. The Note is secured by a first priority mortgage lien on the premises, all of the Company's monies, deposits or other sums held by the Bank on deposit, the Agreement, an assignment of the leases and rents from the premises, a lien on

the Company's personal property, and $500,000 of the proceeds of a life insurance policy which is owned by the Company and issued on the life of the Company's Chief Executive Officer, Leonard A. Rosenbaum.

The Company believes that based on its historical growth rate, its cash and cash equivalents position at June 30, 2008 and available credit facilities, the Company's funds at June 30, 2008 will be sufficient to meet its working capital and investment requirements for the next twelve months.

However, we anticipate the business will grow at a faster rate. This may require additional funding. For this reason, as well as other reasons that arise from time to time, we may consider raising capital through equity or debt financings. Any decision to raise additional capital, as well as the determination of the appropriate vehicle for doing so, will depend on market conditions, order levels, opportunities presented to us and other factors.