Summary of DEWEY ELECTRONICS CORP

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the unaudited condensed financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q, and with the audited financial statements, including the notes thereto, appearing in the Company's 2008 Form 10-KSB. Certain statements in this report may be deemed "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact that address activities, events or developments that the Company or management intends, expects, projects, believes or anticipates will or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by management of the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. The forward-looking statements included in this report are also subject to a number of material risks and uncertainties, including but not limited to economic, governmental, competitive and technological factors affecting the Company's operations, markets, products, services and prices and, specifically, the factors discussed below under "Financing Activities", and "Company Strategy" and in Item 1 (Description of Business - Operational Risks) of the Company's 2008 Form 10-KSB. Such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ from those envisaged by such forward-looking statements.

The Company's operating cycle is long-term and includes various types of products and varying delivery schedules. Accordingly, results of a particular period or period-to-period comparison of recorded revenues and earnings may not be indicative of future operating results. The following comparative analysis should be viewed in this context.

Critical Accounting Policies and Estimates

The Company's financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions affect the application of our accounting policies. Actual results could differ from these estimates. Critical accounting policies are those that require application of management's most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. The Company's critical accounting policies include revenue recognition on contracts and contract estimates, pensions, impairment of long-lived assets, and valuation of deferred tax assets and liabilities. For additional discussion of the application of these and other accounting policies, see Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Note 1 of the Notes to the Financial Statements included in the Company's 2008 Form 10-KSB.

Results of Operations - Revenues

Revenues and estimated earnings under long-term defense contracts (including research and development contracts, except as described in the final sentence of this paragraph) are recorded using the percentage-of-completion method of accounting, measured as the percentage of costs incurred to estimated total costs of each contract. For the Company's indefinite delivery, indefinite quantity contract to provide 2kW generator sets to the military and for orders from other government subcontractors for 2kW generators, percentage- of-completion calculations are based on individual "Delivery Orders" which are periodically received for specified quantities. For research and development contracts total costs incurred are compared to total expected costs for each contract. The Company currently has one development sub- contract to perform qualification tests for an EPA compliant engine for use with its 2kW generator sets on which it does not recognize revenue based on the percentage-of-completion method; rather, revenue is recorded with the successful completion of each milestone in accordance with the contract terms.

The Company uses the percentage-of-completion method to recognize revenue for its replacement parts business when the dollar amount of the order to be delivered in a future period or periods is material, and the duration of the work will span multiple reporting periods. Revenue and earnings for all other orders for replacement parts (including orders for replacement parts for snowmaking equipment, as well as orders for new snowmaking machines) are recorded when deliveries of product are made and title and risk of loss have been transferred to the customer and collection is probable.

For those contracts where revenue has been recognized using the percentage- of-completion method of accounting, provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

Revenues for the second quarter of fiscal year 2009, the three month period ended December 31, 2008, were $12,316 lower when compared to same period in 2007. The lower revenues were due to decreased production of 3.5kW generator sets under a short-term contract with the United States Marines as described below. The decrease in generator set production was offset in part by increases in customer funded research and development revenues and revenues for replacement parts and short-term orders during the second quarter of fiscal year 2009 when compared to the same quarter in fiscal year 2008.

For the three months ended December 31, 2008 production efforts to provide the Armed Forces with diesel operated generator sets provided approximately 62% of revenues compared to approximately 85% in the second quarter of fiscal year 2008 (ended December 31, 2007). The Company's research and development contracts provided approximately 29% of revenues in the second quarter of fiscal 2009, and approximately 8% of revenues in the second quarter of fiscal 2008. Replacement parts and other short-term business including snowmaking equipment provided approximately 9% of revenues in the second quarter of fiscal year 2009 and approximately 7% of revenues in the same period of fiscal 2008.

Revenues for the six-month period ended December 31, 2008 were $138,786 higher when compared to the same period in 2007. This increase in revenue is attributable to increases in customer funded research and development revenues and an increase in revenues from replacement parts while revenue from generator set production decreased during this six month period when compared to the same period last year.

During the six-month period ended December 31, 2008, production efforts under the Company's contract to provide the Armed Forces with 2kW and 3.5kW diesel operated generator sets provided approximately 72% of revenues compared to approximately 86% of such revenues in the same period in 2007. The Company's research and development contracts provided approximately 20% of revenues during the six-month period ended December 31, 2008, versus approximately 7% of such revenues in the same period in 2007. Replacement parts and other short-term business provided approximately 8% of such revenues in the six- month period ended December 31, 2008, and approximately 7% of such revenues in the same period in 2007.

In March 2007, the Company was awarded three related research and development sub-contracts, in the aggregate amount of approximately $230,400 to research and develop electronic controls for diesel fuel cell reformers. Work on these contracts began in the first quarter of fiscal year 2008 and is expected to extend until the third quarter of fiscal 2009. No assurances can be given that the Company will receive any future production orders as a result of these sub-contracts or that the Company will be awarded any additional research and development contracts or sub-contracts.

In July 2007, the Company received a subcontract to develop an armored 3 kilowatt 28 volt DC auxiliary power unit that can be mounted on the back of the USMC main battle tank, the Abrams M1A1. The development contract, for $646,400, was awarded by the USMC Tank Program Office, in Quantico, VA, through a sub-contract administered by CACI, Eatontown, NJ, and had the possibility of a follow-on production contract. Work on this contract also began in the first quarter of fiscal 2008 and continued into the quarter ending September 30, 2008. In December 2008, the Company was notified that the USMC had awarded the production contract to another company who was not part of the development phase awarded in 2007.

In August 2007, the Company received a new contract to provide auxiliary power systems for the United States Marine Corps (USMC) 'Logistic Vehicle'. This contract, awarded by the USMC Systems Command, Quantico, VA, consists of a base year and three option years, exercisable at the Government's option. The Logistics Vehicle Power System (LVPS) is a diesel-powered 3.5 kilowatt 28 volt DC generator providing power to equipment that protects against improvised explosive devices. It is based on the Company's existing 2 kilowatt military tactical generator. A delivery order for the LVPS, valued at approximately $2.4 million was received in August 2007 and completed in December 2007. In July 2008, the Company received a second delivery order valued at approximately $500,000 for additional units to be delivered in January 2009. Work began to produce these units during the first quarter of fiscal 2009 and was substantially completed during the second quarter of fiscal 2009. Subsequent to the second quarter of fiscal year 2009, the Company received a third delivery order valued at approximately $400,000 for delivery expected to be in early July 2009. While the Company was successful in obtaining these initial orders, no assurance can be made that the Company will receive any future production orders as a result of this contract.

In December 2007, the Company announced the award of a $985,976 subcontract from Fibertek, Inc. of Herndon, VA, as part of the U.S. Government's 2kW Military Tactical Generator (MTG) Product Improvements - Engine. This contract covers the efforts to qualify an EPA compliant diesel engine for use in the 2kW portable Military Tactical Generator product line. This engineering and test effort was conducted at the Company's Oakland, NJ, facility. Initial test efforts began during the third quarter of fiscal year 2008 (ended March 31, 2008). First article testing revealed that the replacement EPA compliant engine was incapable of providing the necessary power output in the required range of operating conditions. As a result, the Company does not expect this engine to replace the existing non-compliant engine used in the 2kW product line. The Army has a waiver from the EPA to continue using the non-compliant engine.

In May 2008, the Company received an award of $475,000 to develop a prototype 'idle reduction' system consisting of an environmental control unit and diesel generator under a subcontract from MTC Technologies of Eatontown, NJ. The Company is partnering with AMETEK Corporation of El Cajon, California to develop this system to provide heating and cooling for US Army "long haul" trucks independent of the vehicle's main engine. The generator being developed by the Company under this subcontract will be used to power the environmental control unit while also providing both AC and DC current for the vehicle. Work under this contract was substantially competed in December 2008 and delivery of the prototype units to the customer was made in January 2009. No assurance can be made that the Company will receive any future production orders as a result of this contract or that the Government will award the Company any additional development contracts.

The Company experiences variable amounts of material receipts from time to time during the normal course of business. Material receipts are dependent upon the receipt of orders, project requirements and vendor delivery schedules. As the Company uses the percentage-of-completion method of accounting to record revenues on certain long-term contracts, material costs have an impact upon recorded revenues (see Note 1, Revenue Recognition of the Notes to Financial Statements).

The aggregate value of the Company's backlog of sales orders was $7.1 million on December 31, 2008 and $5.4 million on December 31, 2007. It is estimated that most of the present backlog will be billed during the next 12 months and be substantially recognized as fiscal year 2009 revenues.

Gross Profit

The Company's gross profit was $823,349 for the second quarter of fiscal year 2009, compared with gross profit of $763,974 for the second quarter of fiscal year 2008.

Gross margin is the measure of gross profit as a percentage of revenues. It is affected by a variety of factors including, among other items, product mix, product pricing, and product costs. The Company's gross margin was 29% for the three-month period ended December 31, 2008 and 27% for the three- month period ended December 31, 2007. The increase in gross margin is attributable to a change in product mix with increased revenues from research and development efforts and lower revenues from the production of generator sets compared to the same period in 2007.

For the six-month period ended December 31, 2008 the Company's gross profit was $1,348,248 compared to $1,143,576 for the six-month period ended December 31, 2007.

The Company's gross margin was approximately 26% for the six-month period ended December 31, 2008 and approximately 23% during the six-month period ended December 31, 2007. As with the three month period described above these improved results are due to a shift in product mix with research and development efforts accounting for a higher proportion of revenues in the first six months of fiscal 2009 when compared to the same period in fiscal 2008. Additionally 2kW generator sets sold to other defense contractors made up a higher proportion of revenues from generator set production in the first six months of fiscal 2009 than in the first six months of fiscal 2008. The selling price of these 2kW generators is reflective of current material costs and provides a higher gross margin than 2kW generator sets sold to the Government under the Company's prime contract on which the gross margin has diminished over time due to material costs rising faster than price increases allowed in the contract.

Selling, General and Administrative Expenses

Selling, General and Administrative expense for the three-months ended December 31, 2008 were $460,898 or 16% of revenue. For the three-months ended December 31, 2007, Selling, General and Administrative expenses totaled $454,207 or 16% of revenue.

Selling, General and Administrative expense for the six-months ended December 31, 2008 were $965,153 or 19% of revenue. For the six-months ended December 31, 2007, Selling, General and Administrative expenses totaled $788,783 or 16% of revenue. Expenditures for the six-month period ended December 31, 2008 were higher when compared with the same period last year primarily due to increased sales and marketing efforts.

Interest Expense

The Company had no interest expense in the three month and six month periods ended December 31, 2008 and 2007 respectively.

Other Expense/Income - Net

Amounts reported as other income or expense represent the net effect of interest income and miscellaneous items such as the sale of scrap, bank transaction fees and other like items.

Other expense of $2,747 for the three months ended December 31, 2008 was comprised of bank fees of $1,967 and State and Local Use Tax of $1,625 partly offset by miscellaneous income of $845.

Other income of $8,867 for the three months ended December 31, 2007 was comprised of interest income of $354 and miscellaneous income of $8,513 primarily from the sale of scrap.

Other expense of $4,022 for the six months ended December 31, 2008 was comprised of bank fees of $3,309 and State and Local Use Tax of $1,625 partly offset by miscellaneous income of $912.

Other income of $9,146 for the six months ended December 30, 2007 was comprised of interest income of $574, and miscellaneous income of $8,572.

Net Income before income taxes

Net income before income taxes for the three-month period ended December 31, 2008 was $359,704. For the same period in 2007 net income before income taxes was $318,634.

Results for the second quarter of fiscal year 2009 increased when compared to the same period in fiscal year 2008 primarily due to higher gross profit while Selling, General and Administrative costs were slightly higher as discussed above.

Net income before income taxes for the six-month period ended December 31, 2008 was $379,073. For the same period in 2007 net income before income taxes was $363,939.

Results for the six-month period ended December 31, 2008, increased when compared to the same period in fiscal year 2008 primarily due to higher gross profit while Selling, General and Administrative costs were slightly higher as discussed above.

Income Taxes

Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts and for tax loss and credit carry-forwards.

A valuation allowance is provided against deferred tax assets when it is determined to be more likely than not that these amounts will not be realized.

The Company has provided a valuation allowance against its net deferred tax assets as it believes that it is more likely than not that it will not realize these tax attributes. The Company has approximately $669,000 and $199,000 of federal and state net deferred tax assets, respectively, expiring beginning in 2012. Of these amounts, reductions of approximately $129,000 and $34,000 of federal and state net deferred tax assets, respectively, are the result of net income for the six-month period ending December 31, 2008.

Liquidity and Capital Resources

Historically, the Company's capital expenditures, debt servicing requirements and working capital needs have been financed by cash flow from operations, progress payments on various Government contracts (based on cost incurred) and a line of credit of $500,000. This line of credit expired on February 28, 2007. Starting in fiscal year 2008, the Company has changed the way it progress bills on new contracts. The Company now attempts to negotiate payment based on achievement of milestones rather than relying on demonstration of incurred costs. This approach is expected to result in the Company receiving payment at or before the time it must pay its vendors. The four new contracts described under "Revenues" above that were received in fiscal year 2008 have been structured this way and the Company intends to continue this approach where possible.

As of December 31, 2008 the Company had no material capital expenditure commitments. Management believes that the Company's current cash combined with progress and milestone payments as well as billings at the time of delivery of products will be sufficient to support short-term liquidity requirements, working capital needs and capital expenditures at their current or expected levels.

At December 31, 2008, the Company's working capital was $2,611,184 compared to $2,459,225 at December 31, 2007.

The ratio of current assets to current liabilities was 3.30 to 1 at December 31, 2008 and 2.80 to 1 at December 31, 2007.

The following table is a summary of the Statements of Cash Flows in the Company's Financial Statements:

                                   Six Months ended December 31,
                                    2008                   2007

Net Cash Provided by(used in)
  Operating activities             $  248,314           $  (78,481)
  Investing activities                (26,509)             (64,572)
  Financing activities                     --                   --


Operating Activities:
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Adjustments to reconcile net income to net cash used in operations are presented in the Statements of Cash Flows in the Company's Financial Statements.

Net cash provided by operating activities in the six-month period ended December 31, 2008 was comprised primarily of net income before depreciation and a decrease in accounts receivable, partly offset by increases in contract costs and estimated related profits in excess of billings and inventories, along with decreases in accounts payable, accrued expenses and accrued pension costs.

Net cash used in operating activities for the six-month period ended December 31, 2007 was comprised primarily of net income before depreciation, increases in accounts receivable, contract costs and related estimated profits in excess of billings, and inventories which were partly offset by increases in accounts payable and accrued expenses and a decrease in prepaid expense.

Company sponsored research and development costs are expensed as incurred. These costs consist primarily of material and labor costs. The Company expensed $30,918 of these costs during the six-month period ended December 31, 2008. For the six-month period ended December 31, 2007, the Company expensed $71,061 of research and development costs.

Investing Activities:

During the six-month period ended December 31, 2008, net cash of $26,509 was used in investing activities all of which was used for capital expenditures.

During the six-month period ended December 31, 2007, net cash of $64,572 was used in investing activities all of which was used for capital expenditures.

Financing Activities:

The Company did not use any cash in financing activities during the six month periods ended December 31, 2008 and 2007 respectively.

The Company currently has no debt but is endeavoring to obtain a replacement credit facility for a line of credit that expired in February 2007. The Company does not regard this credit facility as vital to its continued operations.

The Company owns approximately 90 acres of land and the building, which it occupies in Bergen County, New Jersey, adjacent to an interchange of Interstate Route 287. The Company is continuing to actively pursue possible methods of monetizing 68 undeveloped and unused acres of this property, by its sale and/or development. This endeavor has become more complex with the implications of New Jersey's "Highlands Water Protection and Planning Act" ("the Act").

The Act identifies approximately 400,000 acres of New Jersey as The Highlands Preservation Area. Pursuant to the statute, this area has the most onerous restrictions on future development. The Company's property is in this area, and further development would not be permitted without a waiver or other relief from the State. The Company continues to believe that there are strong reasons why its property should not be subject to the severe restrictions of the preservation area, and is attempting to affect a solution.

However, since the Act was passed in June of 2004, the State has repeatedly delayed promulgation of final regulations and a master plan. Originally expected in 2005, final regulations and a master plan were recently approved by the Governor on September 5, 2008. At the same time the Governor issued Executive Order 114 further defining the framework by which the Highlands Council, other State agencies, and both county and municipal governments are to work together. The Company believes that a regulatory environment is now developing within which monetization of the land may be possible. In light of these recent events, the Company is actively assessing its options. However, no assurances can be given that the Company's efforts will be successful, that a satisfactory valuation will be achieved, or that resolution will be timely.

In May 2008, the Company entered into a contract to sell a small parcel of land, approximately 7 acres, for $205,000. The land is physically separated from the main parcel of the Company's property by an interstate highway and is contained within the Highlands Preservation Area. Among other things, the sale of the land is subject to approval for development by the Highlands Commission and various state and local government agencies. Accordingly the Company can make no assurance that the sale will be successfully consummated or, if consummated, the timing thereof.

Recent Pronouncements

In February 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS 159 permits entities to choose, at specified election dates, to measure eligible financial instruments at fair value and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not own any financial instruments and does not expect this statement to have an effect on the Company's financial statements.

In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2008, the FASB issued Staff Position No. 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13" ("FSP 157-1") and Staff Position No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2"). In October 2008, the FASB adopted FASB Staff Position No. 157-3 "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active" ("FSP 157-3"). FSP 157-1 amends SFAS 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the Company's fiscal year beginning July 1, 2009. The measurement and disclosure requirements related to financial assets and financial liabilities are effective for the Company beginning in the Company's 2009 fiscal year beginning July 1, 2008. FSP 157-3 reaffirms that for financial assets fair value is an estimated exit price, and provides examples of how to estimate fair values when relevant observable data are not available. It further . . .