The following is management's discussion and analysis of financial condition and results of operations ("MD&A") of the Company for the years ended December 31, 2008 and 2007. This discussion should be read in conjunction with the Company's consolidated financial statements and related notes contained in this Annual Report on Form 10-K.

Executive Overview

See Part I, Item 1 - Business - Overview for a complete description of the Company.

The global credit markets have been experiencing extreme volatility and disruption for more than a year. During the second half of 2008, the volatility and disruption reached unprecedented levels. See the "Liquidity and Capital Resources" section later in MD&A for further information and discussion. Furthermore, the Company's results of operations are materially affected by U.S. and global economic conditions. The global economic crisis that began in the second half of 2007 continued and substantially increased during 2008, negatively impacting our multi-national OEM customers, and therefore, our business and operating results. Economic conditions have continued to deteriorate in 2009. As a result, we expect lower sales for the first half of 2009 compared to the same period of 2008 and have already adjusted our cost structure accordingly. We expect to mitigate the impact of lower sales through expense reductions and our continued focus on higher-margin business. However, difficult economic conditions may continue to materially adversely affect the Company's business and results of operations, financial condition and cash flows.

During the year ended December 31, 2008, the Company reported a net loss of $361,000, or $0.05 per diluted share, versus net income of $543,000, or $0.08 per diluted share, for 2007. In the second quarter of 2008, the Company recorded a pre-tax charge totaling approximately $800,000 (or $0.07 per diluted share) related to one-time non-cash inventory valuation adjustments and California lease termination expenses. The average number of common shares outstanding during 2008 was 20% higher than the prior year due to the Company's fourth quarter 2007 private equity financing, which increased the dilution of the 2008 results. See below for further discussion of these events.

The Company continues to benefit from the Operational Improvement Plan initiated in 2006 and completed in 2007. In addition, the Company continues efforts to improve operating margins. As the Company continues to address its scalability needs to meet customer requirements and to achieve profitable sales growth, the Company evaluates and challenges existing business that consistently performs below expected results. The Company is seeking new opportunities that are more consistent with the Company's performance goals, and in which customers recognize and value the Company as a partner and enabler of the customer's specialized product and service needs. The Company expects to strengthen its sales force using independent manufacturer's sales representatives around the world. The Company believes strategic use of independent manufacturer's sales representatives will improve the market and geographical coverage of its products and services.

The Company successfully completed a $2.5 million private equity financing on December 20, 2007. The Company issued 1.25 million common shares and warrants to purchase 375,000 additional shares of common stock in a private placement with selected institutional investors. The warrants are exercisable for a period of five years from the closing date of the financing. Approximately $1.2 million of the proceeds were used to purchase all of the equity of Aspan B.V., a Netherlands private limited liability company ("Aspan") in February 2008, and the remaining amount was utilized to reduce the outstanding balance of the line of credit. See Note 4 and Note 10 to the consolidated financial statements for additional information related to the acquisition of Aspan and the private equity financing, respectively.

During 2007, the Company outsourced repair services for its customers in the EMEA and APAC regions to Aspan and established an operation in Hong Kong. Through its Hong Kong operation, the Company provides repair services in the APAC region with staffing provided through a Joint Cooperation Agreement with E.C. Fix Technology Limited. In 2008, the Company provided repair services through its three operations located in North America (Groveport, Ohio, USA), EMEA (Tiel, Gelderland, the Netherlands) and APAC (Tsuen Wan, New Territories, Hong Kong).

In 2007, the Company completed amendments to the original Monrovia, California lease agreement, which eliminated any future obligations under the lease agreement after November 30, 2007.

While the Company continues to evaluate viable acquisition opportunities, the Company does not anticipate any acquisitions in 2009.

Results of Operations

Sales

The following table summarizes the Company's sales by segment for the years
ended December 31:



                     (in thousands)     2008       2007     Change
                     Total sales      $ 63,645   $ 73,397      -13 %
                     Product            52,702     62,615      -16 %
                     Service            10,943     10,782        1 %

The 13% decline in total sales primarily was due to significant reductions in low margin Product segment business during 2008. In addition, the Company experienced softening demand from existing large accounts and delays in generating revenue from new products and the development of multinational OEM customer relationships. However, sales to the Defense/Aerospace sector more than doubled during 2008. Higher Service segment sales primarily were driven by repair service business in the EMEA region, some of which was attributable to the Aspan acquisition.

For 2008, the Company had two customers that generated $27.5 million and $9.3 million, or 43% and 15%, respectively, of total revenues. Of the revenues from these customers, 91% and 9% were included in Product and Service sales, respectively. In addition, these customers represented 34% and 15%, respectively, of accounts receivable as of December 31, 2008.

For 2007, the Company had two customers that generated $28.5 million and $8.8 million, or 40% and 12%, respectively, of total revenues. Of the revenues from these customers, 92% and 8% were included in Product and Service sales, respectively. In addition, these customers represented 43% and 16%, respectively, of accounts receivable as of December 31, 2007.

While the Company continues to seek new opportunities with existing customers, the Company anticipates growth from new domestic and international customers, leading to additional customer diversification over time.

Gross Profit

The following tables summarize the Company's gross profit and gross profit
margins by segment for the years ended December 31:



                   (in thousands)         2008       2007     Change
                   Total gross profit   $ 12,249   $ 16,027      -24 %
                   Product                 9,512     13,523      -30 %
                   Service                 2,737      2,504        9 %

                                          2008     2007     Change
                     Total gross profit     19 %     22 %       -3 %
                     Product                18 %     22 %       -4 %
                     Service                25 %     23 %        2 %

Lower overall and Product segment gross profit margins during 2008 were driven by the non-cash inventory valuation adjustments of approximately $700,000 discussed previously and, to a lesser extent, sales mix. The non-cash charges reflect the Company's increase in reserve due to the aging of programs and slower overall economic activity. The Company assesses its inventory levels and mix in comparison to current customer programs and sells excess inventory or adjusts reserves to reflect current inventory valuations. The increase in Service segment gross profit margin compared to 2007 primarily was due to the positive impact of the Aspan acquisition on Service business. The Company implemented several cost reduction initiatives during 2008 that contributed, and are expected to continue to contribute, to significant savings in labor and facilities costs.

The Company continues to believe that results of operations will be positively affected as gross profit margins increase through the organic growth of existing customers and other additional global business. Gross margins will vary from program to program, and the mix of programs will vary from quarter to quarter causing gross margin percentages to vary from quarter to quarter. Consequently, it is difficult to predict quarterly gross margins on future sales.

Operating and Interest Expenses

The following table summarizes the Company's operating expenses, which include
selling, general and administrative expenses, and interest expense for the years
ended December 31:



                   (in thousands)         2008       2007     Change
                   Operating expenses   $ 12,453   $ 13,998      -11 %
                   Interest expense          309        881      -65 %

The decline in operating expenses in 2008 primarily was due to actions taken by the Company to reduce personnel and corresponding benefit costs to levels commensurate with lower sales volumes. However, the second quarter of 2008 included $0.1 million in expenses associated with the termination of a facility lease in Monrovia, California; reflecting lower than anticipated sublet net proceeds under the amended lease agreement.

Lower interest expense during 2008 was due to a decrease in average debt outstanding and lower average interest rates.

Income Tax Expense (Benefit) and Net Income (Loss)

The following table summarizes the Company's income (loss) before income taxes,
income tax expense (benefit) and net income (loss) for the years ended
December 31:



                (in thousands)                       2008       2007
                Income (loss) before income taxes   $ (513 )   $ 1,148
                Income tax expense (benefit)          (152 )       605

                Net income (loss)                   $ (361 )   $   543

The effective tax rates for 2008 and 2007 were 30% and 53%, respectively. The decrease in the effective tax rate for 2008 primarily was due to a reduction in certain permanent differences and a charge in 2007 for a rate reduction in the Company's deferred tax assets. In addition, in 2008 the Company had foreign income taxed at an effective rate below that of the U.S.

The following table summarizes the Company's earnings (loss) per common share for the years ended December 31:

                                                         2008        2007
             Basic earnings (loss) per common share     $ (0.05 )   $ 0.08
             Diluted earnings (loss) per common share   $ (0.05 )   $ 0.08

Liquidity and Capital Resources

Liquidity and capital resources demonstrate the overall financial strength of the Company and its ability to generate cash flows from operations and borrow funds at competitive rates to meet operating and growth needs.

The Company's current capital structure consists of a line of credit and stockholders' equity. The following table summarizes the Company's capital structure as of December 31:

(in thousands)                                                      2008          2007
Line of credit                                                    $  5,408      $  1,585
Short-term note payable                                                 -          4,000

Total short-term debt                                                5,408         5,585

Stockholders' equity, excluding accumulated other
comprehensive loss                                                   8,952         8,908
Accumulated other comprehensive loss                                   (57 )          -

Total stockholders' equity                                           8,895         8,908

Total capital                                                     $ 14,303      $ 14,493

Based on the Company's historical cash flow and current financial results and our unused capacity on the line of credit, we believe we have access to adequate resources to provide sufficient liquidity for the operations of the Company over the next year. However, the line of credit is a demand facility, and it is possible that funds would be unavailable if the facility were called. See further discussion in "Financing Activities" below.

The following tables summarize the Company's consolidated cash flows for the years ended December 31:

           (in thousands)                               2008         2007
           Net cash provided by operating activities   $ 1,027     $  6,708
           Net cash used in investing activities          (114 )     (1,439 )
           Net cash used in financing activities          (673 )     (5,257 )
           Effect of exchange rate on cash                 (12 )         -

           Increase in cash                                228           12
           Cash at beginning of year                        54           42

           Cash at end of year                         $   282     $     54

Operating Activities

Net cash provided by operating activities was $1.0 million in 2008 compared to $6.7 million in 2007. Net income (loss) adjusted for the effects of non-cash items, which primarily include inventory reserves, depreciation expense and provision for deferred taxes, provided cash in operating activities of $1.5 million and $1.9 million in 2008 and 2007, respectively. Changes in working capital required a net cash outlay of $0.5 million in 2008 and provided net cash of $4.8 million in 2007, which reflects the Company's significant improvement in management of inventory and accounts receivable in 2007 compared to 2006.

Investing Activities

Net cash used in investing activities was $0.1 million and $1.4 million in 2008 and 2007, respectively. During 2008, the Company received $1.2 million in proceeds from the previously discussed private equity transaction and paid $0.9 million to acquire Aspan. The private equity funds were placed in escrow in December 2007 and used for the acquisition of Aspan in February 2008. The $1.2 million was recorded as restricted cash as of December 31, 2007 and classified as cash used in investing activities. In addition, the Company's investing activities included $0.4 million and $0.2 million for the purchase of property and equipment in 2008 and 2007, respectively.

Financing Activities

Net cash used in financing activities was $0.7 million and $5.3 million in 2008 and 2007, respectively. Financing activity in 2008 primarily related to borrowings on the Company's line of credit and repayment of a $4.0 million short-term note as described below. In 2007, the Company's efforts to improve management of inventory and accounts receivable resulted in a significant reduction in the outstanding line of credit as of December 31, 2007. In addition, the Company's aforementioned 2007 private placement included proceeds of $2.3 million, net of transaction costs, of which $1.1 million was applied to the outstanding line of credit.

On September 30, 2008, the Company entered into an Amended and Restated Loan Agreement (the "Agreement") with KeyBank National Association ("KeyBank"), providing for a demand line of credit facility (the "Line") with a maximum line of credit of $8,000,000, subject to borrowing base restrictions. The Agreement replaces the prior Loan Agreement, dated April 8, 2008, between the Company and KeyBank, which provided for an $11,000,000 revolving credit facility (the "Revolving Line," and together with the Line, the "Debt"). The change in the amount of the line of credit sufficiently supports the Company's future projected operating cash requirements. The borrowing base is determined as the lesser of (1) $8,000,000 or (2) the sum of 85% of the aggregate amount of eligible receivable accounts, plus 30% of the aggregate amount of eligible inventory, not to exceed $5,000,000.

The Line is evidenced by a Cognovit Promissory Note Demand Line of Credit made by the Company in favor of KeyBank on September 30, 2008. The Line is secured by substantially all of the assets of the Company, as provided for in the Security Agreement entered into between the Company and KeyBank on April 8, 2008.

As of December 31, 2008, the maximum available borrowing base on the Line was $8,000,000, with unused capacity of $2,592,000. As of December 31, 2008 and 2007, the outstanding balance on the Debt was $5,408,000 and $1,585,000, respectively. As of December 31, 2007, the Company had outstanding $4,000,000 on the Term Note, as described below.

The outstanding balance on the Line bears interest monthly at an annual rate equal to either the prime rate plus 2.00% or the overnight London Interbank Offered Rate ("LIBOR") plus 3.50% (but not less than 5.00%). Use of the prime rate or the overnight LIBOR is at the discretion of the Company. The borrowing rate on the Debt was 3.13% and 7.33% as of December 31, 2008 and 2007, respectively. The weighted average interest rate was 5.04% and 7.62% during the years ended December 31, 2008 and 2007, respectively. In addition, prior to the current Agreement, the unused Debt capacity was subject to a commitment fee of 0.125%, payable quarterly in arrears.

In February 2008, the Company paid off the principal amount of $4,000,000 for a promissory note dated September 28, 2006 (the "Term Note"), as amended and extended, which matured on February 15, 2008. The Company used excess availability on an asset-based line of credit the Company had in place with KeyBank prior to the Revolving Line to pay off the principal amount of the Term Note. The principal amount of the Term Note bore interest at an annual rate equal to the prime rate less 0.25%.

The average Debt balances for the years ended December 31, 2008 and 2007 were $6,234,000 and $11,027,000, respectively. The Company paid interest of $288,000 and $824,000 for the years ended December 31, 2008 and 2007, respectively.

The Line is a Demand Line of Credit without a defined term, and the Company does not control when the Line matures. The Company's ability to maintain access to the Line will be dependent not only upon the Company's future performance, which will be subject to general economic conditions and financial operations, but upon conditions both external and internal to KeyBank, which may have an impact upon KeyBank's lending criteria and management of their loan portfolio. As a result, the Company could be forced to seek new financing or capital on a timetable that the Company cannot control. Because of this, the Company is evaluating financing options, both debt and equity. There can be no assurance that any new financing options will be at terms as favorable to the Company as current terms or acceptable to the Company or that the Company's future performance will not be affected negatively by changes in the above factors.

The availability of additional financing will depend on a variety of factors such as market conditions, the availability of credit generally, and the possibility that customers or lenders could develop a negative perception of the Company's long- or short-term financial prospects if it incurs future losses or if the level of business activity decreases due to a market downturn. If KeyBank is adversely affected by the conditions of the U.S. and global capital markets, it may become unable to fund borrowings under its credit commitment to us, which could have an adverse impact on our financial condition and our ability to borrow additional funds, if needed, for working capital, capital expenditures, acquisitions and other corporate purposes. In such a situation, we would pursue other sources of external financing while relying on internal sources of liquidity, including more aggressive management of working capital, various cost containment measures and a continued focus on higher margin business.

Additional financing also may be required to support the future growth plans of the Company, which include an acquisition strategy that may consist of acquiring companies that are similar to or that complement the Company. The Company's acquisition strategy may be financed by the issuance of additional common or preferred stock that has been previously authorized by shareholders. The issuance of these shares requires approval of the Company's Board of Directors. The Company evaluates acquisition targets based on similar or complementary services as currently provided by the Company that will be accretive within one year thereafter. Acquisition targets may provide large OEM customer relationships that have a potential for additional business through the product synergies of the combined company (which may not be attainable by either company on their own) and/or bring resources, in terms of people, processes and/or systems, that increase the scalability of the combined businesses. The Company does not anticipate any acquisitions in 2009.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements with (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets or similar arrangement that serves as credit, liquidity or market risk support for such assets; or (3) any other obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument or arising out of a variable interest.

During the normal course of business, the Company may have numerous outstanding purchase orders with vendors to purchase inventory for use in products that are sold to the Company's customers or are used in performing repair services for the Company's customers. The Company does not record such orders as liabilities on the consolidated balance sheets until the material is placed on a common carrier or delivered to the Company's facilities, depending on terms of the arrangement. The Company has no minimum purchase quantity requirements with any of its vendors.

Critical Accounting Policies and Recently Issued Accounting Standards

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial

statements and accompanying notes. Actual results could differ significantly from those estimates. The Company's most critical estimates include those related to revenue recognition, accounts receivable, inventory, goodwill and income taxes. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for judgment in application. In addition, there are areas in which management's judgment in selecting an available alternative would not produce a materially different result. Note 2 to the consolidated financial statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. Note 3 provides a summary of recently issued accounting standards.

Revenue Recognition

Revenues are recognized when there is (1) persuasive evidence of a sale arrangement; (2) delivery has occurred and title, ownership and risk of loss transfers to the customer; (3) the price is fixed or determinable; and
(4) collection is reasonably assured. For product sales, revenue is recognized upon transference of title to the customer. For repair sales, revenue is recognized when repair work is completed, and the item is either returned to the customer or returned to a customer-owned inventory location in the Company's warehouse in accordance with repair terms. For certain repair and maintenance programs, the customer pays a flat fee that covers multiple periods. The Company recognizes revenue on a pro-rata basis over the service period. For an inventory and logistics management program, revenue is recognized in the month in which services are provided. For non-recurring engineering projects, the Company recognizes revenue on a percentage-of-completion basis. For certain end of life product management service programs, we may purchase inventory components no longer in production that are necessary for the program based on the customer's estimated needs, with the agreement that the customer will purchase any remaining items after an agreed upon period. The Company will carry such inventory for a certain period, and upon completion of that period, the Company will sell any remaining inventory to the customer and recognize revenue. Certain customers ask that this inventory remain located at our sites for potential future use in small end of life production runs or in repair programs. These "bill and hold" arrangements typically meet the criteria for revenue recognition because (1) they are entered into at the customer's request; (2) they are required due to their business purpose to secure a supply of component parts that will no longer be manufactured; (3) title and risk of loss transfers to the customer; and (4) we physically segregate such components from Company-owned inventory.

Accounts Receivable

Accounts receivable represent amounts due from customers net of an allowance for doubtful accounts. Credit is extended based on evaluation of customers' financial condition and, generally, collateral is not required. Accounts receivable payment terms vary. The Company assesses the collectability of accounts receivable and provides an allowance for doubtful accounts based on the aging of accounts receivable balances, historical write-off experience, and an ongoing review of the Company's trade customers and their ability to make payment. The Company determines its allowance by considering a number of factors, including (1) the length of time trade accounts receivable are past due; (2) the Company's previous loss history with each customer; (3) the customer's current ability to pay its obligation to the Company; and (4) the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible as determined by a continuous review of the customer's ability to pay. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

The Company can provide no assurance that a material adjustment to accounts receivable will not be required in the future. The Company will continue to monitor events and circumstances in future periods to determine whether such an adjustment is warranted.

Inventory

The carrying values of component parts and finished goods represent the lower of . . .