Executive Overview

The results of operations for the year ended December 31, 2008 include the results of ICS which was acquired effective December 31, 2007. Although the Company recorded excellent operating results in its fourth quarter before the goodwill impairment charge, the Company recorded a decrease in operating results for the year ended December 31, 2008. In addition, after completing its impairment testing of goodwill and other intangible assets, the Company recorded an impairment charge of $6,889,000 at December 31, 2008.

Although sales increased by 5.7%, this increase was principally attributable to the inclusion ICS in the current period. Exclusive of ICS, net sales would have decreased by approximately 14.0 % principally due to decreased sales from our Instrument Division and Tulip and despite increased sales from our Power Group. Gross profit margins decreased slightly for the year ended December 31, 2008 compared to the prior year. Due to lower gross margins, higher selling, general and administrative expenses and lower investment and other income, net income for the year ended December 31, 2008 decreased to $1,012,000 from $2,632,000 for the prior year exclusive of the aforementioned goodwill impairment charge and a $130,000 and $50,000 other than temporary impairment loss in our corporate bond portfolio for the current year and prior year, respectively. Inclusive of these one-time charges, net loss for the year ended December 31, 2008 was $6,007,000 compared to net income of $2,582,000 in the prior year.

Our backlog at December 31, 2008 was approximately $15,800,000 compared to $14,500,000 at December 31, 2007. There is no seasonality to the Company's business. Our shipping schedules are generally determined by the shipping schedules outlined in the purchase orders received from our customers. Both of our operating segments are pursuing a significant amount of business opportunities and our confidence level remains high with respect to receiving many of the orders we are pursuing, although timing is always an uncertainty.

Our success of the past few years has significantly strengthened our balance sheet evidenced by our 4.4 to 1 current ratio at December 31, 2008. We currently have a $3,000,000 credit facility in place. As a result of lower profitability related to customer shipping delays in the first and second quarter of 2008, the Company was not in compliance with two of its financial covenants at September 30, 2008. In November 2008, the Company's primary lender waived the covenant default of two of its financial ratios at September 30, 2008 and the Company renegotiated the financial covenant ratios for the quarterly reporting periods December 31, 2008 and March 31, 2009. Beginning June 30, 2009, the covenants will revert back to their original ratios with a modification to a certain financial ratio covenant definition. The Company was in compliance with all of its financial covenants at December 31, 2008.

In August 2008, the Company's Board of directors authorized a stock repurchase program allowing it to purchase up to $3.0 million of its outstanding shares of common stock in open market or privately negotiated transactions. During the period from August 2008 through December 31, 2008, the Company repurchased approximately 237,000 shares at an average price of $2.24 per share. Total consideration for the repurchased stock was approximately $529,000. From August through March 20, 2009, the Company purchased approximately 253,000 shares of its common stock for total cash consideration of $564,000 representing an average price of $2.23 per share.

Forward Looking Statements

Statements in this Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this document are certain statements which are not historical or current fact and constitute "forward-looking statements" within the meaning of such term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual financial or operating results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. Such forward looking statements are based on our best estimates of future results, performance or achievements, based on current conditions and the most recent results of the Company. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "may", "will", "potential", "opportunity", "believes", "belief", "expects", "intends", "estimates", "anticipates" or "plans" to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the Company's financial condition and the results of its operations are based on the Company's financial statements and the data used to prepare them. The Company's financial statements have been prepared based on accounting principles generally accepted in the United States of America. On an on-going basis, we re-evaluate our judgments and estimates including those related to inventory valuation, the valuation allowance on the Company's deferred tax asset, goodwill impairment, valuation of share-based compensation, revenue and cost recognition on long-term contracts accounted for under the percentage-of-completion method and other than temporary impairment on marketable securities. These estimates and judgments are based on historical experience and various other assumptions that are believed to be reasonable under current business conditions and circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect more significant judgments and estimates in the preparation of the consolidated financial statements.

Inventories

Inventory is valued at the lower of cost (specific, average and first-in, first-out basis) or market. Inventory items are reviewed regularly for excess and obsolete inventory based on an estimated forecast of product demand. Demand for the Company's products can be forecasted based on current backlog, customer options to reorder under existing contracts, the need to retrofit older units and parts needed for general repairs. Although the Company makes every effort to insure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have an impact on the level of obsolete material in its inventory and operating results could be affected, accordingly. However, world events have forced our country into various situations of conflict whereby equipment is used and parts may be needed for repair. This could lead to increased product demand as well as the use of some older inventory items that the Company had previously deemed to be obsolete.

Deferred tax asset

At December 31, 2008, the Company had an alternative minimum tax credit of approximately $573,000 with no limitation on the carry-forward period and federal and state net operating loss carry-forwards of approximately $20,000,000 and $7,000,000, respectively that expire through 2020. Approximately, $16,000,000 of federal net operating loss carry-forwards expire between 2010-2012. In addition, the Company receives a tax deduction when their employees exercise their non-qualified stock options thereby increasing the Company's deferred tax asset. The Company records a valuation allowance to reduce its deferred tax asset when it is more likely than not that a portion of the amount may not be realized. The Company estimates its valuation allowance based on an estimated forecast of its future profitability. Any significant changes in future profitability resulting from variations in future revenues or expenses could affect the valuation allowance on its deferred tax asset and operating results could be affected, accordingly. Due to the Company's decrease in profitability in 2008 and a weakening economy that could affect certain portions of its business, the Company decreased its projection for profitability for future periods and decreased its estimate of probability that it will attain those profit levels; thereby increasing its valuation allowance on its deferred tax asset.

Impairment of Goodwill

The Company has significant intangible assets related to goodwill and other acquired intangibles. In determining the recoverability of goodwill and other intangibles, assumptions are made regarding estimated future cash flows and other factors to determine the fair value of the assets. After completing the impairment testing of goodwill and other intangible assets pursuant to Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), the Company concluded an impairment charge should be taken at December 31, 2008 in connection with the recorded goodwill arising from its acquisitions made between 2005 and 2007. If estimates or their related assumptions used in the current testing change in the future, the Company may be required to record further impairment charges for those assets not previously recorded.

Share-Based Compensation

Effective January 1, 2006, the Company began recognizing share-based compensation under SFAS No. 123(R), which requires the measurement at fair value and recognition of compensation expense for all share-based awards. Total share-based compensation expense was $250,000 for the year ended December 31, 2008. The estimated fair value of stock options granted in 2008 were calculated using the Black-Scholes model. This model requires the use of input assumptions. These assumptions include expected volatility, expected life, expected dividend rate, and expected risk-free rate of return.

Revenue and Cost Recognition

Revenue and costs under larger, long-term contracts are reported on the percentage-of-completion method. For projects where materials have been purchased, but have not been placed in production, the costs of such materials are excluded from costs incurred for the purpose of measuring the extent of progress toward completion. The amount of earnings recognized at the financial statement date is based on an efforts-expended method, which measures the degree of completion on a contract based on the amount of labor dollars incurred compared to the total labor dollars expected to complete the contract. When an ultimate loss is indicated on a contract, the entire estimated loss is recorded in the period. Assets related to these contracts are included in current assets as they will be liquidated in the normal course of contract completion, although this may require more than one year.

Other than Temporary Impairment

The Company currently has in excess of $1,000,000 invested in government and corporate bonds. The Company treats its investments as available for sale pursuant to SFAS No. 115 which requires the Company to assess its portfolio each reporting period to determine whether declines in fair value below book value are considered to be other than temporary. If the impairment is determined to be other than temporary, the investment is written down to cost and the write-down is included in earnings as a realized loss, and a new cost is established for the security. Any subsequent recovery in fair value is not recognized until the security either is sold or matures. The Company uses several factors in its determination of whether an other than temporary impairment of one of its securities has occurred including i) the length of time and extent to which market value has been less than cost; ii) the financial condition and near term prospects of the issuer; iii) the intent and ability of the Company to retain its investment in the issuer to allow for any anticipated recovery in market value; iv) whether a decline in fair value is attributable to adverse conditions specifically related to the security or specific conditions in an industry and v) whether interest payments continue to be made. Although the Company received all its interest payments during the current year, it took an other than temporary impairment write-down of $130,000 for the year ended December 31, 2008 consisting of bonds held in three separate issuers in which it determined the decline in fair value was due to adverse conditions specifically related to the security or specific conditions in an industry.

RESULTS OF OPERATIONS:

Year Ended December 31, 2008 vs. Year Ended December 31, 2007

The Company currently operates in two industry segments. Its Orbit Instrument Division and its Tulip subsidiary are engaged in the design and manufacture of electronic components and subsystems and its ICS subsidiary performs system integration for Gun Weapons Systems and Fire Control Interface as well as logistics support and documentation (the "Electronics Group"). Its Behlman subsidiary is engaged in the design and manufacture of commercial power units (the "Power Group"). The results of operations for the year ended December 31, 2008 include the operations of ICS for the entire period since the acquisition was completed effective, December 31, 2007.

Consolidated net sales for the year ended December 31, 2008 increased by 5.7% to $27,364,000 from $25,885,000 for the year ended December 31, 2007 due to the inclusion of ICS in the current period and increased sales from the Power Group and despite lower sales from the Company's Orbit Instrument Division and Tulip subsidiary. Exclusive of ICS, net sales would have decreased by approximately 14%. Sales from the Electronics Group increased only by 5.2% despite the inclusion of ICS in the current period. During the current period, the Company's Orbit Instrument Division resumed shipments of its Remote Control Units (RCU) that had previously been placed on hold while it completed an enhanced hardware solution imposed as an additional hardware requirement by its customer. These shipment delays had adversely impacted the first and second quarters of 2008. The resumption of these deliveries contributed to a strong fourth quarter but did not make up for the shipment shortfall of the previous quarters. The Orbit Instrument Division also experienced an unrelated customer delivery issue in the first quarter of 2008 that resulted in a shipment shortfall for that period, which was resolved at December 31, 2008. This loss of sales, along with decreased sales from the Company's Tulip subsidiary resulted in a slight increase in sales for the Electronics Group despite the inclusion of ICS in the current period. Sales from the Power Group increased by 9.8% for the current year as the segment recorded a record year of bookings and revenue.

Gross profit, as a percentage of net sales, for the year ended December 31, 2008 decreased to 42.2% from 43.4% for the prior year. This decrease resulted from a lower gross profit from the Company's Electronics Group (38.7% v. 42.9%) due to a decrease in sales from both the Orbit Instrument Division and Tulip. The increase in gross profit (47.2% v. 44.3%) from the Power Group was principally due to the increase in sales and to product mix.

Selling, general and administrative expenses increased by 19.9% to $10,469,000 for the year ended December 31, 2008 from $8,729,000 for the year ended December 31, 2007 principally due to the inclusion of ICS's selling, general and administrative costs of $1,741,000 in the current period. Selling, general and administrative expenses, as a percentage of sales, for the year ended December 31, 2008 increased to 38.3% from 33.7% for the year ended December 31, 2007 principally due to the aforementioned increase in costs that was not commensurate with the increase in sales.

After completing the impairment testing of goodwill and other intangible assets pursuant to Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), the Company concluded an impairment charge of $6,889,000 should be taken at December 31, 2008 in connection with the recorded goodwill arising from its Tulip and ICS acquisitions made in 2005 and 2007, respectively.

Interest expense for the year ended December 31, 2008 increased to $342,000 from $332,000 for the year ended December 31, 2007 due to an increase in the amounts owed to lenders in the current year due to the acquisition of ICS effective December 31, 2007, that was partially offset by a reduction in interest rates.

Investment and other income for the year ended December 31, 2008 decreased to $154,000 from $447,000 for the prior year principally due to a decrease in the amounts invested during the current year, a decrease in interest rates and a $130,000 other than temporary impairment loss related to certain corporate bonds held by the Company. For the year ended December 31, 2007, the Company had a $50,000 other than temporary impairment loss related to its corporate bond portfolio.

Loss before income tax provision was $5,987,000 for the year ended December 31, 2008 compared to income of $2,612,000 for the year ended December 31, 2007. This decrease was principally due to the goodwill impairment charge, a decrease in sales from both the Orbit Instrument Division and Tulip, the decrease in gross margins, the increase in selling, general and administrative expense, the decrease in investment and other income and despite the increase in sales and profitability from the Power Group.

Income taxes for the year ended December 31, 2008 and December 31, 2007 consist of $20,000 and $30,000, respectively, in state income taxes that cannot be offset by any state net operating loss carry-forwards.

As a result of the foregoing, net loss for the year ended December 31, 2008 was $6,007,000 compared to income of $2,582,000 for the year ended December 31, 2007.

Earnings before interest, taxes, depreciation and amortization (EBITDA) for the year ended December 31, 2008 decreased to $2,070,000 from $3,505,000 for the year ended December 31, 2007. Listed below is the EBITDA reconciliation to net income:

                                              Year  ended
                                             December  31,
                                             -------------
                                       2008                   2007
                                       ----                   ----

Net  (loss)  income              $(6,007,000)            $2,582,000
Interest  expense                    342,000                332,000
Income  tax  expense                  20,000                 30,000
Goodwill  impairment               6,889,000                    -
Depreciation  and  amortization      826,000                561,000
                                 ------------           ------------
EBITDA                            $2,070,000             $3,505,000
                                  ===========            ==========

EBITDA is a Non-GAAP financial measure and should not be construed as an alternative to net income. An element of the Company's growth strategy has been through strategic acquisitions which have been substantially funded through the issuance of debt. This has resulted in significant interest expense and amortization expense. EBITDA is presented as additional information because the Company believes it is useful to our investors and management as a measure of cash generated by our business operations that will be used to service our debt and fund future acquisitions as well as provide an additional element of operating performance.

Liquidity, Capital Resources and Inflation

Working capital decreased to $17,136,000 at December 31, 2008 as compared to $18,167,000 at December 31, 2007. Despite the decrease in working capital, the ratio of current assets to current liabilities was 4.4 to 1 at December 31, 2008 compared to 4.1 to 1 at December 31, 2007. The reduction in working capital was principally due to the repayment of long-term debt and the purchase of treasury stock.

Net cash used in operating activities for the year ended December 31, 2008 was $1,210,000, primarily attributable to the net loss for the year, the non cash deferred income, increase in accounts receivable and inventory and decrease in accrued expenses, taxes payable and customer advances that was partially offset by the non-cash goodwill impairment charge, amortization of intangible assets, depreciation and stock based compensation, the decrease in cost and estimated earnings in excess of billings and amounts due from ICS sellers, and an increase in accounts payable. Net cash provided by operating activities for the year ended December 31, 2007 was $1,477,000, primarily attributable to net income for the period, the non-cash amortization of intangible assets, depreciation and stock based compensation and the increase in accounts payable that was partially offset by the increase in accounts receivable and inventory and the decrease in customer advances.

Cash flows provided by investing activities for the year ended December 31, 2008 was $2,257,000, attributable to the sale of marketable securities that was partially offset by the purchase of marketable securities and fixed assets, and costs associated with the ICS acquisition. Cash flows used in investing activities for the year ended December 31, 2007 was $3,846,000, attributable to the acquisition of ICS, the purchase of marketable securities and fixed assets that was partially offset by the sale of marketable securities.

Cash flows used in financing activities for the year ended December 31, 2008 was $2,543,000, primarily attributable to the repayments of long term debt and purchase of treasury stock that was partially offset from loan proceeds form the line of credit. Cash flows provided by financing activities for the year ended December 31, 2007 was $2,010,000, attributable to loan proceeds primarily related to the acquisition of ICS and stock option exercises that was partially offset by repayments of debt.

In December 2007, the Company entered into an amended $3,000,000 credit facility with a commercial lender secured by accounts receivable, inventory and property and equipment. In April 2005, the Company entered into a five-year $5,000,000 Term Loan Agreement to finance the acquisition of Tulip ("Tulip Term Loan") and its manufacturing affiliate. In December 2007, the Company entered into a five-year $4,500,000 Term Loan Agreement to finance the acquisition of ICS ("ICS Term Loan"). In connection with the new Term Loan entered into in December 2007, the interest rates on both Term Loan Agreements and the credit facility were amended to equal a certain percentage plus the one month LIBOR depending on a matrix related to a certain financial covenant. The credit facility will continue from year to year unless sooner terminated for an event of default including non-compliance with certain financial covenants. Principal payments under the two term loan facilities are approximately $113,000 per month.

In April 2005, the Company entered into a five year $2,000,000 Promissory Note with the selling shareholders of Tulip ("Tulip Shareholder Note") at an interest rate of prime plus 2.00% (3.25% at December 31, 2008). Principal payments of $100,000 were made on a quarterly basis along with accrued interest. In June 2007, the Company refinanced the balance due on the Promissory Note of $1,050,000 with its primary commercial lender. Under the terms of a new Term Loan, monthly payments of $35,000 will be made over a thirty-month period along with accrued interest pursuant to the interest terms described below.

As a result of lower profitability related to customer shipping delays in the first and second quarter of 2008, the Company was not in compliance with two of its financial covenants at September 30, 2008. In November 2008, the Company entered into amended loan agreements, whereby the Company's primary lender waived the covenant default of two of its financial ratios at September 30, 2008 and the Company renegotiated the financial covenant ratios for the quarterly reporting periods December 31, 2008 and March 31, 2009. Beginning June 30, 2009, the covenants will revert back to their original ratios with a modification to a certain financial ratio covenant definition. The lender instituted an unused line fee of .25% per annum, as a cost to the Company for the waiver and amendment to the loan agreements. In connection therewith, the interest rate on the Tulip Term Loan and Tulip Shareholder Note, increased to the sum of 2.50% plus the one month LIBOR and the interest rate on the ICS Term Loan and line of credit was increased to the sum of 2.25% plus the one month LIBOR. At December 31, 2008, the one month LIBOR was equal to 0.44%. The Company was in compliance with all its financial covenants at December 31, 2008.

The Company's contractual obligations and commitments are summarized as follows:

                                      Less than       1-3            4-5          After 5
Obligation               Total        1 Year          Years          Years        Years
----------               ------       -----           -----          -----        --------

Long-term debt       $ 6,806,000     $1,777,000     $3,690,000      $1,339,000        -

Note payable             399,000        399,000           -              -            -

Employment
  contracts            4,253,000      2,162,000      2,091,000            -           -

Operating leases       3,157,000        789,000      2,092,000         276,000        -
                       ---------      ---------      ---------      ----------    --------

Total contractual
    obligations      $14,615,000     $5,127,000     $7,873,000      $1,615,000        -
                    ============     ==========     ==========      ==========       ===

The Company's existing capital resources, including its bank credit facilities and its cash flow from operations are expected to be adequate to cover the Company's cash requirements for its operations. The Company believes that financing alternatives are available in order to fund future acquisitions.

In August 2008, the Company's Board of directors authorized a stock repurchase program allowing it to purchase up to $3.0 million of its outstanding shares of common stock in open market or privately negotiated transactions. During the period from August 2008 through December 31, 2008, the Company repurchased approximately 237,000 shares at an average price of $2.24 per share. Total consideration for the repurchased stock was approximately $530,000. From August . . .