Results of Operations

The table presented below, which compares our first quarterly period of operations from 2009 to 2008, presents the results for each period, the change in those results from 2009 to 2008 in both dollars and percentage change and the results for each period as a percentage of net revenue. The columns present the following:

· The first two data columns in the table show the absolute results for each period presented.

· The columns entitled "Year Over Year Change" and "Year Over Year Percentage Change" show the change in results, both in dollars and percentages. These two columns show favorable changes as positive and unfavorable changes as negative. For example, when our net revenue increases from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one period to the next, that change is shown as a negative number in both columns.

· The last two columns in the table show the results for each period as a percentage of net revenue. In these two columns, the cost of sales and gross profit for each are given as a percentage of that segment's net revenue. These amounts are shown in italics.

In addition, as used in the table, "NM" means "not meaningful."

Three Months Ended April 5, 2009 Compared to Three Months Ended March 30, 2008

                                                                                              Year Over
                                                                          Year Over             Year               Results as Percentage of
                                                                            Year             Percentage            Net Revenue for the Three
                                            Three Months Ended,            Change              Change                    Months Ended
                                          April 5,      March 30,         Favorable           Favorable          April 5,            March 30,
                                            2009           2008         (Unfavorable)       (Unfavorable)          2009                2008
                                                                         (in thousands, except percentage data)
Net revenue:
Industrial Group                         $   37,498     $   69,815     $       (32,317 )             (46.3 )%          45.9 %              65.7 %
Aerospace & Defense                          30,211         23,424               6,787                29.0             37.0                22.0
Test & Measurement                           13,982         13,023                 959                 7.4             17.1                12.3
Electronics Group                            44,193         36,447               7,746                21.3             54.1                34.3
Total                                        81,691        106,262             (24,571 )             (23.1 )          100.0               100.0

Cost of sales:
Industrial Group                             40,200         62,986              22,786                36.2            107.2                90.2
Aerospace & Defense                          26,955         20,525              (6,430 )             (31.3 )           89.2                87.6
Test & Measurement                           10,181          9,685                (496 )              (5.1 )           72.8                74.4
Electronics Group                            37,136         30,210              (6,926 )             (22.9 )           84.0                82.9
Total                                        77,336         93,196              15,860                17.0             94.7                87.7

Gross profit (loss):
Industrial Group                             (2,702 )        6,829              (9,531 )            (139.6 )           (7.2 )               9.8
Aerospace & Defense                           3,256          2,899                 357                12.3             10.8                12.4
Test & Measurement                            3,801          3,338                 463                13.9             27.2                25.6
Electronics Group                             7,057          6,237                 820                13.1             16.0                17.1
Total                                         4,355         13,066              (8,711 )             (66.7 )            5.3                12.3

Selling, general and administrative          10,472         10,492                  20                 0.2             12.8                 9.9
Research and development                      1,168            995                (173 )             (17.4 )            1.4                 0.9
Amortization of intangible assets                28             71                  43                60.6                -                 0.1
Nonrecurring expense                          1,981              -              (1,981 )                NM              2.4                   -

Operating (loss) income                      (9,294 )        1,508             (10,802 )                NM            (11.3 )               1.4

Interest expense, net                         1,269            952                (317 )             (33.3 )            1.6                 0.9
Other expense, net                              307              8                (299 )                NM              0.4                   -

(Loss) income before income taxes           (10,870 )          548             (11,418 )                NM            (13.3 )               0.5

Income tax expense                              475            163                (312 )            (191.4 )            0.6                 0.1

Net (loss) income                        $  (11,345 )   $      385     $       (11,730 )                NM            (13.9 )%              0.4 %

Backlog. At April 5, 2009, backlog for our Aerospace & Defense segment decreased $12.4 million to $95.1 million from $107.5 million at March 30, 2008, on a 36% decrease in net orders to $20.4 million in the three months ended April 5, 2009 compared to $31.9 million in net orders in the first three months of 2008. Backlog for our Test & Measurement segment decreased $0.9 million to $6.1 million at April 5, 2009, on $13.2 million in net orders compared to $12.3 million in net orders for the first three months of 2008. We expect to convert approximately 74% of the Aerospace & Defense backlog and 100% of the Test & Measurement backlog at April 5, 2009 to revenue during the next twelve months.

Net Revenue. The Industrial Group primarily derives its revenue from manufacturing services and product sales. Compared to the prior year, net revenue in the Industrial Group decreased 46.3% or $32.3 million for the three months ended April 5, 2009. Depressed market conditions for heavy and light trucks and commercial vehicles have contributed to volume related reductions in net revenue of $18.2 million. Volume declines for trailer axles caused a $5.5 million reduction from 2008. Revenue also declined approximately $7.9 million from the discontinued sale of axle shafts to an automotive customer. Further, contractual settlements and price reductions resulted in a $4.3 million decrease in net revenue from 2008. Partially offsetting the volume change was an increase in steel prices, which is passed through to customers under certain contracts, resulting in an increase in net revenue of $3.6 million.

The Aerospace & Defense segment derives its revenue from product sales and technical outsourced services. Aerospace & Defense segment net revenue for the first quarter increased 29.0% or $6.8 million from the prior year, primarily due to increased sales of link encryption products and certain data recording products.

The Test & Measurement segment derives its revenue from technical services and product sales. Technical services revenue accounted for approximately 85% and 88% of total Test & Measurement revenue in the first three months of 2009 and 2008, respectively. Test & Measurement segment net revenue increased 7.4% or $1.0 million for the first quarter primarily due to a $0.7 million increase in volumes of magnetic meters and a $0.5 million increase in calibration services, partially offset by a $0.2 million decrease in product test services.

Gross Profit. The Industrial Group's gross profit decreased to a loss of $2.7 million in the first quarter of 2009 as compared to profit of $6.8 million in the first quarter of 2008. The significant decrease in sales volume and related loss of fixed overhead absorption resulted in a reduction in gross profit of approximately $6.4 million. Higher utilities combined with an increase in employee benefit related costs resulted in a reduction in gross profit of approximately $0.7 million. The Industrial Group also realized a decline in gross profit of $4.3 million as a result of lower revenue from contractual settlements and pricing as compared to the prior year period. The decreases in gross profit were partially offset by approximately $1.9 million in productivity improvements.

The Aerospace & Defense segment's gross profit increased $0.4 million in the first quarter of 2009, primarily due to increased revenues. Gross profit as a percentage of revenue in the first quarter of 2009 declined to 10.8% as compared to 12.4% in the prior year period.

The Test & Measurement segment's gross profit increased $0.5 million for the first quarter of 2009, primarily due to increased revenues. Gross profit as a percentage of revenue increased to 27.2% from 25.6% in the prior year period as a result of an increase in higher margin product sales.

Selling, General and Administrative. Selling, general and administrative expense remained flat at $10.5 million and increased as a percentage of revenue to 12.8% from 9.9% in the prior year. The current period results include approximately $0.5 million of non-capitalized legal and professional fees related to the debt amendment in the first quarter of 2009.

Research and Development. Research and development costs increased $0.2 million to $1.2 million from the prior year quarter primarily due to new product development efforts within our Aerospace & Defense segment.

Nonrecurring Expense, Net. In December 2008, we announced a restructuring program, which included the closure of the Industrial Group's Kenton and Marion, Ohio facilities and the consolidation of Sypris Electronics and Sypris Data Systems into a single operation within the Aerospace & Defense segment. Additionally, we have exited several programs within the Aerospace & Defense segment. The purpose of the restructuring program was to reduce fixed costs, accelerate integration efficiencies, and significantly improve operating earnings on a sustained basis. As a result of these initiatives, we recorded, or expect to record in future periods, aggregate pre-tax expenses of approximately $50.4 million, consisting of the following: $4.0 million in severance and benefit costs, $12.3 million in non-cash asset impairments, $16.1 million in non-cash deferred contract costs write-offs, $7.9 million in inventory related charges, $1.9 million in equipment relocation costs, $1.5 million in asset retirement obligations, $3.2 million in contract termination costs and $3.5 million in other restructuring charges. Of the aggregate $52.8 million in pre-tax costs, the Company expects approximately $13.8 million to be cash-related. Of the total program, we recorded $2.0 million, or $0.11 per share, related to these initiatives during the three months ended April 5, 2009, which is included in nonrecurring expense on the consolidated statement of operations. The charge consisted of $0.7 million for employee severance and benefit costs, $0.7 million in equipment relocation costs, $0.1 million in non-cash asset impairments, and $0.5 million in other various charges. See Note 5 to the consolidated financial statements included in this Form 10-Q.

Interest Expense. Interest expense for the first quarter increased $0.3 million primarily due to an increase in the weighted average debt outstanding, partially offset by a decrease in the weighted average interest rate. Our weighted average debt outstanding increased to $72.5 million for the first quarter of 2009 from $53.7 million during the first quarter of 2008. The weighted average interest rate decreased to 5.8% in the first quarter of 2009 from 7.1% in the first quarter of 2008. However, as a result of the debt amendment during the first quarter of 2009, our interest rate increased, which is expected to result in higher interest expense for the balance of 2009.

Income Taxes. The provision for income taxes in the first quarter of 2009 is associated exclusively with our foreign subsidiaries and includes minimum taxes required to be paid in Mexico.

Liquidity, Capital Resources and Financial Condition

Net cash used by operating activities was $7.9 million in the first quarter of 2009, as compared to net cash provided of $18.6 million in 2008, primarily due to significantly lower revenues during the quarter. Additionally net cash provided by operating activities for the first quarter of 2008 included the receipt of $6.9 million as part of the Dana Settlement. Accounts receivable increased within the Aerospace & Defense segment and used $5.7 million of cash as a result of an increase in shipments toward the end of the period. Approximately 45% of the Aerospace & Defense segment's shipments occurred during the last month of the first quarter. Partially offsetting this was a decrease in accounts receivable within the Industrial Group as a result of collection efforts and the reduction in revenue, which provided $4.9 million of cash during the period. Other current assets increased and used $0.2 million primarily as a result of the timing of prepaid expenses. Inventory decreased and provided $6.0 million primarily as a result of a focus on bringing inventory levels down to meet current demand. In the first quarter of 2009, accounts payable decreased and used $5.5 million primarily due to the timing of payments to and from our suppliers and reduced purchases by our Industrial Group. Accrued liabilities decreased and used $0.8 million primarily as a result of the timing of various accruals.

Net cash used in investing activities decreased $2.0 million to $1.7 million for the first three months of 2009, primarily due to lower capital expenditures.

Net cash provided by financing activities was $1.0 million in the first three months of 2009, as compared to net cash used of $10.6 million in the first three months of 2008. We borrowed an additional $2.0 million on the Revolving Credit Agreement during the three months ended April 5, 2009 as compared to making payments of $10.0 million during the three months ended March 30, 2008. Additionally, we paid $0.7 million in financing fees in conjunction with modifications of our debt in 2009.

We had total borrowings under our Revolving Credit Agreement of $45.0 million at April 5, 2009 and an unrestricted cash balance of $5.1 million. Approximately $2.3 million of the unrestricted cash balance relates to our Mexican subsidiaries. In March 2009, our Revolving Credit Agreement and Senior Notes were amended to, among other things, i) waive the defaults as of December 31, 2008, ii) limit total borrowings, iii) revise the maturity date for the Credit Agreement and Senior Notes to January 15, 2010, iv) revise certain financial covenants, v) restrict the payment of dividends, vi) require mandatory prepayment to the extent that marketable securities or other collateral is sold outside of the ordinary course of business, and vii) increase our interest rate structure. As of April 5, 2009, we were in compliance with all covenants.

Maximum borrowings under the Revolving Credit Agreement are $50.0 million, and standby letters of credit up to a maximum of $15.0 million may be issued under the Revolving Credit Agreement, of which $2.0 million were issued at April 5, 2009.

We also had purchase commitments totaling approximately $28.6 million at April 5, 2009, primarily for inventory and manufacturing equipment.

Assuming we are able to renegotiate our current Revolving Credit Agreement and Senior Notes, we believe that sufficient resources will be available to satisfy our cash requirements for at least the next twelve months. Our assessment of the availability of funds for the next twelve months is based in part on our intent to renegotiate our current Revolving Credit Agreement and Senior Notes or to retire both of these obligations in connection with the execution of new debt financing agreements. There can be no assurance that any additional required financing will be available through bank borrowings, debt or equity financings or otherwise, or that if such financing is available, it will be available on terms acceptable to us. If adequate funds are not available on acceptable terms, our business, results of operations and financial condition could be adversely affected.

Cash requirements for periods beyond the next twelve months depend on our profitability, our ability to manage working capital requirements and our rate of growth. If our largest customers experience financial difficulty, or if working capital and capital expenditure requirements exceed expected levels during the next twelve months or in subsequent periods, we may require additional external sources of capital. There can be no assurance that any additional required financing will be available through bank borrowings, debt or equity financings or otherwise, or that if such financing is available, it will be available on terms acceptable to us. If adequate funds are not available on acceptable terms, our business, consolidated results of operations and financial condition could be materially adversely affected.

Critical Accounting Policies

See the information concerning our critical accounting policies included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Policies in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. There have been no significant changes in our critical accounting policies during the first quarter of 2009.

Forward-looking Statements

This quarterly report, and our other oral or written communications, may contain "forward-looking" statements. These statements may include our expectations or projections about the future of our industries, business strategies, potential acquisitions or financial results and our views about developments beyond our control, including domestic or global economic conditions, trends and market developments. These statements are based on management's views and assumptions at the time originally made, and we undertake no obligation to update these statements, even if, for example, they remain available on our website after those views and assumptions have changed. There can be no assurance that our expectations, projections or views will come to pass, and undue reliance should not be placed on these forward-looking statements.

A number of significant factors could materially affect our specific business operations, and cause our performance to differ materially from any future results projected or implied by our prior statements. Many of these factors are identified in connection with the more specific descriptions contained throughout this report. Other factors which could also materially affect such future results currently include: the effects of a continuing economic downturn which could reduce our revenues, negatively impact our customers or suppliers and materially, adversely affect our financial results; our ability to liquidate our equity interests in Dana Holding Corporation at satisfactory valuation levels; potential impairments, non-recoverability or write-offs of goodwill, assets or deferred costs, including deferred tax assets in the U.S. or Mexico; fees, costs or other dilutive effects of refinancing, compliance with covenants in, or acceleration of, our loan and other debt agreements; unexpected or increased costs, time delays and inefficiencies of restructuring our manufacturing capacity; breakdowns, relocations or major repairs of machinery and equipment; our inability to successfully launch new or next generation programs; the cost, efficiency and yield of our operations and capital investments, including working capital, production schedules, cycle times, scrap rates, injuries, wages, overtime costs, freight or expediting costs; cost and availability of raw materials such as steel, component parts, natural gas or utilities; volatility of our customers' forecasts, financial conditions, market shares, product requirements or scheduling demands; adverse impacts of new technologies or other competitive pressures which increase our costs or erode our margins; failure to adequately insure or to identify environmental or other insurable risks; inventory valuation risks including obsolescence, shrinkage, theft, overstocking or underbilling; changes in government or other customer programs; reliance on major customers or suppliers, especially in the automotive or aerospace and defense electronics sectors; revised contract prices or estimates of major contract costs; dependence on, recruitment or retention of key employees; union negotiations; pension valuation, health care or other benefit costs; labor relations; strikes; risks of foreign operations; currency exchange rates; the costs and supply of debt, equity capital, or insurance (including the possibility that our common stock could cease to qualify for listing on the NASDAQ Stock Market due to a sustained decline in prices per share, or that any reverse stock split or other restructuring of our debt or equity financing could be accompanied by the deregistration of our common stock or other "going private" transactions); changes in licenses, security clearances, or other legal rights to operate, manage our work force or import and export as needed; weaknesses in internal controls; the costs of compliance with our auditing, regulatory or contractual obligations; regulatory actions or sanctions; disputes or litigation, involving customer, supplier, creditor, stockholder, product liability, asbestos-related or environmental claims; war, terrorism or political uncertainty; unanticipated or uninsured disasters, losses or business risks; inaccurate data about markets, customers or business conditions; or unknown risks and uncertainties and the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

In this quarterly report, we may rely on and refer to information and statistics regarding the markets in which we compete. We obtained this information and these statistics from various third party sources and publications that are not produced for the purposes of securities offerings or reporting or economic analysis. We have not independently verified the data and cannot assure the accuracy of the data we have included.