Business Outlook

The business outlook for the Company is excellent. The order backlog, together with potential new orders realized from outstanding quotations by the Company, remain at a high level. Expectations are for product mix and margins to remain favorable for fiscal year 2010, and management expects revenues to increase in fiscal year 2010 over fiscal year 2009. During fiscal 2009 new orders received by the Company were approximately $21.6 million. The order backlog of approximately $39.1 million at June 30, 2009 gives the Company a solid base of future sales. It is presently anticipated that a minimum of $29.6 million of orders comprising the June 30, 2009 backlog will be filled during the fiscal year ending June 30, 2010. The minimum of $29.6 million does not include any shipments, which may be made against orders subsequently received during the fiscal year ending June 30, 2010. The backlog represents the estimated remaining sales value of work to be performed under firm contracts.

In addition to the backlog, the Company currently has outstanding quotations representing in excess of $66.6 million in the aggregate for both repeat and new programs. Many potential orders are currently being discussed and negotiated with existing and potential new customers. The outstanding quotations encompass various new and previously manufactured power supplies, transformers, and subassemblies. However, there can be no assurance that the Company will acquire any or all of the anticipated orders described above, many of which are subject to allocations of the United States defense spending and factors affecting the defense industry and military procurement generally.

Two significant customers in fiscal 2009 and 2008 represented 63% and 56%, respectively, of the Company's total sales. These sales represent significant programs which the Company is a significant supplier of parts. While the Company has always had a small number of customers that make up its total sales in any given year, management is pursuing opportunities with current and new customers with an objective of lowering the overall concentration of sales, mitigating excessive reliance upon a single major product of a particular program and minimizing the impact of loss of a single significant customer. We anticipate significant new orders against the three programs discussed below in the Results of Operations, which, if realized, will diversify our customer base.

Management continues to invest in capital equipment to upgrade its technology and stay current with the industry. Capital expenditures are expected to be approximately $350,000 for fiscal 2010. Also, management along with the Company's Board of Directors continues to look for potential opportunities to expand the Company's business through acquisitions.

Results of Operations

Net Sales for fiscal years ended June 30, 2009 and 2008, were $27,241,635 and $25,701,739, respectively, a 6% increase. This increase can be attributed to the contract specific nature of the Company's business and the timing of deliveries on these contracts. More specifically, shipments of power supplies, spares, and antennas increased by approximately $2.3 million offset by a decrease of approximately $.9 million in transformer shipments.

For the fiscal years ended June 30, 2009 and 2008 gross profits were $6,086,726 and $6,862,246, respectively. Gross profit as a percentage of sales was 22.3% and 26.7%, for fiscal 2009 and 2008, respectively. The primary factor in determining gross profit and net income is product mix. The gross profits on mature products and build to print contracts are higher as compared to products that are still in the engineering development stage or in the early stages of production. In any given accounting period the mix of product shipments between higher margin mature programs and less mature programs including loss contracts, has a significant impact on gross profit and net income. The reduced gross profit and gross profit percentage in fiscal 2009 as compared to fiscal 2008 was primarily the result of unexpected losses incurred on three programs with significant engineering and production time required for design efforts. These three programs experienced significant cost overruns due to extended product qualification testing and difficulties moving the products from engineering design into full production. Currently, one program has completed qualification testing and has moved into full production. The other two programs are still in pre-qualification stages and have made significant progress towards completion. Management is not anticipating any significant future losses on these programs. Management continues to evaluate the Company's workforce to ensure that production and overall execution of the backlog orders and additional anticipated orders are successfully obtained and executed. Employment of full time equivalents at June 30, 2009 was 169 compared to 170 people at June 30, 2008.

Selling, general and administrative expenses were $2,826,676 for the fiscal year ended June 30, 2009, an increase of $203,363, or 7.8% as compared to the prior year. This increase relates primarily to an increase in wages and commissions, travel expenses and consulting fees.

Other income for the fiscal years ended June 30, 2009 and 2008 was $345,010 and $712,252, respectively, a 51.6% decrease. This decrease is due to a drop in scrap metal income and interest income on the Company's cash and cash equivalents and short-term investments. The decrease in interest income is due to lower interest rates available as well as lower cash and cash equivalent and short-term investment balances. The Company does not believe that there is significant risk associated with its investment policy, since at June 30, 2009 all of the investments were primarily represented by short-term liquid investments including certificates of deposit and money market funds.

The effective income tax rate was 24.2% in fiscal 2009 and 30.9% in fiscal 2008. The effective tax rate is less than the statutory tax rate mainly due to the benefit the Company receives on its Qualified Production Activities and the benefit derived from the ESOP dividends paid on allocated shares. The deduction for ESOP dividends was substantially larger in 2009 as compared to 2008, due to the special dividend of $1.50 per share that was paid to ESOP participants in August 2009.

Net income for fiscal 2009, was $2,733,240 or $1.30 and $1.29 per share, basic and diluted, respectively, compared to net income of $3,421,869 or $1.65 and $1.63 per share, basic and diluted, respectively, for fiscal 2008. The decrease in net income per share was primarily due to loss contracts in three programs described above resulting in lower gross profits, higher selling, general and administrative costs and the decrease in interest income.

Liquidity and Capital Resources

The Company's working capital is an appropriate indicator of the liquidity of its business, and during the past two fiscal years, the Company, when possible, has funded all of its operations with cash flows resulting from operating activities and when necessary from its existing cash and investments. The Company did not borrow any funds during the last three fiscal years. Management had available a $3,000,000 line of credit to help fund further growth or working capital needs, but did not anticipate the need for any borrowed funds in the foreseeable future and therefore did not renew the line of credit which expired November 30, 2007.

The Company's working capital as of June 30, 2009 and 2008 was $25,726,492 and $27,448,722, respectively. During 2009 and 2008 the Company repurchased 19,899 and 36,091 shares, respectively, of its common stock from the Company's Employee Retirement Plan and Trust ("ESOP") and in other open market transactions, for a total purchase price of $311,545 and $769,443 respectively. Under existing authorizations from the Company's Board of Directors, as of June 30, 2009, management is authorized to purchase an additional $1,688,454 million of Company stock.

The table below presents the summary of cash flow information for the fiscal year indicated:

                                                         2009          2008
                                                         ----          ----
Net cash provided by operating activities             $   384,936   $ 4,147,247
Net cash provided by (used in) investing activities       731,666    (3,598,961)
Net cash used in financing activities                  (5,193,036)   (4,792,644)

Net cash provided by operating activities fluctuates between periods primarily as a result of differences in net income, the timing of the collection of accounts receivable, purchase of inventory, receipt of progress payments, level of sales and payments of accounts payable. Net cash provided by investing activities increased in fiscal 2009 due to the increase in proceeds from the maturity of short-term investments. The increase in cash used in financing activities is due primarily to an increase in dividends paid on common stock. Included in dividends paid are two special dividends of $1.50 per share that were paid in December 2008 and March 2008.

The Company believes that the cash generated from operations and when necessary, from existing cash and cash equivalents, will be sufficient to meet its long-term funding requirements for the foreseeable future.

Management believes that the Company's reserve for bad debts of $3,000 is adequate given the customers with whom the Company does business. Historically, bad debt expense has been minimal.

During fiscal year 2009 and fiscal 2008, the Company expended $280,790 and $517,959, respectively, for plant improvements and new equipment. The Company has budgeted approximately $350,000 for new equipment and plant improvements in fiscal 2010. Management anticipates that the funds required will be available from current operations.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in note 2 to the financial statements. We believe our most critical accounting policies include revenue recognition and cost estimation on our contracts.

Revenue Recognition and Estimates

A significant portion of our business is comprised of development and production contracts. Generally revenues on long-term fixed-price contracts are recorded on a percentage of completion basis using units of delivery as the measurement basis for progress toward completion.

Percentage of completion accounting requires judgment relative to expected sales, estimating costs and making assumptions related to technical issues and delivery schedules. Contract costs include material, subcontract costs, labor and an allocation of overhead costs. The estimation of cost at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Given the significance of the estimation processes and judgments described above, it is possible that materially different amounts of expected sales and contract costs could be recorded if different assumptions were used, based on changes in circumstances, in the estimation process. When a change in expected sales value or estimated cost is determined, changes are reflected in current period earnings.