Summary of BULOVA TECHNOLOGIES GROUP, INC.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

Certain portions of this report, and particularly the Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Notes to Consolidated Financial Statements, contain forward-looking statements which represent the Company's expectations or beliefs concerning future events. The Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements.

Overview:

Starting January 1, 2009, Bulova Technologies Group, Inc. has operated in two business segments. The Government Contracting segment is focused on the production and procurement of military articles for the US. Government and other Allied Governments throughout the world, and is accounted for through two of the Company's wholly owned subsidiaries, Bulova Technologies Ordnance Systems LLC., and Bulova Technologies (Europe) LLC, The Contract Manufacturing segment produced cable assemblies, circuit boards as well as complete systems, and is accounted for through BT Manufacturing Company, LLC, another of its wholly owned subsidiaries. In June of 2010, because of continuing losses in our contract manufacturing business segment, the Company announced management's decision to market BT Manufacturing Company LLC for sale. During the quarter ended March 31, 2011, the Company accomplished this disposition. For reporting purposes, the Company has identified the assets and liabilities of BT Manufacturing Company LLC as pertaining to discontinued operations and has segregated its operating results and presented them separately as a discontinued operation for all periods. With the Company's disposal of BT Manufacturing Company LLC, the Company is no longer operating more than one business segment as all efforts of the company are now focused on Department of Defense contracting.

Application of critical accounting policies:

Management's Discussion and Analysis of our Financial Condition and Results of Operations is based on the Company's unaudited Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and corresponding disclosures at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we continue to evaluate our estimates which in large part are based on historical experience and on various assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Results of operations :

Discontinued Operations

For the year ended September 30, 2011 compared to the year ended September 30, 2010.

The results of operations of BT Manufacturing Company LLC, reported as discontinued operations reflect a gain of $486,416 for the year ended September 30, 2011 as compared to an operational loss of $3,621,754 and an estimated loss on disposal of $3,550,000 for the year ended September 30, 2010. The reason for the gain after the discontinuance is primarily a result of over estimating the amount of loss to be incurred. The only items remaining to be resolved are the ultimate resolution of a small amount of payables and the debt the Company could not get resolved with the disposition.

Continuing Operations

Revenue for continuing operations for the year ended September 30, 2011 of $4,903,292 is a decrease of $6,766,570 when compared to the revenue for the year ended September 30, 2010 of $11,669,862.

Cost of revenues for continuing operations for the year ended September 30, 2011 of $3,136,389 is a decrease of $5,439,745 when compared to the cost of revenues for the year ended September 30, 2010 of $8,576,134.

Gross profit for continuing operations for the year ended September 30, 2011 of $1,766,903 is a decrease of $1,326,825 when compared to the gross profit for the year ended September 30, 2010 of $3,093,728.

Selling and administrative expenses for continuing operations for the year ended September 30, 2011 of $5,475,857 is an increase of $1,071,986 when compared to selling and administrative expense for the year ended September 30, 2010 of $4,403,871.

Stock based compensation for continuing operations for the year ended September 30, 2011 of $3,020,055 is an increase of $2,436,009 when compared to stock based compensation for the year ended September 30, 2010 of $584,046.

Depreciation and amortization expense for continuing operations for the year ended September 30, 2011 of $2,141,931 is an increase of $1,516,202 when compared to depreciation and amortization for the year ended September 30, 2010 of $625,729. The increase relates primarily to the amortization of debt discounts and loan costs associated with new debt incurred during the current fiscal year

Interest expense for continuing operations for the year ended September 30, 2011 of $1,012,163 is an increase of $280,255 when compared to interest expense for the year ended September 30, 2010 of $731,908 and is due to increased debt incurred during the current fiscal year.

Other income for the year ended September 30, 2011 of $1,273,735 is primarily the result of a dispute settlement in favor of the Company in the amount of $1,272,545.

The Company's net loss from continuing operations for the year ended September 30, 2011 of $8,609,368 is an increase of $5,357,483 when compared to the net loss for the year ended September 30, 2010 of $3,251,885. This increase in net loss is due primarily to the amortization of debt discounts and stock based compensation.

Liquidity and capital resources:

As of September 30, 2011, the Company's sources of liquidity were new debt and loans from shareholders.

As of September 30, 2011, we had $169,499 in cash and cash equivalents.

Cash flows used in operating activities was $2,355,206 for the year ended September 30, 2011. Continuing operations used cash flows of $2,239,035, while discontinued operations used $116,171.

Cash flows used in investing activities was $234,180 for the year ended September 30, 2011, and was all used by continuing operations.

Cash flows from financing activities were $2,746,280 for the year ended September 30, 2011, and was all provided by continuing operations. Cash flows provided by continuing operations consisted primarily of new debt in the amount of $3,581,500, and proceeds from sale of stock in the amount of $633,000.

The Company's ability to cover its operating and capital expenses, and make required debt service payments will depend primarily on its ability to generate substantial operating cash flows.

The Company's business may not generate cash flows at sufficient levels, and it is possible that currently anticipated contract awards may not be achieved. If we are unable to generate sufficient cash flow from operations to service our debt, we may be required to reduce costs and expenses, sell assets, reduce capital expenditures, refinance all or a portion of our existing debt as well as our operating needs, or obtain additional financing and we may not be able to do so on a timely basis, on satisfactory terms, or at all. Our ability to make scheduled principal payments or to pay interest on or to refinance our indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the U.S. defense industry and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.

While the Company believes that anticipated revenues resulting from additional contract awards accompanied by its efforts will be sufficient to bring profitability and a positive cash flow to the Company, it is uncertain that these results can be achieved. Accordingly, the Company will, in all likelihood have to raise additional capital to operate. There can be no assurance that such capital will be available when needed, or that it will be available on satisfactory terms.

There are no off-balance sheet arrangements.

Our ability to utilize net operating loss carry forwards may be limited

As of September 30, 2011, the Company had net operating loss carry forwards (NOLs) of approximately $17.3 million for federal income tax purposes that will begin to expire between the years of 2019 and 2027. These NOLs may be used to offset future taxable income, to the extent we generate any taxable income, and thereby reduce or eliminate our future federal income taxes otherwise payable.
Section 382 of the Internal Revenue Code imposes limitations on a corporation's ability to utilize NOLs if it experiences an ownership change as defined in
Section 382. In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percent over a three-year period. In the event that an ownership change has occurred, or were to occur, utilization of our NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate as defined in the Internal Revenue Code. Any unused annual limitation may be carried over to later years. We may be found to have experienced an ownership change under Section 382 as a result of events in the past or the issuance of shares of common stock upon a conversion of notes, or a combination thereof. If so, the use of our NOLs, or a portion thereof, against our future taxable income may be subject to an annual limitation under Section 382, which may result in expiration of a portion of our NOLs before utilization.