The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere in this report.

Business Overview

We are (i) a leading supplier and distributor of batteries, related power accessories and security accessories and (ii) a third-party logistics services provider, specializing in supply chain management and value-added services.

Distribution Business

We sell, distribute and market batteries, related power accessories, renewable power products and security accessories under various manufacturer brands, private labels and our own proprietary brands. We are one of the leading domestic distributors of sealed, or "maintenance-free," lead-acid batteries ("SLA batteries"). We also assemble lithium-ion and other custom battery packs. Our principal product lines include:

? batteries and custom battery packs of a wide variety of chemistries, battery chargers and related accessories;

? portable battery-powered products, such as jump starters and 12-volt DC power accessories;

? renewable power products such as solar power generators and solar products; and

? security system components, such as alarm panels, perimeter access controls, horns, sirens, speakers, transformers, cable and wire.

Our customers include original equipment manufacturers (OEMs), distributors and both online and traditional retailers. Our products represent basic power solutions to a wide variety of existing applications in a broad market spectrum. They are used in a diverse and growing range of industries and applications including automotive, medical mobility, consumer goods, electronics, marine, hunting, security and surveillance, telecommunications, powersports, solar and portable power.

The demand for batteries and related power accessories is impacted by consumer preferences, technological developments, fuel costs, which impact manufacturing and shipping, the cost of lead and copper, the two principal raw materials used to manufacture batteries, and general economic conditions. We believe that technological change drives growth as new product introductions accelerate sales and provide us with new opportunities. At the same time, battery chemistries are also evolving due to changes in consumer demands and preferences that are driven, in part, by environmental and safety concerns and the need for greater density power and longer life. Therefore, we continue to stay current regarding advances and changes in battery technology.

Third-Party Logistics

We are also a third-party logistics services provider specializing in supply chain management and value-added services, designed to help customers optimize performance by allowing them to outsource supply chain management functions. Our supply chain management services include inventory sourcing, procurement, warehousing and fulfillment. Our value-added services include custom kitting, private labeling, product development and engineering, graphic design and sales and marketing.

We believe that the demand for third-party logistics and supply chain management solutions is growing, particularly with globalization. To be successful, businesses have not only to excel in their core competencies, but they must also execute their supply chain processes quickly and accurately. To remain competitive, businesses strive to identify ways to more efficiently manage their supply chain and streamline their logistics processes by minimizing inventory levels, reducing order and cash-to-cash cycle lengths and outsourcing manufacturing and assembly operations to low-cost locations. An efficient supply chain has become a critical element to improving financial performance. As a result, businesses are increasingly turning to organizations that provide a broad array of logistics and supply chain solutions. These trends have been further facilitated by the rapid growth of technology enabling seamless electronic interfaces between systems of service providers and their customers.

Operations Overview

We continue to focus on executing upon our long-term strategic plan to penetrate new markets, develop new higher-margin products and diversifying to minimize our exposure to the broader economy.

The acquisition of PTI is indicative of this strategy. PTI is a lithium-ion battery pack assembler and distributer; and holds several ISO certifications required by medical and other specialized purchasers of battery packs. As a result, the acquisition of PTI expands our product and service offerings, adds to our technical capabilities and enables us to penetrate new markets such as medical, military, metering, mining, hobby, handheld communications and OEM applications.

In May 2011, the government of the People's Republic of China implemented a broad based inspection program for manufacturing facilities dealing with hazardous materials including lead. These efforts came in response to a number of incidents involving the release of hazardous materials into the environment, resulting in contamination of water supplies and harm to the local population. Chinese government authorities have been particularly focused on lead acid battery manufacturers given the potential for lead poisoning resulting from the methods used by manufacturing and recycling plants to treat waste product, including its potential release into the environment. The Ministry of Environmental Protection in China has been inspecting these manufacturing plants and has closed a significant number of facilities due to their production practices and poor technical standards as well as their proximity to large population centers. These recent closures have impacted production of lead acid batteries in China and have caused delays and disruptions in the supply of batteries to the United States and other global markets. In turn, we continue to see delays in product shipments from a number of China-based factories in the first quarter of 2012. We continue to monitor this situation as the remaining factories resume production and catch up on backorders. We anticipate the supply chain disruptions to continue through the second quarter of 2012.

On May 4, 2012, pursuant to a Securities Purchase Agreement, dated as of May 4, 2012 ("Agreement"), we sold all of the issued and outstanding membership interests of Monarch for $130,000. Of the purchase price, $50,000 was paid in cash at closing and $80,000 was evidenced by a 6% secured promissory note due May 1, 2014. We expect to realize a pre-tax loss of approximately $500,000 related to the sale of Monarch in our second-quarter financial results. When we first purchased Monarch in January 2009, we believed that it held promise in terms of the variety of Monarch's battery-powered products that might be enhanced by UPG's supply chain infrastructure. Unfortunately, over the past three years we determined there was not enough overlap and opportunity for growth in Monarch to justify continued investment in the business. During that time, Monarch generated operating losses, and we were unable to generate profit or positive cash flow from its operations, however as a result of the sale, we expect improved cash flows for our overall business without the ongoing investment demands from Monarch. Despite the loss on the sale of this business, we are encouraged by the opportunities this transaction presents to refocus UPG's resources and management's time on growing our core business of batteries, related power accessories and third-party logistics.

Results of Operations

The following table compares our statement of operations data for the three months ended March 31, 2012 and 2011. The trends suggested by this table may not be indicative of future operating results, which will depend on various factors including the nature of revenues (sales of batteries and other power accessory products versus logistics or value added services) and the relative mix of products sold (batteries versus other power supply products), which can vary from quarter to quarter, as well as the state of the general economy. In addition, our operating results in future periods may also be affected by acquisitions.

                                                        Three months ended March 31,
                                                     2012                           2011
                                            Amount        Percentage       Amount       Percentage
                                                          (dollars in thousands)
Net sales                                  $  26,410          100.0 %    $  21,587          100.0 %
Cost of sales                                 21,734           82.3 %       17,278           80.0 %
Gross profit                                   4,676           17.7 %        4,309           20.0 %
Operating expenses                             4,167           15.8 %        3,536           16.4 %
Operating income                                 509            1.9 %          773            3.6 %
Interest expense, net                           (144 )         (0.5 %)        (141 )         (0.6 %)
Other income, net                                125            0.5 %            -              -
Income before provision for income taxes         490            1.9 %          632            3.0 %
Provision for income taxes                      (198 )         (0.8 %)        (229 )         (1.1 %)
Net income                                 $     292            1.1 %    $     403            1.9 %

Comparison of the three months ended March 31, 2012 and 2011

Net sales

Consolidated net sales for the three-month period ended March 31, 2012 was $26.4 million compared to $21.6 million for 2011, an increase of $4.8 million, or 22.3%. Net sales to customers other than ADT and its authorized dealers increased to $23.5 million in the 2012 period from $16.8 million in 2011 period. This increase is attributable to fulfillment of customer order back logs, new customers and PTI sales. Net sales to ADT and its authorized dealers, our largest customer, were $2.9 million in the 2012 period compared to $4.7 million in the 2011 period, a decrease of approximately 36.3%.

Cost of sales

Cost of sales is comprised of the base product cost, freight, duty and servicing fees where applicable. Cost of sales totaled $21.7 million for the three-month period ended March 31, 2012 compared to $17.3 million in the comparable 2011 period, an increase of $4.4 million, or 25.8%. Cost of sales as a percentage of sales increased to 82.3% in the 2012 period from 80.0% for 2011. This increase was driven by the closure of a significant number of factories as a result of the China Ministry of Environmental Protection's investigative efforts on production practices, which in turn resulted in disruptions and shortages in the supply of batteries to the United States and other global markets. Our overall gross margin for the three-month period ended March 31, 2012, was approximately 17.7% compared to a gross margin of 20% for the comparable period in 2011.

Operating expenses

Operating expenses for the three-month period ended March 31, 2012 increased by approximately $631,000, or 17.8%, compared to 2011. The increase in operating expenses is attributable to an increase of $310,000 in personnel and sales representative costs which also includes PTI related personnel and sales representatives, $283,000 in professional fees, which includes litigation expenses on matters that were settled in the first quarter, $75,000 in marketing expenses, $40,000 in travel and entertainment expenses and $29,000 in facility expenses, offset by a decrease of $46,000 in insurance expense, $23,000 in bad debt expense, $21,000 in depreciation and amortization expenses and $16,000 in various operational expenses.

Operating income

Operating income for the three-month period ended March 31, 2012 was approximately $0.5 million compared to $0.8 million in the corresponding 2011 period.

Interest expense

Interest expense totaled approximately $144,000 for the three-month period ended March 31, 2012 compared to $141,000 for the corresponding 2011 period, a increase of approximately $3,000. The average outstanding loan balance on the line of credit for the 2012 and 2011 periods was $13.3 million and $11.6 million, respectively, with a weighted average interest rate of 2.53% on all 2012 borrowings and a weighted average interest rate of 2.56% on 2011 borrowings.

Income taxes

We recorded an income tax expense on continuing operations of approximately $0.2 million for each of the three-month periods ended March 31, 2012 and 2011. Our effective tax rate was 40.5% and 36.3% for the three-month periods ended March 31, 2012 and 2011, respectively. The rates reflect federal as well as state taxes. Our effective tax rate was higher than the federal statutory rate of 34% for the three-month period ended March 31, 2012 due to state income taxes and items not deductible for income tax reporting.

Liquidity and capital resources

We had cash and cash equivalents of approximately $0.4 million and $0.3 million at March 31, 2012 and December 31, 2011, respectively.

For the three-month period ended March 31, 2012, net cash used in operating activities was approximately $1.1 million compared to $4.9 million provided by operating activities for the three-month period ended March 31, 2011. The net cash used in operating activities for 2012 reflects an increase in trade accounts receivable of $3.0 million, an increase in prepaid expenses and other current assets of $1.8 million, partially offset by an increase in accounts payable of $3.4 million. This change in working capital is attributable to the increase in sales volume and an increase in inventory purchases.

Cash used in investing activities for the three-month period ended March 31, 2012 was $17,000 compared to $0 for the corresponding period in 2011. The increase in cash used in investing activities is due to purchases of property and equipment in 2012.

Net cash provided by financing activities for the three-month period ended March 31, 2012 was approximately $1.2 million as compared to $5.0 million used in financing activities for the corresponding period in 2011. The increase in cash provided by financing activities was primarily due to draw down our line of credit offset by payments on capital lease and note obligations.

We have a revolving credit agreement with Wells Fargo that terminates on July 30, 2013. The credit agreement provides that we may borrow up to $30.0 million, with the possibility that we can increase the line to $40.0 million if we can satisfy certain defined criteria. All of our assets secure our obligations under the credit agreement. Our borrowing availability is limited to 80% of "eligible accounts receivable" and 80% of "eligible inventory," as those terms are defined in the credit agreement. For each borrowing, we have the option to choose a "Base Rate," or "Eurodollar," loan. Interest on Base Rate loans is payable quarterly and interest on Eurodollar loans is generally payable monthly or quarterly at our option. The annual rate of interest payable on Base Rate and Eurodollar loans fluctuate depending upon a number of factors, all as described in the credit agreement. At March 31, 2012, the interest rate was 2.53%.

The credit agreement contains negative covenants restricting our ability to take certain actions without Wells Fargo's consent, including incurring additional indebtedness, transferring or encumbering assets, paying dividends or making certain other payments, and acquiring other businesses. If there is an "event of default", including failure to pay, bankruptcy, breach of covenants and breach of representations and warranties, all amounts outstanding under the credit facility will become immediately due and payable. In addition, we must maintain certain financial covenants on a quarterly basis.

At March 31, 2012, approximately $13.9 million was outstanding under the credit facility out of a maximum availability of approximately $19.7 million based on the borrowing formula.

We believe that cash provided by operations and cash available under our line of credit will be sufficient to meet our operational needs over the next year.

At December 31, 2011, we did not have any material commitments for capital expenditures. We may enter into various commitments during 2012 if expansion opportunities arise. We will disclose material items in press releases and other appropriate filings as they develop. We have no off balance sheet financing arrangements.