The following discussion should be read in conjunction with the audited consolidated financial statements and the notes thereto appearing elsewhere in this report and is qualified in its entirety by the foregoing.

Executive Overview

Epolin, Inc. (the "Company", "we", "us" and "our") which was incorporated in the State of New Jersey in May 1984, is a specialized chemical company primarily engaged in the manufacturing, marketing, research and development of dyes and dye formulations. Our business is heavily weighted towards the development, manufacture and sale of near infrared dyes. Applications for these dyes cover several markets that include laser protection, welding, sunglasses, optical filters, glazing and imaging and security inks and tagants. Paralleling the growth of the dye business, we maintain a level of production and sales of specialty products made on a custom basis. These include additives for plastics, thermochromic materials for use in paints as well as other specialty chemicals made in low volume to sell at prices that reflect the value of the product. However, unlike the dye business, we do not expect our specialty chemical business to grow.

We sell our products to manufacturers of plastics/resins, credit cards, electronics, glass and other basic materials. Our customers are located in all regions of the world, although a material portion of our business is dependent on certain domestic customers, the loss of which could have a material effect on operations. During the year ended February 29, 2012, approximately 22.7% of sales were to three customers. During the year ended February 28, 2011, approximately 28.7% of sales were to three customers. The loss of one or more key customers could have a material adverse effect on the Company.

Results of Operations

The following tables set forth operations data for the year ended February 29, 2012 and year ended February 28, 2011.

                                       2012            2011         % change

Sales                               $ 3,410,695     $ 3,065,554          11.3 %
Gross profit                          1,654,934       1,612,048           2.7 %

Gross profit percentage                    48.5 %          52.6 %        -4.1 %
Selling, general & administrative     1,423,086       1,598,029         -10.9 %
Operating income                        231,848          14,019        1553.8 %
Other Income                             59,687          10,494         468.8 %
Income before taxes                     291,535          24,513        1089.3 %
Income taxes                            115,375         (14,727 )       883.4 %
Net income (after taxes)            $   176,160     $    39,240         348.9 %

Sales

For the year ended February 29, 2012, sales were $3,411,000 as compared to $3,066,000 for the year ended February 28, 2011, an increase of $345,000 or 11.3%.

Such increase in sales for the year ended February 29, 2012 versus the prior year is primarily due to increased sales in the eye protection market, a modest increase in sales in the custom market and a slight increase in sales in the ink and coating market, partially offset by a decrease in sales in the light management market.

In both fiscal 2012 and fiscal 2011, the eye protection market represented our largest market with sales in the eye protection representing approximately 59% and 53% of sales in fiscal 2012 and fiscal 2011, respectively. Sales in the eye protection market increased by approximately $400,000 for the year ended February 29, 2012 compared to the prior year. This increase versus the prior year is due to growth in the laser and welding eye protection segments.

For the light management market, which is our next largest market, sales decreased by approximately $180,000 for the year ended February 29, 2012 compared to the year ended February 28, 2011. Such sales represented approximately 23% of sales for the year ended February 29, 2012 compared to approximately 32% of sales for the prior year. This decrease is primarily due to weakness in the aerospace and automotive segments.

With regard to the ink and coating market, sales increased by approximately $30,000 for the year ended February 29, 2012 compared to the prior year. Such sales represented approximately 10% of our sales for each of fiscal 2012 and fiscal 2011. This slight increase was primarily due a small resurgence in the credit card market.

For the custom market, sales increased by approximately $85,000 compared to the prior year. Such sales represented approximately 5% of our sales for fiscal 2012 compared to approximately 3% of our sales for fiscal 2011. This increase was primarily due to a credit for sending spent catalyst to a vendor for recycling.

Categorized by geographic area, sales in the United States and Europe increased for the year ended February 29, 2012 while sales in Asia slightly decreased in fiscal 2012 compared to the prior year. For the year ended February 29, 2012 compared to the prior year, sales increased in the United States to $2,322,000 from $2,168,000 primarily due to strong demand for industrial and military eye protection, and sales in Europe increased to $611,000 from $420,000 primarily due to growth in the laser filter, security ink and digital electronic segments, while sales in Asia slightly decreased and were $449,000 for the year ended February 29, 2012 compared to $469,000 for the year ended February 28, 2011. Sales in other nations increased to $29,000 for fiscal 2012 from $9,000 in fiscal 2011.

Gross Profit

Gross profit, defined as sales less cost of sales, was $1,655,000 or 48.5% of sales for the year ended February 29, 2012 compared to $1,612,000 or 52.6% of sales for the year ended February 28, 2011, a decrease of 4.1%. Such percentage decrease was primarily due to an increase in cost of materials. In terms of absolute dollars, gross profit increased $43,000 in fiscal 2012 compared to the prior year.

Cost of sales was $1,756,000 for the year ended February 29, 2012 which represented 51.5% of sales compared to $1,454,000 for the year ended February 28, 2011 which represented 47.4% of sales. In terms of absolute dollars, cost of sales increased $302,000 for fiscal 2012 compared to the prior year. The cost of sales increase was primarily due to increased cost of materials.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased to $1,423,000 or 41.7% of sales for the year ended February 29, 2012 compared to $1,598,000 or 52.1% of sales for the year ended February 28, 2011, a decrease of $175,000. Such decrease in absolute dollars was primarily due to a decrease in professional fees offset by small increases in salaries, commissions and consulting fees, and increased environmental remediation costs. Such decrease in professional fees was primarily due to certain non-recurring services incurred in fiscal 2011 in connection with the strategic alternatives being pursued by the Company as previously disclosed and described below.

Operating Income

We had operating income of $232,000 for the year ended February 29, 2012 compared to operating income of $14,000 for the year ended February 28, 2011. Such operating income for fiscal 2012 was primarily due to increased sales of $345,000 combined with a decrease in selling, general and administrative expenses of $175,000, offset by the percentage increase in cost of sales. As a percentage of sales, operating income was 6.8% of sales for the year ended February 29, 2012 compared to 0.5% of sales for the year ended February 28, 2011.

Other Income

Total other income for the year ended February 29, 2012 was $60,000 compared to $10,000 for the year ended February 28, 2011. During fiscal 2012, we had miscellaneous income of $57,000 due to proceeds from an insurance claim for which there was no comparable item in fiscal 2011. Interest income decreased in fiscal 2012 primarily due to less cash on hand. We have not had any rental income since fiscal 2010. In May 2009, our then subtenant abandoned the premises which it had been subleasing since September 2005. The Company has since used this space as a productive R&D facility for the development of new markets.

Net Income

During fiscal 2012, we reported income before taxes of $292,000 as compared to income before taxes of $25,000 for fiscal 2011, an increase of $267,000. Income taxes were $115,000 for fiscal 2012 compared to $(15,000) for fiscal 2011. Changes in income taxes are generally attributed to changes from period to period in sales and expenses. Net income after taxes was $176,000 or $0.01 per share for the year ended February 29, 2012 as compared to $39,000 or $0.00 per share for the year ended February 28, 2011. As a percentage of sales, net income after taxes was 5.2% of sales for the year ended February 29, 2012 compared to 1.3% of sales for the year ended February 28, 2011.

Net income in the future will be dependent upon our ability to maintain revenues in excess of our cost of sales and other expenses. Prior to fiscal 2007, sales had grown for a number of consecutive years. However, from fiscal 2007 through fiscal 2010, we had four consecutive years of decreased sales compared to sales in the immediate prior year. A positive sign, however, is that sales increased, though modestly, in fiscal 2011 compared to fiscal 2010 by $121,000 and sales continued to increase in fiscal 2012 by $345,000 compared to fiscal 2011. In addition, net income increased in fiscal 2012 by $137,000 compared to the prior year period.

Operations Outlook

Following a period of readjustment in our business priorities, we were able to achieve $3,701,000 in sales for fiscal 2006 which was an all time high for the Company. Nevertheless, we have not since then been able to achieve comparable sales levels as achieved in fiscal 2006. Beginning in fiscal 2007 and through fiscal 2010, sales decreased from year to year with fiscal 2009 being the year with the most dramatic change in sales compared to the immediate prior year. In fiscal 2011, however, sales increased modestly compared to the prior year which we find to be an encouraging sign. Sales were $3,065,000 in fiscal 2011 compared to sales $2,945,000 achieved in fiscal 2010. This increase has continued into fiscal 2012 with sales increasing to $3,411,000 in the fiscal 2012. During these periods of reduced sales, we had a major decline in sales of security inks for the credit card market which had been a key area of our growth from 2005 to 2007. While this market remains a source of business for us, we will likely not be able to achieve the same level of sales in the future which we achieved from 2005 to 2007 in the security inks market. Nevertheless, we are confident that with our core group of products, we will be able to maintain sales in our principal markets, such as the eye protection market and the light management market, while always seeking new areas for the use of our dyes.

As previously disclosed, Millburn Capital Group was retained in February 2009 as the Company's financial advisor in connection with the Board's decision to explore strategic alternatives for the Company, including the potential sale of the Company. On March 14, 2012, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Polymathes Holdings I LLC, a New Jersey limited liability company (the "Parent"), and Polymathes Acquisition I Inc., a New Jersey corporation and wholly owned subsidiary of the Parent (the "Purchaser"). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, Parent has agreed to cause the Purchaser to commence a tender offer (the "Offer") to purchase all of the outstanding shares of common stock, no par value per share, of the Company (the "Shares"), at a price of $0.22 per Share (the "Offer Price"), paid to the seller in cash, without interest thereon and subject to applicable withholding taxes. Pursuant to the Merger Agreement, after the consummation of the Offer, and subject to certain conditions set forth in the Merger Agreement, the Parent shall cause the Purchaser to be merged with and into the Company (the "Merger"), with the Company continuing as the surviving corporation and as a wholly owned subsidiary of Parent. The tender offer is being made pursuant to a Tender Offer Statement (including an Offer to Purchase, Letter of Transmittal, and related tender offer documents), which has been filed by Polymathes Acquisition I Inc. and Polymathes Holdings I LLC with the U.S. Securities and Exchange Commission ("SEC") on May 8, 2012. In addition, on May 11, 2012, Epolin, Inc. filed a Solicitation/Recommendation Statement on Schedule 14D-9 with the SEC related to the tender offer. These documents have been mailed to all Company shareholders of record. These documents, as they may be amended or supplemented from time to time, contain important information about the tender offer and the Company's shareholders are urged to read them carefully before any decision is made with respect to the tender offer. The discussion herein has been prepared prior to the completion of the Offer and the Merger, and the Company cannot assure that the Offer and subsequent Merger will be completed.

The New Jersey Industrial Site Recovery Act, N.J.S.A. 13:1k-6 et seq. ("ISRA") requires an environmental investigation and remediation of properties prior to the sale of most manufacturing businesses or properties. In anticipation of a potential sale or similar transaction involving the Company, we engaged a Licensed Site Remediation Professional ("LSRP") and special environmental counsel in the State of New Jersey. Pursuant to ISRA, LSRPs will be responsible for the oversight of the environmental investigation and remediation on a site subject to ISRA compliance. In anticipation of triggering ISRA, we have conducted certain testing to date, including but not limited to obtaining soil and groundwater samples, and further testing and other related actions are expected to be done as part of this ongoing process. Future remediation costs estimated for the year ended February 28, 2013 approximate $70,000. Our policy is to accrue environmental and related costs of a non-capital nature when it is both probable that a liability has been incurred and that the amount can be reasonably estimated. Due to the execution of the Merger Agreement, we became subject to ISRA which requires that our facility be remediated or that we submit a Remediation Certification to the New Jersey Department of Environmental Protection pursuant to N.J.A.C. 7:26B prior to the transfer of ownership. Accruals for estimated losses from environmental remediation and to obtain the necessary approvals in conjunction with the potential sale of our company in the amount of $74,111 were charged to selling, general and administrative expenses as of February 29, 2012.

The Company maintained a Simplified Employee Pension Plan which was adopted in 1994 for its employees as a retirement and income tax reduction facility. The plan has not met the Internal Revenue Service requirements of Section 416 and
Section 408(k)(6) regarding contribution limits and employee deferral amounts. We have tested all years of the plan to insure our compliance with Internal Revenue Service regulations. In accordance with the results, we have accrued a contribution to the plan in the amount of $284,955. As of February 29, 2012, we have paid all accrued amounts to the plan through the date of testing. In addition, as a result of contributions paid to the plan subsequent to the testing date, additional interest was accrued to the plan in the amount of $41,952 which was paid May 1, 2012. In August 2010, the Company adopted a 401(k) Plan to replace the Simplified Employee Pension Plan.

Liquidity and Capital Resources

Our primary source of funds is cash flow from operations in the normal course of selling products. On February 29, 2012, we had working capital of $1,801,000, a debt to equity ratio of 0.14 to 1, and stockholders' equity of $2,595,000 compared to working capital of $3,025,000, a debt to equity ratio of 0.07 to 1, and stockholders' equity of $3,876,000. On February 29, 2012, we had $749,000 in cash and cash equivalents, total assets of $2,970,000 and total liabilities of $375,000, compared to $1,881,000 in cash and cash equivalents, total assets of $4,145,000 and total liabilities of $270,000 on February 28, 2011.

Net cash provided by operating activities for the year ended February 29, 2012 was $367,000 which was primarily the result of net income of $176,000 plus a decrease in prepaid taxes of $189,000 and prepaid expenses of $45,000, and an increase in taxes payable of $84,000 and accrued expenses of $40,000, offset by an increase in accounts receivable of $124,000 primarily due to increased billings during the fourth quarter and inventories of $132,000 primarily due to increased purchases and production. The decrease in prepaid taxes was primarily due to the carryback and receipt of tax benefits arising from operating losses we incurred during the year ended February 28, 2011.

Net cash used by operating activities for the year ended February 28, 2011 was $191,000 which was primarily the result of net income of $39,000 plus a decrease in inventories of $73,000 and an increase in accrued expenses of $195,000, offset by an increase in accounts receivable of $33,000, prepaid expenses of $41,000 and prepaid taxes of $155,000, and a prior period adjustment for pension contribution of $200,000 net of taxes and an adjustment of $195,000 due to obligations under deferred compensation agreements. The adjustment of $200,000 represents the liability we have incurred to correct the Simplified Employee Pension Plan as described above. The adjustment of $195,000 represents the aggregate of the amount paid to the Company's President for the remaining balance due to him under a deferred compensation agreement and an amount paid to the Company's Chairman for a deferred compensation accrual remaining due to him, each of which was paid in the second quarter of fiscal 2011.

Net cash used in investing activities for the year ended February 29, 2012 was $28,000 due to payments for plant, property and equipment compared to net cash provided by investing activities for the year ended February 28, 2011 which was $163,000 due to a decrease in cash value of a life insurance policy of $189,000 (resulting from the surrender of a life insurance policy for its net surrender value maintained in connection with the deferred compensation agreement with the Company's President) offset by payments of plant, property and equipment of $25,000.

Net cash used in financing activities for the year ended February 29, 2012 was $1,472,000 due to a $0.12 cash dividend paid to stockholders during the first quarter of fiscal 2012 compared to no cash provided by or used in financing activities for the year ended February 28, 2011.

We anticipate, based on currently proposed plans and assumptions relating to our operations, that our current cash and cash equivalents together with projected cash flows from operations and projected revenues will be sufficient to satisfy its contemplated cash requirements for more than the next 12 months. Our contemplated cash requirements for the balance of fiscal 2013 and beyond will depend primarily upon level of sales of our products, inventory levels, product development, sales and marketing expenditures and capital expenditures.

Inflation has not significantly impacted our operations.

Significant Accounting Policies

Our discussion and analysis of the Company's financial condition and results of operations are based upon our consolidated financial statements which have been prepared in conformity with U.S. generally accepted accounting principles. Our significant accounting policies are described in Note 2 to the consolidated financial statements included elsewhere herein. The application of our critical accounting policies is particularly important to the portrayal of our financial position and results of operations. These critical accounting policies require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of the consolidated financial statements.

Accounts Receivable - Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts though a charge to earnings and a credit to a valuation allowance based on its assessment of the status of individual accounts. This allowance is an amount estimated by management to be adequate to absorb possible losses. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.

Inventories - Our inventories consist of raw materials, work in process, finished goods and supplies which we value at the lower of cost or market under the first-in, first-out method.

Plant, Property and Equipment - Our plant, property and equipment are stated at cost. We compute provisions for depreciation on the straight-line methods, based upon the estimated useful lives of the various assets. We also capitalize the costs of major renewals and betterments. Repairs and maintenance are charged to operations as incurred. Upon disposition, the cost and related accumulated depreciation are removed and any related gain or loss is reflected in earnings.

Income taxes - We provide for income taxes under ASC Topic 740-10. ASC Topic 740-10 requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. Temporary differences relate primarily to different accounting methods used for depreciation and amortization of property and equipment and deferred compensation. ASC Topic 740-10 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. ASC Topic 740-10 clarifies the accounting for uncertainty in income tax positions, as defined. It requires, among other matters, that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. We analyze the filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions.

Revenue Recognition - We recognize revenue based upon factors such as passage of title, payments and customer acceptance. Any amounts received prior to satisfying our revenue recognition criteria will be recorded as deferred revenue in the accompanying balance sheet. We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, when title has passed, the price is fixed or determinable, and we are reasonably assured of collecting the resulting receivable. Our policy is to replace certain products that do not conform to customer specifications; however, replacements are made at our discretion subject to in house product lab analysis. There are no terms or conditions set forth within our sales contracts that provide for product replacements. We expense replacement costs as incurred.

Stock-based Compensation - We rely on the guidance provided by ASC 718, ("Share Based Payments"). ASC 718 requires companies to expense the value of employee stock options and similar awards and applies to all outstanding and vested stock-based awards. In computing the impact, the fair value of each option is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk free interest rate; volatility; and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating our forfeiture rate, we analyze our historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If our actual forfeiture rate is materially different from our estimate, or if we reevaluate the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what we have recorded in the current period. The fair value concepts were not changed significantly in ASC 718; however, in adopting this Standard, companies were given the option to choose among alternative valuation models and amortization assumptions. We elected to continue to use the Black-Scholes option pricing model and expense the options as compensation over the requisite service period of the grant. We will reconsider use of the Black-Scholes model if additional information becomes available in the future that indicates another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model. Deferred charges for options granted to non-employees are determined as the fair value of the consideration or the fair value of the equity instruments issued, whichever is more reliably measured.

Other Information

Subsequent to the end of fiscal 2006, the Board of Directors approved the adoption of a dividend policy under which we will issue a regular annual cash dividend on shares of our Common Stock. The amount of the dividend, record date and payment date will be subject to approval every year by the Board of Directors. In accordance with the dividend policy, a regular annual cash dividend of $0.02 per share was paid in each of May 2006, May 2007 and May 2008. In addition, since of the adoption of the dividend policy in fiscal 2007, a special cash dividend of $0.02 per share was paid in each of January 2007 and January 2008, and a supplemental special cash dividend of $0.04 per share was paid in August 2008. No further dividends were paid in fiscal 2009. In addition, no dividends were paid in fiscal 2010 and fiscal 2011 primarily due to the Company's decision to seek strategic alternatives.

Subsequent to the end of fiscal 2011 and in May 2011, the Board of Directors declared a special cash dividend of $0.12 per share which was paid on May 12, 2011 to shareholders of record at the close of business on April 28, 2011. The aggregate amount of payment made in connection with this special cash dividend was approximately $1,472,000.

In August 2001, the Board of Directors of the Company authorized a 500,000 share stock repurchase program. Pursuant to the repurchase program, the Company may . . .