We believe that it is important to communicate our future expectations to our security holders and to the public. This report, therefore, contains statements about future events and expectations which are "forward-looking statements" within the meaning of Sections 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934, including the statements about our plans, objectives, expectations and prospects under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." You can expect to identify these statements by forward-looking words such as "may," "might," "could," "would," "will," "anticipate," "believe," "plan," "estimate," "project," "expect," "intend," "seek" and other similar expressions. Any statement contained in this report that is not a statement of historical fact may be deemed to be a forward-looking statement. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved.

Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the "Risk Factors" section of and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in our subsequent filings with the Securities and Exchange Commission, and include, among others, the following:

? changes or advances in technology;

? the success of our LMR product line;

? competition in the land mobile radio industry;

? general economic and business conditions, including federal, state and local government budget deficits and spending limitations;

? the availability, terms and deployment of capital;

? reliance on contract manufacturers and suppliers;

? heavy reliance on sales to agencies of the United States government;

? our ability to utilize deferred tax assets;

? retention of executive officers and key personnel;

? our ability to manage our growth;

? government regulation;

? our business with manufacturers located in other countries;

? our inventory and debt levels;

? protection of our intellectual property rights;

? acts of war or terrorism; and

? any infringement claims.

We assume no obligation to publicly update or revise any forward-looking statements made in this report, whether as a result of new information, future events, changes in assumptions or otherwise, after the date of this report. Readers are cautioned not to place undue reliance on these forward-looking statements.

Reported dollar amounts in management's discussion and analysis are disclosed in millions or as whole dollar amounts.

Executive Summary

Our financial and operating results for the three and six months ended June 30, 2012 improved significantly compared with the same periods last year. Total sales and sales of P25 digital products both increased, while costs of products declined. These improvements combined to yield operating income for both the three and six month periods ended June 30, 2012, compared with operating losses for the same periods last year.

For the three and six months ended June 30, 2012, total sales were approximately $9.3 million and $13.7 million, respectively, compared with approximately $4.7 million and $11.4 million for the same periods last year. Sales of P25 digital products for the second quarter of 2012 totaled approximately $6.7 million (71.8% of total sales) compared with approximately $2.5 million (53.8% of total sales) for the same quarter last year. For the six months ended June 30, 2012, sales of P25 digital products totaled approximately $8.9 million (64.8% of total sales) compared with approximately $7.0 million (61.8% of total sales) for the same period last year.

Gross margins as a percentage of sales for the second quarter ended June 30, 2012 improved to 49.7% compared with 35.5% for the same quarter last year. For the six months ended June 30, 2012, gross margins as a percentage of sales were 46.0% compared with 37.4% for the same period in 2011. The gross margins for both periods are the result of a greater content of P25 digital product sales and an increase in total sales, which fueled higher manufacturing volumes.

For the three months ended June 30, 2012, selling, general and administrative expenses (SG&A) totaled approximately $2.6 million (28.1% of sales) compared with approximately $2.5 million (53.2% of sales) for the same period last year. For the six months ended June 30, 2012, selling, general and administrative expenses totaled approximately $5.0 million (36.2% of sales) compared with approximately $5.7 million (50.3% of sales) for the same period last year. The increase in SG&A expenses during the second quarter 2012 was related to sales and marketing expenses. For the six month period, SG&A expenses declined due to expense reductions initially implemented in May 2011.

Pretax income for the three and six months ended June 30, 2012 totaled approximately $2.0 million and $1.3 million, respectively, compared with pretax losses of approximately $855,000 and $1.5 million for the same periods last year.

For the three and six months ended June 30, 2012, income tax expense totaled approximately $765,000 and $488,000, respectively, compared with no income tax expense or benefit for the same periods last year. Our income tax expense is largely non-cash due to deferred tax assets derived primarily from our net operating loss carryforwards.

Net income for the three months ended June 30, 2012 was approximately $1.2 million ($0.09 per basic and diluted share), compared with a net loss of approximately $855,000 ($0.06 per basic share) for the same period last year. For the six months ended June 30, 2012 net income was approximately $845,000 ($0.06 per basic and diluted share), compared with a net loss of approximately $1.5 million ($0.11 per basic share) for the same period last year.

As of June 30, 2012, working capital totaled approximately $20.7 million, of which approximately $10.0 million was comprised of cash and trade receivables. As of December 31, 2011 working capital totaled approximately $19.5 million, of which approximately $6.8 million was comprised of cash and trade receivables.

Results of Operations

As an aid to understanding our operating results for the periods covered by this
report, the following table shows selected items from our condensed consolidated
statements of operations expressed as a percentage of sales:

                                                   Percentage of Sales              Percentage of Sales
                                                   Three Months Ended                Six Months Ended
                                                June 30,         June 30,        June 30,         June 30,
                                                  2012             2011            2012             2011

Sales                                               100.0 %          100.0 %         100.0 %          100.0 %
Cost of products                                    (50.3 )          (64.5 )         (54.0 )          (62.6 )
Gross margin                                         49.7             35.5            46.0             37.4
Selling, general and administrative expenses        (28.1 )          (53.2 )         (36.2 )          (50.3 )
Net interest -expense-                               (0.0 )           (0.6 )          (0.0 )           (0.5 )
Other expense-                                       (0.0 )            0.0            (0.1 )           (0.1 )
Pretax (loss) income                                 21.6            (18.3 )           9.7            (13.5 )
Income tax expense                                   (8.2 )           (3.6 )          (3.6 )           (0.0 )
Net (loss) income                                    13.4 %           (6.2 )%          6.2 %          (13.5 )%

Net Sales

For the second quarter ended June 30, 2012, net sales were approximately $9.3 million compared with approximately $4.7 million for the same quarter last year. Sales of P25 digital products for the quarter totaled approximately $6.7 million (71.8% of total sales), compared with approximately $2.5 million (53.8% of total sales) for the same quarter last year.

For the six months ended June 30, 2011, net sales were approximately $13.7 million, compared with approximately $11.4 million for the same period last year. Sales of P25 digital products for the six months ended June 30, 2012 totaled approximately $8.9 million (64.9% of total sales) compared with approximately $7.0 million (61.4% of total sales) for the same period last year.

Net sales and sales of P25 digital products for the second quarter ended June 30, 2011 rebounded from the second quarter last year and the immediately preceding quarter, reversing our sluggish start to the year. The sales improvement was broad-based, including new state and local government customers as well as international customers and those in U.S. federal government agencies. The sales increases related primarily to our P25 digital products, including both new KNG products and legacy D-Series products.

During the second quarter 2012 we received our first order under the previously announced Tactical Communications (TacCom) contract issued by the U.S. Department of Homeland Security (DHS). The contract is for the procurement of P25 digital two-way radios and related equipment by all agencies of the DHS, as well as certain other non-DHS agencies, such as the U.S. Departments of Justice, State and Interior, and the White House Communications Agency. The maximum total value of the contract is $3 billion with a two-year base period commencing on March 26, 2012, and three one-year option periods at the option of the DHS from March 26, 2014 through March 26, 2017. The contract names RELM among a select group of suppliers that meet established qualifications. The contract also contains guidelines intended to assure that qualified small business suppliers are the beneficiaries of a portion of the equipment procurements made under the contract. RELM is one of only three companies designated by the contract as a qualified small business supplier for subscriber equipment (i.e. portable and mobile two-way radios). The contract does not specify purchase dates or quantities of equipment from any particular named supplier.

Cost of Products and Gross Margin

Gross margins as a percentage of sales for the second quarter ended June 30, 2012 were 49.7% compared with 35.5% for the same quarter last year. For the six months ended June 30, 2012, gross margins as a percentage of sales were 46.0% compared with 37.4% for the same period last year.

Our cost of products and gross margins are primarily related to material and labor costs, product mix, manufacturing volumes and pricing. The decrease in cost of products and corresponding increase in gross margins for the three and six months ended June 30, 2012 reflected a favorable mix of product sales more heavily weighted toward P25 digital products. Also, as a result of the increase in total sales, manufacturing volumes increased. Accordingly, we realized improved utilization and absorption of our base of manufacturing and support expenses.

We continue to utilize contract manufacturing relationships to maximize production efficiencies and minimize material and labor costs. We also regularly consider manufacturing alternatives to improve quality, speed and costs. We anticipate that the current contract manufacturing relationships or comparable alternatives will be available to us in the future. As demonstrated during the second quarter 2012, leveraging increased sales volumes and P-25 product sales combined with the aforementioned manufacturing improvements, we believe, should yield gross margin improvements.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses consist of marketing, sales, commissions, engineering, product development, management information systems, accounting, headquarters and non-cash share-based employee compensation expenses.

SG&A expenses for the second quarter 2012 were approximately $2.6 million (28.1% of sales) compared with approximately $2.5 million (53.2% of sales) for the same quarter last year. For the six months ended June 30, 2012, SG&A expenses totaled approximately $5.0 million (36.2% of sales) compared with approximately $5.7 million (50.3% of sales) for the same period last year.

Engineering and product development expenses for the second quarter 2012 declined approximately $227,000 (21.8%) compared with the same quarter last year. For the six months ended June 30, 2012, engineering and product development expenses decreased approximately $792,000 (32.3%) compared with the same period last year. The expense decreases for the second quarter and six month periods were the result of expense reductions initially implemented during the second quarter last year, and maintained thereafter, as some product development initiatives were completed.

Marketing and selling expenses for the second quarter 2012 increased by approximately $218,000 (28.2%) compared with the same quarter last year. For the six months ended June 30, 2012, marketing and selling expenses decreased approximately $79,000 (4.1%) compared with the same period last year. The second quarter increase in marketing and selling expenses relates primarily to commissions and incentives, which directly correlate with the growth in sales. For the six month period, the decrease in marketing and selling expenses is the result of expense reductions initially implemented during the second quarter last year and maintained thereafter.

General and administrative expenses for the second quarter 2012 increased by approximately $149,000 (22.2%) compared with the same quarter last year. For the six months ended June 30, 2012, general and administrative expenses increased approximately $103,000 (7.6%) compared with the same period last year. These expense increases are primarily related to additional headquarters and public company expenses.

Operating Income (Loss)

Operating income for the quarter ended June 30, 2012 totaled approximately $2.0 million (21.6% of sales), compared with an operating loss of approximately $828,000 (17.7% of sales) for the same quarter last year. For the six months ended June 30, 2012, operating income totaled approximately $1.3 (9.7%) million compared with an operating loss of approximately $1.5 million (13.0%) for the same period last year. Changes in operating income for the second quarter and six months ended June 30, 2012 were primarily due to higher product sales combined with decreases in cost of products and the resulting increase in gross margins.

Net Interest Expense

For the second quarter and six months ended June 30, 2012, net interest expense totaled $3,000, compared with $27,000 and $62,000, respectively, for the same periods last year. We incur interest expense on outstanding borrowings under our revolving credit facility and earn interest income on our cash balances. The decreases in interest expense were the result of the repayment of borrowings under our revolving credit facility. The interest rate on such revolving credit facility as of June 30, 2012 was 4.50% per annum. This rate is variable based on the lender's prime rate plus 50 basis points.

Income Taxes

We recorded income tax expense for the quarter ended June 30, 2012 of approximately $765,000, compared with no income tax benefit or expense for the same quarter last year. For the six months ended June 30, 2012, income tax expense totaled approximately $488,000 compared with no income tax expense or benefit for the same period last year. Our income tax expense and benefit is primarily non-cash.

As of June 30, 2012, our net deferred tax assets totaled approximately $7.7 million, and are primarily composed of net operating loss carry forwards (NOLs). These NOLs total $10.7 million for federal and $18.8 million for state purposes, with expirations starting in 2017 through 2030.

In order to fully utilize the net deferred tax assets, we will need to generate sufficient taxable income in future years to utilize our NOLs prior to their expiration. ASC Topic 740, "Income Taxes", requires us to analyze all positive and negative evidence to determine if, based on the weight of available evidence, we are more likely than not to realize the benefit of the net deferred tax assets. The recognition of the net deferred tax assets and related tax benefits is based upon our conclusions regarding, among other considerations, estimates of future earnings based on information currently available and current and anticipated customers, contracts and product introductions, as well as historical operating results and certain tax planning strategies.

We have evaluated the available evidence and the likelihood of realizing the benefit of our net deferred tax assets. From our evaluation we have concluded that based on the weight of available evidence, it is more likely than not that we will not realize a portion of the benefit of our net deferred tax assets recorded at June 30, 2012. Accordingly, as of June 30, 2012, we maintained our valuation allowance totaling approximately $250,000 for the portion of benefit of our federal and state deferred tax assets that more likely than not will not be realized. We cannot presently estimate what, if any, changes to the valuation of our deferred tax assets may be deemed appropriate in the future. If we incur future losses, it may be necessary to record additional valuation allowance related to the deferred tax assets recognized as of June 30, 2012.

Liquidity and Capital Resources

For the six months ended June 30, 2012, net cash provided by operating activities totaled approximately $1.8 million compared with net cash used in operating activities of approximately $935,000 for the same period last year. Cash provided by operating activities was primarily related to net income, decreased inventories and increased trade payables. These items were partially offset by increases in trade receivables. For the six months ended June 30, 2012, we realized net income of approximately $845,000 compared with a net loss totaling approximately $1.5 million for the same period last year. The approximately $1.4 million increase in trade receivables as of June 30, 2012 was the result of increased sales. For the same period last year accounts receivable decreased approximately $1.4 million due to collections from customers. Trade payables for the period increased approximately $459,000 due to higher business volumes and related material purchases. Last year trade payables decreased by approximately $826,000 primarily due to payments to suppliers. Net inventories decreased during the six months ended June 30, 2012 by approximately $914,000 due to increased sales and tighter management of purchases. We are continuing to actively manage purchases and better align inventory with anticipated business levels. Depreciation and amortization totaled approximately $641,000 for the six months ended June 30, 2012, compared with approximately $704,000 for the same period last year as some capital assets have reached the end or a later stage of their depreciation cycle.

Cash used in investing activities for the six months ended June 30, 2012 totaled approximately $139,000 compared with approximately $181,000 for the same period last year. Cash used in investing activities for both the six months ended June 30, 2012 and the prior year's same period was primarily to fund the purchase of engineering and manufacturing equipment and tooling. We anticipate that future capital expenditures will be funded through our existing cash balance and operating cash flow.

Cash provided by financing activities for the six months ended June 30, 2012 totaled approximately $22,000, representing proceeds from the issuance of common stock. For the same period last year cash provided by financing activities totaled approximately $300,000, which represented borrowings under our revolving credit facility of approximately $1.5 million net of repayments of approximately $1.2 million.

We have a secured revolving credit facility with Silicon Valley Bank with maximum borrowing availability of $5 million (subject to the borrowing base) and a maturity date of December 31, 2012.

As of June 30, 2012 and the date of this report, we were in compliance with all covenants under the loan and security agreement, as amended, governing the revolving credit facility. For a description of such covenants and the other terms and conditions of the loan and security agreement, as amended, reference is made to Note 6 (Debt) of our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

As of June 30, 2012 and the date of this report, there were no borrowings outstanding under the revolving credit facility. As of June 30, 2012 and the date of this report, there was approximately $3.2 million and $2.5 million, respectively, of borrowing available under the revolving credit facility.

Our cash balance at June 30, 2012 was approximately 4.4 million. We believe these funds combined with anticipated cash generated from operations and borrowing availability under our revolving credit facility are sufficient to meet our working capital requirements for the foreseeable future. However, although we do not anticipate needing additional capital in the near term, the current financial and economic conditions could limit our access to credit and impair our ability to raise capital, if needed, on acceptable terms or at all. We also face other risks that could impact our business, liquidity and financial condition. For a description of these risks, see "Item 1A. Risk Factors" set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Critical Accounting Policies

In response to the SEC's financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have selected for disclosure our revenue recognition process and our accounting processes involving significant judgments, estimates and assumptions. These processes affect our reported revenues and current assets and are therefore critical in assessing our financial and operating status. We regularly evaluate these processes in preparing our financial statements. The processes for revenue recognition, allowance for collection of trade receivables, reserves for excess or obsolete inventory, software development and income taxes involve certain assumptions and estimates that we believe to be reasonable under present facts and circumstances. These estimates and assumptions, if incorrect, could adversely impact our operations and financial position. There were no changes to our critical accounting policies during the quarter ended June 30, 2012 as described in Item 7. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.