Summary of CPI AEROSTRUCTURES INC

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Company's Condensed Financial Statements and notes thereto contained in this report.

Forward Looking Statements

When used in this Form 10-Q and in future filings by us with the Securities and Exchange Commission, the words or phrases "will likely result," "management expects" or "we expect," "will continue," "is anticipated," "estimated" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The risks are included in Item 1A - Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2011 and Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q. We have no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.

Business Operations

We are engaged in the contract production of structural aircraft parts principally for the U.S. Air Force and other branches of the U.S. armed forces, either as a prime contractor or as a subcontractor to other defense prime contractors. CPI Aero also acts as a subcontractor to prime aircraft manufacturers in the production of commercial aircraft parts. Our strategy for growth has been focused primarily as a subcontractor for defense prime contractors. Due to our success as a subcontractor to defense prime contractors we have pursued opportunities to increase our commercial subcontracting business.

Marketing and New Business

From the beginning of the current fiscal year through August 3, 2012, we received approximately $44.6 million of new contract awards, which included approximately $0.2 million of government prime contract awards, approximately $43.9 million of government subcontract awards and approximately $0.5 million of commercial subcontract awards, compared to a total of $58.6 million of new contract awards, of all types, in the same period last year.

Included in new contract awards are:

· A $12.7 million purchase order from Boeing for assemblies on the A-10 aircraft.

· A $10.7 million order from Goodrich Corporation for the supply of structural aerospace assemblies. In addition, we will have, for the first time in our history, design authority for design modifications to the structure it is manufacturing.

We have approximately $980 million in formalized bids outstanding as of August 4, 2012 and continue to make bids on contracts on a weekly basis. Unawarded solicitations include two bids totaling approximately $647 million to an international aerospace company for work on the Boeing 787. While we cannot predict the probability of obtaining or the timing of awards, some of these outstanding proposals are significant in amount.

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

While historically our direct U.S. Government work has typically ranged from six months to two years, our major subcontract awards for the E-2D, A-10 and G650 average a 7 year life. Except in cases where contract terms permit us to bill on a progress basis, we must incur upfront costs in producing assemblies, amortize the costs and bill our customers upon delivery. Because of the upfront costs incurred, the timing of our billings and the nature of the percentage-of-completion method of accounting described below, there can be a significant disparity between the periods in which (a) costs are expended, (b) revenue and earnings are recorded and (c) cash is received.

Critical Accounting Policies

Revenue Recognition

We recognize revenue from our contracts over the contractual period under the percentage-of-completion ("POC") method of accounting. Under the POC method of accounting, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at the completion of the contract. Recognized revenues that will not be billed under the terms of the contract until a later date are recorded as an asset captioned "Costs and estimated earnings in excess of billings on uncompleted contracts." Contracts where billings to date have exceeded recognized revenues are recorded as a liability captioned "Billings in excess of costs and estimated earnings on uncompleted contracts." Changes to the original estimates may be required during the life of the contract. Estimates are reviewed monthly and the effect of any change in the estimated gross margin percentage for a contract is reflected in revenue in the period the change becomes known. The use of the POC method of accounting involves considerable use of estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods. As a result, there can be a significant disparity between earnings (both for accounting and tax purposes) as reported and actual cash received by us during any reporting period. We continually evaluate all of the issues related to the assumptions, risks and uncertainties inherent with the application of the POC method of accounting; however, we cannot assure you that our estimates will be accurate. If our estimates are not accurate or a contract is terminated, we will be forced to adjust revenue in later periods. Furthermore, even if our estimates are accurate, we may have a shortfall in our cash flow and we may need to borrow money, or seek access to other forms of liquidity, to fund our work in process or to pay taxes until the reported earnings materialize as actual cash receipts.

Item2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Revenue

Revenue for the three months ended June 30, 2012 was $20,854,627 compared to $17,426,223 for the same period last year, representing an increase of $3,428,404 or 19.7%. For the six months ended June 30, 2012, revenue was $40,575,722 compared to $33,435,831 for the same period last year, representing an increase of $7,139,891 or 21.4%.

We generate revenue from government contracts for which we act as a prime contractor or as a subcontractor as well as from commercial contracts. Revenue generated from prime government contracts for the six months ended June 30, 2012 was $3,570,726 compared to $3,131,184 for the six months ended June 30, 2011, an increase of $439,542 or 14.0%. This increase was predominitley the result of increased revenue on the C-5 TOP contract in 2012.

Revenue generated from government subcontracts for the six months ended June 30, 2012 was $25,289,399 compared to $26,196,691 for the six months ended June 30, 2011, a decrease of $907,292 or 3.6%. This decrease is predominately the result of a $4.2 million increase in revenue on the E-2D program for Northrop Grumman, for normal scheduling increases, offset by a $4.9 million decrease in revenue on the Boeing A-10 program.

Revenue generated from commercial contracts was $11,715,596 for the six months ended June 30, 2012 compared to $4,107,956 for the six months ended June 30, 2011, an increase of $7,607,640 or 185.2%. The majority of the increase in revenue from commercial customers was related to increases in production of leading edges for the Gulfstream G650 ($4 million) and preliminary work for Honda ($1.8 million) on the production of flaps and inlets for the HondaJet Advanced Light Jet.

Inflation historically has not had a material effect on our operations.

Gross Profit

Gross profit for the three months ended June 30, 2012 was $5,768,644 compared to $4,244,801 for the three months ended June 30, 2011, an increase of $1,52,843. As a percentage of revenue, gross profit for the three months ended June 30, 2012 was 27.7% compared to 24.4% for the same period last year. Gross profit for the six months ended June 30, 2012 was $10,733,030 compared to $8,094,905 for the six months ended June 30, 2011, an increase of $2,638,125. As a percentage of revenue, gross profit for the six months ended June 30, 2012 was 26.5% compared to 24.2% for the same period last year. Our gross margin percentage for the six months ended June 30, 2012 was in line with our expected gross margin percentage of 25%-27%.

We expect our gross margin for the full year to fall within our expected range of 25%-27%.

Item2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended June 30, 2012 were $1,570,231 compared to $2,082,464 for the three months ended June 30, 2011, a decrease of $512,233, or 24.6%. This decrease was predominately the result of changing policy of issuing stock options to most of our board of directors. In 2012, options were granted only in the first quarter of the year, compared to granting options in both first and second quarters in 2011. In addition, the 2012 board compensation arrangement limits the expense related to stock option grants.

For the six months ended June 30, 2012, selling, general and administrative expenses were $3,675,112, compared to $3,882,887 for the same period last year, a decrease of $207,775 or 5.4%.

Income Before Provision for Income Taxes

Income before provision for income taxes for the three months ended June 30, 2012 was $4,024,019 compared to $2,094,816 for the same period last year, an increase of $1,929,203. For the six months ended June 30, 2012, income before provision for income taxes was $6,734,338 compared to $4,106,865 for the same period last year, an increase of $2,627,473.

Provision for Income Taxes

Provision for income taxes was $1,328,000 for the three months ended June 30, 2012, or 33% of pre-tax income, compared to $524,000 or 25% of pre-tax income for the three months ended June 30, 2011. Provision for income taxes was $2,119,000 for the six months ended June 30, 2012, or 31.5% of pre-tax income compared to $1,168,000 or 28% or pre-tax income for the six months ended June 30, 2011. The provision for income taxes as a percentage of pre-tax income was below the statutory rate of 34% because in 2011 the Company began taking a deduction for domestic production activity which results in approximately a 2%-3% tax savings. In addition, the exercise of non-qualified stock options in 2011 results in a tax savings of an additional 2%-3%. During 2012, the Company accrued penalties and interest for underpayment of income taxes which offset these deductions by 3% - 4%.

Item2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Net Income

Net income for the three months ended June 30, 2012 was $2,696,019, or $0.37 per basic share, compared to net income of $1,570,816, or $0.23 per basic share, for the same period last year. Net income for the six months ended June 30, 2012 was $4,615,338, or $0.65 per basic share, compared to net income of $2,938,865, or $0.43 per basic share, for the same period last year. Diluted income per share for the three months ended June 30, 2012 was $0.36, calculated utilizing 7,414,273 average shares outstanding. Diluted income per share for the six months ended June 30, 2012 was $0.63, calculated utilizing 7,280,294 average shares outstanding.

Liquidity and Capital Resources

General

At June 30, 2012, we had working capital of $72,414,992 compared to $52,186,436 at December 31, 2011, an increase of $20,228,556, or 38.8%.

On June 13, 2012, the Company sold 1,000,000 shares of common stock at a sales price of $12 per share, upon the closing of an underwritten stock offering. Roth Capital Partner, LLC acted as representative of the several underwriters (the "Underwriters"). The gross proceeds of the offering were $12 million and net proceeds, after deducting the Underwriters' fees and estimated offering expenses, were approximately $11.1 million. The Company used $3 million of the net proceeds to repay a portion of the Sovereign Revolving Facility.

Cash Flow

A large portion of our cash is used to pay for materials and processing costs associated with contracts that are in process and which do not provide for progress payments. Contracts that permit us to bill on a progress basis must be classified as "on time" for us to apply for progress payments. Costs for which we are not able to bill on a progress basis are components of "Costs and estimated earnings in excess of billings on uncompleted contracts" on our condensed balance sheets and represent the aggregate costs and related earnings for uncompleted contracts for which the customer has not yet been billed. These costs and earnings are recovered upon shipment of products and presentation of billings in accordance with contract terms.

Because the POC method of accounting requires us to use estimates in determining revenue, costs and profits and in assigning the amounts to accounting periods, there can be a significant disparity between earnings (both for accounting and tax purposes) as reported and actual cash that we receive during any reporting period. Accordingly, it is possible that we may have a shortfall in our cash flow and may need to borrow money, or to raise additional capital, until the reported earnings materialize into actual cash receipts.

At June 30, 2012, we had a cash balance of $3,604,047 compared to $878,200 at December 31, 2011.

Our costs and estimated earnings in excess of billings increased by approximately $9.7 million during the six months ended June 30, 2012. The Boeing A-10 contract accounted for approximately $4.6 million of this increase. Although this contract does provide for milestone billings, the Company has been limited in its ability to invoice Boeing because of the lack of performance by certain vendors. This has resulted in us not achieving certain milestone billing events. Additionally, Boeing has made engineering changes to parts under contract with us. We have not yet completed pricing negotiations related to these changes. We are contractually obligated to continue production on these parts, however we are not able to invoice for the expected full value until price negotiations are completed. Lastly, a significant amount of production has been completed, however such items can't be shipped and invoiced, as we are awaiting a further Boeing configuration change.

Because of our high growth rate, in order to perform on new programs, such as the recently announced Goodrich and Embraer programs, we may be required to expend up-front costs that may have to be amortized over a portion of production units. In the case of significant program delays and/or program cancellations, we could be required to bear impairment charges which may be material, for costs that are not recoverable. Such charges and the loss of up-front costs could have a material impact on our liquidity and results of operations.

We continue to work to obtain better payment terms with our customers, including accelerated progress payment arrangements, as well as exploring alternative funding sources.

Item2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Credit Facilities

Line of Credit

In August 2007, we entered into a revolving credit facility with Sovereign Bank (the "Sovereign Revolving Facility"), secured by all of our assets.

On May 26, 2010, the Company entered into a third amendment to its credit agreement with Sovereign Bank increasing the existing revolving credit facility under the Credit Agreement (the "Credit Agreement") from an aggregate of $3.5 to an aggregate of $4.0 and extending the term of the revolving credit facility from August 2011 to August 2013. In addition, the interest rate on borrowings under the revolving credit facility was decreased to (i) the greater of 3.75% or 3.25% in excess of the LIBOR Rate or (ii) the greater of 3.75% or 0.50% in excess of Sovereign Bank's prime rate, as elected by the Company in accordance with the Credit Agreement.

On May 10, 2011, the Company entered into a fifth amendment to its credit agreement with Sovereign Bank, increasing the existing revolving credit facility from an aggregate of $4.0 million to an aggregate of $10.0 million and extending the term from August 2013 to August 2014. In addition, the interest rate of borrowings under the revolving credit facility will no longer be subject to a minimum rate of 3.75%.

On September 1, 2011, the Company entered into a sixth amendment to its credit agreement with Sovereign Bank providing for a $3.0 million increase until November 30, 2011 of the existing revolving credit facility under the Credit Agreement, from an aggregate of $10.0 million to an aggregate of $13.0 million.

On November 29, 2011, the Company entered into a seventh amendment to the Sovereign Revolving Facility which increased the existing revolving credit facility from an aggregate of $13.0 million to an aggregate of $18.0 million and extended the term of earlier terminating revolving credit loans to August 2014. The Amendment also provides for a reduction in the interest rate of borrowings under the revolving credit facility to 2.75% in excess of the LIBOR rate or Sovereign Bank's prime rate, as elected by the Company in accordance with the Credit Agreement, a reduction in the commitment fee to a rate of 0.4% per annum on the average daily unused portion of the revolving credit commitment, commencing December 31, 2011 and the addition of a covenant to the Credit Agreement requiring that the Company maintain a ratio of Unsubordinated Liabilities to Capital Base, as such terms are defined in the Credit Agreement.

As of June 30, 2012, we were in compliance with all of the financial covenants contained in the Credit Agreement, as amended, and $14.6 million was outstanding under the Sovereign Revolving Facility.

Term Loan

On October 22, 2008, we obtained a $3.0 million term loan from Sovereign Bank to be amortized over five years (the "Sovereign Term Facility"). The Sovereign Term Facility bears interest at LIBOR plus 2.5% and is secured by all of our assets.

The terms and conditions of the Sovereign Revolving Facility are applicable to the Sovereign Term Facility.

Additionally, the Company and Sovereign Bank entered into a five-year interest rate swap agreement, in the notional amount of $3.0 million. Under the interest rate swap, the Company pays an amount to Sovereign Bank representing interest on the notional amount of 5.8% and receives an amount from Sovereign representing interest on the notional amount at a rate equal to the one-month LIBOR plus 2.5%. The effect of this interest rate swap will be the Company paying a fixed interest rate of 5.8% over the term of the Sovereign Term Facility.

On March 9, 2012, the Company entered into an eighth amendment to its credit agreement with Sovereign Bank which provides for an additional term loan from Sovereign in the principal amount of $4.5 to be amortized over five years (the "Sovereign Term Facility 2"). The Sovereign Term Facility 2 shall be used by the Company to purchase tooling and equipment in connection with certain contracts. The Sovereign Term Facility 2 is subject to the same acceleration provision as the Revolving Credit Loans and Sovereign Term Facility, which provision allows the Sovereign, at its option, to declare all Loans and other outstanding amounts under the Credit Agreement as due and payable upon the occurrence of any Event of Default. The Amendment also requires a prepayment of the Sovereign Term Facility 2 upon the Company's receipt of a termination or cancellation payment in connection with the Designated Contracts in an amount equal to the lesser of 50% of such payment or the outstanding principal balance of the Sovereign Term Facility 2.

Pursuant to the terms of the ISDA 2002 Master Agreement and Schedule between Sovereign and the Company, dated October 22, 2008, the Registrant also entered into a five-year interest rate swap agreement in the notional amount of $4.5 million. Under the Interest Rate Swap, the Company pays an amount to the Sovereign representing interest on the notional amount at a fixed rate of 4.11% and receives an amount from Sovereign representing interest on the notional amount at a rate equal to the one month LIBOR rate plus 300 basis points. The effect of this Interest Rate Swap will be the Company paying a fixed interest rate of 4.11% over the term of the Sovereign Term Facility 2.

Contractual Obligations

For information concerning our contractual obligations, see "Contractual Obligations" under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2011