The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This report contains certain forward-looking statements and information that are based on the beliefs of management as well as assumptions made by and information currently available to management. The statements contained in this report relating to matters that are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, future demand for our products and services, addressing the process of U.S. defense procurement, reduced U.S. defense spending, the successful commercialization of our products, our reliance on certain key customers, the impairment of our intangible assets, general domestic and global economic conditions, including the uncertainty with government budget approvals, the unique risks associated with our Chinese operations, government and environmental regulations, finalization of non-bid government contracts, competition and customer strategies, technological innovations in the non-rechargeable and rechargeable battery industries, changes in our business strategy or development plans, capital deployment, business disruptions, including those caused by fires, raw material supplies, and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements described herein. When used in this report, the words "anticipate", "believe", "estimate" or "expect" or words of similar import are intended to identify forward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011.

Undue reliance should not be placed on our forward-looking statements. Except as required by law, we disclaim any obligation to update any factors or to publicly announce the results of any revisions to any of the forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect new information, future events or other developments.

The following discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q and our Consolidated Financial Statements and Notes thereto contained in our Form 10-K for the year ended December 31, 2011.

The financial information in this Management's Discussion and Analysis of Financial Condition and Results of Operations is presented in thousands of dollars, except for share and per share amounts. All figures presented below represent results from continuing operations, unless otherwise specified.

General

We offer products and services ranging from portable power solutions to communications and electronics systems. Through our engineering and collaborative approach to problem solving, we serve government, defense and commercial customers across the globe. We design, manufacture, install and maintain power and communications systems including: rechargeable and non-rechargeable batteries, communications and electronics systems and accessories, and custom engineered systems and solutions. We sell our products worldwide through a variety of trade channels, including original equipment manufacturers ("OEMs"), industrial and retail distributors, national retailers and directly to U.S. and international defense departments.

We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products segment includes: lithium 9-volt, cylindrical and various other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories, such as cables. The Communications Systems segment includes: power supplies, cable and connector assemblies, RF amplifiers, amplified speakers, equipment mounts, case equipment, integrated communication system kits and communications and electronics systems design. We believe that reporting performance at the gross profit level is the best indicator of segment performance. As such we report segment performance at the gross profit level and operating expenses as Corporate charges.

We continually evaluate ways to grow, including opportunities to expand through mergers, acquisitions and joint ventures, which can broaden the scope of our products and services, expand operating and market opportunities and provide the ability to enter new lines of business synergistic with our portfolio of offerings.

On March 8, 2011, our senior management, as authorized by our Board of Directors, decided to exit our Energy Services business. As a result of management's review of our business segments and products, and taking into account the lack of growth and profitability potential of the Energy Services segment as well as its sizeable operating losses, we determined it was appropriate to refocus our operations on profitable growth opportunities presented in our other segments, Battery & Energy Products and Communications Systems. In the fourth quarter of 2010, we recorded a non-cash impairment charge of $13,793 to write-off the goodwill and intangible assets and certain fixed assets associated with the standby power portion of our Energy Services business. The actions taken to exit our Energy Services business resulted in the elimination of approximately 40 jobs and the closing of five facilities, primarily in California, Florida and Texas. We completed all exit activities with respect to our Energy Services segment by the end of the second quarter of 2011, and have reclassified our Energy Services segment as a discontinued operation.

In connection with the exit activities described above, we recorded total restructuring charges of approximately $2,924. The restructuring charges include approximately $703 of employee-related costs, including termination benefits, approximately $250 of lease termination costs, approximately $941 of inventory and fixed asset write-downs and approximately $1,030 of other associated costs. The cash component of the aggregate total restructuring charges was approximately $1,984. Subsequent to the completion of our exit activities, adjustments have been made to estimates of certain reserves and accruals that existed at that time. These adjustments amount to $39 and were due to the difference in our actual experience compared to our expectations as of the completion of our exit activities.

In 2011, we implemented a series of Lean initiatives throughout our entire organization. Lean is a disciplined management philosophy which is 100% focused on using resources more effectively and the elimination of non-value added functions to any process. The expected result is a reduction in costs and increased efficiency.

On February 15, 2012, our senior management, as authorized by our Board of Directors, decided to divest our RedBlack Communications business. As a result of management's ongoing review of our business portfolio, management had determined that RedBlack offers limited opportunities to achieve the operating margin thresholds of our new business model and decided to refocus our operations on profitable growth opportunities presented in the other product lines that comprise our business segments, Battery & Energy Products and Communications Systems. Since 2008, our RedBlack Communications business has incurred significant operating losses. We are actively seeking to sell our RedBlack business as a going concern and have engaged appropriate professionals to assist in that effort. We have received non-binding letters of intent and interest from several interested parties and have executed one of them. We anticipate that the actions taken to divest the RedBlack Communications business will result in the elimination of approximately 30 jobs and the transfer of the RedBlack facility located in Hollywood, Maryland. We expect the RedBlack divestiture to occur within the next nine months. Commencing with the first quarter of 2012 and concluding with the ultimate closing of the transaction, the results of the RedBlack operations and related divestiture costs will be reported as a discontinued operation.

Overview

Consolidated revenues for the three-month period ended July 1, 2012 decreased by $24,406, or 56.6%, from the three-month period ended July 3, 2011. The decrease was primarily attributable to revenue that did not recur this quarter resulting from shipments of 5390 batteries to the United States Defense Logistics Agency ("DLA"), the completion of a large non-recurring non-U.S. portion of a telematics battery contract, as well as the shipment of over 500 SATCOM units, all in the second quarter of 2011, and to a slower government and defense order rate in the Battery & Energy Products segment.

Gross profit for the second quarter of 2012 was $4,467, or 23.9% of revenues, compared to $11,560, or 26.8% of revenues, for the same quarter a year ago. The decrease in the gross margin percentage was attributable to sales mix and lower shipments in the Communications Systems segment, partially offset by improved margins in our Battery & Energy Products segment.

Operating expenses decreased to $7,399 during the three-month period ended July 1, 2012, a decrease of $1,124, or 13.2%, from the $8,523 during the three-month period ended July 3, 2011, resulting from ongoing reductions in workforce, general and administrative spending cuts, lower sales commissions and more focused research & development and new product spending. Operating expenses as a percentage of revenue increased from 19.8% during the quarter ended July 3, 2011 to 39.6% during the quarter ended July 1, 2012 primarily because of lower sales volumes.

Adjusted EBITDA from continuing operations, defined as net income (loss) attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation and amortization, plus/minus expenses/income that we do not consider reflective of our ongoing continuing operations, amounted to $(1,641) in the second quarter of 2012 compared to $4,355 for the second quarter of 2011. This decrease in Adjusted EBITDA from continuing operations was primarily attributable to our operating results. See the section "Adjusted EBITDA from continuing operations" beginning on page 32 for a reconciliation of Adjusted EBITDA from continuing operations to net income (loss) attributable to Ultralife.

The outstanding balance on our credit facility was $357 at July 1, 2012. By comparison, at July 3, 2011 and at December 31, 2011, the outstanding revolver balance under our credit facility was $3,657 and $-0-, respectively. The decrease from the second quarter of 2011 is primarily attributable to cash generated from operations and diligent working capital management.

Outlook

For 2012, management continues to expect high-single to low-double digit year-over-year revenue growth for our Communication Systems segment and China operations. However, given the continued softness in the Battery & Energy Products segment, our largest segment, management expects year-over-year total sales to decline by between 20% and 30%. Having taken actions to reduce spending and align capacity, management believes that a return to operating profitability for the second half of 2012 is achievable with operating margin in the low- to mid-single digits. The magnitude of the first half operating loss is expected to result in a total year operating loss.

Results of Operations

Three-month periods ended July 1, 2012 and July 3, 2011

Revenues. Consolidated revenues for the three-month period ended July 1, 2012 amounted to $18,706, a decrease of $24,406, or 56.6%, from the $43,112 reported in the same quarter in 2011.

Battery & Energy Products sales decreased $15,716, or 50.3%, from $31,239 during the second quarter last year to $15,523 during the second quarter this year. Of this decrease, approximately $8,600 was due to business that did not recur, and consists of approximately $4,600 related to shipments to the DLA under the indefinite delivery/indefinite quantity ("IDIQ") contract awarded in September 2010 and approximately $4,000 related to the completion of the non-U.S. portion of a telematics battery contract in the second quarter of 2011. The remaining approximately $7,100 decrease is primarily attributable to a slower government and defense order rate for rechargeable and non-rechargeable batteries and charger systems.

Communications Systems revenues decreased $8,690, or 73.2%, from $11,873 during the second quarter last year to $3,183 during the second quarter this year. The year-over-year comparison was impacted by the shipment of over 500 SATCOM units in the second quarter of 2011 that did not recur in the second quarter of 2012 representing approximately $7,500 of revenue. In addition, the current period was further impacted by lower shipments of 20 watt amplifiers reflecting timing differences in orders for large international funded projects.

Cost of Products Sold. Cost of products sold totaled $14,239 for the quarter ended July 1, 2012, a decrease of $17,313, or 54.9%, from the $31,552 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased from 73.2% for the three-month period ended July 3, 2011 to 76.1% for the three-month period ended July 1, 2012. Correspondingly, consolidated gross margin was 23.9% for the three-month period ended July 1, 2012, compared with 26.8% for the three-month period ended July 3, 2011, primarily attributable to sales mix and lower volumes in the Communications Systems segment, partially offset by improved margins in our Battery & Energy Products segment.

In our Battery & Energy Products segment, the cost of products sold decreased $12,226, from $23,986 during the three-month period ended July 3, 2011 to $11,760 during the three-month period ended July 1, 2012. Battery & Energy Products' gross profit for the second quarter of 2012 was $3,763, or 24.2% of revenues, a decrease of $3,490 from gross profit of $7,253, or 23.2% of revenues, for the second quarter of 2011. Battery & Energy Products' gross margin as a percentage of revenues increased by 100 basis points for the three-month period ended July 1, 2012 primarily attributable to sales mix and reductions in production scrap.

In our Communications Systems segment, the cost of products sold decreased $5,087 from $7,566 during the three-month period ended July 3, 2011 to $2,479 during the three-month period ended July 1, 2012. Communications Systems' gross profit for the second quarter of 2012 was $704, or 22.1% of revenues, a decrease of $3,603 from gross profit of $4,307, or 36.3% of revenues, for the second quarter of 2011. The decrease in gross margins was attributable to sales mix, which included a much higher concentration of radio accessory products and the sale of some legacy products in the current period versus higher volumes of amplifiers and SATCOM units in the second quarter of 2011, and the recording of a reserve to rework and upgrade McDowell products requested by a strategically important customer for products purchased in 2008.

Operating Expenses. Total operating expenses for the three-month period ended July 1, 2012 totaled $7,399, a decrease of $1,124 from $8,523 for the three-month period ended July 3, 2011, resulting from ongoing reductions in workforce, general and administrative spending cuts, lower sales commissions and more focused research & development and new product spending.

Overall, operating expenses as a percentage of revenues increased to 39.6% during the second quarter of 2012 from 19.8% reported in the second quarter of 2011 because of lower sales volumes. Amortization expense associated with intangible assets related to our acquisitions was $125 for the second quarter of 2012 ($60 in selling, general and administrative expenses and $65 in research and development costs), compared with $157 for the second quarter of 2011 ($78 in selling, general, and administrative expenses and $79 in research and development costs). Research and development costs were $1,970 in the second quarter of 2012, a decrease of $144, or 6.8%, from the $2,114 reported in the second quarter of 2011, as we focused our spending on the development of new products with the highest estimated return on investment. Selling, general, and administrative expenses decreased $980, or 15.3%, to $5,429 during the second quarter of 2012 as compared to the second quarter of 2011, reflecting lower sales commission and continued actions to reduce general and administrative expenses.

Other Income (Expense). Other income (expense) totaled $(133) for the second quarter of 2012, compared to $(170) for the second quarter of 2011. Interest expense, net of interest income, decreased $48, to $113 for the second quarter of 2012 from $161 for the comparable period in 2011, as a result of lower average borrowings under our revolving credit facilities. Miscellaneous income/expense amounted to expense of $20 for the second quarter of 2012 compared with expense of $9 for the second quarter of 2011. The expense in the second quarters of 2012 and 2011 was primarily due to transactions impacted by changes in foreign currencies relative to the U.S. dollar.

Income Taxes. We reflected a tax provision of $171 for the second quarter of 2012 compared with $118 during the second quarter of 2011. The expense is primarily due to (a) the recognition of deferred tax liabilities generated from goodwill and certain intangible assets that cannot be predicted to reverse for book purposes during our loss carryforward periods, and (b) the income reported for our China operations during the periods. The effective consolidated tax rate for the three-month periods ended July 1, 2012 and July 3, 2011 was:

                                             Three-Month Periods Ended
                                         July 1, 2012        July 3, 2011
Income (Loss) before Incomes Taxes (a)   $      (3,065 )     $       2,867

Total Income Tax Provision (b)           $         171       $         118

Effective Tax Rate (b/a)                           5.6 %               4.1 %

See Note 8 in the Notes to Condensed Consolidated Financial Statements for additional information regarding our income taxes.

We have determined that a change in ownership, as defined under Internal Revenue Code Section 382, occurred in 2005 and 2006. As such, the domestic net operating loss ("NOL") carryforward will be subject to an annual limitation estimated to be in the range of approximately $12,000 to $14,500. The unused portion of the annual limitation can be carried forward to subsequent periods. Our ability to utilize NOL carryforwards due to successive ownership changes is currently limited to a minimum of approximately $12,000 annually, plus the carryover from unused portions of the annual limitations. We believe such limitation will not impact our ability to realize the deferred tax asset.

In addition, certain of our NOL carryforwards are subject to U.S. alternative minimum tax such that carryforwards can offset only 90% of alternative minimum taxable income. This limitation did not have an impact on income taxes determined for the second quarters of 2012 and 2011. The use of our U.K. NOL carryforwards may be limited due to the change in the U.K. operation during 2008 from a manufacturing and assembly center to primarily a distribution and service center.

Discontinued Operations. Income (loss) from discontinued operations, net of tax, totaled $49 for the second quarter of 2012, compared to $(2,325) for the second quarter of 2011. The second quarter of 2012 income includes operating results and costs related to our previously announced divestiture of our RedBlack Communication business and our exit from the Energy Services business which was completed in the second quarter of 2011. The loss from discontinued operations for the second quarter of 2011 reflects the inclusion of costs associated with the previously announced exit from the Energy Services business. For more information, see Note 2 to the Condensed Consolidated Financial Statements.

Net Income (Loss) Attributable to Ultralife. Net loss attributable to Ultralife and loss attributable to Ultralife common shareholders per diluted share was $3,167 and $0.18, respectively, for the three months ended July 1, 2012, compared to a net income attributable to Ultralife and income attributable to Ultralife common shareholders per diluted share of $439 and $0.03, respectively, for the second quarter of 2011. Average common shares outstanding used to compute diluted earnings per share increased from 17,308,000 in the second quarter of 2011 to 17,396,000 in the second quarter of 2012, mainly due to stock option exercises and shares of common stock issued to our non-employee directors.

Six-month periods ended July 1, 2012 and July 3, 2011

Revenues. Consolidated revenues for the six-month period ended July 1, 2012 amounted to $46,207, a decrease of $24,820, or 34.9%, from the $71,027 reported in the same period in 2011.

Battery & Energy Products sales decreased $19,882, or 35.8%, from $55,487 during the first six months last year to $35,605 during the first six months this year. Revenues for Battery & Energy Products decreased due to the absence of shipments of 5390 batteries to the DLA, the completion of large non-recurring telematics orders in 2011 and a slower government and defense order rate for rechargeable and non-rechargeable batteries and charger systems.

Communications Systems revenues decreased $4,938, or 31.8%, from $15,540 during the first six months last year to $10,602 during the first six months this year. The year-over-year comparison was impacted by the shipment of over 500 SATCOM units in the second quarter of 2011 that did not recur in the second quarter of 2012 representing approximately $7,500 of revenue, partially offset by our broader focus on large, global modernization opportunities, which resulted in higher amplifier sales in the first quarter of 2012.

Cost of Products Sold. Cost of products sold totaled $35,147 for the six-month period ended July 1, 2012, a decrease of $19,906, or 36.2%, from the $55,053 reported for the same six-month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 77.5% for the six-month period ended July 3, 2011 to 76.1% for the six-month period ended July 1, 2012. Correspondingly, consolidated gross margin was 23.9% for the six-month period ended July 1, 2012, compared with 22.5% for the six-month period ended July 3, 2011, primarily attributable to higher margins in our Batteries and Energy Products segment and last year's $2,730 DCAA settlement charge, partially offset by lower sales volumes and sales mix in our Communications Systems segment.

In our Battery & Energy Products segment, the cost of products sold decreased $17,294, from $45,193 during the six-month period ended July 3, 2011 to $27,899 during the six-month period ended July 1, 2012. Battery & Energy Products' gross profit for the first six months of 2012 was $7,706, or 21.6% of revenues, a decrease of $2,588 from gross profit of $10,294, or 18.6% of revenues, for the first six months of 2011. Battery & Energy Products' gross margin increased by 300 basis points for the six-month period ended July 1, 2012, primarily reflecting last year's DCAA settlement charge.

In our Communications Systems segment, the cost of products sold decreased $2,612 from $9,860 during the six-month period ended July 3, 2011 to $7,248 during the first six months of 2012. Communications Systems' gross profit for the first six months of 2012 was $3,354, or 31.6% of revenues, a decrease of $2,326 from gross profit of $5,680, or 36.6% of revenues, for the first six months of 2011. The decrease in gross margin was attributable to sales mix, which included a much higher concentration of radio accessory products and the sale of some legacy products in the current period versus higher volumes of amplifiers and SATCOM units in the second quarter of 2011, the recording of a reserve to rework and upgrade McDowell products requested by a strategically important customer for products they purchased in 2008, as well as, reduced volume pricing for certain large projects in the first quarter of 2012.

Operating Expenses. Total operating expenses for the six-month period ended July 1, 2012 totaled $15,281, a decrease of $1,592 from $16,873 for the six-month period ended July 3, 2011, resulting from continued actions to reduce general and administrative expenses and focused spending in the development of new products.

Overall, operating expenses as a percentage of revenues increased to 33.1% during the first six months of 2012 from 23.8% reported in the first six months of 2011 because of lower sales volumes. Amortization expense associated with intangible assets related to our acquisitions was $250 for the first six months of 2012 ($120 in selling, general and administrative expenses and $130 in research and development costs), compared with $314 for the first six months of 2011 ($157 in selling, general, and administrative expenses and $157 in research and development costs). Research and development costs were $4,109 in the first six months of 2012, a decrease of $510, or 11.0%, from the $4,619 reported in the first six months of 2011, as we focused our spending on the development of new products with the highest estimated return on investment. Selling, general, and administrative expenses decreased $1,082, or 8.8%, to $11,172 during the first six months of 2012 as compared to the first six months of 2011, reflecting on-going actions to reduce general and administrative expenses.

Other Income (Expense). Other income (expense) totaled $(184) for the first six months of 2012, compared to $(26) for the first six months of 2011. Interest expense, net of interest income, decreased $100, to $216 for the first six months of 2012 from $316 for the comparable period in 2011, as a result of lower average borrowings under our revolving credit facilities. Miscellaneous income/expense amounted to income of $32 for the first six months of 2012 compared with income of $290 for the first six months of 2011. The income in the first six months of 2012 and 2011 was primarily due to transactions impacted by changes in foreign currencies relative to the U.S. dollar.

Income Taxes. We reflected a tax provision of $262 for the first six months of 2012 compared with $176 during the first six months of 2011. The expense is primarily due to (a) the recognition of deferred tax liabilities generated from goodwill and certain intangible assets that cannot be predicted to reverse for book purposes during our loss carryforward periods, and (b) the income reported for our China operations during the periods. The effective consolidated tax rate for the six-month periods ended July 1, 2012 and July 3, 2011 was:

                                              Six-Month Periods Ended
                                         July 1, 2012         July 3, 2011
Income (Loss) before Incomes Taxes (a)   $      (4,405 )     $         (925 )

Total Income Tax Provision (b)           $         262       $          176

Effective Tax Rate (b/a)                           5.9 %               19.0 %

See Note 8 in the Notes to Condensed Consolidated Financial Statements for . . .