Forward Looking Statements

Statements in this Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this document are certain statements which are not historical or current fact and constitute "forward-looking statements" within the meaning of such term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual financial or operating results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. Such forward looking statements are based on our best estimates of future results, performance or achievements, based on current conditions and the most recent results of the Company. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "may," "will," "potential," "opportunity," "believes," "belief," "expects," "intends," "estimates," "anticipates" or "plans" to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission.

Executive Overview

We recorded a decrease in revenue and profitability for the six and three months ended June 30, 2012 as compared to the same periods in 2011. Our sales decrease in the current six month period was principally due to a decrease in sales from our Electronics Group and the decrease in sales during the current three month period was primarily due to a decrease in sales at both our Electronics and Power Groups. We recorded net income of $199,000 and a net loss of $1,176,000 during the three and six months ended June 30, 2012, respectively, compared to net income of $917,000 and $1,441,000, respectively, during the comparable periods in 2011. The decrease in profitability during the current six and three month periods was primarily a result of our decrease in sales, a decrease in gross profit, an increase in selling, general and administrative expenses and a decrease in investment and other income, net. The current year six month period was also adversely affected by a $1,194,000 charge taken in connection with the non-renewal of our former chief operating officer's employment contract.

Our backlog at June 30, 2012 was approximately $19,500,000 compared to $18,300,000 at June 30, 2011. There is no seasonality to our business. Our shipping schedules are generally determined by the shipping schedules outlined in the purchase orders received from our customers. Both of our operating segments are pursuing a significant amount of business opportunities and while we are confident that we will receive many of the orders we are pursuing, there can be no assurance as to the ultimate receipt and timing of these orders.

Our financial condition remains strong as evidenced by our 4.1 to 1 current ratio at June 30, 2012. We currently have a $3,000,000 credit facility in place, which expires June 1, 2013, and we were in compliance with our financial covenants, as amended, at June 30, 2012. In March 2012, in privately negotiated transactions, we purchased 95,000 shares of our common stock for total cash consideration of approximately $402,000, including costs associated with the transaction of approximately $2,000, at an average price of $4.23. In August 2012, in a privately negotiated transaction, we purchased 100,000 shares of our common stock for total cash consideration of approximately $308,000 at an average price of $3.08.

Critical Accounting Policies

The discussion and analysis of our financial condition and the results of operations are based on our financial statements and the data used to prepare them. Our financial statements have been prepared based on accounting principles generally accepted in the United States of America. On an on-going basis, we re-evaluate our judgments and estimates including those related to inventory valuation, the valuation allowance on our deferred tax asset, impairment of goodwill, valuation of share-based compensation, revenue and cost recognition on long-term contracts accounted for under the percentage-of-completion method and other than temporary impairment on marketable securities. These estimates and judgments are based on historical experience and various other assumptions that are believed to be reasonable under current business conditions and circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect more significant judgments and estimates in the preparation of the consolidated financial statements.

Inventories

Inventory is valued at the lower of cost (average cost method and specific identification) or market. Inventory items are reviewed regularly for excess and obsolete inventory based on an estimated forecast of product demand. Demand for our products can be forecasted based on current backlog, customer options to reorder under existing contracts, the need to retrofit older units and parts needed for general repairs. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have an impact on the level of obsolete material in our inventory and operating results could be affected, accordingly. However, world events which have forced our country into various conflicts have resulted in increased usage of hardware and equipment which are now in need of repair and refurbishment. This could lead to increased product demand as well as the use of some older inventory items that we had previously determined obsolete. In addition, recently announced reductions in defense spending may result in deferral or cancellation of purchases of new equipment, which may require refurbishment of existing equipment.

Deferred Tax Asset

At June 30, 2012, we had an alternative minimum tax credit of approximately $573,000 with no limitation on the carry-forward period and Federal and state net operating loss carry-forwards of approximately $9,000,000 and $7,000,000, respectively, that expire through 2030. Approximately, $4,000,000 of Federal net operating loss carry-forwards expire in 2012. In addition, we receive a tax deduction when our employees exercise their non-qualified stock options thereby increasing our deferred tax asset. We record a valuation allowance to reduce our deferred tax asset when it is more likely than not that a portion of the amount may not be realized. We estimate our valuation allowance based on an estimated forecast of our future profitability. Any significant changes in future profitability resulting from variations in future revenues or expenses could affect the valuation allowance on our deferred tax asset and operating results could be affected, accordingly. If our strong profitability from 2011 continues during the remainder of 2012 (despite our net loss for the first six months of 2012), we will evaluate the possible reduction of some or all of our valuation allowance relating to our deferred tax asset. The reduction of some or all of our valuation allowance would create a deferred tax benefit, resulting in an increase to net income in our condensed consolidated statements of operations.

Impairment of Goodwill

The balance of goodwill for each of our operating units as of June 30, 2012 is $820,000 and $868,000 for TDL and Behlman, respectively. After adopting ASU 2011-08, we performed a qualitative assessment of Behlman's goodwill at December 31, 2011 and concluded that it was not more likely that not that the fair value of Behlman was less than its carrying amount. This assessment was based on certain factors, such as: i) Behlman's record bookings and revenue in 2011, ii) Behlman's strong net income in 2011 and iii) based on the 2010 goodwill impairment test, Behlman's fair value at December 31, 2010 exceeded its carrying amount by approximately 27%. In determining the recoverability of TDL's goodwill, assumptions were made regarding estimated future cash flows and other factors to determine the fair value of the asset. After completing the quantitative impairment testing of goodwill for TDL, we concluded that goodwill was not impaired at December 31, 2011.

Our analysis of TDL's goodwill employed the use of both a market and income approach. Significant assumptions used in the income approach include growth and discount rates, margins and our weighted average cost of capital. We used historical performance and management estimates of future performance to determine margins and growth rates. Our weighted average cost of capital included a review and assessment of market and capital structure assumptions. Based on TDL's goodwill impairment test at December 31, 2011, TDL had a fair value that was in excess of its carrying value by approximately 15%. Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows. Changes in our actual results and/or estimates or any of our other assumptions used in our analysis could result in a different conclusion.

Share-Based Compensation

We account for share-based compensation awards by recording compensation based on the fair value of the awards on the date of grant and expensing such compensation over the vesting periods of the awards, which is generally one to ten years. Total share-based compensation expense was $152,000 and $80,000 for the six months ended June 30, 2012 and 2011, respectively. During the six months ended June 30, 2012 and 2011, no shares of restricted stock or stock options were granted.

Revenue and Cost Recognition

We recognize a substantial portion of our revenue upon the delivery of product. We recognize such revenue when title and risk of loss are transferred to our customer and when there is: i) persuasive evidence that an arrangement with the customer exists, which is generally a customer purchase order, ii) the selling price is fixed and determinable, iii) collection of the customer receivable is deemed probable, and iv) we do not have any continuing obligations. However, for certain products, revenue and costs under larger, long-term contracts are reported on the percentage-of-completion method. For projects where materials have been purchased, but have not been placed in production, the costs of such materials are excluded from costs incurred for the purpose of measuring the extent of progress toward completion. The amount of earnings recognized at the financial statement date is based on an efforts-expended method, which measures the degree of completion on a contract based on the amount of labor dollars incurred compared to the total labor dollars expected to complete the contract. When an ultimate loss is indicated on a contract, the entire estimated loss is recorded in the period the loss is identified. Costs and estimated earnings in excess of billings on uncompleted contracts represent an asset that will be liquidated in the normal course of contract completion, which at times may require more than one year. The components of costs and estimated earnings in excess of billings on uncompleted contracts are the sum of the related contract's direct material, direct labor, and manufacturing overhead and estimated earnings less accounts receivable billings.

Marketable Securities

We currently have approximately $254,000 invested in corporate bonds. We treat our investments as available-for-sale which requires us to assess our portfolio each reporting period to determine whether declines in fair value below book value are considered to be other than temporary. We must first determine that we have both the intent and ability to hold a security for a period of time sufficient to allow for an anticipated recovery in its fair value to its amortized cost. In assessing whether the entire amortized cost basis of the security will be recovered, we compare the present value of future cash flows expected to be collected from the security (determination of fair value) with the amortized cost basis of the security. If the impairment is determined to be other than temporary, the investment is written down to its fair value and the write-down is included in earnings as a realized loss, and a new cost is established for the security. Any further impairment of the security related to all other factors is recognized in other comprehensive income. Any subsequent recovery in fair value is not recognized until the security either is sold or matures.

We use several factors in our determination of the cash flows expected to be collected including: i) the length of time and extent to which market value has been less than cost, ii) the financial condition and near term prospects of the issuer, iii) whether a decline in fair value is attributable to adverse conditions specifically related to the security or specific conditions in an industry, iv) whether interest payments continue to be made, and v) any changes to the rating of the security by a rating agency.

Results of Operations

Three month period ended June 30, 2012 v. June 30, 2011

We currently operate in two industry segments. Our Orbit Instrument Division and our TDL subsidiary are engaged in the design and manufacture of electronic components and subsystems and our ICS subsidiary performs system integration for Gun Weapons Systems and Fire Control Interface as well as logistics support and documentation (which collectively comprise our "Electronics Group"). Our Behlman subsidiary is engaged in the design and manufacture of commercial power units and COTS power solutions (which comprises our "Power Group").

Consolidated net sales for the three month period ended June 30, 2012 decreased by 9.4% to $7,509,000 from $8,284,000 for the three month period ended June 30, 2011, due primarily to lower sales from both our Electronics and Power Groups. Sales from our Electronics Group decreased by 10.0% due principally to lower sales from our Orbit Instrument Division and ICS subsidiary, and despite an increase in sales from our TDL subsidiary. The decrease in sales at our Orbit Instrument Division was primarily due to customer delivery schedules weighted toward the second half of the current year. The decrease in sales at our ICS subsidiary was principally due to the absence of MK 119 sales, as a follow-on order for the MK 119 was not received for shipping in 2012. Sales from our Power Group decreased by 11.1% due to a decrease in sales from its commercial division which was partially offset by an increase in sales at its COTS division. The decrease in sales from its commercial division was principally due to a decrease in bookings during the current year period and the increase in sales from its COTS division was principally due to increased shipments pursuant to customer delivery schedules.

Gross profit, as a percentage of sales, for the three months ended June 30, 2012 decreased to 37.7% from 40.0% for the three month period ended June 30, 2011. The decrease was the result of lower gross profit at both our Electronics and Power Groups. The decrease in gross profit from our Electronics Group was principally due to lower gross profit at our Orbit Instrument Division and ICS subsidiary which, in turn, resulted from lower sales and a change in product mix, this was partially offset by higher gross profit at our TDL subsidiary, primarily due to higher sales and a change in product mix. The decrease in gross profit at our Power Group was principally due to lower sales during the current year period.

Selling, general and administrative expenses increased by 7.9% to $2,575,000 for the three month period ended June 30, 2012 from $2,387,000 for the three month period ended June 30, 2011. The increase was principally due to corporate costs relating to the departure of a senior officer and higher selling, general and administrative expenses from our Electronics Group due to additional sales and engineering personnel at our Orbit Instrument Division. The increase was partially offset by a decrease in selling, general and administrative expenses at our Power Group. Selling, general and administrative expenses, as a percentage of sales, for the three month period ended June 30, 2012 increased to 34.3% from 28.8% for the three month period ended June 30, 2011 principally due to a decrease in sales and an increase in costs.

Interest expense for the three months ended June 30, 2012 decreased to $36,000 from $53,000 for the three months ended June 30, 2011 due to a decrease in the amounts owed to lenders under our term debt and lower interest rates on our term debt and line of credit.

Investment and other income for the three month period ended June 30, 2012 decreased to $4,000 from $71,000 for the three month period ended June 30, 2011 principally due to both a $40,000 gain on the sale of a corporate bond and a deferred gain of $21,000 in the prior year period.

Net income before taxes was $227,000 for the three months ended June 30, 2012 compared to $947,000 for the three months ended June 30, 2011. The decrease in income was principally due to a decrease in sales and gross profit from both the Electronics and Power Groups, a decrease in investment and other income, net, an increase in selling, general and administrative expenses and despite a decrease in interest expense.

Income taxes for the three months ended June 30, 2012 and June 30, 2011 consist of $28,000 and $30,000, respectively, in state income and Federal minimum taxes that cannot be offset by any state or Federal net operating loss carry-forwards.

As a result of the foregoing, net income for the three months ended June 30, 2012 was $199,000 compared to net income of $917,000 for the three months ended June 30, 2011.

Earnings before interest, taxes and depreciation and amortization (EBITDA) for the three months ended June 30, 2012 decreased to $338,000 from $1,065,000 for three months ended June 30, 2011. Listed below is the EBITDA reconciliation to net income:

EBITDA is a Non-GAAP financial measure and should not be construed as an alternative to net income. An element of the Company's growth strategy has been through strategic acquisitions which have been substantially funded through the issuance of debt. This has resulted in significant interest expense and amortization expense. EBITDA is presented as additional information because the Company believes it is useful to our investors and management as a measure of cash generated by our business operations that will be used to service our debt and fund future acquisitions as well as provide an additional element of operating performance.

                                   Three months ended
                                        June 30,
                                  2012           2011

Net income                      $ 199,000     $   917,000
Interest expense                   36,000          53,000
Income tax expense                 28,000          30,000
Depreciation and amortization      75,000          65,000
EBITDA                          $ 338,000     $ 1,065,000

Six month period ended June 30, 2012 v. June 30, 2011

Consolidated net sales for the six month period ended June 30, 2012 decreased by 9.4% to $13,671,000 from $15,096,000 for the six month period ended June 30, 2011 due to lower sales from our Electronics Group and slightly lower sales from our Power Group. Sales from our Electronics Group decreased by 19.6%, due principally to a decrease in sales from our Orbit Instrument Division and ICS subsidiary. The decrease in sales at our Orbit instrument Division was principally due to customer delivery schedules weighted towards the second half of the current year. The decrease in sales at our ICS subsidiary was principally due to the absence of MK 119 sales, as a follow-on order for the MK 119 was not received for shipping in 2012.

Gross profit, as a percentage of sales, for the six months ended June 30, 2012 decreased to 38.2% from 41.4% for the six month period ended June 30, 2011. This decrease was primarily the result of lower gross profit from our Electronics Group. The decrease at our Electronics Group was principally due to lower gross profit at our Orbit Instrument Division and ICS subsidiary, primarily due to lower sales and a change in product mix, that was partially offset by higher gross profit at our TDL subsidiary, which was primarily due to higher sales and a change in product mix. During the current year period, gross profit, as a percentage of sales, at our Power Group decreased slightly, approximately 0.2%, as compared to the prior year period.

Selling, general and administrative expenses increased by 8.8% to $5,172,000 for the six month period ended June 30, 2012 from $4,755,000 for the six month period ended June 30, 2011. The increase was principally due to higher corporate costs relating to the departure of a senior officer and an increase in selling, general and administrative expenses at our Orbit Instrument Division due to additional sales and engineering personnel. Selling, general and administrative expenses from our Power Group increased slightly during the current year period compared to the prior year. Selling, general and administrative expenses, as a percentage of sales, for the six month period ended June 30, 2012 increased to 37.8% from 31.5% for the six month period ended June 30, 2011 principally due to a decrease in sales and an increase in costs.

During the first quarter of 2012, we reached a decision that made it probable that the employment agreement of our former chief operating officer would not be renewed, which would effectively terminate his employment as of July 31, 2012. Pursuant to the terms of his existing agreement, we recorded an expense of $1,194,000 for estimated costs associated with the contract non-renewal.

Interest expense for the six months ended June 30, 2012 decreased to $70,000 from $106,000 for the six months ended June 30, 2011 due principally to a decrease in the amounts owed to lenders under our term debt and line of credit and also due to a reduction in the interest rate on our term debt and line of credit.

Investment and other income for the six month period ended June 30, 2012 decreased to $97,000 from $105,000 for the six month period ended June 30, 2011 principally due to a gain of $45,000 on corporate bonds sold in the prior period and despite a $43,000 increase in a deferred gain during the current year period.

Net loss before taxes was $1,118,000 for the six months ended June 30, 2012 compared to net income before taxes of $1,487,000 for the six months ended June 30, 2011. The decrease in income was principally due to a $1,194,000 charge taken in connection with the non-renewal of our former chief operating officer's contract, a decrease in sales from both the Electronics and Power Groups, a decrease in gross profit at our Electronics Group and an increase in selling, general and administrative expenses.

Income taxes for the six months ended June 30, 2012 and June 30, 2011 consist of $58,000 and $36,000, respectively, in state income and Federal minimum taxes that cannot be offset by any state or Federal net operating loss carry-forwards.

As a result of the foregoing, the net loss for the six months ended June 30, 2012 was $1,176,000 compared to net income of $1,441,000 for the six months ended June 30, 2010.

Earnings (loss) before interest, taxes and depreciation and amortization (EBITDA) for the six months ended June 30, 2012 decreased to a loss of $907,000 from income of $1,727,000 for the six months ended June 30, 2011. Listed below is the EBITDA reconciliation to net income:

                                      Six months ended
                                          June 30,
                                    2012            2011

Net (loss) income               $ (1,176,000 )   $ 1,441,000
Interest expense                      70,000         106,000
Income tax expense                    58,000          46,000
Depreciation and amortization        141,000         134,000
EBITDA                          $   (907,000 )   $ 1,727,000

Material Change in Financial Condition

Working capital decreased to $16,010,000 at June 30, 2012 compared to $17,038,000 at December 31, 2011. The ratio of current assets to current liabilities decreased to 4.1 to 1 at June 30, 2012 compared to 5.4 to 1 at December 31, 2011. The decrease in working capital was primarily attributable to the net loss for the period, the increase in the liability associated with non-renewal of senior officers' contracts and the repayment of debt.

Net cash used in operating activities for the six month period ended June 30, 2012 was $1,531,000, primarily attributable to the net loss for the period, an increase in inventory and costs and estimated earnings in excess of billings on uncompleted contracts, the decrease in accrued expenses and taxes payable and despite the decrease in accounts receivable and other current assets, the increase in liabilities associated with the non-renewal of senior officers' contracts and accounts payable and the non-cash depreciation and stock based compensation. Net cash used in operating activities for the six month period ended June 30, 2011 was $2,238,000, primarily attributable to the increase in inventory, accounts receivable and costs and estimated earnings in excess of billings and a decrease in the liability associated with our former chief executive officer and despite the net income for the period and an increase in accounts payable.

Cash flows used in investing activities for the six month period ended June 30, 2012 was $281,000, attributable to the purchase of fixed assets. Cash flows used in investing activities for the six month period ended June 30, 2011 was $185,000, primarily attributable to the purchase of fixed assets and marketable securities that was partially offset by the sale of marketable securities and fixed assets.

Cash flows from financing activities for the six month period ended June 30, 2012 was $1,268,000, primarily attributable to the proceeds from issuance of note payable-bank and long-term debt and the decrease in restricted cash which was partially offset by the repayment of long term debt and purchase of treasury stock. Cash flows from financing activities for the six month period ended June 30, 2011 was $506,000, primarily attributable to the proceeds from issuance of note payable-bank which was partially offset by the repayment of long-term debt.

On March 10, 2010, we entered into a credit agreement (the "Credit Agreement") with a commercial lender pursuant to which we: (a) established a new line of . . .