Item 7. Management's Discussion and Analysis or Plan of Operations

Results of Operations

Year ended June 30, 2012 ("2012") compared with year ended June 30, 2011
("2011")

PHAZAR CORP recorded a net loss of $882,302 in 2012, compared to a net loss of $ $326,771 in 2011 attributed to lower sales volumes and a higher level of selling, general and administration expense.

PHAZAR CORP's consolidated sales from operations were $6,613,864 in 2012, compared to consolidated sales from operations of $8,399,586 in 2011, a decrease of $1,785,722, or 21%. The decrease in sales reflects significant declines in the instrument landing system (ILS) market, down $2,223,399 year over year.

Orders decreased by $2,497,615 from $8,359,869 in 2011 compared to $5,862,254 in 2012. Backlog was down $790,075 from $2,277,566 at the end of 2011 compared to $1,487,491 as of June 30, 2012 primarily due to a non-recurring order placed by the Federal Aviation Administration for ILS equipment in the fiscal year 2011 backlog.

Cost of sales and contracts and gross profit for fiscal year 2012, were $3,675,255 and $2,938,609, respectively. For the same period in 2011, costs of sales and contracts and gross profit were $4,713,705 and $3,685,881, respectively. The gross profit margin for both fiscal year 2012 and 2011 was 44%.

Sales and administration expenses were $3,483,946 in 2012, compared to $2,586,064 in 2011. The $897,882 increase in sales and administration expense reflects a $545,000 increase in the level of marketing costs in fiscal year 2012 versus 2011, $218,631 of non-recurring stock compensation expense in fiscal year 2012 along with a continued increase in plant utilization overhead. Research and development costs were $503,343 in 2012 compared to $160,611 in 2011, a 5.7% increase as a percentage on sales year over year. In fiscal year 2011 a substantial portion of the research and development costs for the year were reclassified and charged to discontinued operations.

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The income from operations before income taxes was a loss of $910,549 in 2012 compared to income from operations before income taxes of $1,017,521 in 2011.

As of June 30, 2012, the Company recorded a $273,861 valuation allowance on the amount of the non-current deferred tax asset related to the net operating loss carry forward, as it is more likely than not that some portion of this non-current deferred tax asset may not be realized. There was no valuation allowance provided in prior year. In management's estimation, the remaining deferred tax assets and liabilities will reverse over time and, therefore, are not offset by a valuation allowance.

The loss from discontinued operations, net of tax was $22,187 in 2012 down $971,895 from $994,082 in 2011. The Company recorded a net loss of $882,302 in 2012 compared to a net loss of $326,771 in 2011.

Product Warranties

See Note 7 of the Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

Sources of Liquidity

Based on current trends, funds from operations and current cash balances PHAZAR CORP believes there are sufficient resources to run the Company's operations for at least the next twelve months.

Capital Requirements

Management of the operating subsidiaries evaluates the facilities and reviews equipment requirements for existing and projected contracts on a regular basis. An annual capital plan is generated by management, as needed and submitted to the Board of Directors for review and approval. In fiscal year 2012 there were $84,560 in capital expenditures for new and replacement equipment.

At June 30, 2012, PHAZAR CORP had cash and cash equivalents of $528,876. Deferred revenue at June 30, 2012, was $19,619.

Cash Flows

Operating Activities

The $42,405 of cash flow used in operating activities consists of a $882,302 net loss offset by a $355,805 decline in inventory, a $207,045 decrease in income taxes receivable and $218,631 non-cash stock based compensation expense in fiscal year 2012. The $355,805 decline in inventory levels is primarily attributed to selling product that was previously manufactured and in finished goods inventory at the beginning of the fiscal year. The $207,045 decrease in income taxes receivable was impacted by a $232,000 refund from the Internal Revenue Service on the June 30, 2011 tax return with no current year receivable available. The stock based compensation in fiscal year 2012 was impacted by a one-time grant on March 16, 2012 for a group of employees resulting in an expense in the amount of $164,387 in fiscal year ended June 30, 2012 and an expense of $54,244 related to the fair market value of stock issued to directors during fiscal year 2012 and amortization of prior year stock awards issued to employees vesting over time.

Investing Activities

Cash of $598,037 was used in investing activities during the fiscal year ending June 30, 2012, which consists of the $513,477 funding of notes receivable (see Note 5 of the Notes to the Consolidated Financial Statements) and $84,560 was used to purchase property and equipment. The Company did not buy back any stock in either fiscal year 2011 or 2012.

On December 8, 2009, the Company entered into a $500,000 Principal 8% Per Year Senior Secured Convertible Note with Tracciare, Inc. due in full on May 31, 2011. In addition, the Company received a warrant to purchase up to eighty percent of Tracciare's equity for a total price of $500,000. In March, 2011, the note was amended to extend the maturity date to June 30, 2013. At June 30, 2012 Tracciare, Inc. had drawn all of the $500,000 note, along with additional fundings in the amount of $821,993 all under separate notes with the same terms and agreements as the original note and amendment. The $1,477,161 Note Receivable balance at June 30, 2012 includes $155,168 of accrued interest receivable. Traccaire, Inc. is a development-stage company in the pilot-project phase. It focuses on automated meter intelligence for municipal utility customers.

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Financing Activities

There were no financing activities requiring cash during the fiscal years ending June 30, 2012 and 2011. However there were non cash federal income tax benefits related to the stock based compensation expensed during the years ended June 30, 2012 and 2011 in the amounts of $74,335 and $35,104, respectively. At June 30, 2012 and 2011, PHAZAR CORP had no long-term debt outstanding.