General

We are a solution-driven organization that designs, develops, manufactures and markets high-grade, customized and flexible power solutions for demanding applications in the medical, military, telecom, and industrial markets. Our products serve global markets worldwide. Revenues are generated from selling products to our customers directly by our sales force and through manufacturing representatives and distributors.

During the year ended December 31, 2011, profitability increased significantly from the prior year. We intend to remain an innovative leader in the development of cutting-edge custom power solutions, low emission, high-grade, high-density, modular power systems and rugged power solutions to meet harsh and extreme environmental requirements. We also intend to continue to pursue our strategy to reduce production costs and deliver high quality products in a timely manner through production agreements with numerous contract manufacturers in Asia. Our revenues have increased and we had an operating income and a net income. We believe that our cash will be sufficient to fund our operation in the next 12 months.

Foreign Currency Fluctuations

Our wholly-owned subsidiary, DPL, operates using the United Kingdom pound sterling. Therefore, we are subject to monetary fluctuations between the U.S. dollar and the United Kingdom pound sterling. For the year ended December 31, 2011, we recorded a foreign currency translation loss of $18,000 in Other Comprehensive Income (Loss) in shareholders' equity. For the year ended December 31, 2010, we recorded a foreign currency translation loss of $62,000.

Results of Operations

The table below sets forth certain statements of operations data as a percentage of revenues for the years ended December 31, 2011 and 2010:

                                                 Years Ended December 31,
                                                  2011               2010
        Revenues                                    100.00 %           100.00 %
        Cost of revenues                             59.79              64.68
        Gross profit                                 40.21              35.32
        Engineering and product development           6.67               5.40
        Sales and marketing                           8.98              10.87
        General and administrative                   14.26              14.29
        Total operating expenses                     29.91              30.56
        Operating income (loss)                      10.30               4.76
        Financial income (expenses)                   0.07             (0.06)
        Income before tax                            10.37               4.70
        Tax expenses                                  0.37               0.02
        Net income (loss)                            10.00 %             4.68 %

The following discussion and analysis should be read in connection with the consolidated financial statements and the notes thereto and other financial information included elsewhere in this Annual Report. We prepared the financial statements in accordance with U.S. generally accepted accounting principles, which require management to make estimates, and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Year Ended December 31, 2011, Compared to Year Ended December 31, 2010

Revenues

For the year ended December 31, 2011, revenues increased by 8.0% to $11,231,000 from $10,396,000 for the year ended December 31, 2010. The increase in revenues is mainly due to higher sales of our standard and custom design commercial products and our military products. During the year ended December 31, 2011, we generated revenues from the sale of a fully customized product solution for the medical market, as part of our earlier strategy to transition away from a dependence on standard, commodity products. In addition, during this period, we successfully delivered one of our major military projects.

Revenues derived from our defense products for the year ended December 31, 2011 were $2,300,000, a decrease of 16.1% from revenues of $2,741,000 from defense products for the year ended December 31, 2010. Revenues derived from our commercial products for the year ended December 31, 2011 increased by 16.7% to $8,931,000 from $7,655,000 for the year ended December 31, 2010. The increase in commercial product revenue in 2011 resulted primarily from the increase in sales of our standard commercial products.

Revenues from our domestic operations increased by 13.6% to $6,577,100 for the year ended December 31, 2011, from $5,792,000 for the year ended December 31, 2010. The increase in product revenues is mainly attributed to an increase in sales of our standard commercial products.

Revenues from our European operations (Gresham) decreased by 1.1% to $4,653,600 for the year ended December 31, 2011, from $4,604,000 for the year ended December 31, 2010. The decrease in revenues from Gresham in 2011 is due to a decrease in commercial product revenues and by a decrease in defense product revenues.

Gross Margins

Gross margins were 40.2% for the year ended December 31, 2011, compared to 35.3% for the year ended December 31, 2010. We retained the higher level of gross margins in 2011 as a result of our effort to continue outsourcing our production to contract manufacturers in Asia, cost reductions and variations in our product mix.

Engineering and Product Development

Engineering and product development expenses were $749,000, or 6.7% of revenues, for the year ended December 31, 2011, compared to $561,000, or 5.4% of revenues, for the year ended December 31, 2010. The increase is attributable to new product development due to the fact that during the year ended December 31, 2011, we had new design expenses.

Selling and Marketing

Selling and marketing expenses were $1,009,000, or 9.0% of revenues, for the year ended December 31, 2011, compared to $1,130,000, or 10.9% of revenues, for the year ended December 31, 2010. The decrease in selling and marketing expenses for the year ended December 31, 2011 was primarily due to a temporary decrease in salary-related expenses.

General and Administrative

General and administrative expenses were $1,601,000, or 14.3% of revenues, for the year ended December 31, 2011, compared to $1,486,000, or 14.3% of revenues, for the year ended December 31, 2010. The increase in general and administrative expenses during the year ended December 31, 2011 was mainly due to an increase in consulting expenses and an increase in general expenses, such as travel.

Financial Expenses, Net

Financial income were $8,000 for the year ended December 31, 2011, compared to financial expenses of $6,000 for year ended December 31, 2010. The change in financial results was due to foreign currency fluctuations during the respective periods.

Net Income (Loss)

For the year ended December 31, 2011, we had a net income of $1.12 million compared to a net income of $487,000 for the year ended December 31, 20010. The net income for the year ended December 31, 2011 is due primarily to the increase in our revenues and gross margins.

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported assets, liabilities, sales, and expenses in the accompanying consolidated financial statements. Critical accounting policies are those that require the most subjective and complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. The following are considered our most critical accounting policies that, under different conditions or using different assumption or estimates, could show materially different results on our financial condition and results of operations.

Revenue Recognition

Revenue from product sales is recognized in accordance with the provisions of ASC 605-15, "Revenue Recognition in Financial Statements", when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred (when risk of loss and title have transferred to the customer) , the sale price is fixed or determinable and collection is reasonably assured.

We generally use customer purchase orders and contracts to determine the existence of an arrangement. Shipping documents and customer acceptance, when applicable, are used to verify delivery. We assess whether the sales price is fixed or determinable based on the payment terms associated with the transaction and whether the price is subject to refund or adjustment. We assess collectability based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer's payment history.

Revenue on shipments to distributors and resellers is recognized on delivery. Generally, we do not grant a right of return. However, certain distributors are allowed, in the sixth month after the initial stock purchase, to rotate stock that has not been sold for other products. This stock rotation may be repeated every six months thereafter for fifteen to eighteen months, based on a fixed percentage at no more than the distributor's purchases during the previous six months. Revenues subject to stock rotation rights are deferred until the products are sold to the end customer or until the rotation rights expire.

Service revenues are deferred and recognized on a straight-line basis over the term of the service agreement. Service revenues are immaterial in proportion to the Company's revenues.

Inventory Obsolescence Accruals

We periodically assess our inventory valuation by reviewing revenue forecasts and technological obsolescence. We write down the value of obsolete or unmarketable inventory to the estimated net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

During 2011 and 2010, we recorded inventory write-offs of $36,000 and $28,000, respectively.

Allowance for Doubtful Accounts

Our accounts receivable are derived from sales to customers located primarily in the U.S. and Europe. We perform ongoing credit evaluations of our customers' financial condition and currently require no collateral from our customers. An allowance for doubtful accounts for estimated losses is maintained in anticipation of the inability of customers to make required payments. The allowance for doubtful accounts as of December 31, 2011 and 2010 was $148,000 and $119,000, respectively. When we become aware that a specific customer is unable to meet its financial obligations as a result of bankruptcy or the deterioration of the customer's operating results or financial position, for example, we record a specific allowance to reflect the level of credit risk in the customer's outstanding receivable balance. We are not able to predict changes in the financial condition of customers, and if the condition or circumstances of our customers deteriorates, estimates of the recoverability of trade receivables could be materially affected and we may be required to record additional allowances. Alternatively, if our estimates are determined to be greater than the actual amounts necessary, we may decrease a portion of such allowance in future periods based on actual collection experience.

Other Accrued Liabilities

Our accrued liabilities are based on a variety of factors including past experience and, in many cases, require estimates. If future experience differs from these estimates, operating results in future periods would be impacted.

Marketable Securities

The Company classifies its investment in Telkoor's shares as available-for-sale securities in accordance with ASC 320 (originally issued as SFAS 115), "Investment in Debt and Equity Securities". Marketable securities classified as "available for sale securities" are carried at fair value, based on quoted market prices. Unrealized gains and losses are reported in a separate component of shareholders' equity in "accumulated other comprehensive loss". When evaluating the investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company's intent to sell, or whether it is more likely than not that it will be required to sell, the investment before recovery of the investment's amortized cost basis. Based on the factors considered by the Company, the Company concluded that unrealized losses on its available-for-sale securities were not other-than-temporary. As such, the Company did not recognize any impairment charges on outstanding securities.

Equity-based Compensation Expense

We account for equity-based compensation in accordance with SFAS No. 123(R), "Share-Based Payment." Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service periods. Determining the fair value of share-based awards at the grant date requires the exercise of judgment, including the amount of share-based awards that are expected to be forfeited. Estimated forfeitures are based on historical pre-vesting forfeitures. If actual results differ from these estimates, equity-based compensation expense, and therefore our results of operations, could be impacted.

The Company estimates the fair value of stock options granted under ASC 718 (formerly: SFAS No. 123 (revised 2004)), "Share-Based Payment" ("ASC 718"), using the Black-Scholes option-pricing model, which uses the following assumption:

Expected volatility is based on historical volatility, which is representative of future volatility over the expected term of the options. The expected term of options granted was determined based on the simplified method, which is calculated as the midpoint between the vesting date and the end of the contractual term of the option. The risk free interest rate is based on the yield of U.S Treasury bonds with equivalent terms. The dividend yield is based on the Company's historical and future expectation of dividends payouts. The Company has not paid cash dividends historically and has no plans to pay cash dividends in the foreseeable future.

Liquidity and Capital Resources

On December 31, 2011, we had cash and cash equivalents of $1,777,300 and working capital of $3,846,000. This compares with cash and cash equivalents of $2,115,000 and working capital of $3,583,000 at December 31, 2010. The decrease in cash and cash equivalents is due mainly to the completion of the purchase of an investment in Telkoor and increase in inventory. The increase in working capital is mainly due to an increase in inventories, offset partially by a decrease in accounts receivable.

Net cash provided by operating activities totaled $842,000 for the year ended December 31, 2011, compared to net cash provided by operating activities of $386,000 for the year ended December 31, 2010. The net usage of cash from operating activities was mainly due to an increase in inventories, a decrease in related parties-trade payables and accounts receivable.

Net cash used in investing activities was $1,277,000 for the year ended December 31, 2011, compared to net cash used in investing activities of 484,000 for the year ended December 31, 2010. The net usage of cash from investing activities is due to the investment of Telkoor for $1.0 million and purchase of capital equipment for $270,000.

Net cash provided by financing activities was $38,000 for the year ended December 31, 2011 and $58,000 for the year ended December 31, 2010, and was due to the exercise of employee options.

In September, 2010, our wholly-owned subsidiary, DPL, entered into a new fifteen-year lease for its 25,000 square-foot facility in Salisbury, United Kingdom, where it designs, develops, manufactures, markets and distributes commercial and military power products for the European market. Sales and service support staff for its European network of distributors are located within the building together with other functions, such as engineering and administration. DPL's rent expense is approximately $13,000 per month, and DPL has the option to cancel the lease after ten years.

We believe we have adequate resources at this time to continue our operational and promotional efforts to increase sales and support our current operation. However, if we do not increase our sales, we may have to obtain financing through the issuance of debt and/or equity, which may dilute shareholders' equity.