The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere in this report.

Business Overview

We are (i) a leading supplier and distributor of batteries, related power accessories, low voltage wire and cable products and security accessories and
(ii) a third-party logistics services provider, specializing in supply chain management and value-added services.

Distribution Business

We sell, distribute and market batteries, related power accessories, low voltage wire and cable products and security accessories under various manufacturer brands, private labels and our own proprietary brands. We are one of the leading domestic distributors of sealed, or "maintenance-free," lead-acid batteries ("SLA batteries"). We also assemble lithium-ion and other custom battery packs. Our principal product lines include:

? batteries and custom battery packs of a wide variety of chemistries, battery chargers and related accessories;

? portable battery-powered products, such as jump starters and 12-volt DC power accessories;

? low voltage wire and cable products;

? security system components, such as alarm panels, perimeter access controls, horns, sirens, speakers, transformers, cable and wire; and

? renewable power products such as solar power generators and solar products.

Our customers include original equipment manufacturers (OEMs), distributors and both online and traditional retailers. Our products represent basic power solutions to a wide variety of existing applications in a broad market spectrum. They are used in a diverse and growing range of markets and applications including automotive, medical mobility, consumer goods, electronics, marine, hunting, powersports, solar, portable power, security and surveillance, fire, energy management, electrical and telecommunications.

The demand for our products is impacted by consumer and market preferences, technological developments, fuel costs, which impact manufacturing and shipping, the cost of lead and copper, the two principal raw materials used to manufacture batteries and wire and cable products, and general economic conditions. We believe that technological change drives growth as new product introductions accelerate sales and provide us with new opportunities. At the same time, product needs are also evolving due to changes in consumer demands and preferences that are driven, in part, by environmental and safety concerns and the need for greater density power and longer life. Therefore, we continue to stay current regarding advances and changes in our products.

Third-Party Logistics

We are also a third-party logistics services provider specializing in supply chain management and value-added services, designed to help customers optimize performance by allowing them to outsource supply chain management functions. Our supply chain management services include inventory sourcing, procurement, warehousing and fulfillment. Our value-added services include custom kitting, private labeling, product development and engineering, graphic design and sales and marketing.

We believe that the demand for third-party logistics and supply chain management solutions is growing, particularly with globalization. To be successful, businesses have not only to excel in their core competencies, but they must also execute their supply chain processes quickly and accurately. To remain competitive, businesses strive to identify ways to more efficiently manage their supply chain and streamline their logistics processes by minimizing inventory levels, reducing order and cash-to-cash cycle lengths and outsourcing manufacturing and assembly operations to low-cost locations. An efficient supply chain has become a critical element to improving financial performance. As a result, businesses are increasingly turning to organizations that provide a broad array of logistics and supply chain solutions. These trends have been further facilitated by the rapid growth of technology enabling seamless electronic interfaces between systems of service providers and their customers.

Operations Overview

We continue to focus on executing upon our long-term strategic plan to penetrate new markets, developing new higher-margin products and diversifying product mix to minimize our exposure to the broader economy.

The acquisition of ProTechnologies, Inc. ("PTI") is indicative of this strategy. PTI is a lithium-ion battery pack assembler and distributer; and holds several ISO certifications required by medical and other specialized purchasers of battery packs. As a result, the acquisition of PTI expands our product and service offerings, adds to our technical capabilities and enables us to penetrate new markets such as medical, military, metering, mining, hobby, handheld communications and OEM applications.

In May 2011, the government of the People's Republic of China implemented a broad based inspection program for manufacturing facilities dealing with hazardous materials including lead. These efforts came in response to a number of incidents involving the release of hazardous materials into the environment, resulting in contamination of water supplies and harm to the local population. Chinese government authorities have been particularly focused on lead acid battery manufacturers given the potential for lead poisoning resulting from the methods used by manufacturing and recycling plants to treat waste product, including its potential release into the environment. The Ministry of Environmental Protection in China has been inspecting these manufacturing plants and has closed a significant number of facilities due to their production practices and poor technical standards as well as their proximity to large population centers. These recent closures have impacted production of lead acid batteries in China and have caused delays and disruptions in the supply of batteries to the United States and other global markets. In the first nine months of 2012 we experienced delays in product shipments from a number of China-based factories.

On May 4, 2012, pursuant to a Securities Purchase Agreement, dated as of May 4, 2012 ("Agreement"), we sold all of the issued and outstanding membership interests of Monarch for $130,000. Of the purchase price, $50,000 was paid in cash at closing and $80,000 was evidenced by a 6% secured promissory note due May 1, 2014. We realized a pre-tax loss of approximately $600,000 related to the sale of Monarch in our second-quarter financial results. When we first purchased Monarch in January 2009, we believed that it held promise in terms of the variety of Monarch's battery-powered products that might be enhanced by UPG's supply chain infrastructure. Unfortunately, over the past three years we determined there was not enough overlap and opportunity for growth in Monarch to justify continued investment in the business. During that time, Monarch generated operating losses, and we were unable to generate profit or positive cash flow from its operations, however as a result of the sale, we expect improved cash flows for our overall business because the ongoing investment demands from Monarch will no longer be required.

Results of Operations

The following table compares our statement of operations data for the three and nine months ended September 30, 2012 and 2011. The trends suggested by this table may not be indicative of future operating results, which will depend on various factors including the nature of revenues (sales of batteries, power accessories, wire and cable products, security products versus logistics or value added services) and the relative mix of products sold (batteries versus security products, wire and cable products and power accessories), which can vary from quarter to quarter, as well as the state of the general economy. In addition, our operating results in future periods may also be affected by acquisitions.

                             Three months ended September 30,                        Nine months ended September 30,
                              2012                        2011                        2012                        2011
                     Amount       Percent        Amount       Percent        Amount       Percent        Amount       Percent
                                                               (dollars in thousands)
Net sales           $ 22,114         100.0 %    $ 24,676         100.0 %    $ 72,035         100.0 %    $ 67,785         100.0 %
Cost of sales         18,539          83.8 %      19,920          80.7 %      59,617          82.8 %      54,349          80.2 %
Gross profit           3,575          16.2 %       4,756          19.3 %      12,418          17.2 %      13,436          19.8 %
Operating
expenses               3,312          15.0 %       4,241          17.2 %      10,883          15.1 %      11,524          17.0 %
Operating income         263           1.2 %         515           2.1 %       1,535           2.1 %       1,912           2.8 %
Interest expense        (145 )        (0.7 %)       (161 )        (0.7 %)       (441 )        (0.6 %)       (452 )        (0.7 %)
Other, net                 3           0.1 %           -             -           129           0.2 %           -             -
Income from
continuing
operations before
provision for
income taxes             121           0.6 %         354           1.4 %       1,223           1.7 %       1,460           2.1 %
Provision for
income taxes             (78 )        (0.4 %)       (197 )        (0.8 %)       (439 )        (0.6 %)       (623 )        (0.9 %)
Income from
continuing
operations                43           0.2 %         157           0.6 %         784           1.1 %         837           1.2 %
Gain (loss) on
discontinued
operations                 -           0.0 %          40           0.1 %        (707 )        (1.0 %)       (187 )        (0.3 %)
Provision for
income taxes               -           0.0 %         (14 )        (0.0 %)        161           0.2 %          61           0.1 %
Gain (loss) on
discontinued
operations                 -           0.0 %          26           0.0 %        (546 )        (0.8 %)       (126 )        (0.2 %)
Net income          $     43           0.2 %    $    183           0.7 %    $    238           0.3 %    $    711           1.0 %

Comparison of the three months ended September 30, 2012 and 2011

Net sales

Consolidated net sales for the three-month period ended September 30, 2012 was $22.1 million compared to $24.7 million for same period in 2011, a decrease of $2.6 million or 10.4%. This decrease was attributable to the decrease in sales to retail customers and ADT and its authorized dealers which was offset by an increase of PTI sales.

Cost of sales

Cost of sales is comprised of the base product cost, freight, duty and servicing fees where applicable. Cost of sales totaled $18.5 million for the three-month period ended September 30, 2012 compared to $19.9 million in the comparable 2011 period, a decrease of $1.4 million, or 6.9%. Cost of sales as a percentage of sales increased to 83.8% in the 2012 three-month period from 80.7% in 2011. This increase was driven by the closure of a significant number of factories as a result of the China Ministry of Environmental Protection's investigative efforts on production practices, which in turn resulted in disruptions and shortages in the supply of batteries to the United States and other global markets. This increase in cost of sales was attributable in part to increased costs as a result of the shortage in supply of sealed lead acid batteries due to factory closures and manufacturing disruptions from Chinese suppliers. We have also seen higher product costs overall as material and labor costs have risen in China. These cost increases combined with the need to honor our pricing commitments to our customers placed downward pressure on gross margins.

Operating expenses

Operating expenses for the three-month period ended September 30, 2012 decreased by approximately $929,000 or 21.9%, compared to the same period in 2011. For the 2012 period, the decrease in operating expenses is attributable to decreases of
(i) $271,000 in personnel and travel cost; (ii) $259,000 in legal and professional fees; (iii) $142,000 depreciation and amortization and (iv) $234,000 in facilities costs, marketing expenses, bad debts expenses and insurance.

Operating income

For the three-month period ended September 30, 2012, our operating income decreased by approximately $252,000, or 48.9%, compared to the same period in 2011.

Interest expense

Interest expense totaled approximately $145,000 and $161,000 for the three-month period ended September 30, 2012 and 2011, respectively. The average outstanding loan balance on the line of credit for the 2012 and 2011 periods was $21.4 million and $13.0 million, respectively, with a weighted average interest rate of 2.5% and 2.48% on all 2012 and 2011 borrowings, respectively. The 2011 period included $43,000 of interest expense related to the interest rate swap which was fully expensed in June 2012.

Discontinued operations

For the three-month period ended September 30, 2012 we did not have any gain or loss from discontinued operations compared to a gain of $40,000 in the same period in 2011. We sold Monarch for $130,000 of which approximately $40,000 was net cash and $80,000 was in a two-year secured promissory note. This was offset by $100,000 in inventory, $200,000 in property and equipment and $400,000 in rent. The total remaining contractual estimated lease obligation amounted to $700,000 accrued in connection with the sale, including future estimated property taxes, until the expiration of the Monarch lease on August 31, 2018 offset by sublease income and estimated fair rental value for the remainder of the Monarch lease term of $300,000.

Income taxes

We recorded an income tax expense on continuing operations of approximately $78,000 and $197,000 for each of the three-month periods ended September 30, 2012 and 2011, respectively. Our effective tax rate was 64.5% and 55.6% for the three-month periods ended September 30, 2012 and 2011, respectively. The taxes reflect federal as well as state taxes. The high effective tax rates are driven by an increase in state income taxes and permanent differences.

For the nine months ended September 30, 2012 and 2011

Net sales

For the nine-month period ended September 30, 2012, we had net sales of $72.0 million compared to $67.8 million for the same period in 2011, an increase of $4.2 million, or 6.3%. This increase was attributable to an increase in sales to new and existing customers and sales by PTI which was off-set by a decrease in sales to retail customers for the 2012 period compared to the 2011 period.

Cost of sales

Cost of sales totaled $59.6 million for the nine-month period ended September 30, 2012 compared to $54.3 million in the comparable 2011 period, an increase of $5.3 million, or 9.7%. Cost of sales as a percentage of sales increased to 82.8% in 2012 compared to 80.2% in 2011. This increase was driven by the closure of a significant number of factories as a result of the China Ministry of Environmental Protection's investigative efforts on production practices, which in turn resulted in disruption and shortages in the supply of batteries to the United States and other global markets. This shortage in supply of sealed lead acid batteries due to factory closures and manufacturing disruptions from Chinese contributed to increased cost of sales during the first nine months of 2012. We have also seen higher product costs overall as material and labor costs have risen in China. These cost increases combined with the need to honor our pricing commitments to our customers placed downward pressure on gross margins. Our overall gross margin for the nine-month period ended September 30, 2012, was approximately 17.2% compared to a gross margin of 19.8% for the comparable period in 2011.

Operating expenses

Operating expenses for the nine-month period ended September 30, 2012 decreased by approximately $641,000, or 5.6%, to $10.9 million compared to $11.5 million in the same period in 2011. For the 2012 period, the decrease in operating expenses is attributable to decreases of (i) $258,000 in depreciation and amortization; (ii) $110,000 in legal and professional fees; (iii) $93,000 in personnel and travel cost and (iv) $177,000 in facilities costs, marketing expenses, bad debts expenses, public company costs and insurance.

Operating income

For the nine-month period ended September 30, 2012, our operating income decreased to approximately $1.5 million compared to $1.9 million for the same period in 2011.

Interest expense

Interest expense totaled approximately $441,000 and $452,000 for the nine-month periods ended September 30, 2012 and 2011, respectively. The average outstanding loan balance on the line of credit for the 2012 and 2011 periods was $17.6 million and $13.5 million, respectively, with a weighted average interest rate of 2.51% and 2.48% on all 2012 and 2011 borrowings, respectively. Interest expense related to the interest rate swap which was fully expensed in June 2012, totaled approximately $78,000 and $131,000 for the 2012 and 2011 periods, respectively.

Discontinued operations

For the nine-month periods ended September 30, 2012 and 2011 we had losses from discontinued operations of $707,000 and $187,000, respectively. The disposition of Monarch in the second quarter of 2012 resulted in a loss on disposal of approximately $600,000 for the nine-month period ended September 30, 2012. We sold Monarch for $130,000 of which approximately $40,000 was net cash and $80,000 was in a two-year secured promissory note. This was offset by $100,000 in inventory, $200,000 in properaty and equipment and $400,000 in rent. The total remaining contractual estimated lease obligation amounted to $700,000 accrued in connection with the sale, including future estimate property taxes, until the expiration of the Monarch lease on August 31, 2018 offset by sublease income and estimated fair rental value for the remainder of the Monarch lease term of $300,000.

Income taxes

We recorded income tax expense on continuing operations of approximately $439,000 and $623,000 for the nine-month periods ended September 30, 2012 and 2011, respectively. Our effective tax rate was 35.9% and 42.7% for the nine-month periods ended September 30, 2012 and 2011, respectively. The rates reflect federal as well as state taxes, and are also impacted by expenses not deductible for income tax reporting purposes.

Liquidity and capital resources

We had cash and cash equivalents of approximately $987,000 and $283,000, at September 30, 2012 and December 31, 2011, respectively.

For the nine-month period ended September 30, 2012, net cash used in operating activities was approximately $7.9 million compared to $9.6 million provided by operating activities for the same period in 2011. The net cash used in operating activities for 2012 reflects non-cash charges of $600,000 resulting from loss on disposal of Monarch, increase in deferred income taxes of $340,000, an increase in inventory of $9.9 million, a decrease in accounts payable and accrued expenses of $1.4 million which were an offset by decrease in trade accounts receivable of $1.9 million, a decrease in prepaid expenses of $550,000 and decrease of $550,000 in income tax receivable. This change in cash used in operating activities was primarily attributable to the increase in inventory purchases in 2012 to rebuild our inventory levels. Our inventory levels were affected by the production issues of battery manufacturers in China, as significant shipping delays resulted in the depletion of our inventory during 2011, resulting in exceptionally low inventory levels at December 31, 2011. As manufacturing and delivery lead times improved during 2012, we were able to increase inventories to more historical levels. In addition, we elected to add additional inventory to provide an extra layer of safety given the continued uncertainties in the market.

Net cash used in investing activities for the nine-month period ended September 30, 2012 was $19,000 compared to $2.3 million used in investing activities for the same period in 2011. The decrease in cash used in 2012 was primarily attributable to our investment of approximately $2.3 million to acquire substantially all of the business assets of PTI in the same prior year period.

For the nine-month period ended September 30, 2012, net cash provided by financing activities was approximately $8.6 million compared to $7.1 million used in financing activities for the corresponding period in 2011. The increase in cash provided by financing activities was primarily due to draw down on our line of credit in the first nine months of 2012, while the cash used in financing activities in the prior year period primarily reflects repayments on the line of credit.

We have a revolving credit agreement with Wells Fargo that matures on July 30, 2013. The Credit Agreement provides that we may borrow up to $30.0 million, with the possibility that we can increase the line to $40.0 million if we can satisfy certain defined criteria. All of our assets secure our obligations under the Credit Agreement. Our borrowing availability is limited to 80% of "eligible accounts receivable" and 80% of "eligible inventory," as those terms are defined in the Credit Agreement. For each borrowing, we have the option to choose a "Base Rate," or "Eurodollar," loan. Interest on Base Rate loans is payable quarterly and interest on Eurodollar loans is generally payable monthly or quarterly at our option. The annual rate of interest payable on Base Rate and Eurodollar loans fluctuate depending upon a number of factors, all as described in the Credit Agreement. At September 30, 2012, the interest rate was 2.50%. The Credit Agreement contains negative covenants restricting our ability to take certain actions without Wells Fargo's consent, including incurring additional indebtedness, transferring or encumbering assets, paying dividends or making certain other payments, and acquiring other businesses. If there is an "event of default", including failure to pay, bankruptcy, breach of covenants and breach of representations and warranties, all amounts outstanding under the credit facility will become immediately due and payable. In addition, we must maintain certain financial covenants on a quarterly basis.

At September 30, 2012, approximately $21.3 million was outstanding under the credit facility out of a maximum availability of approximately $22.2 million based on the borrowing formula.

We believe that our cash and cash equivalents, cash provided by operations and cash available under our line of credit will be sufficient to meet our operational needs over the next 12 months.

Capital Resources

At December 31, 2011, we did not have any material commitments for capital expenditures. Other than the lease agreement signed in October 2012, we may enter into various commitments during the fourth quarter of 2012 if expansion opportunities arise. We will disclose material items in press releases and other appropriate filings as they develop. We have no off balance sheet financing arrangements.