ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

In addition to historical information, this Quarterly Report contains forward-looking statements regarding future events relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995, the Securities Act of 1933 and the Securities Exchange Act of 1934 provide safe harbors for forward-looking statements. In order to comply with the terms of these safe harbors, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially and adversely from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of the Company's business include, but are not limited to, those matters discussed herein in the section entitled Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. The words "believe," "expect," "anticipate," "project," "target," "intend," "plan," "seek," "estimate," "endeavor," "should," "could," "may" and similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to projections for our future financial performance, our anticipated growth trends in our business and other characterizations of future events or circumstance are forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including without limitation, the Company's Annual Report on Form 10-K for the year ended December 31, 2011 (See Item 1 - Business; Item 1A - Risk Factors; Item 3 - Legal Proceedings and Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations).

General

The Company was incorporated in November, 1988, under the laws of Delaware as GPS Acquisition Corp. for the purpose of acquiring the business of Blonder-Tongue Laboratories, Inc., a New Jersey corporation, which was founded in 1950 by Ben H. Tongue and Isaac S. Blonder to design, manufacture and supply a line of electronics and systems equipment principally for the private cable industry. Following the acquisition, the Company changed its name to Blonder Tongue Laboratories, Inc. The Company completed the initial public offering of its shares of Common Stock in December, 1995.

Today the Company is a technology-development and manufacturing company that delivers television signal encoding, transcoding, digital transport and broadband product solutions for a broad range of applications. The markets served include cable televisions systems, the multi-dwelling unit communities, the lodging/hospitality market, and institutional systems including hospitals, prisons and schools. The technology requirements of these markets change rapidly and the Company's research and development team is continually delivering high performance-lower cost solutions to meet customers' needs.

The Company's strategy is focused on the development of products for digital signal generation and transmission. Since 2008 the Company has entered into and renewed agreements for various technologies in concert with its digital encoder and EdgeQAM line of products. As a result, the Company continues to significantly expand its digital product lines. The continuing evolution of the Company's product lines will focus on the increased needs created in the digital space by Internet Protocol Television ("IPTV"), digital standard definition ("SD") and high definition ("HD") video content and the transport of these signals over state of the art broadband networks.

The Company has experienced a shift in product mix from analog products to digital products and expects this shift to continue. Sales of digital video headend products were $10,720,000 and $6,794,000 in the first nine months of 2012 and 2011, respectively. Sales of analog video headend products were $5,238,000 and $5,021,000 in the first nine months of 2012 and 2011, respectively. Any substantial decrease in sales of analog products without a related increase in digital products could have a material adverse effect on the Company's results of operations, financial condition and cash flows. .

In April 2010, the Company obtained a $4.1 million purchase commitment for the first member of its EdgeQAM family of products (the "EQAM-400") from World Cinema Inc. ("World Cinema"), a supplier of free-to-guest digital and HD television to the hospitality market. These shipments were made in the second and third quarters of 2010, during which time the EQAM-400 was exclusive to World Cinema. Since then, the parties have agreed to extend the exclusivity arrangement, with the most recent extension occurring in September, 2011 which extended exclusivity through the end of 2012. In connection with this most recent extension, World Cinema committed to purchase approximately $2.2 million of EQAM-400 through the third quarter of 2012, which commitment was met. World Cinema's purchases of this product were approximately $380,000 and $408,000 in the three months ended September 30, 2012 and 2011, respectively and $1,489,000 and $1,224,000 in the nine months ended September 30, 2012 and 2011, respectively. Future purchase commitments by World Cinema, which are presently the subject of negotiations between the Company and World Cinema, would allow them to further extend this exclusivity arrangement. The EQAM-400 product accepts HD content received by satellite via its IP Gigabit Ethernet (GbE) input, adds content protection by utilizing Pro:Idiom™ encryption, and QAM modulates it for distribution over standard coax networks.

On February 1, 2012, the Company's wholly-owned subsidiary, R. L. Drake Holdings, LLC ("RLD"), a Delaware limited liability company, acquired substantially all of the assets and assumed certain specified liabilities of R. L. Drake, LLC, a Delaware limited liability company ("Seller") (the "RLD Acquisition"), pursuant to an Asset Purchase Agreement of even date, by and among RLD, Seller, R. L. Drake Acquisition Corporation, a Delaware corporation, and WBMK Holding Company, an Ohio corporation, as amended by a certain First Amendment to Asset Purchase Agreement dated February 3, 2012 (as so amended, the "Asset Purchase Agreement"). The purchase price was approximately $7,020,000, which included a working capital adjustment of approximately $545,000, plus contingent purchase price payments of up to $1,500,000 in the aggregate that may be made over the three year period after closing if certain financial results are realized. The assets acquired from Seller include assets used in the manufacturing and delivery of electronic communications solutions for cable television systems, digital television reception, video signal distribution and digital video encoding, including equipment, supplies and other tangible personal property, inventory, accounts receivable, business records, trademarks and other intellectual property rights. The Asset Purchase Agreement includes customary representations and warranties and post-closing covenants, including indemnification obligations, subject to certain limitations, on behalf of the parties with respect to the Asset Purchase Agreement. In addition, the Seller and certain members of the Seller agreed, for a period of five (5) years, not to engage in any business that competes with the business formerly conducted by Seller and/or sold by Seller to RLD or the business presently conducted by RLD or any affiliate of RLD or solicit employees or customers of Seller or RLD or any affiliate of RLD.

RLD manufactures and distributes similar products to those currently being produced by the Company. The acquisition allows the Company to leverage the combined research and development and sales and marketing departments to shorten the development and manufacturing cycle and deliver a more complete compliment of business and product solutions for the markets the Company serves.

The Company's manufacturing is allocated primarily between its facility in Old Bridge, New Jersey and a key contract manufacturer located in the People's Republic of China ("PRC"). The Company currently manufactures most of its digital products, including the latest encoder and EdgeQAM collections at its New Jersey facility. Since 2007 the Company has transitioned and continues to manufacture certain high volume, labor intensive products, including many of the Company's analog products, in the PRC, pursuant to a manufacturing agreement that governs the production of products that may from time to time be the subject of purchase orders submitted by (and in the discretion of) the Company. The Company may transition additional products to the PRC if determined by the Company to be advantageous based upon changing business and market conditions. Manufacturing products both at the Company's Old Bridge facility as well as in the PRC, enables the Company to realize cost reductions while maintaining a competitive position and time-to-market advantage. As a result of the RLD Acquisition, the Company assumed certain post-closing obligations for a leased manufacturing, engineering, sales and administrative facility in Franklin, Ohio at which the RLD products were being manufactured. The lease for this facility expired in November, 2012. In anticipation of such expiration, in August 2012 the Company secured an alternative smaller space in Miamisburg, Ohio, that it believes is more suitable to its continuing business activities. The Company began the process of transitioning the manufacture of RLD products from the Franklin, Ohio facility to the Old Bridge facility shortly after the closing of the RLD Acquisition. This transition was substantially completed during July 2012 and is now complete.

The Company may, from time to time, provide manufacturing, research and development and product support services for other companies' products. In December 2007, the Company entered into an agreement to provide manufacturing, research and development and product support to Buffalo City Center Leasing, LLC ("Buffalo City") for an electronic on-board recorder that Buffalo City was producing for Turnpike Global Technologies, LLC (which was purchased in 2010 by, and operates as a division of, XATA Corporation ("XATA")). A director of the Company is also the managing member and a vice president of Buffalo City and may be deemed to control the entity which owns fifty percent (50%) of the membership interests of Buffalo City. The agreement with Buffalo City expired by its terms in the first quarter of 2011, however, Buffalo City continued purchasing such product from the Company through July, 2011 on the same terms and conditions. In the second quarter of 2011, the Company entered into a new agreement directly with XATA Corporation (the "XATA Agreement"), which sets forth the terms and conditions of purchases by XATA of the next generation of the product. The XATA Agreement also permits XATA to obtain financing from approved third party lenders to finance its purchases from the Company. In November 2011, the Company and Buffalo City entered into a letter agreement (the "Buffalo City Agreement") to memorialize the agreement by which the Company approved Buffalo City to act as an approved third party lender to XATA and has permitted Buffalo City (in this capacity) to purchase products from the Company on open account with a credit limit of $1,000,000, the terms for payment of which were net 110 days after shipment. Under the terms of the XATA Agreement, obligations of Buffalo City to the Company were guaranteed by XATA. During the first quarter of 2012, Buffalo City advised the Company that Buffalo City would no longer be financing products as an approved third-party lender for XATA. As such, effective as of February 10, 2012, the Company and Buffalo City terminated Buffalo City's status as an approved lender under the Buffalo City Agreement. All amounts due from Buffalo City to the Company under the Buffalo City Agreement have been fully paid. The Company received no revenue during 2012 from Buffalo City. The Company received $946,000 and $2,503,000 in revenue from Buffalo City in the three and nine months ended September 30, 2011, respectively. In addition, the Company's accounts receivable included $960,000 (21% of total accounts receivable) due from Buffalo City at December 31, 2011. The Company continues to contract manufacture products directly for XATA under the XATA Agreement. While the termination of the Buffalo City Agreement did not have a material adverse impact on aggregate sales of these contract manufactured products, recent declines in sales volume to XATA have been experienced, which we believe are attributable to the general decline in economic conditions.

Results of Operations

Third three months of 2012 Compared with third three months of 2011

Net Sales.Net sales increased $1,606,000 or 22.9%, to $8,610,000 in the third three months of 2012 from $7,004,000 in the third three months of 2011. The increase is primarily attributed to an increase in sales of digital video headend products, offset by a decrease in sales of contract manufactured products. Sales of digital video headend products were $4,246,000 and $2,190,000 and contract manufactured products were $538,000 and $1,274,000 in the third three months of 2012 and 2011, respectively. The Company has experienced and expects to continue to experience a shift in product mix from analog products to digital products. While the Company's sales of contract manufactured products have not been adversely affected by the termination of its business with Buffalo City, recent declines in sales volume to XATA have been experienced, which we believe are attributable to the general decline in economic conditions. The RLD Acquisition contributed $1,851,000 to net sales for the third three months of 2012.

Cost of Goods Sold. Cost of goods sold increased to $5,296,000 for the third three months of 2012 from $4,573,000 for the third three months of 2011 but decreased as a percentage of sales to 61.5% from 65.3%. The increase was primarily due to an increase in sales. The decrease as a percentage of sales was primarily attributed to a more favorable product mix as well as the integration of the RLD acquisition. The Company expects cost of goods sold as a percentage of sales to approximate this level in the fourth quarter of 2012.

Selling Expenses.Selling expenses increased to $865,000 for the third three months of 2012 from $687,000 in the third three months of 2011, and increased as a percentage of sales to 10.1% for the third three months of 2012 from 9.8% in the third three months of 2011. The $178,000 increase was primarily the result of an increase in salary expense (including fringe benefits) of $145,000 due to increased headcount primarily related to the RLD Acquisition. The percentage increase was also the result of the ongoing operation of RLD.

General and Administrative Expenses. General and administrative expenses increased to $1,458,000 for the third three months of 2012 from $1,068,000 for the third three months of 2011, and increased as a percentage of sales to 16.9% for the third three months of 2012 from 15.3% for the third three months of 2011. The $390,000 increase was primarily the result of increased salary expense (including fringe benefits) of $163,000 due to increased headcount, and increased amortization expense of $64,000 relating to intangible assets, all associated with the RLD Acquisition. The percentage increase was primarily the result of these same increases.

Research and Development Expenses. Research and development expenses increased to $815,000 in the third three months of 2012 from $684,000 in the third three months of 2011 but decreased as a percentage of sales to 9.5% for the third three months of 2012 from 9.8% for the third three months of 2011. This $131,000 increase is primarily the result of an increase in salary expense (including fringe benefits) of $182,000 associated with the increased headcount of ongoing operation of RLD. The percentage decrease was primarily the result of increased sales. These transitional increases were contemplated in connection with the RLD Acquisition; however the Company expects its future research and development expenses will be reduced by annualized savings of approximately $325,000 after evaluating its combined research and development capabilities to determine the extent to which future efficiencies would be realized.

Operating Income (Loss). Operating income of $176,000 for the third three months of 2012 represents an increase from the operating loss of $(8,000) for the third three months of 2011. Operating income (loss) as a percentage of sales was 2.0% in the third three months of 2012 compared to (0.1) % in the third three months of 2011.

Other Expense.Interest expense increased to $85,000 in the third three months of 2012 from $42,000 in the third three months of 2011. The increase is the result of higher average borrowing.

Income Taxes. The current provision for income taxes for the third three months of 2012 and 2011 was zero. The Company sustained an estimated tax loss for the period and the resulting deferred tax asset was offset by a corresponding valuation allowance.

First nine months of 2012 Compared with first nine months of 2011

Net Sales.Net sales increased $2,713,000, or 13.4%, to $22,921,000 in the first nine months of 2012 from $20,208,000 in the first nine months of 2011. The increase is primarily attributed to an increase in sales of digital video headend products offset by a reduction in contract manufactured product sales. Sales of digital video headend products were $10,720,000 and $6,794,000 and contract manufactured product sales were $1,684,000 and $2,837,000 in the first nine months of 2012 and 2011, respectively. The Company has experienced and expects to continue to experience a shift in product mix from analog products to digital products. While the Company's sales of contract manufactured products have not been adversely affected by the termination of its business with Buffalo City, recent declines in sales volume to XATA have been experienced, which we believe are attributable to the general decline in economic conditions. The RLD Acquisition contributed $3,252,000 to net sales for the first nine months of 2012.

Cost of Goods Sold. Cost of goods sold increased to $15,093,000 for the first nine months of 2012 from $13,026,000 for the first nine months of 2011 and increased as a percentage of sales to 65.9% from 64.5%. The increase was primarily due to an increase in sales of lower margin products. The increase as a percentage of sales was primarily attributed to an increase in inventory reserve of $614,000, an overall reduction in manufacturing overhead, a less favorable product mix as well as the impact of RLD Acquisition through the absorption of certain redundancies and inefficiencies in the first and second quarters of 2012. The Company expects cost of goods sold as a percentage of sales to decrease from 65.9% in the fourth quarter of 2012 as products manufactured by RLD in Ohio will have been transitioned to the Old Bridge facility and as overall product mix is anticipated to improve.

Selling Expenses.Selling expenses increased to $2,487,000 for the first nine months of 2012 from $1,947,000 in the first nine months of 2011, and increased as a percentage of sales to 10.9% for the first nine months of 2012 from 9.6% in the first nine months of 2011. The $540,000 increase was primarily the result of an increase in salary expense (including fringe benefits) of $434,000 due to increased headcount and an increase in travel and entertainment expense of $47,000, both primarily related to the RLD Acquisition. The percentage increase was also the result of the ongoing operation of RLD.

General and Administrative Expenses. General and administrative expenses increased to $4,405,000 for the first nine months of 2012 from $3,334,000 for the first nine months of 2011, and increased as a percentage of sales to 19.2% for the first nine months of 2012 from 16.5% for the first nine months of 2011. The $1,071,000 increase was primarily the result of increased professional fees of $311,000, increased salary expense (including fringe benefits) of $405,000 due to increased headcount, and increased amortization expense of $169,000 relating to intangible assets, all associated with the RLD Acquisition. The percentage increase was primarily the result of these same increases.

Research and Development Expenses. Research and development expenses increased to $2,652,000 in the first nine months of 2012 from $2,023,000 in the first nine months of 2011 and increased as a percentage of sales to 11.6% for the first nine months of 2012 from 10.0% for the first nine months of 2011. This $629,000 increase is primarily the result of an increase in salary expense (including fringe benefits) of $564,000 associated with the increased headcount of ongoing operation of RLD. The percentage increase was primarily the result of these same increases. These transitional increases were contemplated in connection with the RLD Acquisition; however the Company expects its future research and development expenses will be reduced by annualized savings of approximately $325,000 after evaluating its combined research and development capabilities to determine the extent to which future efficiencies would be realized.

Operating Income (Loss). Operating loss of $(1,716,000) for the first nine months of 2012 represents an increase from the operating loss of $(122,000) for the first nine months of 2011 (due to costs incurred in connection with the acquisition of RLD). Operating loss as a percentage of sales was (7.5%) in the first nine months of 2012 compared to (0.6%) in the first nine months of 2011.

Other Expense.Interest expense increased to $256,000 in the first nine months of 2012 from $139,000 in the first nine months of 2011. The increase is the result of higher average borrowing.

Income Taxes. The current provision for income taxes for the first nine months of 2012 and 2011 was zero. The Company sustained an estimated tax loss for the period and the resulting deferred tax asset was offset by a corresponding valuation allowance.

Liquidity and Capital Resources

As of September 30, 2012 and December 31, 2011, the Company's working capital was $9,730,000 and $11,838,000, respectively. The decrease in working capital is primarily due to an increase in the Revolver of $3,496,000 due to the RLD Acquisition.

The Company's net cash provided by operating activities for the nine month period ended September 30, 2012 was $1,808,000, compared to net cash provided by operating activities of $814,000 for the nine month period ended September 30, 2011, primarily due to an increase in accounts payable of $1,510,000.

Cash used in investing activities for the nine month period ended September 30, 2012 was $7,389,000, of which $7,020,000 was attributable to the RLD Acquisition.

Cash provided by financing activities was $4,900,000 for the first nine months of 2012, which was comprised of borrowings on the Revolver of $3,496,000 and additional borrowings under the Term Loan of $1,550,000 for the RLD Acquisition and additional debt borrowings of $51,000, offset by repayment of debt of $197,000.

On August 6, 2008, the Company entered into a Revolving Credit, Term Loan and Security Agreement with Sovereign Business Capital ("Sovereign"), a division of Sovereign Bank ("Sovereign Agreement"), pursuant to which the Company obtained an $8,000,000 credit facility from Sovereign (the "Sovereign Financing"). The Sovereign Financing consisted of (i) a $4,000,000 asset-based revolving credit facility ("Revolver") and (ii) a $4,000,000 term loan facility ("Term Loan"), each with a three-year term. The amounts which may be borrowed under the Revolver are based on certain percentages of Eligible Receivables and Eligible Inventory, as such terms are defined in the Sovereign Agreement. The obligations of the Company under the Sovereign Agreement are secured by substantially all of the assets of the Company.

Under the Sovereign Agreement, the Revolver bears interest at a rate per annum equal to the prime lending rate announced from time to time by Sovereign ("Prime") plus 0.25% or the LIBOR rate plus 3.00%. The Term Loan bears interest at a rate per annum equal to Prime plus 0.50% or the LIBOR rate plus 3.25%. Prime was 3.25% at September 30, 2012.

On January 14, 2011, the Company entered into a First Amendment to Revolving Credit, Term Loan and Security Agreement (the "First Amendment") with Sovereign, to amend the Sovereign Financing. The First Amendment (1) increased the maximum amount that may be borrowed by the Company under the Revolver to $5,000,000 from $4,000,000, (2) extended the termination date of the Sovereign Agreement from August 6, 2011 to January 15, 2013, (3) modified the definition of "Eligible Receivables" to increase the permitted concentration percentage of certain customer receivables (as defined in the Sovereign Agreement) which are included in such calculation, and (4) modified a certain financial covenant.

On February 1, 2012, the Company entered into a Second Amendment to Revolving Credit, Term Loan and Security Agreement (the "Second Amendment") with Sovereign, to amend the Sovereign Financing. The Second Amendment (1) added RLD as a co-borrower, (2) increased the maximum amount that may be borrowed by the Company under the Revolver to $8,500,000 from $5,000,000, (3) extended the termination date of the Sovereign Agreement from January 15, 2013 to February 1, 2015, (4) modified the amounts that may be borrowed under the Revolver based on certain percentages of Eligible Inventory, (as defined in the Sovereign Agreement) that are included in such calculation, (5) modified certain financial covenants, and (6) increased the Term Loan to $4,350,000.

In August, 2012, the Sovereign Agreement was amended to modify a certain financial covenant retroactively effective as of June 30, 2012, relative to the trailing 12-month period ended on such date. Had Sovereign not retroactively amended such financial covenant, the Company would not have been in compliance therewith as of June 30, 2012 and would have required a waiver from Sovereign. Sovereign has advised the Company that had the retroactive amendment not been entered into, such waiver would have been granted.

Upon termination of the Revolver, all outstanding borrowings under the Revolver are due. The Term Loan requires equal monthly principal payments of approximately $18,000 each, plus interest, with the remaining balance due at maturity. The outstanding principal balance of the Term Loan was $4,233,000 at September 30, 2012.

The Sovereign Agreement contains customary representations and warranties as well as affirmative and negative covenants, including certain financial covenants. The Sovereign Agreement contains customary events of default, including, among others, non-payment of principal, interest or other amounts when due.

The Company's primary sources of liquidity are its existing cash balances, cash generated from operations and amounts available under the Sovereign Financing. As of September 30, 2012, the Company had approximately $3,496,000 outstanding under the Revolver and $2,793,000 of additional availability for borrowing under the Revolver. The Company anticipates these sources of liquidity will be sufficient to fund its operating activities, anticipated capital expenditures and debt repayment obligations for the next twelve months.

The Company's primary long-term obligations are for payment of interest and principal on its Revolver and Term Loan, both of which expire on February 1, 2015. The Company expects to use cash generated from operations to meet its long-term debt obligations, and anticipates refinancing its long-term debt obligations at maturity. The Company considers opportunities to refinance its . . .