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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

                          Commission file number 1-4987

                               SL INDUSTRIES, INC.
               (Exact name of Company as specified in its charter)


                                                          
                   NEW JERSEY                                     21-0682685
        (State or other jurisdiction of                        (I.R.S. Employer
         incorporation or organization)                      Identification No.)



                                                               
520 FELLOWSHIP ROAD, SUITE A114, MT. LAUREL, NJ                     08054
    (Address of principal executive offices)                      (Zip Code)


          Company's telephone number, including area code: 856-727-1500

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:



     TITLE OF EACH CLASS              NAME OF EACH EXCHANGE ON WHICH REGISTERED:
     -------------------              ------------------------------------------
                                   
Common stock, $.20 par value          American Stock Exchange
                                      Philadelphia Stock Exchange


        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

     Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

     Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

     Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer or a non-accelerated filer. See definition of "accelerated
filer" and large accelerated filer in Rule 12b-2 of the Exchange Act).

 Large accelerated filer [ ]   Accelerated filer [ ]   Non-accelerated filer [X]

     Indicate by check mark whether the Registrant is a shell Company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant based on the closing price of the Common Stock on the last
business day of the Registrant's most recently completed second fiscal quarter,
as reported by the American Stock Exchange was approximately $69,879,000.

             The number of shares of common stock outstanding as of
                          March 1, 2006, was 5,614,213.

                       DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Part III of this report (Items 10, 11, 12, 13
and 14) is incorporated by reference from the Company's proxy statement to be
filed pursuant to Regulation 14A with respect to the registrant's 2006 annual
meeting of stockholders.

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                                TABLE OF CONTENTS



                                                                            PAGE
                                                                            ----
                                                                         
PART I
Item 1     Business .....................................................     1
Item 1A    Risk Factors..................................................     7
Item 2     Properties....................................................    12
Item 3     Legal Proceedings.............................................    13
Item 4     Submission of Matters to a Vote of Security Holders...........    15

PART II
Item 5     Market for Registrant's Common Equity,
              Related Stockholder Matters, and Issuer
              Purchases of Equity Securities.............................    15
Item 6     Selected Financial Data.......................................    17
Item 7     Management's Discussion and Analysis of Financial
              Condition and Results of Operations........................    17
Item 7A    Quantitative and Qualitative Disclosures about
              Market Risk................................................    33
Item 8     Financial Statements and Supplementary Data...................    33
Item 9     Changes in and Disagreements with Accountants
              on Accounting and Financial Disclosure.....................    33
Item 9A    Controls and Procedures.......................................    33
Item 9B    Other Information.............................................    34

PART III
Item 10    Directors and Executive Officers of the Registrant............    34
Item 11    Executive Compensation........................................    34
Item 12    Security Ownership of Certain Beneficial Owners
              and Management and Related Stockholder Matters.............    34
Item 13    Certain Relationships and Related Transactions................    34
Item 14    Principal Accountant Fees and Services........................    34

PART IV
Item 15    Exhibits and Financial Statement Schedules....................    35

SIGNATURES...............................................................    36

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE...........    F1





PART I

ITEM 1. BUSINESS

(A) GENERAL DEVELOPMENT OF BUSINESS

The Company, through its subsidiaries, designs, manufactures and markets power
electronics, motion control, power protection and specialized communication
equipment that is used in a variety of medical, aerospace, computer, datacom,
industrial, telecom, transportation and electric power utility equipment
applications. Its products are generally incorporated into larger systems to
increase operating safety, reliability and efficiency. The Company's products
are largely sold to Original Equipment Manufacturers ("OEMs"), the electric
power utility industry, and to a lesser extent, to commercial distributors. On
March 29, 1956, the Company was incorporated as G-L Electronics Company in the
state of New Jersey. Its name was changed to G-L Industries, Inc. in November
1963; SGL Industries, Inc. in November 1970; and then to the present name of SL
Industries, Inc. in September 1984.

On January 6, 2003, the Company sold all of the issued and outstanding shares of
capital stock of its indirect subsidiary, Elektro-Metall Export GmbH ("EME"),
for a purchase price of $8,000,000, which consisted of cash and purchaser notes.
In addition, a distribution of $2,000,000 was paid prior to closing by EME to a
subsidiary of the Company and the purchaser did not require that the Company pay
down EME's bank debt of approximately $3,600,000 prior to closing. The purchaser
notes were a $3,000,000 secured note that bore interest at the prime rate plus
2%, which was paid on March 14, 2003, and a $1,000,000 unsecured note that bore
interest at an annual rate of 12%, which was paid on April 2, 2004. Cash
proceeds of $4,000,000 received at closing plus the $2,000,000 distribution and
the $3,000,000 secured note paid March 14, 2003 were used to pay down bank debt.
All cash proceeds related to the sale of EME have been received. As a result of
the transaction, the Company recorded a pre-tax loss from the sale of
discontinued operations of approximately $1,619,000 in 2002. The tax effects
were not material to the transaction.

On November 24, 2003, the Company sold substantially all of the assets of its
subsidiary, SL Surface Technologies, Inc. ("SurfTech"). The Company received
cash of $600,000 at closing. In addition, the purchaser assumed certain
liabilities and ongoing obligations of SurfTech. As a result of the transaction,
the Company recorded an after tax loss from the sale of discontinued operations
of approximately $442,000. The results of operations of SurfTech are presented
as discontinued operations for the year ended December 31, 2003.

On August 3, 2005, the Company entered into a revolving credit facility (the
"Revolving Credit Facility") with Bank of America, N.A. ("Bank of America") to
replace its previous credit facility. The Revolving Credit Facility (with a
standby and commercial letter of credit sub-limit of $5,000,000) provides for
borrowings up to $25,000,000 and under certain circumstances maximum borrowings
of $30,000,000. The Revolving Credit Facility expires on June 30, 2008.
Borrowings under the Revolving Credit Facility bear interest, at the Company's
option, at the London interbank offering rate ("LIBOR") plus a margin rate
ranging from 0.9% to 1.9%, or the higher of a Base Rate plus a margin rate
ranging from 0% to 0.5%. The Base Rate is equal to the higher of (i) the Federal
Funds Rate plus 0.5%, or (ii) Bank of America's publicly announced prime rate.
The margin rates are based on certain leverage


                                     Page 1



ratios, as defined. The Company is subject to compliance with certain financial
covenants set forth in the Revolving Credit Facility, including but not limited
to, capital expenditures, consolidated net worth, and certain interest and
leverage ratios, as defined.

On August 10, 2005, James C. Taylor was elected as Chief Executive Officer and
President of the Company.

On December 19, 2005, the Company announced that it had signed a definitive
agreement to acquire all of the outstanding shares of common stock of Ault
Incorporated ("Ault") for $2.90 per share in cash. On January 26, 2006, the
Company, through a wholly owned subsidiary, completed a tender offer for Ault.
The Company acquired approximately 86.9% of the outstanding common stock of Ault
at $2.90 per share. The Company had previously purchased in the open market
approximately 4.8% of the outstanding common stock of Ault for $567,000. On
January 26, 2006, the Company's wholly owned-subsidiary was merged with and into
Ault. As a result, Ault became a wholly-owned subsidiary of the Company, and the
shares not tendered were converted into the right to receive $2.90 per share in
cash, without interest. The total purchase price for the common stock of Ault
was approximately $13,986,000, which includes the shares already owned by the
Company. The Company also paid approximately $2,079,000 to acquire all of the
outstanding shares of Ault's preferred stock. Ault is a leading manufacturer of
power conversion products and is a major supplier to OEMs of wireless and wire
line communications infrastructure, computer peripherals and handheld devices,
medical, industrial, and printing/scanning equipment. Ault is headquartered in
Minneapolis, Minnesota and has an engineering and sales office in Norwood,
Massachusetts, and engineering, sales and a manufacturing facility in the
People's Republic of China. (For additional information regarding the
acquisition of Ault see Subsequent Event Note 19 in the notes to the
Consolidated Financial Statements included in Part IV of the Annual Report on
Form 10-K).

(B) FINANCIAL INFORMATION ABOUT SEGMENTS

Financial information about the Company's business segments is incorporated
herein by reference to Note 16 in the Notes to Consolidated Financial Statements
included in Part IV of this Annual Report on Form 10-K.

(C) NARRATIVE DESCRIPTION OF BUSINESS

SEGMENTS

In 2005, the Company operated under four business segments: Condor DC Power
Supplies, Inc. ("Condor"), Teal Electronics Corp. ("Teal"), SL Montevideo
Technology, Inc. ("SL-MTI"), and RFL Electronics Inc. ("RFL"). In the second
quarter of 2003, management decided to combine Condor and Teal into one business
unit classified as the Power Electronics Group. Accordingly, for the years ended
December 31, 2005, December 31, 2004 and December 31, 2003, the Company's
reportable segments consisted of Condor, Teal (collectively, The Power
Electronics Group), SL-MTI and RFL.

CONDOR - Condor produces a wide range of standard and custom power supply
products that convert AC or DC power to direct electrical current to be used in
customers' end products. Standard and custom AC-DC and DC-DC power supplies in
both linear and switching configurations are produced, with


                                     Page 2



ranges in power from 1 to 5000 watts, and are manufactured in either commercial
or medical configurations. Power supplies closely regulate and monitor power
outputs, using patented filter and other technologies, resulting in little or no
electrical interference. Power supplies are also used in drive systems for
electric equipment and other motion control systems. For the years ended
December 31, 2005, December 31, 2004 and December 31, 2003, net sales of Condor,
as a percentage of consolidated net sales from continuing operations, were 34%,
35% and 38%, respectively.

TEAL - Teal designs and manufactures custom power conditioning and power
distribution units. Products are developed and manufactured for custom
electrical subsystems for OEMs of semiconductor, medical imaging, graphics and
telecommunication systems. Outsourcing the AC power system helps OEMs reduce
cost and time to market while increasing system performance and customer
satisfaction. Customers are also helped by getting necessary agency approvals.
Custom products are often called "Power Conditioning and Distribution Units,"
which provide voltage conversion and stabilization, system control, and power
distribution for systems such as CT and MRI scanners, chip testers and
industrial systems. For the years ended December 31, 2005, December 31, 2004 and
December 31, 2003, net sales of Teal, as a percentage of consolidated net sales
from continuing operations, were 26%, 25% and 19%, respectively.

SL-MTI - SL-MTI is a technological leader in the design and manufacture of
intelligent, high power density precision motors. Important programs in both
traditional and new market areas have been won as a result of new motor and
(patented and patent pending) motor control technologies. New motor and motion
controls are used in numerous applications, including aerospace, medical and
industrial products. Negotiations are continuing with customers on advanced
designs for numerous programs, including fuel cell energy storage systems, high
performance missile guidance motors, and medical/surgical drills and saws. For
the years ended December 31, 2005, December 31, 2004 and December 31, 2003, net
sales of SL-MTI, as a percentage of consolidated net sales from continuing
operations, were 22%, 21% and 21%, respectively.

RFL - RFL designs and manufactures communication and power protection
products/systems that are used to protect electric utility transmission lines
and apparatus by isolating faulty transmission lines from a transmission grid.
These products are sophisticated communication systems that allow electric
utilities to manage their high-voltage power lines more efficiently and include
a system that is a completely digital, fully-integrated relay/communications
terminal, suitable for high-speed protective relaying of overhead or underground
high-voltage transmission lines. RFL provides customer service and maintenance
for all of its products. For the years ended December 31, 2005, December 31,
2004 and December 31, 2003, net sales of RFL, as a percentage of consolidated
net sales from continuing operations, were 18%, 19% and 22%, respectively.

THE COMPANY'S DISCONTINUED OPERATIONS CONSIST OF:

SURFTECH - SurfTech produced industrial coatings and platings for equipment in
the corrugated paper and telecommunications industries. On November 24, 2003,
the Company sold substantially all of the assets of SurfTech. As a result,
SurfTech is reported as a discontinued operation for all periods presented. For
the year ended December 31, 2003, net sales of SurfTech were $1,840,000.


                                     Page 3



EME - EME is based in Ingolstadt, Germany with low cost manufacturing operations
in Paks, Hungary. EME manufacturered electromechanical actuation systems, power
drive units and complex wire harness systems for use in the aerospace and
automobile industries. On January 6, 2003, the Company sold all of the issued
and outstanding shares of capital stock of EME. As a result, EME is reported as
a discontinued operation for all periods presented.

SL WABER - SL Waber manufactured surge suppressors that protect computers,
audiovisual and other electronic equipment from sudden surges in power. These
products were sold to OEM customers as well as to distributors and dealers of
electronics and electrical supplies and retailers and wholesalers of office,
computer, and consumer products. In September 2001, the Company sold
substantially all of the assets of SL Waber, including its name and goodwill, as
a going concern. As a result, SL Waber is reported as a discontinued operation
for all periods presented.

RAW MATERIALS

Raw material components are supplied by various domestic and international
vendors. In general, availability of materials is not a problem for the Company.
However in 2005, the Company did experience a sharp increase in the cost of
certain strategic raw materials, particular copper. During 2005, there were no
major disruptions in the supply of raw materials.

Raw materials are purchased directly from the manufacturer whenever possible to
avoid distributor mark-ups. Average lead times generally run from immediate
availability to eight weeks. Lead times can be substantially higher for
strategic components subject to industry shortages. In most cases, viable
multiple sources are maintained for flexibility and competitive leverage.

PATENTS, TRADEMARKS, LICENSES, FRANCHISES, AND CONCESSIONS

The Company has proprietary information that it has developed and uses in its
business. This proprietary information is protected by contractual agreements as
well as through patents and patents pending, to the extent appropriate. The
patents are protected by federal law. To protect its proprietary information,
the Company also enters into non-disclosure agreements with its employees,
vendors and customers. Where appropriate, the Company will take and has taken
all steps necessary to defend its intellectual property.

SEASONALITY

Generally, seasonality is not a significant factor in any of the Company's
segments.

SIGNIFICANT CUSTOMERS

The Company has no customer that accounts for 10% or more of its consolidated
net sales from continuing operations. Each of Condor, Teal, SL-MTI and RFL has
certain major customers, the loss of any of which could have a material adverse
effect on such entity.

BACKLOG

Backlog at March 5, 2006, March 6, 2005 and February 29, 2004 was $39,132,000,
$41,607,000 and $42,022,000, respectively. The backlog at March 5, 2006
decreased by $2,475,000, or 6%, compared to March 6, 2005. In 2006 the Company
experienced a decrease in orders from OEM's in the medical, industrial and
military markets, partially offset by increased orders in the medical imaging
market. Also, there has been some shift in orders from OEM's to distributors,
which has shorter lead times.


                                     Page 4



COMPETITIVE CONDITIONS

The Company's businesses are in active competition with domestic and foreign
companies with national and international name recognition that offer similar
products or services and with companies producing alternative products
appropriate for the same uses. In addition, Condor has experienced significant
offshore competition for certain products in certain markets. The uncertain
commercial aerospace market has also created more competitive conditions in that
industry. Each of the Company's businesses differentiates themselves from their
competition by concentrating on customized products based on customer needs. The
Company's businesses seek a competitive advantage based on quality, service,
innovation, delivery and price.

ENVIRONMENTAL

The Company (together with the industries in which it operates or has operated)
is subject to United States and Mexican environmental laws and regulations
concerning emissions to the air, discharges to surface and subsurface waters and
generation, handling, storage, transportation, treatment and disposal of waste
materials. The Company and the industry are also subject to other federal, state
and local environmental laws and regulations, including those that require the
Company to remediate or mitigate the effects of the disposal or release of
certain chemical substances at various sites, including some where it has ceased
operations. It is impossible to predict precisely what effect these laws and
regulations will have on the Company in the future.

It is the Company's policy to comply with all environmental, health and safety
regulations, as well as industry standards for maintenance. The Company's
domestic competitors are subject to the same environmental, health and safety
laws and regulations and the Company believes that the compliance issues and
potential expenditures of its operating subsidiaries are comparable to those
faced by their major domestic competitors.

There are two sites on which the Company may incur material environmental costs
in the future as a result of past activities of its former SurfTech subsidiary.
These sites are the Company's properties located in Pennsauken, New Jersey, and
in Camden, New Jersey. With respect to the Pennsauken site, the Company is one
of several defendants in two separate lawsuits, in which it is alleged to be
responsible for groundwater contamination. The Company believes it has
significant defenses against all or any part of the claims in each of these
lawsuits and that any material adverse impact is unlikely. Regarding the Camden
site, the Company is still in the early stages of evaluating the nature and
extent of any contamination, but based on the information so far, the Company
believes that the cost to remediate the property should not exceed approximately
$560,000, which has been fully accrued as of December 31, 2005 and December 31,
2004. Anticipated environmental costs have been reclassified in discontinued
operations as a result of the sale of SurfTech on November 24, 2003. For
additional information related to environmental issues, see "Item 3. Legal
Proceedings," and Note 13 to the Notes to Consolidated Financial Statements
included in Part IV of this Annual Report on Form 10-K.

The Company has reported a soil and ground water contamination on SL-MTI's
property in Montevideo, Minnesota. SL-MTI has conducted analysis of the
contamination and performed remediation at the site. Further remediation efforts
will be required and the Company is engaged in discussions with the Minnesota
Pollution Control Agency to develop a remediation plan. Based on the current
information,


                                     Page 5



the Company believes it will incur remediation costs at this site of
approximately $220,000, which has been accrued at December 31, 2005. The accrual
for this site was $268,000 at December 31, 2004.

EMPLOYEES

As of December 31, 2005, the Company had approximately 1,348 employees. Of these
employees, 193 were subject to collective bargaining agreements.

FOREIGN OPERATIONS

In addition to manufacturing operations in California, Minnesota, and New
Jersey, the Company manufactures substantial quantities of products in premises
leased in Mexicali, Mexico and Matamoros, Mexico. The Company has outsourced
some of its products with contract manufacturers located in Tecate, Mexico;
Shanghai, China; and Dongguan, China. These external and foreign sources of
supply present risks of interruption for reasons beyond the Company's control,
including political or economic instability and other uncertainties.

Generally, the Company's sales are priced in United States dollars and its costs
and expenses are priced in United States dollars and Mexican pesos. Accordingly,
the competitiveness of the Company's products relative to locally produced
products may be affected by the performance of the United States dollar compared
with that of its foreign customers' and competitors' currencies. Foreign net
sales comprised 13%, 13% and 12% of net sales from continuing operations for the
years ended December 31, 2005, December 31, 2004 and December 31, 2003,
respectively.

Additionally, the Company is exposed to foreign currency exchange rate
fluctuations, which might result from adverse fluctuations in the value of the
Mexican peso. At December 31, 2005 and December 31, 2004, the Company had net
liabilities of $639,000 and $286,000, respectively, subject to fluctuations in
the value of the Mexican peso. Fluctuations in the value of the foreign
currencies were not significant in 2005. There can be no assurance that the
value of the Mexican peso will continue to remain stable.

Condor manufactures most of its products in Mexico and incurs its labor costs
and supplies in Mexican pesos. Teal has moved a limited amount of its
manufacturing to a dedicated contract manufacturer located in Tecate, Mexico,
and is in the process of establishing a wholly-owned subsidiary at that
location. SL-MTI manufactures approximately 75% of its products in Mexico and
incurs related labor costs and supplies in Mexican pesos. Condor, Teal and
SL-MTI price and invoice their sales in United States dollars. The Mexican
subsidiaries of Condor and SL-MTI, and eventually Teal, maintain their books and
records in Mexican pesos. For additional information related to financial
information about foreign operations, see Notes 16 and 17 in the Notes to
Consolidated Financial Statements included in Part IV of this Annual Report on
Form 10-K.


                                     Page 6



ADDITIONAL INFORMATION

Additional information regarding the development of the Company's businesses
during 2005 and 2004 is contained in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Part II
and Notes 1 and 2 of the Notes to the Consolidated Financial Statements included
in Part IV of this Annual Report on Form 10-K.

ITEM 1A. RISK FACTORS

THE COMPANY MAY BE ADVERSELY IMPACTED BY FLUCTUATIONS IN CASH FLOWS, LIQUIDITY
AND DEBT LEVELS.

Working capital requirements and cash flows historically have been, and are
expected to continue to be, subject to quarterly and yearly fluctuations,
depending on such factors as levels of sales, timing and size of capital
expenditures, timing of deliveries and collection of receivables, inventory
levels, customer payment terms, customer financing obligations, and supplier
terms and conditions. The inability to manage adverse cash flow fluctuations
resulting from such factors could have a material adverse effect on the
Company's business, results of operations, and financial condition. In order to
finance the working capital requirements of the Company's business, the Company
entered into a three-year revolving credit facility with Bank of America and
subsequent to December 31, 2005, borrowed funds thereunder. At December 31,
2005, there were no outstanding borrowed funds under the credit facility, and
total availability thereunder was $30,000,000. In addition, at December 31, 2005
the Company maintained a cash balance of $9,985,000.

THE COMPANY'S OPERATING RESULTS MAY FLUCTUATE, AND THERE MAY BE VOLATILITY IN
GENERAL INDUSTRY, ECONOMIC AND MARKET CONDITIONS.

The results of operations for any quarter or year are not necessarily indicative
of results to be expected in future periods. Future operating results may be
affected by various trends and factors that must be managed in order to achieve
favorable operating results. The inability to accurately forecast and manage
these trends and factors could have a material adverse effect on the Company's
business, results of operations, and financial condition.

General economic conditions and specifically market conditions in the medical,
telecommunications, semiconductor and electric power utility equipment
industries in the United States and globally, affect the Company's business. In
addition, reduced capital spending and/or negative economic conditions in the
United States, Europe, Asia, Latin America and/or other areas of the world could
have a material adverse effect on the Company's business, results of operations,
and financial condition.

Gross margins may be adversely affected by increased price competition, excess
capacity, higher material or labor costs, warranty costs, obsolescence charges,
loss of cost savings on future inventory purchases as a result of high inventory
levels, introductions of new products, increased levels of customer services,
changes in distribution channels, and changes in product and geographic mix.
Lower than expected gross margins could have a material adverse effect on the
Company's business, results of operations, and financial condition.


                                     Page 7



THE COMPANY'S OPERATING RESULTS AND STOCK PRICE MAY BE ADVERSELY AFFECTED BY
FLUCTUATIONS IN CUSTOMERS' BUSINESSES.

Business is dependent upon product sales to telecommunications, semiconductor,
medical imaging, aerospace and other businesses, which in turn are dependent for
their business upon orders from their customers. Any downturn in the business of
any of these parties affects the Company. Moreover, sales often reflect orders
shipped in the same quarter in which they are received, which makes sales
vulnerable to short-term fluctuations in customer demand and difficult to
predict. In general, customer orders may be cancelled, modified or rescheduled
after receipt. Consequently, the timing of these orders and any subsequent
cancellation, modification or rescheduling of these orders has affected, and
will in the future affect, results of operations from quarter to quarter. Also,
as some of the Company's customers typically order in large quantities, any
subsequent cancellation, modification or rescheduling of an individual large
order may affect results of operations.

FAILURE TO REMAIN COMPETITIVE COULD ADVERSELY IMPACT THE COMPANY'S OPERATING
RESULTS.

The markets in which the Company sells its products are highly competitive and
characterized by rapidly changing and converging technologies. The Company faces
intense competition from established competitors and the threat of future
competition from new and emerging companies in all aspects of business. The
Company's future success will depend on its ability to enhance current products
and to develop new products that keep pace with technological developments and
respond to changes in customer requirements. Among its current competitors are
its customers, who are vertically integrated and either manufacture and/or are
capable of manufacturing some or all of the Company's products sold to them. In
addition to current competitors, new competitors providing niche, and
potentially broad, product solutions will likely increase in the future. To
remain competitive in both the current and future business climates, the Company
must maintain a substantial commitment to focused research and development,
improve the efficiency of its manufacturing operations, and streamline its
marketing and sales efforts and attendant customer service and support. Among
other things, the Company may not be able to anticipate shifts in its markets or
technologies, may not have sufficient resources to continue to make the
investments necessary to remain competitive, or may not make the technological
advances necessary to remain competitive. In addition, notwithstanding its
efforts, technological changes, manufacturing efficiencies or development
efforts by competitors may render the Company's products or technologies
obsolete or uncompetitive.

CONSOLIDATION IN THE INDUSTRY COULD INCREASE COMPETITIVE PRESSURES ON THE
COMPANY.

The industries in which the Company operates are consolidating and will continue
to consolidate in the future as companies attempt to strengthen or hold their
market positions. Such consolidations may result in stronger competitors that
are better able to compete as sole-source vendors for customers. The Company's
relatively small size may increase competitive pressure for customers seeking
single vendor solutions. Such increased competition would increase the
variability of the Company's operating results and could otherwise have a
material adverse effect on the Company's business, results of operations, and
financial condition.

THE COMPANY IS DEPENDENT UPON THIRD PARTIES FOR PARTS AND COMPONENTS.

The ability to meet customer demand depends, in part, on the ability of the
Company to obtain timely and adequate delivery of parts and components from
suppliers and internal manufacturing capacity. The Company has experienced
significant shortages in the past, and although it works closely with its


                                     Page 8



suppliers to avoid shortages, there can be no assurance that it will not
encounter further shortages in the future. A further reduction or interruption
in component supplies or a significant increase in the price of one or more
components could have a material adverse effect on the Company's business,
results of operations and financial condition.

THE COMPANY MAY BE SUBJECT TO SIGNIFICANT COSTS IN COMPLYING WITH ENVIRONMENTAL
LAWS.

The Company's facilities are subject to a broad array of environmental laws and
regulations. The costs of complying with complex environmental laws and
regulations may be significant in the future. Present accruals for such costs
and liabilities may not be adequate in the future since the estimates on which
the accruals are based depend on a number of factors, including the nature of
the problem, the complexity of the site, the nature of the remedy, the outcome
of discussions with regulatory agencies and other potentially responsible
parties ("PRPs") at multiparty sites, and the number and financial viability of
other PRPs.

Further, the Company is the subject of various lawsuits and actions relating to
environmental issues, including an administrative action in connection with
SurfTech's Pennsauken facility which could subject the Company to, among other
things, $9,266,000 in collective reimbursements (with other parties) to NJDEP
(as defined herein). In addition, a class action suit was filed on June 12, 2002
against the Company, SurfTech and 37 other defendants alleging that the
plaintiffs may suffer personal injuries as a result of consuming contaminated
water distributed from the Puchack Wellfield in Pennsauken, New Jersey (which
supplies Camden, New Jersey). There can be no assurance that the Company will be
able to successfully defend itself against or settle at a reasonable cost these
or any other actions to which it is a party. For additional information related
to environmental risks, see "Item 3. Legal Proceedings," and Note 13 to the
Notes to Consolidated Financial Statements included in Part IV of this Annual
Report on Form 10-K.

THE COMPANY MAY HAVE TO PAY SIGNIFICANT COSTS FOR REGULATORY COMPLIANCE AND
LITIGATION.

Rapid or unforeseen escalation of the cost of regulatory compliance and/or
litigation, including but not limited to, environmental compliance,
product-related liability, assertions related to intellectual property rights
and licenses, adoption of new accounting policies, or changes in current
accounting policies and practices and the application of such policies and
practices could have a material adverse effect on the Company's business.
Additionally, the Company is subject to certain legal actions involving
complaints by terminated employees and disputes with customers and suppliers. In
the second quarter of 2005, the Company paid $809,000 to satisfy a judgment
resulting from a lawsuit brought by a former customer of SL-MTI. In the future
there can be no assurance of the outcome in any litigation. An adverse
determination in any one or more significant legal actions could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Item 3. Legal Proceedings," and Note 13 to the Notes to the
Consolidated Financial Statements included in Part IV of this Annual Report on
Form 10-K.

THE COMPANY IS DEPENDENT UPON KEY PERSONNEL FOR THE MANAGEMENT OF ITS
OPERATIONS.

The Company's success depends in part upon the continued services of many of its
highly skilled personnel involved in management, engineering and sales, and upon
its ability to attract and retain additional highly qualified officers and
employees. The loss of service of any of these key personnel could have a
material adverse effect on business. In addition, future success will depend on
the ability of


                                     Page 9



officers and key employees to manage operations successfully.

THE COMPANY'S OPERATING RESULTS AND COMMON STOCK ARE SUBJECT TO PRICE
FLUCTUATIONS.

Operating results for future periods are never perfectly predictable even in the
most certain of economic times, and the Company expects to continue to
experience fluctuations in its quarterly results. These fluctuations, which in
the future may be significant, could cause substantial variability in the market
price of the Company's stock. The market price for the Company's common stock
has been, and is likely to continue to be, highly volatile. The market for the
Company's common stock is subject to fluctuations as a result of a variety of
factors, including factors beyond its control. These include:

     -    additions or departures of key personnel;

     -    changes in market valuations of similar companies;

     -    announcements of new products or services by competitors or new
          competing technologies;

     -    conditions or trends in medical equipment, medical imaging, aerospace,
          and electric utility industries;

     -    general market and economic conditions; and

     -    other events or factors that are unforeseen.

OTHER FACTORS MAY AFFECT FUTURE RESULTS.

The risks and uncertainties described herein are not the only ones facing the
Company. Additional risks and uncertainties not presently known, or that may now
be deemed immaterial, may also impair business operations.

(D) FORWARD-LOOKING INFORMATION

From time to time, information provided by the Company, including written or
oral statements made by representatives, may contain forward-looking information
as defined in the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, contain forward-looking
information, particularly statements which address activities, events or
developments that the Company expects or anticipates will or may occur in the
future, such as expansion and growth of the Company's business, future capital
expenditures and the Company's prospects and strategy. In reviewing such
information, it should be kept in mind that actual results may differ materially
from those projected or suggested in such forward-looking information. This
forward-looking information is based on various factors and was derived
utilizing numerous assumptions. Many of these factors previously have been
identified in filings or statements made by or on behalf of the Company.

Important assumptions and other important factors that could cause actual
results to differ materially from those set forth in the forward-looking
information include changes in the general economy, changes in capital
investment and/or consumer spending, competitive factors and other factors
affecting the Company's business in or beyond the Company's control. These
factors include a change in the rate of inflation, a change in state or federal
legislation or regulations, an adverse determination with respect to a claim in
litigation or other claims (including environmental matters), the ability to
recruit and develop employees, the ability to successfully implement new
technology and the stability of product costs. These factors also include the
timing and degree of any business recovery in certain of the


                                    Page 10



Company's markets that are currently experiencing a cyclical economic downturn.

Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. The Company does not undertake to update forward-looking
information contained herein or elsewhere to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
information.

Future factors include the effectiveness of cost reduction actions undertaken by
the Company; the timing and degree of any business recovery in certain of the
Company's markets that are currently experiencing economic uncertainty;
increasing prices, products and services offered by U.S. and non-U.S.
competitors, including new entrants; rapid technological developments and
changes and the Company's ability to continue to introduce and develop
competitive new products and services on a timely, cost-effective basis;
availability of manufacturing capacity, components and materials; credit
concerns and the potential for deterioration of the credit quality of customers;
customer demand for the Company's products and services; U.S. and non-U.S.
governmental and public policy changes that may affect the level of new
investments and purchases made by customers; changes in environmental and other
U.S. and non-U.S. governmental regulations; protection and validity of patent
and other intellectual property rights; compliance with the covenants and
restrictions of bank credit facilities; and outcome of pending and future
litigation and governmental proceedings. These are representative of the future
factors that could affect the outcome of the forward-looking statements. In
addition, such statements could be affected by general industry and market
conditions and growth rates, general U.S. and non-U.S. economic conditions,
including economic instability in the event of a future terrorist attack or
sharp increases in the cost of energy and interest rate and currency exchange
rate fluctuations and other future factors.


                                    Page 11


ITEM 2. PROPERTIES

Set forth below are the properties where the Company conducted business as of
December 31, 2005.



                                                                                       Approx.
                                                                                       Square   Owned or Leased And
          Location                               General Character                     Footage    Expiration Date
          --------                               -----------------                    --------  -------------------
                                                                                       
Oxnard, CA                     Manufacture and distribution of power supply            36,500   Leased - 4/30/06
                               products (Condor)

Ventura, CA                    Manufacture and distribution of power supply            31,200   Leased - 4/30/11
                               products (Condor)

Mexicali, Mexico               Manufacture and distribution of power supply            62,500   Leased - 4/30/06
                               products (Condor)                                       14,500   Leased - 4/30/06

South Molton, United Kingdom   Distribution of power supply products (Condor)           2,500   Leased - 6/30/10

San Diego, CA                  Manufacture of power distribution and conditioning      45,054   Leased - 3/22/07
                               units (Teal)

Montevideo, MN                 Manufacture of precision motors and motion control      30,000   Owned
                               systems (SL-MTI)

Matamoros, Mexico              Manufacture of precision motors (SL-MTI)                28,517   Leased - 12/31/07

Boonton Twp., NJ               Manufacture of electric utility equipment protection    78,000   Owned
                               systems (RFL)

Camden, NJ                     Industrial surface finishing (Other) (1)                15,800   Owned

Pennsauken, NJ                 Document warehouse (Other) (2)                           6,000   Owned

Mt. Laurel, NJ                 Corporate office (Other)                                 4,200   Leased - 11/30/08


(1)  Ownership retained by the Company after the sale of SurfTech on November
     24, 2003.

(2)  Formerly used for industrial surface finishing operations.


                                     Page 12



All manufacturing facilities are adequate for current production requirements.
The Company believes that its facilities are sufficient for future operations,
maintained in good operating condition and adequately insured. Of the owned
properties, none are subject to a major encumbrance material to the operations
of the Company.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of its business, the Company is subject to loss
contingencies pursuant to foreign and federal, state and local governmental laws
and regulations and is also party to certain legal actions, frequently involving
complaints by terminated employees and disputes with customers and suppliers. In
the opinion of management, such claims are not expected to have a material
adverse effect on the financial condition or results of operations of the
Company.

In a November 1991 Administrative Directive, the New Jersey Department of
Environmental Protection ("NJDEP") alleged that SurfTech, formerly SL Modern
Hard Chrome, Inc., and 20 other respondents are responsible for a contamination
plume which has affected the Puchack Wellfield in Pennsauken, New Jersey (which
supplies Camden, New Jersey). SurfTech is alleged to have contributed to the
groundwater contamination through its operations conducted in Pennsauken, New
Jersey (the "SurfTech site"). Three other actions have been initiated from the
underlying directive. The first is Supplemental Directive No. 1 ("Directive No.
1") issued by the NJDEP to the same parties in May 1992, which seeks a cost
reimbursement of $8,655,000 for the construction of a treatment system at the
Puchack site and an annual payment of $611,000 (a total of $9,266,000) for
ongoing operation and maintenance of the treatment system. The second matter is
a lawsuit initiated by one of the parties named in Directive No. 1 seeking to
have the remainder of those parties, and more than 600 others, pay some or all
of that party's cost of compliance with Directive No. 1 and any other costs
associated with its site. This second matter is a claim for indemnification of
potential damages. Accordingly, it is unspecified in amount. The third matter is
a Spill Act Directive by the NJDEP to SurfTech alone, regarding similar matters
at its site and consists of a claim for contribution towards potential damages
and is unspecified in amount. Both the second and third matters relate to the
payment of a portion of the damages set forth in the discussion of Directive No.
1. The state has not initiated enforcement action regarding any of its three
Directives. There also exists an outstanding enforcement issue regarding the
Company's compliance with state environmental laws at the same site.

With regard to the $9,266,000 amount discussed in the preceding paragraph, in
the Company's view, it is not appropriate to consider that amount as "potential
cost reimbursements." The SurfTech site has undergone remedial activities under
NJDEP's supervision since 1983. The Company believes that it has a significant
defense against all or any part of the $9,266,000 claim since technical data
generated as part of previous remedial activities indicate that there is no
offsite migration of contaminants at the SurfTech site. Based on this and other
technical factors, the Company has been advised by its outside technical
consultant, with the concurrence of its outside counsel, that it has a
significant defense to Directive No. 1 and any material exposure is unlikely.

On June 12, 2002, the Company and SurfTech were served with notice of a class
action complaint filed in Superior Court of New Jersey for Camden County. The
Company and SurfTech are currently two of approximately 39 defendants in this
action. The complaint alleges, among other things, that plaintiffs


                                    Page 13


may suffer personal injuries as a result of consuming water distributed from the
Puchack Wellfield in Pennsauken, New Jersey (which supplies Camden, New Jersey).

This case arises from the same factual circumstances as the current
administrative actions involving the Puchack Wellfield, which are described
above. The administrative actions and the class action lawsuit both allege that
SurfTech and other defendants contaminated ground water through the disposal of
hazardous substances at industrial facilities in the area. As with the
administrative actions, the Company believes it has significant defenses against
the class action plaintiffs' claims and intends to pursue them vigorously.
Technical data generated as part of remedial activities at the SurfTech site
have not established offsite migration of contaminants. Based on this and other
technical factors, the Company has been advised by its outside counsel that it
has a strong defense against the claims alleged in the class action plaintiffs'
complaint, as well as the environmental administrative actions discussed above.

The Company filed claims with several of its insurers seeking reimbursement for
past and future environmental costs. In settlement of its claims, the Company
received aggregate cash payments of $2,800,000 prior to fiscal 2001, and
commitments from three insurers to pay for a portion of environmental costs
associated with the SurfTech site of 15% of costs up to $300,000, 15% of costs
up to $150,000 and 20% of costs up to $400,000, respectively. During 2005 and
2004, the Company billed these insurers a total of $131,000 and $654,000,
respectively, for their contingent commitments. Reimbursed cost related to these
billings is recorded in discontinued operations.

Loss contingencies include potential obligations to investigate and eliminate or
mitigate the effects on the environment of the disposal or release of certain
chemical substances at various sites, such as Superfund sites and other
facilities, whether or not they are currently in operation. The Company is
currently participating in environmental assessments and cleanups at six sites
under these laws and may in the future be involved in additional environmental
assessments and cleanups. Based upon investigations completed by the Company and
its independent engineering consulting firms to date, management has provided an
estimated accrual for all known costs believed to be probable in the amount of
$1,220,000. Of this amount, the Company expects to spend approximately $293,000
related to environmental matters in 2006. However, it is in the nature of
environmental contingencies that other circumstances might arise, the costs of
which are indeterminable at this time due to such factors as changing government
regulations and stricter standards, the unknown magnitude of defense and cleanup
costs, the unknown timing and extent of the remedial actions that may be
required, the determination of the Company's liability in proportion to other
responsible parties, and the extent, if any, to which such costs are recoverable
from other parties or from insurance. Although these contingencies could result
in additional expenses or judgments, or off-sets thereto, at present such
expenses or judgments are not expected to have a material effect on the
consolidated financial position or results of operations of the Company.

In the second quarter of 2005, the Company paid Eaton Aerospace LLC a final
judgment of $809,000, with respect to a lawsuit filed by Eaton alleging breach
of contract and warranty.

It is management's opinion that the impact of legal actions brought against the
Company and its operations will not have a material adverse effect on its
financial position or results of operations. However, the ultimate outcome of
these matters, as with litigation generally, is inherently uncertain, and


                                    Page 14


it is possible that some of these matters may be resolved adversely to the
Company. The adverse resolution of any one or more of these matters could have a
material adverse effect on the business, operating results, financial condition
or cash flows of the Company. Additional information pertaining to legal
proceedings is found in Note 13 in the Notes to the Consolidated Financial
Statements included in Part IV of this Annual Report on Form 10-K.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of fiscal 2005, no matter was submitted to a vote of
the Company's security holders.

PART II

ITEM 5. MARKET FOR REGISTANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

The Company's common stock is currently registered on both the AMEX and the
Philadelphia Stock Exchange under the symbol "SLI." The Company moved from the
NYSE to the AMEX on April 30, 2003. The following table sets forth the high and
low closing sales price per share of the Company's common stock for the periods
indicated:



                         Year                     Year
               Ended December 31, 2005   Ended December 31, 2004
               -----------------------   -----------------------
                     HIGH    LOW              HIGH      LOW
                    -----   -----            -----     -----
                                         
Stock Prices
1st Quarter         14.09   12.45            10.00      8.15
2nd Quarter         18.14   14.03            11.24      9.18
3rd Quarter         18.33   13.93            11.50      9.90
4th Quarter         17.76   13.20            14.46     11.07


As of March 1, 2006, there were approximately 701 registered shareholders. The
Company suspended dividend payments during 2001 and has no present intention of
making dividend payments in the foreseeable future. The Revolving Credit
Facility restricts the payment of dividends. Additional information pertaining
to the Revolving Credit Facility is found in Note 10 in the Notes to the
Consolidated Financial Statements included in Part IV of this Annual Report on
Form 10-K.

For the "Equity Compensation Plan Information," please refer to the Company's
Proxy Statement for the 2006 Annual Meeting of Shareholders, which is
incorporated herein by reference.


                                    Page 15


On December 12, 2003, the Company announced that its Board of Directors had
authorized the repurchase of up to 10% of the outstanding shares of the common
stock of the Company. Any repurchases would be made in the open market or in
negotiated transactions. For the twelve months ended December 31, 2005, the
Company did not repurchase any shares pursuant to its stock repurchase program;
however, it did purchase 25,000 shares through its deferred compensation plans.
For the twelve months ended December 31, 2004, the Company purchased 545,900
shares pursuant to its stock repurchase program and 56,500 shares through its
deferred compensation plans.

                      ISSUER PURCHASES OF EQUITY SECURITIES



                                             Total Number       Maximum Number
                                              of Shares       of Shares That May
                   Total                  Purchased as Part    Yet Be Purchased
                 Number of     Average       of Publicly        under Publicly
                   Shares    Price Paid    Announced Plans    Announced Plans or
    Period       Purchased    per Share      or Programs           Programs
    ------       ---------   ----------   -----------------   ------------------
                                                  
January 2005         --            --             --                48,024
February 2005        --            --             --                48,024
March 2005        1,700(1)     $13.50             --                48,024
April 2005           --            --             --                48,024
May 2005          3,800(1)     $16.71             --                48,024
June 2005         5,400(1)     $17.93             --                48,024
July 2005         6,900(1)     $17.94             --                48,024
August 2005          --            --             --                48,024
September 2005    3,900(1)     $14.57             --                48,024
October 2005         --            --             --                48,024
November 2005        --            --             --                48,024
December 2005     3,300(1)     $17.05             --                48,024
                 ------        ------            ---
Total            25,000        $16.81             --
                 ======        ======            ===


(1)  The Company purchased these shares other than through a publicly announced
     plan or program in open market transactions or in negotiated transactions.


                                     Page 16



ITEM 6. SELECTED FINANCIAL DATA

Selected consolidated financial data with respect to the calendar years ended
December 31, 2005, 2004, 2003, 2002 and 2001 are presented below.



                                                            Years Ended December 31,
                                              ----------------------------------------------------
                                                2005       2004       2003       2002       2001
                                              --------   --------   --------   --------   --------
                                                  (amounts in thousands except per share data)
                                                                           
Net sales(1)                                  $126,873   $118,804   $105,284   $107,912   $109,770
Income (loss) from continuing operations      $  7,620   $  6,301   $  3,742   $    801   $ (8,452)
(Loss) income from discontinued operations    $   (473)  $  2,371   $ (2,422)  $ (1,271)  $ (2,927)
Net income (loss)(2)                          $  7,147   $  8,672   $  1,320   $   (470)  $(11,379)
Diluted net income (loss) per common share    $   1.25   $   1.48   $   0.22   $  (0.08)  $  (2.00)
Shares used in computing diluted net income
   (loss) per common share                       5,738      5,871      5,956      5,867      5,698
Cash dividend per common share                $     --   $     --   $     --   $     --   $     --
YEAR-END FINANCIAL POSITION
Working capital                               $ 25,807   $ 19,496   $ 16,612   $ 10,107   $ 12,132
Current ratio(3)                                  2.40       2.05       1.98       1.03       1.01
Total assets                                  $ 70,314   $ 63,084   $ 58,421   $ 90,667   $109,911
Long-term debt                                $     --   $  1,456   $  2,015   $     --   $     --
Shareholders' equity                          $ 46,645   $ 37,687   $ 34,581   $ 32,983   $ 33,204
Book value per share                          $   8.33   $   6.91   $   5.82   $   5.59   $   5.81
OTHER
Capital expenditures(4)                       $  1,904   $  1,642   $  1,616   $  1,466   $  1,039
Depreciation and amortization                 $  1,986   $  2,133   $  1,851   $  2,634   $  3,670


(1)  On November 24, 2003, the Company sold certain assets of SurfTech. On
     January 6, 2003, effective for the year ended December 31, 2002, the
     Company sold EME, and in 2001, the Company sold certain assets of SL Waber.
     Accordingly, the operations of SurfTech, EME, and SL Waber have been
     accounted for as discontinued operations in all periods presented.

(2)  Fiscal 2004 includes a settlement fee of $2,516,000, net of tax, received
     by SL Waber and the recovery of certain legal fees for environmental
     matters in the amount of $392,000, net of tax. Fiscal 2003 includes an
     asset impairment of $275,000 recorded against the carrying value of the
     Company's property located in Camden, New Jersey. Fiscal 2002 includes
     $1,834,000 of special charges related to change-of-control and proxy costs,
     $703,000 of impairment charges related to the write-off of goodwill,
     $556,000 and $147,000 of asset impairment charges at SurfTech. Fiscal 2001
     includes costs related to inventory write-offs of $2,890,000, asset
     impairment charges of $4,145,000 and restructuring costs of $3,683,000
     related to Condor, and inventory write-offs of $50,000 and restructuring,
     and intangible asset impairment charges of $185,000 and $125,000,
     respectively, related to SurfTech.

(3)  The current ratio for 2002 and 2001 includes all debt classified as
     current, due to the December 31, 2002 maturity date of the Company's
     previous revolving credit facility. The current ratio calculations for all
     years exclude net current assets and liabilities held for sale.

(4)  Excludes assets acquired in business combinations.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The Company through its subsidiaries, designs, manufactures and markets power
electronics, motion control, power protection, and specialized communication
equipment that is used in a variety of aerospace, computer, datacom, industrial,
medical, telecom, transportation and utility equipment applications. The Company
is comprised of four domestic business segments, two of which have significant
manufacturing operations in Mexico. Most of the Company's sales are made to
customers who are based in the United States. However, over the years the
Company has increased its


                                     Page 17


\
presence in international markets. The Company places an emphasis on high
quality, well-built, dependable products and continues its dedication to product
enhancement and innovations.

ORGANIZATION OF FINANCIAL INFORMATION

The Company's Management Discussion and Analysis provides material historical
and prospective disclosures intended to enable investors and other users to
assess the Company's financial condition and results of operations. Statements
that are not historical are forward-looking and involve risks and uncertainties,
as discussed under the caption "Forward-Looking Statements" in Item 1 of this
Annual Report on Form 10-K. The consolidated financial statements and notes are
presented in Part IV of this Annual Report on Form 10-K. Included in the
consolidated financial statements are the Consolidated Balance Sheets,
Consolidated Statements of Income, Consolidated Statements of Comprehensive
Income, Consolidated Statements of Shareholders' Equity and Consolidated
Statements of Cash Flows. The notes, which are an integral part of the
consolidated financial statements, provide additional information required to
fully understand the nature of amounts included in the consolidated financial
statements. Additionally, in Note 16, the Company provides a summary of net
sales, income from continuing operations before income taxes, total assets and
depreciation and amortization by industry segment. The Company's Management
Discussion and Analysis provides a more detailed discussion related to the
operations of business segments.

SIGNIFICANT TRANSACTIONS AND FINANCIAL TRENDS

Included in the financial sections of this Annual Report on Form 10-K is a
description of significant transactions or events that have materially affected
earnings, cash flow and business trends. The Company's Management Discussion and
Analysis for fiscal 2005 also includes income and charges related to
discontinued operations. Significant transactions in 2005 that impacted the
Company's financial results and cash flows included: 1) the repayment of the
Company's previous credit facility in the amount of $2,015,000; 2) the receipt
of proceeds from stock options exercised during the year in the amount of
$1,399,000; 3) the recording of foreign tax credits, which has increased income
from continuing operations by approximately $1,035,000, or $0.18 per diluted
share; and 4) the purchase of approximately 4.8% of the outstanding shares of
Ault for $567,000. The Company completed a tender offer for Ault on January 26,
2006 (see Subsequent Events Note 19 presented in Part IV of this report of Form
10-K). Significant transactions in 2004 that impacted the Company's financial
results and cash flows included: 1) the expenditure of $6,076,000 to acquire
545,900 shares of common stock pursuant to the Company's publicly announced
repurchase program; 2) the tax benefit of approximately $1,295,000, or $0.22 per
diluted share, due to research and development tax credits recorded during 2004;
and 3) the accrual of $809,000 in compensation expense related to certain stock
based compensation arrangements with key executives. The compensation expenses
are non-cash charges for the year and are recorded in selling, general and
administrative expenses. In addition, the Company recorded income related to a
settlement fee received by SL Waber, net of tax, in the amount of $2,516,000 and
net proceeds from insurance companies related to the recovery of certain legal
fees for environmental matters in the amount of $392,000, net of tax. These
transactions were reported as part of income from discontinued operations.

While these items are important in understanding and evaluating financial
results and trends, other transactions or events, which are disclosed in this
Management Discussion and Analysis, have a material impact on continuing
operations. A complete understanding of these transactions is necessary in order
to estimate the likelihood that these trends will continue.


                                     Page 18



CRITICAL ACCOUNTING POLICIES

In December 2001, the Securities and Exchange Commission (the "SEC") issued
disclosure guidance for "critical accounting policies." The SEC defines
"critical accounting policies" as those that require application of management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain and
may change in subsequent periods.

The Company's significant accounting policies are described in Note 1 in the
Notes to Consolidated Financial Statements included in Part IV of this Annual
Report on Form 10-K. Not all of these significant accounting policies require
management to make difficult, subjective or complex judgments or estimates.
However, the following policies are deemed to be critical within the SEC
definition.

REVENUE RECOGNITION

Revenue from product sales is recognized at the time the product is shipped,
with provisions established for estimated product returns and returns related to
one business segment's stock scrap program with distributors. Upon shipment, the
Company provides for the estimated cost that may be incurred for product
warranties. Rebates and other sales incentives offered by the Company are
recorded as a reduction of sales at the time of shipment. Revenue recognition is
significant because net sales is a key component of results of operations. In
addition, revenue recognition determines the timing of certain expenses, such as
commissions and royalties. The Company follows generally accepted guidelines in
measuring revenue. Revenue is recorded in accordance with Staff Accounting
Bulletin ("SAB") No. 104. However, certain judgments affect the application of
its revenue policy. For a discussion of the Company's revenue recognition
policies, see Note 1 in the Notes to Consolidated Financial Statements included
in Part IV in this Annual Report on Form 10-K. Revenue results are difficult to
predict, and any shortfall in revenue or delay in recognizing revenue could
cause operating results to vary significantly from quarter to quarter and could
result in future operating losses.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company's estimate for the allowance for doubtful accounts related to trade
receivables is based on two methods. The amounts calculated from each of these
methods are combined to determine the total amount reserved. First, the Company
evaluates specific accounts where it has information that the customer may have
an inability to meet its financial obligations (bankruptcy, etc.). In these
cases, the Company uses its judgment, based on the best available facts and
circumstances, and records a specific reserve for that customer against amounts
due to reduce the receivable to the amount that is expected to be collected.
These specific reserves are reevaluated and adjusted as additional information
is received that impacts the amount reserved. Second, a general reserve is
established for all customers based on several factors, including historical
write-offs as a percentage of sales. If circumstances change (i.e., higher than
expected defaults or an unexpected material adverse change in a major customer's
ability to meet its financial obligation), the Company's estimates of the
recoverability of amounts due could be reduced by a material amount.

INVENTORIES

The Company values inventory at the lower of cost or market, and continually
reviews the book value of discontinued product lines to determine if these items
are properly valued. The Company identifies these


                                     Page 19



items and assesses the ability to dispose of them at a price greater than cost.
If it is determined that cost is less than market value, then cost is used for
inventory valuation. If market value is less than cost, then related inventory
is adjusted to market value.

If a write down to the current market value is necessary, the market value
cannot be greater than the net realizable value, which is defined as selling
price less costs to complete and dispose, and cannot be lower than the net
realizable value less a normal profit margin. The Company also continually
evaluates the composition of its inventory and identifies slow-moving and excess
inventories. Inventory items identified as slow-moving or excess are evaluated
to determine if reserves are required. If the Company is not able to achieve its
expectations of the net realizable value of the inventory at current market
value, it would have to adjust its reserves accordingly.

ACCOUNTING FOR INCOME TAXES

The Company records the estimated future tax effects of temporary differences
between the tax basis of assets and liabilities and amounts reported in the
accompanying consolidated balance sheets, as well as operating loss and tax
credit carryforwards. The Company follows the guidelines under Statement of
Financial Accounting Standard ("SFAS") No. 109 in determining the recoverability
of any tax assets recorded on the balance sheet and provides any necessary
allowances as required. As part of the process of preparing its consolidated
financial statements, the Company is required to estimate its income taxes in
each of the jurisdictions in which it operates. This process involves estimating
the actual current tax exposure, together with assessing temporary differences
resulting from the differing treatment of certain items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within the consolidated balance sheet. Management must then assess
the likelihood that deferred tax assets will be recovered from future taxable
income and to the extent it believes that recovery is not likely, the Company
must establish a valuation allowance. To the extent it establishes a valuation
allowance or increases or decreases this allowance in a period, it must include
expense or income, as the case may be, within the tax provision in the
consolidated statement of operations.

Significant management judgment is required in determining the provision for
income taxes, the deferred tax assets and liabilities and any valuation
allowance recorded against deferred tax assets. As of December 31, 2005, the
Company had recorded total valuation allowances of $3,572,000 due to
uncertainties related to the utilization of some deferred tax assets, primarily
consisting of certain research and development tax credits, loss carryforwards
and foreign tax credits, before they expire. The valuation allowance is based on
estimates of taxable income by jurisdiction in which the Company operates and
the period over which deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or these estimates are adjusted in
future periods, the Company may need to establish an additional valuation
allowance or reduce existing allowances that could materially impact its
consolidated financial position and results of operations.

The net deferred tax assets as of December 31, 2005 were $5,980,000, net of
valuation allowances of $3,572,000. The carrying value of the Company's net
deferred tax assets assumes that the Company will be able to generate sufficient
future taxable income in certain tax jurisdictions, based on estimates and
assumptions. If these estimates and related assumptions change in the future,
the Company may be required to record additional valuation allowances against
its deferred tax assets resulting in additional income tax expense in the
consolidated statement of income. Management evaluates the realizability


                                     Page 20



of the deferred tax assets and assesses the need for additional valuation
allowances quarterly.

The Company's effective tax rate includes the impact of certain undistributed
foreign earnings for which no U.S. taxes have been provided because such
earnings are planned to be reinvested indefinitely outside the United States.
The Company's 2005 results do not reflect the impact of the American Jobs
Creation Act of 2004 (the "Jobs Act"). The Company re-evaluated its position
with respect to the indefinite reinvestment of foreign earnings account for the
possible election of the repatriation provisions contained in the Jobs Act. The
result of this evaluation had no impact on the Company's results of operations.

LEGAL CONTINGENCIES

The Company is currently involved in certain legal proceedings. As discussed in
Note 13 in the Notes to the Consolidated Financial Statements included in Part
IV to this Annual Report on Form 10-K, the Company has accrued an estimate of
the probable costs for the resolution of these claims. This estimate has been
developed after investigation and is based upon an analysis of potential
results, assuming a combination of litigation and settlement strategies.
Management does not believe these proceedings will have a material adverse
effect on the Company's consolidated financial position. It is possible,
however, that future results of operations for any particular quarterly or
annual period could be materially affected by changes in these assumptions, or
the effectiveness of these strategies, related to these proceedings.

IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS

The Company's long-lived and intangible assets primarily consist of fixed
assets, goodwill and other intangible assets. Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") requires
that goodwill be tested for impairment at the reporting unit level (operating
segment or one level below an operating segment) on an annual basis and between
annual tests in certain circumstances. Application of the goodwill impairment
test requires judgment, including the identification of reporting units,
assigning assets and liabilities to reporting units, assigning goodwill to
reporting units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of reporting units
include estimating future cash flows, determining appropriate discount rates and
other assumptions. Changes in these estimates and assumptions could materially
affect the determination of fair value for each reporting unit.

Effective January 1, 2002, the Company adopted SFAS 142 and performed a
transitional test of its goodwill and intangible assets. No impairment charges
were recorded as a result of the initial impairment test. Impairment losses
recorded in the future could have a material adverse impact on the Company's
financial condition and results of operations.

The Company periodically reviews the carrying value of its long-lived assets
held and used, other than goodwill and intangible assets with indefinite lives,
and assets to be disposed of whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company assesses the
recoverability of the asset by estimated cash flows and at times by independent
appraisals. It compares estimated cash flows expected to be generated from the
related assets, or the appraised value of the asset, to the carrying amounts to
determine whether impairment has occurred. If the estimate of cash flows
expected to be generated changes in the future, the Company may be required to
record impairment charges that were not previously recorded for these assets. If
the carrying value of a long-


                                     Page 21


lived asset is considered impaired, an impairment charge is recorded for the
amount by which the carrying value of the long-lived asset exceeds its fair
value.

ENVIRONMENTAL EXPENDITURES

The Company is subject to United States and Mexican environmental laws and
regulations concerning emissions to the air, discharges to surface and
subsurface waters, and generation, handling, storage, transportation, treatment
and disposal of waste materials. The Company is also subject to other federal,
state and local environmental laws and regulations, including those that require
it to remediate or mitigate the effects of the disposal or release of certain
chemical substances at various sites, including some where the Company has
ceased operations. It is impossible to predict precisely what effect these laws
and regulations will have in the future.

Expenditures that relate to current operations are charged to expense or
capitalized, as appropriate. Expenditures that relate to an existing condition
caused by past operations are expensed and recorded as part of discontinued
operations. Expenditures include costs of remediation and legal fees to defend
against claims for environmental liability. Liabilities are recorded when
remedial efforts are probable and the costs can be reasonably estimated. The
liability for remediation expenditures includes, as appropriate, elements of
costs such as site investigations, consultants' fees, feasibility studies,
outside contractor expenses and monitoring expenses. Estimates are not
discounted, and they are not reduced by potential claims for recovery from
insurance carriers. The liability is periodically reviewed and adjusted to
reflect current remediation progress, prospective estimates of required activity
and other relevant factors, including changes in technology or regulations.

The above listing is not intended to be a comprehensive list of all of the
Company's accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by generally accepted accounting
principles with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternatives would not produce a materially different result. See the Company's
audited Consolidated Financial Statements and Notes thereto included in Part IV
of this Annual Report on Form 10-K, which contain accounting policies and other
disclosures required by generally accepted accounting principles.

LIQUIDITY AND CAPITAL RESOURCES



                               December 31,   December 31,
                                   2005           2004       $ Variance   % Variance
                               ------------   ------------   ----------   ----------
                                                   (in thousands)
                                                              
Cash and cash equivalents         $ 9,985        $ 2,659      $ 7,326         276%
Bank debt                         $    --        $ 2,015      $(2,015)       (100%)
Working capital: (less cash)      $15,822        $16,837      $(1,015)         (6%)
Shareholders' equity              $46,645        $37,687      $ 8,958          24%
                                  -------        -------      -------        ----


At December 31, 2005, the Company maintained a cash balance of $9,985,000, with
no outstanding bank debt. During the year ended December 31, 2005 ("2005"), the
net cash provided by continuing operating activities was $11,208,000, as
compared to net cash provided by continuing operating activities of $4,543,000
during the year ended December 31, 2004 ("2004"). The primary sources of


                                     Page 22


cash provided by continuing operating activities for 2005 were income from
continuing operations of $7,620,000, a decrease in inventories of $1,269,000 and
an increase in accounts payable of $2,026,000. These sources of cash were
partially offset by a decrease in other accrued liabilities of $1,487,000. The
decreases in inventories were primarily attributable to activities at RFL and
Condor, which had decreases of $1,202,000 and $790,000, respectively, offset by
an increase at SL-MTI of $914,000. The decreases at RFL and Condor were due to
the timing of sales in the fourth quarter of 2005, compared to 2004. SL-MTI's
increase was primarily due to increased volume, postponement of customer orders
and redesign of some products that have been rescheduled for the first quarter
of fiscal 2006. The decrease in other accrued liabilities is primarily related
to payments made by the Company to settle certain litigation, fees and claims,
which were accrued at December 31, 2004. The primary sources of cash provided by
continuing operating activities for 2004 were income from continuing operations
of $6,301,000 and an increase in accounts payable in the amount of $1,921,000.
These sources of cash were partially offset by an increase in accounts
receivable of $2,714,000, an increase in inventory in the amount of $4,830,000
and payments made under the Company's 2003 bonus and incentive programs. The
increase in accounts receivable and inventory were primarily related to the
Company's sales growth, which was 13% greater than prior year.

During 2005, net cash used in investing activities was $2,936,000, primarily
related to the purchases of machinery, building improvements, equipment upgrades
and manufacturing equipment in the amount of $1,904,000 and the purchases of
Ault common stock in the amount of $567,000. During 2004, net cash used in
investing activities was $633,000, primarily related to the purchases of
machinery and equipment in the amount of $1,642,000. The use of cash was
partially offset by proceeds of $1,000,000, representing the final installment
on the sale of EME.

During 2005, net cash used in financing activities was $529,000, primarily due
to the repayment of the Company's previous credit facility in the amount of
$2,015,000, partially offset by the proceeds from the exercise of stock options
of $1,399,000. During 2004, net cash used in financing activities was
$6,603,000, primarily due to the purchase of the Company's common stock. During
2004, the Company expended $6,233,000 to reacquire its shares, of which
$6,076,000 related to the purchase of 545,900 shares of common stock at an
average price of $11.13 per share. These purchases were made under the Company's
repurchase program approved by the Board of Directors on December 12, 2003. Also
during this period, the Company made payments of $887,000 under its previous
credit facility. These uses of cash were partially offset by proceeds from stock
options exercised during the year in the amount of $517,000.

During 2005 until August 2, 2005, the Company was a party to a three-year senior
secured credit facility with LaSalle Business Credit LLC, which was secured by
all of the Company's assets. On August 2, 2005, the Company repaid the
outstanding balances under such senior credit facility in the amount of
$1,641,000. The Company also paid $212,000 in early termination and legal fees.
On August 3, 2005, the Company entered into a Revolving Credit Facility with
Bank of America, N.A. (see Note 10 in the Notes to the Consolidated Financial
Statements included in Part IV to this Annual Report on Form 10-K).


                                    Page 23



The Company's current ratio was 2.40 to 1 at December 31, 2005 and 2.05 to 1 at
December 31, 2004. This ratio increased mainly due to an increase in cash and
cash equivalents, with current assets increasing by $6,204,000 and current
liabilities decreasing by $107,000 from the prior year.

As a percentage of total capitalization, consisting of debt and shareholders'
equity, total borrowings by the Company were 0% at December 31, 2005 and 5% at
December 31, 2004. At December 31, 2005, total borrowings decreased by
$2,015,000, compared to December 31, 2004.

Capital expenditures of $1,904,000 were made in 2005, primarily for machinery
and equipment, building improvements and equipment upgrades. The capital
expenditures of $1,642,000 made in 2004 primarily related to machinery and
equipment purchases.

The Company has been able to generate adequate amounts of cash to meet its
operating needs and expects to do so in the future.

With the exception of the segment reported as "Other" (which consists primarily
of corporate office expenses, financing activities, public reporting costs and
accruals not specifically allocated to the reportable business segments) all of
the Company's operating segments had income from operations in 2005 and 2004.

CONTRACTUAL OBLIGATIONS

The following is a summary of the Company's contractual obligations at December
31, 2005 for the periods indicated:



                    Less Than   1 to 3   4 to 5    After
                      1 Year     Years    Years   5 Years    Total
                    ---------   ------   ------   -------   ------
                                    (in thousands)
                                             
Operating Leases      $1,157    $  825    $204      $ --    $2,186
Debt                      --        --      --        --        --
Capital Leases            54        11      --        --        65
Other Obligations         52       175     136       164       527
                      ------    ------    ----      ----    ------
                      $1,263    $1,011    $340      $164    $2,778
                      ======    ======    ====      ====    ======


Other obligations include the Company's withdrawal liability to a
union-administered defined benefit multi-employer pension plan to which SurfTech
had made contributions (see Note 2 to the Consolidated Financial Statements).

OFF-BALANCE SHEET ARRANGEMENTS

It is not the Company's usual business practice to enter into off-balance sheet
arrangements such as guarantees on loans and financial commitments,
indemnification arrangements and retained interests in assets transferred to an
unconsolidated entity for securitization purposes. Consequently, the Company has
no off-balance sheet arrangements, except for operating lease commitments
disclosed in the table above, which have, or are reasonably likely to have, a
material current or future effect on its financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital


                                    Page 24



expenditures or capital resources.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004



                                      Years Ended December 31,
                           ---------------------------------------------
                             2005       2004     $ Variance   % Variance
                           --------   --------   ----------   ----------
                                           (in thousands)
                                                  
NET SALES
Power Electronics Group:
   Condor                  $ 43,233   $ 41,457     $1,776          4%
   Teal                      32,777     30,265      2,512          8%
                           --------   --------     ------        ---
      Total                  76,010     71,722      4,288          6%
                           --------   --------     ------        ---
SL-MTI                       28,085     24,497      3,588         15%
RFL                          22,778     22,585        193          1%
                           --------   --------     ------        ---
Total                      $126,873   $118,804     $8,069          7%
                           ========   ========     ======        ===




                                      Years Ended December 31,
                           ---------------------------------------------
                             2005       2004     $ Variance   % Variance
                           --------   --------   ----------   ----------
                                           (in thousands)
                                                  
INCOME FROM OPERATIONS
Power Electronics Group:
   Condor                  $ 4,543    $ 3,789      $  754         20%
   Teal                      4,911      4,635         276          6%
                           -------    -------      ------        ---
      Total                  9,454      8,424       1,030         12%
                           -------    -------      ------        ---
SL-MTI                       3,371      2,827         544         19%
RFL                          2,284      2,091         193          9%
Other                       (4,911)    (5,033)        122          2%
                           -------    -------      ------        ---
Total                      $10,198    $ 8,309      $1,889         23%
                           =======    =======      ======        ===


Consolidated net sales for 2005, compared to 2004, increased by $8,069,000, or
7%. All of the Company's business segments contributed to the increase in net
sales. SL-MTI, which recorded a sales increase of $3,588,000, or 15%,
experienced sales increases in all of its major markets. Teal reported an
increase in net sales of $2,512,000, or 8%, primarily due to increases in its
medical imaging product line. Condor recorded an increase in net sales of
$1,776,000, or 4%, and RFL recorded an increase in net sales of $193,000, or 1%.

The Company's income from operations increased to $10,198,000 in 2005, compared
to $8,309,000 in 2004, or 23%. All of the Company's operating business segments
had increases in income from operations in 2005, as compared to 2004. These
increases ranged from 20% to 6%.

Income from continuing operations in 2005 was $7,620,000, or $1.33 per diluted
share, compared to income from continuing operations in 2004 of $6,301,000, or
$1.08 per diluted share. Income from continuing operations benefited by
approximately $1,035,000, or $0.18 per diluted share, and by approximately
$470,000, or $0.08 per diluted share, due to foreign and research and
development tax


                                    Page 25



credits recorded during 2005. In 2004 income from continuing operations
benefited by approximately $152,000, or $0.03 per diluted share, and by
approximately $1,295,000, or $0.22 per diluted share, due to foreign and
research and development tax credits. The Company's business segments and the
components of operating expenses are discussed more fully in the following
sections.

The Power Electronics Group, which is comprised of Condor and Teal, recorded a
sales increase of $4,288,000, or 6%, and an increase in income from operations
of $1,030,000, or 12%. Condor experienced an increase in net sales of
$1,776,000, or 4%, and an increase in income from operations of $754,000, or
20%, over the prior year. Condor reported a sales increase in its medical
product line of $3,843,000, or 17%, while sales to manufacturers of industrial
equipment decreased $1,945,000, or 12%. Net sales of telecommunications products
also decreased by $502,000, or 14%. International sales, which represent
approximately 18% of Condor's total net sales, increased 62%, aided by sales to
two international customers. Also in August 2005 Condor opened a European sales
office to increase its presence in the European market. Domestic sales decreased
by $1,224,000, or 3%, primarily due to decreased sales to the industrial market.
Condor's increase in income from operations is primarily due to its increase in
sales and a slight reduction in costs of products sold. Teal experienced a sales
increase of $2,512,000, or 8%, primarily due to increased sales of its medical
imaging product line of $4,691,000. Sales of its semiconductor product line
decreased by approximately $2,589,000. Teal's increase in income from operations
is primarily due to increased sales and decreased operating costs.

SL-MTI's net sales in 2005 increased approximately $3,588,000, or 15%, while
income from operations increased by $544,000, or 19%, compared to net sales and
income from operations in 2004. Contributing to the increase in net sales was
significant increases in the DC Brush and Brushless Motor product lines, which
increased by $3,491,000, or 21%, compared to 2004. By market segment, the
largest contributor to the net sales increases was the military market of
$2,852,000, or 18%. The increase in net sales was the primary reason that income
from operations increased, which was partially offset by increases in cost of
products sold. Operating costs at SL-MTI remained relatively constant.

RFL's net sales in 2005 increased approximately $193,000, or 1%, and income from
operations increased approximately $193,000, or 9%, compared to net sales and
income from operations in 2004. Sales of RFL's communications product line
increased by $120,000, or 1%, and customer service sales increased $420,000, or
41%, while its teleprotection product line decreased by $347,000, or 4%. RFL's
domestic sales increased by $1,415,000, or 9%, while export sales decreased by
$1,222,000, or 18%. The decrease in international sales was partially due to a
labor strike encountered at one of RFL's largest customers. Income from
operations increased due to the increase in sales and a reduction in the cost of
products sold, which was partially offset by a modest increase in operating
costs.

COST OF PRODUCTS SOLD

As a percentage of net sales, cost of products sold was approximately 65% in
2005 compared to 64% in 2004. Although aggregate cost of products sold, as a
percentage of net sales, remained relatively constant year-to-year, there were
differences among the operating business segments. The Power Electronics Group
cost of products sold percentage increased to 66% in 2005, from 65% in 2004.
This increase was due to increases in the cost of raw materials at Teal, and to
a lesser extent the start-up cost associated with moving a portion of its
manufacturing operations to Mexico. Condor's cost of products sold percentage
improved slightly in 2005, compared to 2004. SL-MTI's experienced an increase in
its


                                    Page 26



cost of products sold percentage to 71% in 2005, from 69% in 2004. This increase
is primarily due to additional training costs, increased cost of quality and
higher manufacturing inefficiencies, primarily related to the transfer of new
programs to its manufacturing facility in Matamoros, Mexico. RFL's cost of
products sold percentage improved to 53%, compared to 54% in 2004. This
improvement is attributable to product mix and process improvements in its
assembly and test areas.

ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES

Engineering and product development expenses in 2005 were $9,367,000, an
increase of approximately $416,000, or 5%, compared to 2004. As a percentage of
net sales, engineering and product development expenses in 2005 and 2004
remained relatively constant. Condor and Teal increased engineering and product
development expenses, with annual increases of $214,000, or 7%, and $206,000, or
12%, respectively.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for 2005 were approximately 19% of
net sales, compared to 20% in 2004. These expenses decreased by $283,000, or 1%,
over the comparative periods as sales increased 7%. Included in selling, general
and administrative costs are compensation expense related to certain stock based
compensation arrangements with key executives. These expenses are non-cash
charges. For 2005 theses charges were $268,000, compared to $809,000 in 2004, a
decrease of $541,000. Without these charges, selling, general and administrative
costs would have increased by, $258,000, or less than one percent of sales.

DEPRECIATION AND AMORTIZATION EXPENSES

Depreciation and amortization expenses in 2005 were $1,986,000, a decrease of
approximately $147,000, or 7%, compared to 2004. Depreciation expense was
approximately 2% of sales for each of 2005 and 2004.

AMORTIZATION OF DEFERRED FINANCING COSTS

In connection with entering into its previous credit facility on January 6,
2003, the Company incurred costs of approximately $1,342,000. These costs had
been deferred and were being amortized over the three-year term of the facility.
On August 2, 2005 the Company terminated its previous credit facility and
accordingly wrote off the remaining deferred financing costs related thereto. In
connection with entering into the Revolving Credit Facility with Bank of
America, N.A. on August 3, 2005, the Company has incurred costs of approximately
$258,000. These costs have been deferred and are being amortized over the
three-year term of the Revolving Credit Facility. For the year ended December
31, 2005, amortization of deferred financing costs was $485,000 which included
the write-off of the deferred financing costs related to the previous credit
facility and the amortization of the deferred financing costs related to the
current Revolving Credit Facility with Bank of America, N. A. For the year ended
December 31, 2004, amortization of deferred financing costs was $447,000.

INTEREST INCOME (EXPENSE)

In 2005, interest income was $216,000, compared to $102,000 in 2004. Interest
expense in 2005 was $522,000, compared to $347,000 in 2004. The increase in
interest expense for 2005 is primarily related to $185,000 in early termination
fees related to the repayment of the previous credit facility, which occurred in
the third quarter of 2005.


                                    Page 27


TAXES

The effective tax rate for 2005 was approximately 19%, compared to 17% in 2004.
The effective tax rate for both periods reflects the statutory rate after
adjustments for state and international tax provisions, offset by the recording
of benefits from research and development tax credits, foreign tax credits and
certain income exclusion benefits. The benefit rate related to the recording of
foreign tax credits was 11% in 2005 and 2% in 2004. The benefit rate related to
the recording research and development tax credit was 5% in 2005, compared to
17% in 2004.

DISCONTINUED OPERATIONS

In 2005, the Company recorded a loss from discontinued operations, net of tax,
of $473,000. This amount consists primarily of the cost related to environmental
and legal charges, partially offset by insurance recoveries related to
discontinued operations. In 2004, the Company recorded income from discontinued
operations, net of tax, of $2,371,000. This amount is primarily related to a
settlement fee received by SL Waber, in the amount of $2,516,000, net of tax,
the reversal of certain tax reserves related to EME, in the amount of $225,000,
net of expenses, and insurance proceeds related to environmental matters, in the
amount of $392,000, net of tax. These income amounts were partially offset by
environmental, legal and litigation charges related to discontinued operations.

YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31, 2003



                                      Years Ended December 31,
                           ---------------------------------------------
                             2004       2003     $ Variance   % Variance
                           --------   --------   ----------   ----------
                                           (in thousands)
                                                  
NET SALES
Power Electronics Group:
   Condor                  $ 41,457   $ 39,450    $ 2,007          5%
   Teal                      30,265     20,393      9,872         48%
                           --------   --------    -------        ---
      Total                  71,722     59,843     11,879         20%
                           --------   --------    -------        ---
SL-MTI                       24,497     22,053      2,444         11%
RFL                          22,585     23,388       (803)        (3%)
                           --------   --------    -------        ---
Total                      $118,804   $105,284    $13,520         13%
                           ========   ========   ========        ===




                                     Years Ended December 31,
                           -------------------------------------------
                             2004      2003    $ Variance   % Variance
                           -------   -------   ----------   ----------
                                          (in thousands)
                                                
INCOME FROM OPERATIONS
Power Electronics Group:
   Condor                  $ 3,789   $ 3,377    $   412         12%
   Teal                      4,635     2,671      1,964         74%
                           -------   -------    -------        ---
      Total                  8,424     6,048      2,376         39%
                           -------   -------    -------        ---
SL-MTI                       2,827     1,957        870         44%
RFL                          2,091     2,236       (145)        (6%)
Other                       (5,033)   (3,563)    (1,470)       (41%)
                           -------   -------    -------        ---
Total                      $ 8,309   $ 6,678    $ 1,631         24%
                           =======   =======    =======        ===



                                    Page 28



Consolidated net sales from continuing operations for 2004, compared to 2003,
increased by $13,520,000, or 13%. This increase is primarily due to a $9,872,000
net sales increase at Teal, a $2,444,000 net sales increase at SL-MTI and a
$2,007,000 net sales increase at Condor. Net sales increases from 2003 at Teal,
SL-MTI and Condor were 48%, 11% and 5%, respectively.

The Company's operating income increased to $8,309,000 in 2004, compared to
$6,678,000 in 2003. Other than RFL, all of the Company's business segments had
increases in operating income in 2004, compared to 2003. RFL's operating income
decreased $145,000, or 6%.

Income from continuing operations in 2004 was $6,301,000, or $1.08 per diluted
share, compared to net income from continuing operations in 2003 of $3,742,000,
or $0.63 per diluted share. Income from continuing operations benefited by
approximately $1,295,000, or $0.22 per diluted share, due to research and
development tax credits recorded during 2004. The Company's business segments
and the components of operating expenses are discussed more fully in the
following sections.

The Power Electronics Group reported an increase in net sales of $11,879,000, or
20%, and an increase in income from operations of $2,376,000, or 39%, over the
prior year. The increase in net sales within the Power Electronics Group was
primarily attributable to increased sales at Teal of its medical product line,
and to a lesser extent its semiconductor product line. Condor's increase was
related to increases in sales to OEMs in the medical and industrial markets.
International sales, which represent approximately 12% of Condor's total net
sales, decreased 9% from the prior year. Net sales of telecommunications
products decreased approximately 35% in 2004, compared to 2003.

SL-MTI's net sales in 2004 increased approximately $2,444,000, or 11%, while
income from operations increased by $870,000, or 44%, compared to net sales and
income from operations in 2003. Contributing to the increase in net sales was
significant increases in the windings and DC motor product lines, which
increased by 20% and 11%, respectively, compared to 2003. By market segment, the
largest contributor to the net sales increases was the military market. In
addition to increased net sales, improved gross margins contributed to higher
income from operations from the prior year.


                                    Page 29



RFL's net sales in 2004 decreased approximately $803,000, or 3%, and income from
operations decreased approximately $145,000, or 6%, compared to net sales and
income from operations in 2003. RFL recorded sales decreases throughout its
product line, with the exception of a sales increase of $632,000, or 7%, in its
carrier communications products line. RFL experienced weak demand in the U.S.
market, as large infrastructure expansion projects by electric power utility
companies continued to be deferred in favor of smaller emergency and maintenance
projects. RFL maintained its gross margins, compared to 2003, due to its product
mix and certain cost containment programs. Despite lower sales volume, in 2004
RFL increased its expenditures for engineering and product development by
approximately 7%, compared to 2003.

COST OF PRODUCTS SOLD

As a percentage of net sales, cost of products sold in 2004 was approximately
64%, compared to approximately 63% in 2003. Although aggregate cost of products
sold, as a percentage of net sales, remained relatively constant year-to-year,
there were differences among the business segments. The Power Electronics Group
cost of products sold percentage increased to 65% in 2004, from 63% in 2003.
This increase was due to increases in the cost of raw materials at Teal, and to
a lesser extent, product mix at both Condor and Teal. SL-MTI's decreased its
cost of products sold percentage by 3%, primarily due to increased sales volume
and improved operating efficiencies at its manufacturing facility in Matamoros,
Mexico. RFL's cost of products sold percentage remained constant in 2004,
compared to 2003, despite a decrease in sales volume, due to its product mix and
cost containment measures.

ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES

Engineering and product development expenses in 2004 were $8,951,000, an
increase of approximately $1,095,000, or 14%, compared to 2003. As a percentage
of net sales, engineering and product development expenses in 2004 and 2003 were
approximately 8%. All of the Company's business segments increased their
engineering and product development expenditures in 2004, compared to 2003.
Condor and SL-MTI significantly increased engineering and product development
expenses, with annual increases of 18% and 24%, respectively.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for 2004 were approximately 20% of
net sales, compared to 21% in 2003. These expenses increased by $1,215,000, or
5%, over the comparative periods. The major reason for the increase was costs
related to the increase in sales volume of 13%. Also contributing to the
increase was $809,000 in compensation expense related to certain stock based
compensation arrangements with key executives, which were non-cash charges for
the period. In addition, the Company named an Executive Vice President and Chief
Operating Officer at the beginning of the year, which was a position that did
not exist in 2003.

DEPRECIATION AND AMORTIZATION EXPENSES

Depreciation and amortization expenses in 2004 were $2,133,000, an increase of
approximately $282,000, or 15%, compared to 2003. Depreciation expense for 2004
and 2003 was approximately 2% of sales.

AMORTIZATION OF DEFERRED FINANCING COSTS

In connection with entering into its previous credit facility on January 6,
2003, the Company incurred


                                    Page 30



costs of approximately $1,342,000. These costs were deferred and amortized over
the three-year term of the facility. The amortization expense was $447,000 in
each of 2004 and 2003, respectively.

INTEREST INCOME (EXPENSE)

In 2004, interest income was $102,000, compared to $172,000 in 2003. Interest
expense in 2004 was $347,000, compared to $380,000 in 2003. The decrease in
interest expense for 2004 is related to significantly reduced debt levels.

TAXES

The effective tax rate for 2004 was approximately 17%, compared to 38% in 2003.
The effective tax rate for 2004 is significantly lower than the statutory rate
primarily due to research and development tax credits recorded during the year.

DISCONTINUED OPERATIONS

In 2004, the Company recorded income from discontinued operations, net of tax,
of $2,371,000. This amount is primarily related to a settlement fee received by
SL Waber, in the amount of $2,516,000, net of tax, the reversal of certain net
tax reserves related to EME, in the amount of $225,000, net of expenses, and the
receipt of insurance proceeds related to environmental matters, in the amount of
$392,000, net of tax. These income amounts were partially offset by current
environmental, legal and litigation charges related to discontinued operations.
In 2003, the Company recorded a loss of $2,422,000, net of tax, from
discontinued operations. This amount consisted primarily of the net loss upon
the sale of SurfTech, in the amount of $1,450,000 and after-tax environmental
costs of $682,000.

NEW ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED

In November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4" ("SFAS 151").
SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) and requires these costs be
treated as current period charges. In addition, SFAS 151 requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. These provisions of SFAS 151
are effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The Company does not believe that the adoption of SFAS 151 will
have a significant impact on its financial position and results of operations.

In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29"
("SFAS 153"). SFAS 153 amends the guidance in APB Opinion No. 29, "Accounting
for Nonmonetary Transactions," which is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged, with certain exceptions. SFAS 153 amends APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The provisions of SFAS 153 are
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The Company does not believe that the adoption of SFAS 153
will have a significant impact on its financial position and results of
operations.


                                    Page 31



In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R is a
revision of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and its related implementation guidance. SFAS 123R
establishes standards for the accounting of transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. SFAS 123R
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS 123R requires a
public entity to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant date fair value of the award
(with limited exceptions). That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award. The
provisions of SFAS 123R were to be effective for public entities that do not
file as small business issuers as of the beginning of the first interim or
annual reporting period that begins after June 15, 2005. On April 14, 2005, the
SEC adopted a new rule that amends the compliance dates for SFAS 123R. The new
rule allows companies to implement SFAS 123R at the beginning of their next
fiscal year, which for the Company would be for the period ended March 31, 2006.
The Company will experience a negative impact on its financial position and
results of operations in the first quarter of 2006 as a consequence of adopting
the grant date fair value provisions of the statement (See Note 1 in the Notes
to Consolidated Financial Statements included in Part IV of this Annual Report
on Form 10-K).

In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections" ("SFAS 154"), which replaces APB
Opinion No. 20, "Accounting Changes," and Statement of Financial Accounting
Standards No. 3 "Reporting Accounting Changes in Interim Financial Statements"
("SFAS 3"). This Statement changes the requirements for the accounting for and
reporting of a change in accounting principles, and applies to all voluntary
changes in accounting principles, as well as changes required by an accounting
pronouncement in the unusual instance that it does not include specific
transition provisions. Specifically, this Statement requires retrospective
application to prior periods' financial statements, unless it is impracticable
to determine the period-specific effects or the cumulative effect of the change.
When it is impracticable to determine the effects of the change, the new
accounting principle must be applied to the balances of assets and liabilities
as of the beginning of the earliest period for which retrospective application
is practicable and a corresponding adjustment must be made to the opening
balance of retained earnings for that period rather than being reported in an
income statement. When it is impracticable to determine the cumulative effect of
the change, the new principle must be applied as if it were adopted
prospectively from the earliest practicable date. This Statement also requires
that a change in depreciation, amortization, or depletion method for long-lived,
non-financial assets be accounted for as a change in accounting estimate
effected by a change in accounting principle. This Statement is effective for
the Company for all accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. This Statement does not change the
transition provisions of any existing pronouncements. The Company does not
believe that the adoption of SFAS 154 will have a significant impact on its
financial position and results of operations.


                                    Page 32



ENVIRONMENTAL

See "Item 3. Legal Proceedings" in Part I of this Annual Report on Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk from changes in interest and foreign
currency exchange rates. Changes in the market interest rate affect both
interest paid and earned by the Company. The Company's investments and
outstanding debt bear variable interest rates. As of December 31, 2005, the
Company had no borrowings under its Revolving Credit Facility. During the year
and until August 2, 2005, the Company had an outstanding loan balance under its
previous credit facility, which bore interest rates ranging from the prime rate
plus fifty basis points to the prime rate plus 2%. The Company manufactures some
of its products in Mexico and purchases some components in foreign markets. All
other foreign market component purchases are primarily invoiced in U.S. dollars.
Changes in interest and foreign currency exchange rates did not have a material
impact on earnings for 2005, and are not expected to have a material impact on
earnings in 2006.

See generally, "Item 1A. Business - Risk Factors" and "Item 1. Business -
Foreign Operations" in Part I of this Annual Report on Form 10-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Financial Statements and supplementary data, together with the
report of Grant Thornton LLP, independent registered public accounting firm, are
included in Part IV of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: The Company, under the
supervision and with the participation of its management, including the Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the design and operation of the Company's "disclosure controls and
procedures," as such term is defined in Rules 13a-15e and 15d-15e promulgated
under the Securities Exchange Act of 1934, as amended, (the "Exchange Act").
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures
were effective as of the end of the period covered by this Annual Report on Form
10-K, and provide reasonable assurance that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.


                                    Page 33



CHANGES IN INTERNAL CONTROLS: There have been no changes in internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

It should be noted that any control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Apart from certain information concerning the Company's executive officers,
which is set forth in Part I of this Annual Report on Form 10-K, the information
required under this Item is incorporated herein by reference to the applicable
information in the Proxy Statement for the Company's 2006 Annual Meeting of
Shareholders.

ITEM 11. EXECUTIVE COMPENSATION

The information required under this Item is incorporated by reference to the
Proxy Statement for the Company's 2006 Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required under this Item is incorporated by reference to the
Proxy Statement for the Company's 2006 Annual Meeting of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required under this Item is incorporated by reference to the
Proxy Statement for the Company's 2006 Annual Meeting of Shareholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding the Company's independent auditor fees and services and
other information required by Item 14 of Part III of this Report is incorporated
herein by reference to the Proxy Statement for the Company's 2006 Annual Meeting
of Shareholders.


                                    Page 34



PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) (1) FINANCIAL STATEMENTS

The information required by this Item is included in this Annual Report on Form
10-K. Consolidated financial statements and supplementary data, together with
the report of Grant Thornton LLP, independent registered public accounting firm,
are filed as part of this report. See Index to Financial Statements and
Financial Statement Schedule, which appears on page F-1 herein.

(A) (2) FINANCIAL STATEMENT SCHEDULES

The following financial statement schedule for the years ended December 31,
2005, December 31, 2004, and December 31, 2003 are submitted herewith:

     Schedule II - Valuation and Qualifying Accounts

All other schedules are omitted because (a) the required information is shown
elsewhere in this Annual Report on Form 10-K, or (b) they are inapplicable, or
(c) they are not required.

See Index at page F-1 to Consolidated Financial Statements included in Part IV
of this Annual Report on Form 10-K.

(A) (3) EXHIBITS

The information required by this Item is listed in the Exhibit Index of this
Annual Report on Form 10-K.


                                    Page 35



                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

SL INDUSTRIES, INC.
(Company)


By /s/ Warren G. Lichtenstein           Date March 22, 2006
   ----------------------------------
   Warren G. Lichtenstein

                                POWER OF ATTORNEY

     SL INDUSTRIES, INC. AND EACH OF THE UNDERSIGNED DO HEREBY APPOINT GLEN
KASSAN AND WARREN LICHTENSTEIN, AND EACH OF THEM SEVERALLY, ITS OR HIS TRUE AND
LAWFUL ATTORNEY TO EXECUTE ON BEHALF OF SL INDUSTRIES, INC. AND THE UNDERSIGNED
ANY AND ALL AMENDMENTS TO THIS ANNUAL REPORT ON FORM 10-K AND TO FILE THE SAME
WITH ALL EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION; EACH OF SUCH ATTORNEYS SHALL HAVE THE POWER
TO ACT HEREUNDER WITH OR WITHOUT THE OTHER.

     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY
AND IN THE CAPACITIES AND ON THE DATE INDICATED.


By /s/ Warren G. Lichtenstein           Date March 22, 2006
   ----------------------------------
   Warren G. Lichtenstein -
   Chairman of the Board


By /s/ Glen M. Kassan                   Date March 22, 2006
   ----------------------------------
   Glen M. Kassan - Vice Chairman


By /s/ James C. Taylor                  Date March 22, 2006
   ----------------------------------
   James C. Taylor - President and
   Chief Executive Officer
   (Principal Executive Officer)


By /s/ David R. Nuzzo                   Date March 22, 2006
   ----------------------------------
   David R. Nuzzo - Vice President,
   Chief Financial Officer,
   Treasurer and Secretary
   (Principal Financial Officer)


By /s/ J. Dwane Baumgardner             Date March 22, 2006
   ----------------------------------
   J. Dwane Baumgardner - Director


By /s/ Avrum Gray                       Date March 22, 2006
   ----------------------------------
   Avrum Gray - Director


By /s/ James R. Henderson               Date March 22, 2006
   ----------------------------------
   James R. Henderson - Director


By /s/ James A. Risher                  Date March 22, 2006
   ----------------------------------
   James A. Risher - Director


By /s/ Mark E. Schwarz                  Date March 22, 2006
   ----------------------------------
   Mark E. Schwarz - Director


                                    Page 36


INDEX TO EXHIBITS

The exhibit number, description and sequential page number in the original copy
of this document where exhibits can be found as follows:



Exhibit #                               Description
---------                               -----------
         
    2.1     Securities Purchase Agreement by and among SL Industries, Inc., SL
            Industries Vertrieb GmbH, and DCX-Chol Holding GmbH, DCX-Chol
            Enterprises, Inc. and Chol Enterprises, Inc. dated as of January 3,
            2003. Incorporated by reference to Exhibit 2.1 to the Company's
            report on Form 8-K filed with the Securities and Exchange Commission
            on January 17, 2003.

    2.2     Agreement and Plan of Merger, dated December 16, 2005, by and among
            SL Industries, Inc., Lakers Acquisition Corp. and Ault Incorporated.
            Incorporated by reference to Exhibit 2.1 to the Company's report on
            Form 8-K filed with the Securities and Exchange Commission on
            December 16, 2005.

    3.1     Restated Articles of Incorporation. Incorporated by reference to
            Exhibit 3.1 to the Company's report on Form 10-K for the fiscal year
            ended December 31, 2000.

    3.2     Restated By-Laws. Incorporated by reference to Exhibit 3.2 to the
            Company's report on Form 10-K for the fiscal year ended December 31,
            2000.

  10.1*     Supplemental Compensation Agreement for the Benefit of Byrne
            Litschgi. Incorporated by reference to Exhibit 10.1 to the Company's
            report on Form 8 dated November 9, 1990.

  10.2*     1988 Deferred Compensation Agreement with a Certain Officer.
            Incorporated by reference to Exhibit 10.6 to the Company's report on
            Form 8 dated November 9, 1990.

  10.3*     1991 Long Term Incentive Plan of SL Industries, Inc., as amended, is
            incorporated by reference to Appendix to the Company's Proxy
            Statement for its 1995 Annual Meeting held November 17, 1995,
            previously filed with the Securities and Exchange Commission.

  10.4*     Capital Accumulation Plan. Incorporated by reference to the
            Company's report on Form 10K/A for the fiscal period ended July 31,
            1994.

  10.5*     Change-in-Control Agreement dated May 1, 2001 between the Company
            and James C. Taylor. Incorporated by reference to Exhibit 10.9 to
            the Company's report on Form 10-K for the fiscal year ended December
            31, 2003.

  10.6*     Bonus Agreement dated August 5, 2002 between the Company and James
            C. Taylor. Incorporated by reference to Exhibit 10.10 to the
            Company's report on Form 10-K for the fiscal year ended December 31,
            2003.

  10.7*     Management Agreement dated as of January 23, 2002 between the
            Company and Steel Partners, Ltd. Incorporated by reference to
            Exhibit 10.12 to the Company's report on Form 10-K for the fiscal
            year ended December 31, 2003.

   10.8     Revolving Credit Agreement dated as of August 3, 2005, among Bank of
            America, N.A., as



                                    Page 37




         
            Agent and Lender, SL Industries, Inc., as parent borrower and Cedar
            Corporation, Condor D.C. Power Supplies, Inc., Condor Holdings,
            Inc., RFL Electronics, Inc., SL Auburn, Inc., SL Delaware, Inc., SL
            Surface Technologies, Inc., SL Montevideo Technology, Inc., SLW
            Holdings, Inc., Teal Electronics Corporation and Waber Power Ltd.,
            collectively, as subsidiary borrowers (transmitted herewith).

     14     Code of Conduct and Ethics. Incorporated by reference to Exhibit 14
            to the Company's report on Form 10-K for the fiscal year ended
            December 31, 2003.

     21     Subsidiaries of the Company (transmitted herewith).

     23     Consent of Independent Registered Public Accounting Firm
            (transmitted herewith).

   31.1     Certification by Principal Executive Officer pursuant to Rule
            13a-15(e) or 15(d)-15(e) of the Securities Exchange Act of 1934, as
            amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
            Act of 2002 (transmitted herewith).

   31.2     Certification by Principal Financial Officer pursuant to Rule
            13a-15(e) or 15(d)-15(e) of the Securities and Exchange Act of 1934,
            as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
            Act (transmitted herewith).

     32     Certification by Principal Executive Officer and Principal Financial
            Officer pursuant to Rule 13a or 15d of the Securities Exchange Act
            of 1934, as amended, as adopted pursuant to section 906 of the
            Sarbanes-Oxley Act of 2002 (transmitted herewith).


*    Indicates a management contract or compensatory plan or arrangement.


                                     Page 38


                               SL Industries, Inc.
         Index to Financial Statements and Financial Statement Schedule



                                                                    Page number
                                                                  in this report
                                                                  --------------
                                                               
Report of Independent Registered Public Accounting Firm                 F2
Consolidated Balance Sheets                                             F3
Consolidated Statements of Income                                       F4
Consolidated Statements of Comprehensive Income                         F4
Consolidated Statements of Shareholders' Equity                         F5
Consolidated Statements of Cash Flows                                   F6
Notes to Consolidated Financial Statements                           F7 to F32
Financial Statement Schedule:
II. Valuation and Qualifying Accounts                                   F33



                                       F-1


             Report of Independent Registered Public Accounting Firm
             -------------------------------------------------------

The Board of Directors and Shareholders
SL Industries, Inc.

     We have audited the accompanying consolidated balance sheets of SL
Industries, Inc. and its subsidiaries (the Company) as of December 31, 2005 and
2004 and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2005. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SL Industries, Inc. and its subsidiaries at December 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.

     Our audits were conducted for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. Schedule II, Valuation
and Qualifying Accounts, is presented for purposes of additional analysis and is
not a required part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.


/s/ GRANT THORNTON LLP

Philadelphia, Pennsylvania
March 3, 2006

                                       F-2



Item 1.  Financial Statements

                               SL INDUSTRIES, INC.
                           CONSOLIDATED BALANCE SHEETS



                                                                           December 31,   December 31,
                                                                               2005           2004
                                                                           ------------   ------------
                                                                                    
ASSETS
Current assets:
   Cash and cash equivalents                                               $  9,985,000   $  2,659,000
   Receivables, net                                                          16,436,000     15,734,000
   Inventories, net                                                          14,570,000     15,839,000
   Prepaid expenses                                                             632,000        714,000
   Deferred income taxes, net                                                 2,571,000      3,044,000
                                                                           ------------   ------------
      Total current assets                                                   44,194,000     37,990,000
                                                                           ------------   ------------
Property, plant and equipment, net                                            8,754,000      8,509,000
Deferred income taxes, net                                                    3,409,000      3,280,000
Goodwill                                                                     10,303,000     10,303,000
Investments available for sale                                                  670,000             --
Other intangible assets, net                                                  1,085,000      1,209,000
Other assets and deferred charges                                             1,899,000      1,793,000
                                                                           ------------   ------------
         Total assets                                                      $ 70,314,000   $ 63,084,000
                                                                           ============   ============

LIABILITIES
Current liabilities:
   Debt, current portion                                                   $         --   $    559,000
   Accounts payable                                                           7,648,000      5,626,000
   Accrued income taxes                                                         417,000        962,000
   Accrued liabilities
      Payroll and related costs                                               6,229,000      6,059,000
      Other                                                                   4,093,000      5,288,000
                                                                           ------------   ------------
         Total current liabilities                                           18,387,000     18,494,000
                                                                           ------------   ------------
Debt, less current portion                                                           --      1,456,000
Deferred compensation and supplemental retirement benefits                    3,829,000      3,858,000
Other liabilities                                                             1,453,000      1,589,000
                                                                           ------------   ------------
         Total liabilities                                                   23,669,000     25,397,000
                                                                           ------------   ------------

Commitments and contingencies

SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized, 6,000,000 shares; none issued   $         --   $         --
Common stock, $.20 par value; authorized, 25,000,000 shares;
   issued, 8,298,000 shares                                                   1,660,000      1,660,000
Capital in excess of par value                                               40,136,000     39,210,000
Accumulated other comprehensive income                                           67,000             --
Retained earnings                                                            24,837,000     17,690,000
Treasury stock at cost, 2,701,000 and 2,844,000 shares, respectively        (20,055,000)   (20,873,000)
                                                                           ------------   ------------
         Total shareholders' equity                                          46,645,000     37,687,000
                                                                           ------------   ------------
 Total liabilities and shareholders' equity                                $ 70,314,000   $ 63,084,000
                                                                           ============   ============


See accompanying notes to consolidated financial statements.


                                       F-3


                               SL INDUSTRIES, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                        FOR THE YEARS ENDED DECEMBER 31,



                                                                 2005           2004           2003
                                                             ------------   ------------   ------------
                                                                                  
Net sales                                                    $126,873,000   $118,804,000   $105,284,000
Cost and expenses:
   Cost of products sold                                       81,776,000     75,582,000     66,010,000
   Engineering and product development                          9,367,000      8,951,000      7,856,000
   Selling, general and administrative                         23,546,000     23,829,000     22,614,000
   Depreciation and amortization                                1,986,000      2,133,000      1,851,000
   Asset impairment                                                    --             --        275,000
                                                             ------------   ------------   ------------
Total cost and expenses                                       116,675,000    110,495,000     98,606,000
                                                             ------------   ------------   ------------
Income from operations                                         10,198,000      8,309,000      6,678,000
Other income (expense):
   Amortization of deferred financing costs                      (485,000)      (447,000)      (447,000)
   Interest income                                                216,000        102,000        172,000
   Interest expense                                              (522,000)      (347,000)      (380,000)
                                                             ------------   ------------   ------------
Income from continuing operations before income taxes           9,407,000      7,617,000      6,023,000
Income tax provision                                            1,787,000      1,316,000      2,281,000
                                                             ------------   ------------   ------------
Income from continuing operations                               7,620,000      6,301,000      3,742,000
(Loss) income from discontinued operations (net of tax)          (473,000)     2,371,000     (2,422,000)
                                                             ------------   ------------   ------------
Net income                                                   $  7,147,000   $  8,672,000   $  1,320,000
                                                             ============   ============   ============
BASIC NET INCOME (LOSS) PER COMMON SHARE
   Income from continuing operations                         $       1.37   $       1.10   $       0.63
   (Loss) income from discontinued operations (net of tax)          (0.09)          0.41          (0.41)
                                                             ------------   ------------   ------------
   Net income                                                $       1.29   $       1.51   $       0.22
                                                             ============   ============   ============
                                                                        *
DILUTED NET INCOME (LOSS) PER COMMON SHARE
   Income from continuing operations                         $       1.33   $       1.08   $       0.63
   (Loss) income from discontinued operations (net of tax)          (0.08)          0.40          (0.41)
                                                             ------------   ------------   ------------
   Net income                                                $       1.25   $       1.48   $       0.22
                                                             ============   ============   ============
Shares used in computing basic net income (loss)
   per common share                                             5,544,000      5,760,000      5,917,000
Shares used in computing diluted net income (loss)
   per common share                                             5,738,000      5,871,000      5,956,000


                               SL INDUSTRIES, INC.
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                        FOR THE YEARS ENDED DECEMBER 31,



                                                                      2005         2004          2003
                                                                   ----------   ----------   ----------
                                                                                    
Net income                                                         $7,147,000   $8,672,000   $1,320,000
Other comprehensive income (net of tax):
   Unrealized gain on securities                                       67,000           --           --
                                                                   ----------   ----------   ----------
Comprehensive income                                               $7,214,000   $8,672,000   $1,320,000
                                                                   ==========   ==========   ==========


*    Earnings per share does not total due to rounding.

See accompanying notes to consolidated financial statements.


                                       F-4



                               SL INDUSTRIES, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005


                                                    Common Stock
                                 --------------------------------------------------                                Accumulated
                                         Issued                Held In Treasury       Capital in                      Other
                                 ----------------------   -------------------------    Excess of      Retained    Comprehensive
                                   Shares      Amount       Shares        Amount       Par Value      Earnings    Income (Loss)
                                 ---------   ----------   ----------   ------------   -----------   -----------   -------------
                                                                                             
BALANCE DECEMBER 31, 2002        8,298,000   $1,660,000   (2,398,000)  $(15,195,000)  $38,820,000   $ 7,698,000      $    --
Net income                                                                                            1,320,000
Other, including exercise of
   employee stock options and
   related income tax benefits                                20,000        143,000         6,000
Treasury stock sold                                          171,000      1,070,000        37,000
Treasury stock purchased                                    (149,000)      (978,000)
                                 ---------   ----------   ----------   ------------   -----------   -----------      -------
BALANCE DECEMBER 31, 2003        8,298,000   $1,660,000   (2,356,000)  $(14,960,000)  $38,863,000   $ 9,018,000      $    --
                                 =========   ==========   ==========   ============   ===========   ===========      =======
Net income                                                                                            8,672,000
Other, including exercise of
   employee stock options and
   related income tax benefits                                73,000        497,000       170,000
Treasury stock sold                                           41,000        277,000       177,000
Stock repurchase plan                                       (546,000)    (6,101,000)
Treasury stock purchased                                     (56,000)      (586,000)
                                 ---------   ----------   ----------   ------------   -----------   -----------      -------
BALANCE DECEMBER 31, 2004        8,298,000   $1,660,000   (2,844,000)  $(20,873,000)  $39,210,000   $17,690,000      $    --
                                 =========   ==========   ==========   ============   ===========   ===========      =======
Net income                                                                                            7,147,000
Unrealized gain on securities                                                                                         67,000
Other, including exercise of
   employee stock options and
   related income tax benefits                               136,000      1,005,000       394,000
Treasury stock sold                                           32,000        233,000       532,000
Treasury stock purchased                                     (25,000)      (420,000)
                                 ---------   ----------   ----------   ------------   -----------   -----------      -------
BALANCE DECEMBER 31, 2005        8,298,000   $1,660,000   (2,701,000)  $(20,055,000)  $40,136,000   $24,837,000      $67,000
                                 =========   ==========   ==========   ============   ===========   ===========      =======


See accompanying notes to consolidated financial statements.


                                       F-5



                               SL INDUSTRIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE YEARS ENDED DECEMBER 31,



                                                                               2005         2004 *        2003 *
                                                                           -----------   -----------   ------------
                                                                                              
OPERATING ACTIVITIES:
   Net income                                                              $ 7,147,000   $ 8,672,000   $  1,320,000
      Add: losses (less: income) from discontinued operations                  473,000    (2,371,000)     2,422,000
                                                                           -----------   -----------   ------------
   Income from continuing operations                                         7,620,000     6,301,000      3,742,000
   Adjustments to reconcile income from continuing operations
      to net cash provided by operating activities:
      Depreciation                                                           1,605,000     1,848,000      1,654,000
      Amortization                                                             381,000       285,000        197,000
      Amortization of deferred financing costs                                 485,000       447,000        447,000
      Asset impairment                                                              --            --        275,000
      Non-cash compensation expense                                            268,000       959,000        309,000
      Provisions for losses on accounts receivable                              72,000       136,000         23,000
      Cash surrender value of life insurance policies                          (26,000)      (17,000)        21,000
      Deferred compensation and supplemental retirement benefits               510,000       348,000        458,000
      Deferred compensation and supplemental retirement benefit payments      (529,000)     (502,000)      (545,000)
      Deferred income taxes                                                    107,000      (651,000)     2,122,000
      Loss on sales of equipment                                                12,000         3,000          9,000
      Changes in operating assets and liabilities, excluding effects of
         business dispositions:
         Accounts receivable                                                  (731,000)   (2,714,000)     4,366,000
         Inventories                                                         1,269,000    (4,830,000)     2,711,000
         Prepaid expenses                                                      533,000       353,000       (410,000)
         Other assets                                                         (580,000)     (512,000)      (346,000)
         Accounts payable                                                    2,026,000     1,921,000     (1,508,000)
         Other accrued liabilities                                          (1,487,000)     (137,000)    (2,249,000)
         Accrued income taxes                                                 (327,000)    1,305,000     (1,312,000)
                                                                           -----------   -----------   ------------
   Net cash provided by operating activities from continuing operations     11,208,000     4,543,000      9,964,000
   Net cash (used in) provided by operating activities from discontinued
      operations                                                              (417,000)    1,851,000     (1,410,000)
                                                                           -----------   -----------   ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                   10,791,000     6,394,000      8,554,000
                                                                           -----------   -----------   ------------
INVESTING ACTIVITIES:
   Purchases of property, plant and equipment                               (1,904,000)   (1,642,000)    (1,616,000)
   Purchases of investments available for sale                                (567,000)           --             --
   Purchases of other assets                                                  (465,000)           --             --
   Proceeds from sale of subsidiary (cash and notes receivable)                     --     1,000,000      7,600,000
   Proceeds from sale of equipment                                                  --         9,000             --
   Proceeds from notes receivable                                                   --            --          2,000
                                                                           -----------   -----------   ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES                         (2,936,000)     (633,000)     5,986,000
                                                                           -----------   -----------   ------------
FINANCING ACTIVITIES:
   Payments of deferred financing costs                                       (258,000)           --       (201,000)
   Payments of term loans                                                   (2,015,000)     (887,000)      (616,000)
   Proceeds from stock options exercised                                     1,399,000       517,000        149,000
   Treasury stock sales (purchases), net                                       345,000    (6,233,000)       129,000
   Net proceeds from Senior Credit Facility                                         --            --      3,518,000
   Payments to Revolving Credit Facility                                            --            --    (17,557,000)
                                                                           -----------   -----------   ------------
NET CASH USED IN FINANCING ACTIVITIES                                         (529,000)   (6,603,000)   (14,578,000)
                                                                           -----------   -----------   ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS                                      7,326,000      (842,000)       (38,000)
                                                                           -----------   -----------   ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                             2,659,000     3,501,000      3,539,000
                                                                           -----------   -----------   ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                 $ 9,985,000   $ 2,659,000   $  3,501,000
                                                                           ===========   ===========   ============


*    Revised from prior presentation (see Note 1).

See accompanying notes to consolidated financial statements.


                                       F-6



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BACKGROUND: SL Industries, Inc. (the "Company"), a New Jersey corporation,
through its subsidiaries, designs, manufactures and markets power electronics,
motion control, power protection, and specialized communication equipment that
is used in a variety of medical, aerospace, computer, datacom, industrial,
telecom, transportation and electric power utility equipment applications. Its
products are incorporated into larger systems to increase operating safety,
reliability and efficiency. The Company's products are largely sold to original
equipment manufacturers, the electric utility industry, and, to a lesser extent,
commercial distributors. The Company's customer base is primarily located in the
United States.

BASIS OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.

CASH FLOW REVISION: In 2005, the Company has separately disclosed cash flows
attributable to discontinued operations (all of which are operating activities),
which in the prior periods were reported on a combined basis as a single amount
outside of operating, investing and financing activities. The Company had no
cash flows attributable to discontinued operations related to investing and
financing activities for all periods presented.

RECLASSIFICATIONS: Reclassifications, when applicable, are made to the prior
year consolidated financial statements to conform with the current year
presentation.

CASH EQUIVALENTS: The Company considers all highly liquid debt instruments with
an original maturity date of three months or less and investments in money
market accounts to be cash equivalents. At December 31, 2005 and December 31,
2004, cash and cash equivalents are held principally at one financial
institution.

REVENUE RECOGNITION: Revenue is recognized when persuasive evidence of an
arrangement exists, when title and risk of ownership passes, the sales price is
fixed or determined and collectibility is probable. Generally, those criteria
are met at the time the product is shipped. Provisions are made at the time the
related revenue is recognized for product returns, product warranties, rebates,
certain stock scrap programs with distributors and other sales incentives
offered by the Company to its customers. Freight revenues billed to customers
are included in net sales and expenses for shipping products are included in
cost of sales.

ACCOUNTS RECEIVABLE: The Company's accounts receivable primarily consist of
trade receivables and are reported net of allowances for doubtful accounts of
approximately $569,000 and $472,000 for 2005 and 2004, respectively. The
Company's estimate for the allowance for doubtful accounts related to trade
receivables is based on two methods. The amounts calculated from each of these
methods are combined to determine the total amount reserved. First, the Company
evaluates specific accounts where it has information that the customer may have
an inability to meet its financial obligations (bankruptcy, etc.). In these
cases, the Company uses its judgment, based on the best available facts and
circumstances, and


                                       F-7



records a specific reserve for that customer against amounts due to reduce the
receivable to the amount that is expected to be collected. These specific
reserves are reevaluated and adjusted as additional information is received that
impacts the amount reserved. Second, a general reserve is established for all
customers based on several factors, including historical write-offs as a
percentage of sales and anticipated returns related to customer receivables. If
circumstances change (e.g., higher than expected defaults or an unexpected
material adverse change in a major customer's ability to meet its financial
obligation), the Company's estimates of the recoverability of amounts due could
be reduced by a material amount.

INVENTORIES: Inventories are valued at the lower of cost or market. Cost is
primarily determined using the first-in, first-out ("FIFO") method. Cost for
certain inventories is determined using the last-in, first-out ("LIFO") method.
The Company ensures inventory is valued at the lower of cost or market, and
continually reviews the book value of discontinued product lines to determine if
these items are properly valued. The Company identifies these items and assesses
the ability to dispose of them at a price greater than cost. If it is determined
that cost is less than market value, then cost is used for inventory valuation.
If market value is less than cost, then related inventory is set to that value.
If a write down to the current market value is necessary, the market value
cannot be greater than the net realizable value, defined as selling price less
costs to complete and dispose and cannot be lower than the net realizable value
less a normal profit margin. The Company also continually evaluates the
composition of its inventory and identifies slow-moving and excess inventories.
Inventory items identified as slow-moving or excess are evaluated to determine
if reserves are required. If the Company is not able to achieve its expectations
of the net realizable value of the inventory at current value, it would adjust
its reserves accordingly.

PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are carried at cost
and include expenditures for new facilities and major renewals and betterments.
Maintenance, repairs and minor renewals are charged to expense as incurred. When
assets are sold or otherwise disposed of, any gain or loss is recognized
currently. Depreciation is provided primarily using the straight-line method
over the estimated useful lives of the assets, which range from 25 to 40 years
for buildings, 3 to 15 years for equipment and other property, and the lease
term for leasehold improvements.

GOODWILL AND OTHER INTANGIBLES: In June 2001, FASB issued Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"), which requires that goodwill and certain other intangible assets having
indefinite lives will no longer be amortized to earnings, but instead be subject
to periodic testing for impairment. Intangible assets determined to have
definitive lives will continue to be amortized over their estimated useful
lives.

LONG-LIVED ASSETS: As of January 1, 2002, the Company adopted Statement of
Financial Accounting Standard No. 144 ("SFAS No. 144"), "Accounting for the
Impairment or Disposal of Long Lived Assets" ("SFAS No. 144"), which supersedes
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of."
Accordingly, whenever events or circumstances indicate that the carrying amount
of an asset may not be recoverable, the Company assesses the recoverability of
the asset either by estimated cash flows or independent appraisals.

ENVIRONMENTAL EXPENDITURES: Environmental expenditures that relate to current
operations are charged to expense or capitalized, as appropriate. Environmental
expenditures that relate to former business units are reported as part of
discontinued operations. Liabilities are recorded when remedial efforts are


                                       F-8



probable and the costs can be reasonably estimated. The liability for
remediation expenditures includes elements of costs such as site investigations,
consultants' fees, feasibility studies, outside contractor expenses and
monitoring expenses. Estimates are not discounted, nor are they reduced by
potential claims for recovery from the Company's insurance carriers. The
liability is periodically reviewed and adjusted to reflect current remediation
progress, prospective estimates of required activity and other relevant factors
including changes in technology or regulations.

DEBT ISSUANCE COSTS: Costs incurred in securing long-term debt are deferred and
amortized over the term of the related debt.

PRODUCT WARRANTY COSTS: The Company offers various warranties on its products.
The Company provides for its estimated future warranty obligations in the period
in which the related sale is recognized primarily based on historical
experience. For 2005, 2004 and 2003, these expenses were $273,000, $326,000 and
$423,000, respectively.

ADVERTISING COSTS: Advertising costs are expensed as incurred. For 2005, 2004
and 2003, these costs were $289,000, $268,000 and $296,000, respectively.

RESEARCH AND DEVELOPMENT COSTS: Research and development costs are expensed as
incurred. For 2005, 2004 and 2003, these costs were $3,319,000, $3,811,000 and
$2,659,000, respectively.

INCOME TAXES: The Company utilizes the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities.

FOREIGN CURRENCY CONVERSION: The Company's Mexican subsidiaries' functional
currency is U.S. dollars. Conversion gains or losses resulting from these
foreign currency transactions are included in the accompanying consolidated
statements of income.

USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant areas which require the use of management estimates relate to
product warranty costs, accrued liabilities related to litigation, allowance for
doubtful accounts, allowance for inventory obsolescence and environmental costs.

NET INCOME PER COMMON SHARE: The Company has presented net income per common
share pursuant to Financial Accounting Standards Board Statement of Financial
Accounting Standard No. 128, "Earnings per Share." Basic net income per common
share is computed by dividing reported net income available to common
shareholders by the weighted average number of shares outstanding for the
period. Diluted net income per common share is computed by dividing reported net
income available to common shareholders by the weighted average shares
outstanding for the period, adjusted for the dilutive effect of common stock
equivalents, which consist of stock options, using the treasury stock method.


                                       F-9


The table below sets forth the computation of basic and diluted net income per
share:



                                        Net Income   Shares   Per Share Amount
                                        ----------   ------   ----------------
                                               (in thousands, except per
                                                    share amounts)
                                                     
For the Year Ended December 31, 2005:
Basic net income per common share         $7,147      5,544        $ 1.29
Effect of dilutive securities                 --        194         (0.04)
                                          ------      -----        ------
Diluted net income per common share       $7,147      5,738        $ 1.25
                                          ======      =====        ======

For the Year Ended December 31, 2004:
Basic net income per common share         $8,672      5,760        $ 1.51
Effect of dilutive securities                 --        111         (0.03)
                                          ------      -----        ------
Diluted net income per common share       $8,672      5,871        $ 1.48
                                          ======      =====        ======

For the Year Ended December 31, 2003:
Basic net income per common share         $1,320      5,917        $ 0.22
Effect of dilutive securities                 --         39            --
                                          ------      -----        ------
Diluted net income per common share       $1,320      5,956        $ 0.22
                                          ======      =====        ======


For the years ended December 31, 2005 and December 31, 2004, 6,000 and 437,000
stock options were excluded from the dilutive computations because the option
exercise prices were greater than the average market price of the Company's
common stock.

STOCK BASED COMPENSATION: In December 2002, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 148, "Accounting for Stock Based
Compensation-Transition and Disclosure" ("SFAS No. 148"), an amendment of SFAS
No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 148
provides alternative methods for a voluntary change to the fair value method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS No. 123. The Company has elected to continue to account for
its stock-based employee compensation plans under Accounting Principals Board
Opinion 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and
related interpretations. The following disclosures are provided in accordance
with SFAS No. 148.

As permitted by the FASB, the Company has elected to follow APB No. 25 and
related interpretations in accounting for its stock option plans. Under APB
Opinion No. 25, compensation expense is measured as the excess, if any, of the
fair value of the Company's common stock at the date of the grant over the
amount a grantee must pay to acquire the stock. The Company's stock option plans
enable the Company to grant options with an exercise price not less than the
fair value of the Company's common stock at the date of the grant. However, the
Company has recognized approximately $268,000 and $809,000 in the years ended
December 31, 2005 and December 31, 2004, respectively, in compensation expense
related to certain stock based compensation arrangements.

The exercise price of all stock options generally equals the market price of the
Company's common stock on the date of grant. Compensation cost has been
recognized for the Company's stock option plans as noted in the table below. Had
compensation cost for the Company's stock option plans been


                                      F-10



determined based upon the fair value at the grant date for awards under these
plans, consistent with the methodology prescribed under SFAS No. 123, the
Company's net income and net income per common share would have been as follows:



                                                      Years Ended December 31,
                                                      ------------------------
                                                       2005     2004     2003
                                                      ------   ------   ------
                                                        (in thousands, except
                                                         per share amounts)
                                                               
Net income, as reported                               $7,147   $8,672   $1,320
Add: Stock-based employee compensation
   expense included in reported net income,
   net of related tax effects                            170      534      186
                                                      ------   ------   ------
                                                       7,317    9,206    1,506
Deduct: Total stock-based employee
   compensation expense determined under
   fair value based method for awards granted,
   modified, or settled, net of related tax effects     (280)    (761)    (752)
                                                      ------   ------   ------
Pro forma net income                                  $7,037   $8,445   $  754
                                                      ======   ======   ======

Earnings per common share:
Basic - as reported                                   $ 1.29   $ 1.51   $ 0.22
Basic - pro forma                                     $ 1.27   $ 1.47   $ 0.13

Diluted - as reported                                 $ 1.25   $ 1.48   $ 0.22
Diluted - pro forma                                   $ 1.23   $ 1.44   $ 0.13
                                                      ======   ======   ======


The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:



                                                     Years Ended December 31,
                                                   ---------------------------
                                                     2005      2004      2003
                                                   -------   -------   -------
                                                              
Expected dividend yield                                  0%        0%        0%
Expected stock price volatility                      36.87%    46.73%    66.18%
Risk-free interest rate                               4.35%     2.81%     2.69%
Expected life of stock option                      5 years   5 years   5 years
                                                   =======   =======   =======


In December 2004, the FASB issued Statement of Financial Standards No. 123
(revised 2004), "Share-Based Payment" ("SFAS No. 123R"), requiring all
share-based payments to employees, including grants of employee stock options to
be recognized as compensation expense in the financial statements based on their
fair values. The Securities and Exchange Commission ("SEC") has specified that
this standard is to be effective for annual periods beginning after June 15,
2005, the Company's first quarter in fiscal 2006 and includes two transition
methods. The Company will use the "modified prospective method" upon adoption
and therefore not restate prior period results. Under the modified prospective
method, awards granted, modified, or settled after the date of adoption should
be measured and accounted for in accordance with SFAS No. 123R. Unvested
equity-classified awards that were granted prior to the effective date should
continue to be accounted for in accordance with SFAS 123 except that amounts
must be recognized in the consolidated statements of income. All of the
Company's stock option plans have expired and are fully vested at December 31,
2005 (See Note 14). During the year, the Company did issue 25,000 options to a
recently hired executive of the Company in accordance with the rules and
regulations of the SEC. These options are 25% vested at December 31, 2005 and
are subject to the


                                      F-11



provisions of SFAS No. 123R. The Company has not accelerated or modified the
existing stock option plans to eliminate the recording of stock option expense
as required by SFAS No. 123R.

The unrecognized compensation expense associated with unvested stock options was
approximately $170,000 as of December 31, 2005, which will be amortized over an
average period of approximately three years. The Company's 2006 fiscal results
are expected to include approximately $66,000 of additional compensation expense
as a result of the adoption of SFAS No. 123R.

RECENT ACCOUNTING PRONOUNCEMENTS: In December 2004, the FASB issued Statement of
Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment"
("SFAS 123R"). SFAS 123R is a revision of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
implementation guidance. SFAS 123R establishes standards for the accounting of
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. SFAS 123R focuses primarily on accounting for transactions
in which an entity obtains employee services in share-based payment
transactions. SFAS 123R requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant date fair value of the award (with limited exceptions). That cost will be
recognized over the period during which an employee is required to provide
service in exchange for the award. The provisions of SFAS 123R were to be
effective for public entities that do not file as small business issuers as of
the beginning of the first interim or annual reporting period that begins after
June 15, 2005. On April 14, 2005, the SEC adopted a new rule that amends the
compliance dates for SFAS 123R. The new rule allows companies to implement SFAS
123R at the beginning of their next fiscal year, which for the Company would be
for the period ended March 31, 2006. The Company will experience a negative
impact on its financial position and results of operations by the first quarter
of 2006 as a consequence of adopting the grant date fair value provisions of the
statement. Also the effects of adopting this standard will depend on the
Company's future stock option activity and terms of options granted.

NOTE 2. DISCONTINUED OPERATIONS

SL WABER, INC.

Effective August 27, 2001, substantially all of the assets of SL Waber, Inc.
("SL Waber") and the stock of Waber de Mexico S.A. de C.V. was sold for
approximately $1,053,000. As part of this transaction, the purchaser acquired
the rights to the SL Waber name and assumed certain liabilities and obligations
of SL Waber. Subsequent to the sale, the Company changed the name of SL Waber to
SLW Holdings, Inc. ("SLW Holdings"). The net income or losses of this subsidiary
are included in the consolidated statements of income under discontinued
operations for all periods presented.

ELEKTRO-METALL EXPORT GMBH

On January 6, 2003, the Company sold its wholly-owned, indirect German
subsidiary, Elektro-Metall Export GmbH ("EME"). EME was a producer of electronic
actuation devices and cable harness systems sold to original equipment
manufacturers in the aerospace and automotive industries. Its operations are
located in Ingolstadt, Germany and Paks, Hungary. In consideration for 100% of
the issued and outstanding capital stock of EME, the purchaser paid $8,000,000,
consisting of cash of $4,000,000 paid at closing and $4,000,000 of purchaser
notes. In addition, EME made a distribution of $2,000,000 to the


                                      F-12


Company prior to closing. The purchaser notes were comprised of a $3,000,000
secured note that bore interest at the prime rate plus 2%, which was paid on
March 14, 2003, and a $1,000,000 unsecured note that bore interest at an annual
rate of 12%, which was paid on April 2, 2004. The net income or losses of this
subsidiary are included in the consolidated statements of income under
discontinued operations for all periods presented.

SL SURFACE TECHNOLOGIES, INC.

SL Surface Technologies, Inc. ("SurfTech") produced industrial coatings and
platings for equipment in the corrugated paper and telecommunications
industries. On November 24, 2003, the Company sold the operating assets of
SurfTech. The sale included current assets and equipment used by SurfTech. The
purchaser paid $600,000 in cash, plus the assumption of certain liabilities. The
Company continues to own the land and building on which SurfTech's operations
were conducted, and has entered into a ten-year lease with the buyer. As a
result of the sale, the Company recorded an after tax loss of $442,000, which
included severance, closing costs and a required contribution to a union pension
plan discussed more fully below. In addition, as a result of the sale, the
Company had reclassified a $428,000 asset impairment charge related to
SurfTech's assets as part of discontinued operations.

SurfTech had made contributions, based on rates per hour, as specified in two
union agreements, to two union-administered defined benefit multi-employer
pension plans. Under the multi-employer Pension Plan Amendments Act of 1980, an
employer is liable upon withdrawal from or termination of a multi-employer plan
for its proportionate share of the plan's unfunded vested benefits liability.
During 2003 the Company withdrew from both plans and recorded a total charge of
$684,000 regarding the Company's withdrawal from the two plans.

Revenue and income before income taxes from the discontinued operations of
SurfTech (exclusive of the loss on the sale of net assets) were as follows:



                                                                   Year Ended
                                                               December 31, 2003
                                                               -----------------
                                                                 (in thousands)
                                                            
Revenues                                                            $ 1,840
Net loss before income taxes                                        $(2,941)
                                                                    =======


NOTE 3. INCOME TAXES

Income tax (benefit) provision for the years ended December 31, 2005, 2004 and
2003 is as follows:



                                                               Years Ended December 31,
                                                              -------------------------
                                                               2005     2004      2003
                                                              ------   ------   -------
                                                                    (in thousands)
                                                                       
Income tax from continuing operations                         $1,787   $1,316   $ 2,281
Income tax (benefit) provision from discontinued operations     (295)     892    (1,097)
                                                              ------   ------   -------
                                                              $1,492   $2,208   $ 1,184
                                                              ======   ======   =======



                                      F-13



Income from continuing operations before provision for income taxes consists of
the following:



                                                        Years Ended December 31,
                                                        ------------------------
                                                         2005     2004     2003
                                                        ------   ------   ------
                                                             (in thousands)
                                                                 
U.S.                                                    $9,378   $7,504   $5,724
Non-U.S.                                                    29      113      299
                                                        ------   ------   ------
                                                        $9,407   $7,617   $6,023
                                                        ======   ======   ======


The provision (benefit) for income taxes from continuing operations consists of
the following:



                                                        Years Ended December 31,
                                                        ------------------------
                                                         2005     2004     2003
                                                        ------   ------   ------
                                                             (in thousands)
                                                                 
Current:
   Federal                                              $1,276   $1,367   $   32
   International                                           152      110      144
   State                                                   121      (24)     158
Deferred:
   Federal                                                  10       (5)   1,576
   State                                                   228     (132)     371
                                                        ------   ------   ------
                                                        $1,787   $1,316   $2,281
                                                        ======   ======   ======


The benefit for income taxes related to discontinued operations for 2005 was
$295,000. The income tax provision related to discontinued operations for 2004
was $892,000, and a benefit of $1,097,000 was recorded for 2003.

Significant components of the Company's deferred tax assets and liabilities as
of December 31, 2005 and December 31, 2004 are as follows:


                                      F-14





                                                                  December 31,
                                                               -----------------
                                                                 2005      2004
                                                               -------   -------
                                                                 (in thousands)
                                                                   
Deferred tax assets:
   Deferred compensation                                       $ 1,683   $ 1,646
   Inventory valuation                                             531       759
   Tax loss carryforwards                                        1,871     1,837
   Foreign tax credit carryforwards                              1,113       564
   R&D tax credit carryforwards                                  2,707     2,856
   Other                                                         1,479     1,364
                                                               -------   -------
                                                                 9,384     9,026
                                                               -------   -------
Less: valuation allowance                                       (3,572)   (3,267)
                                                               -------   -------
                                                                 5,812     5,759
                                                               -------   -------
Deferred tax liabilities:
   Accelerated depreciation and amortization                       954       663
                                                               -------   -------
                                                                 4,858     5,096
                                                               -------   -------
Assets & liabilities related to discontinued operations, net     1,122     1,228
                                                               -------   -------
                                                               $ 5,980   $ 6,324
                                                               =======   =======


As of December 31, 2005 and December 31, 2004, the Company's gross foreign tax
credits totaled approximately $1,113,000 and $564,000, respectively. These
credits can be carried forward for ten years and expire between 2009 and 2015.

As of December 31, 2005 and December 31, 2004, the Company's research and
development tax credits totaled approximately $2,707,000 and $2,856,000. Of
these credits approximately $2,196,000 can be carried forward for fifteen years
and expire between 2013 and 2020, while $511,000 will carry over indefinitely.

The Company has assessed its past earnings history and trends, sales backlog,
budgeted sales, and expiration dates of tax carryforwards and has determined
that it is more likely than not that the $5,980,000 of the net deferred tax
assets as of December 31, 2005 will be realized. The Company has an allowance of
$3,572,000 provided against the gross deferred tax asset, relating primarily to
research and development tax credits and state net operating loss carryforwards.


                                      F-15


The following is a reconciliation of income tax expense (benefit) related to
continuing operations at the applicable federal statutory rate and the effective
rates:



                                                                    Years Ended December 31,
                                                                    ------------------------
                                                                       2005   2004   2003
                                                                       ----   ----   ----
                                                                            
Statutory rate                                                          34%    34%    34%
Tax rate differential on foreign sales
   corporation/extraterritorial income exclusion benefit earnings       (1)    (2)    (2)
International rate differences                                           2      1      1
State income taxes, net of federal income tax                            4      5      5
Foreign tax credits                                                    (11)    (2)    --
Research and development credits                                        (5)   (17)    --
Other                                                                   (4)    (2)    --
                                                                       ---    ---    ---
                                                                        19%    17%    38%
                                                                       ===    ===    ===


NOTE 4. RECEIVABLES

Receivables consist of the following:



                                                                          December 31,
                                                                       -----------------
                                                                         2005      2004
                                                                       -------   -------
                                                                         (in thousands)
                                                                           
Trade receivables                                                      $16,638   $15,771
Less: allowance for doubtful accounts                                     (569)     (472)
                                                                       -------   -------
                                                                        16,069    15,299
Recoverable income taxes                                                     2        82
Other                                                                      365       353
                                                                       -------   -------
                                                                       $16,436   $15,734
                                                                       =======   =======


NOTE 5. CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with high credit
quality financial institutions. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers comprising
the Company's customer base, and their dispersion across many industries and
geographic regions.


                                      F-16



NOTE 6. INVENTORIES

Inventories consist of the following:



                                            December 31,
                                         -----------------
                                           2005      2004
                                         -------   -------
                                           (in thousands)
                                             
Raw materials                            $ 9,774   $ 9,669
Work in process                            4,699     5,000
Finished goods                             1,926     3,633
                                         -------   -------
                                          16,399    18,302
Less: allowances                          (1,829)   (2,463)
                                         -------   -------
                                         $14,570   $15,839
                                         =======   =======


The above includes certain inventories which are valued using the LIFO method,
which aggregated $4,746,000 and $3,832,000 as of December 31, 2005 and December
31, 2004, respectively. The excess of FIFO cost over LIFO cost as of December
31, 2005 and December 31, 2004 was approximately $502,000 and $565,000,
respectively.

NOTE 7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:



                                           December 31,
                                       -------------------
                                         2005       2004
                                       --------   --------
                                            
                                          (in thousands)
Land                                   $  1,170   $  1,170
Buildings and leasehold improvements      6,956      6,834
Equipment and other property             18,585     17,013
                                       --------   --------
                                         26,711     25,017
Less: accumulated depreciation          (17,957)   (16,508)
                                       --------   --------
                                       $  8,754   $  8,509
                                       ========   ========


NOTE 8. INVESTMENTS AVAILABLE FOR SALE

Investments available for sale consist of the Company's equity ownership in Ault
Incorporated ("Ault"), a publicly traded company. The Company's investment in
Ault is accounted for as an available for sale security in accordance with the
provisions of Financial Accounting Standards No.115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). The investment, which
has a cost basis of $567,000, is carried at fair value determined by currently
available market prices. The unrealized gain, net of tax, in the amount of
$67,000, is reported in accumulated other comprehensive income as a component of
shareholders' equity until realized. At December 31, 2005, the Company owned
approximately 234,000 shares of Ault, which were purchased in the open market.
(See Note 19 Subsequent Events for further discussion of Ault securities).


                                      F-17


NOTE 9. GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consist of the following:



                                           December 31, 2005                       December 31, 2004
                                --------------------------------------   --------------------------------------
                                               Accumulated                              Accumulated
                                Gross Value   Amortization   Net Value   Gross Value   Amortization   Net Value
                                -----------   ------------   ---------   -----------   ------------   ---------
                                                                 (in thousands)
                                                                                    
Goodwill                          $10,303         $ --        $10,303      $10,303        $   --       $10,303
                                  -------         ----        -------      -------        ------       -------
Other intangible assets:
   Patents                            919          723            196          946           666           280
   Covenant not to compete             --           --             --          110           110            --
   Trademarks                         572           --            572          572            --           572
   Licensing fees                     355           53            302          355            18           337
   Other                               51           36             15          437           417            20
                                  -------         ----        -------      -------        ------       -------
Total other intangible assets       1,897          812          1,085        2,420         1,211         1,209
                                  -------         ----        -------      -------        ------       -------
                                  $12,200         $812        $11,388      $12,723        $1,211       $11,512
                                  =======         ====        =======      =======        ======       =======


The Company conducted its initial test for impairment of goodwill and other
intangible assets in the second quarter of 2002. The Company allocated its
adjusted goodwill balance to its reporting units and conducted the transitional
impairment tests required by SFAS No. 142. The fair values of the reporting
units were estimated using a combination of the expected present values of
future cash flows and an assessment of comparable market values. No impairment
charges were recorded as a result of the initial impairment test. There were no
impairment charges related to goodwill and intangible assets recorded during
2005, 2004 and 2003.

The other intangible assets that have definite lives are all amortizable and
have original estimated useful lives as follows: patents are amortized over
approximately 13 years, licensing fees over approximately 10 years and
trademarks are not amortized. Amortization expense for intangible assets subject
to amortization in each of the next five fiscal years is estimated to be
approximately $111,000 for the next two years, $66,000 in the third year and
$39,000 in the fourth and fifth years.

Amortization expense related to intangible assets for 2005, 2004 and 2003 was
$112,000, $126,000 and $113,000, respectively. Intangible assets subject to
amortization have a weighted average life of approximately 11 years.


                                      F-18



NOTE 10. DEBT

Debt consists of the following:



                          December 31,
                         --------------
                          2005    2004
                          ----   ------
                         (in thousands)
                           
Term loan A                $--   $1,600
Term loan B                 --      415
                           ---   ------
                            --    2,015
Less: current portion       --     (559)
                           ---   ------
Total long-term debt       $--   $1,456
                           ===   ======


During 2005 until August 2, 2005, the Company was a party to a three-year senior
secured credit facility (the "Senior Credit Facility") with LaSalle Business
Credit LLC. The Senior Credit Facility provided for a revolving loan and two
term loans up to a maximum indebtedness of $20,000,000. The revolving loan of up
to $16,810,000 was based upon eligible receivables and inventory, as well as an
overadvance amount of $1,500,000. The overadvance amount was fully paid down on
April 7, 2004. The two term loans of $2,350,000 and $840,000 were to be paid
down over a three-year term. The Senior Credit Facility restricted investments,
acquisitions, capital expenditures and dividends. The Senior Credit Facility
also contained financial covenants relating to minimum levels of net worth,
fixed charge coverages, levels of earnings before interest, taxes, depreciation
and amortization and maximum levels of capital expenditures, as defined.

The Company's Senior Credit Facility bore interest ranging from the prime rate
plus fifty basis points to the prime rate plus 2%. The Senior Credit Facility
was secured by all of the Company's assets. The Senior Credit Facility also
provided for certain reserves for outstanding letters of credit and other
contingencies. These reserves reduced the Company's availability under the
revolving loan portion of the Senior Credit Facility. In July 2005, the Company
received a waiver related to the reserves for other contingencies. This waiver
reduced the Company's reserve requirement by $3,000,000. The Senior Credit
Facility was set to expire on January 6, 2006. The outstanding term loan
balances bore interest at an annual rate of 6.75%.

On August 2, 2005, the Company paid the outstanding term loan balances under its
existing Senior Credit Facility in the amount of $1,641,000. The Company also
paid legal and early termination fees of $212,000. These payments were made from
the Company's available funds. Also the Company wrote off approximately $189,000
of the remaining deferred financing costs related to the Senior Credit Facility.

On August 3, 2005, the Company entered into a revolving credit facility (the
"Revolving Credit Facility") with Bank of America, N.A. ("Bank of America") to
replace its Senior Credit Facility. The Revolving Credit Facility (with a
standby and commercial letter of credit sub-limit of $5,000,000) provides for
borrowings up to $25,000,000 and under certain circumstances maximum borrowings
of $30,000,000. The Revolving Credit Facility expires on June 30, 2008.
Borrowings under the Revolving Credit Facility bear interest, at the Company's
option, at the London interbank offering rate ("LIBOR") plus a margin rate
ranging from 0.9% to 1.9%, or the higher of a Base Rate plus a margin rate
ranging


                                      F-19


from 0% to 0.5%. The Base Rate is equal to the higher of (i) the Federal Funds
Rate plus 0.5%, or (ii) Bank of America's publicly announced prime rate. The
margin rates are based on certain leverage ratios, as defined. The Company is
subject to compliance with certain financial covenants set forth in the
Revolving Credit Facility, including but not limited to, capital expenditures,
consolidated net worth, and certain interest and leverage ratios, as defined. As
of December 31, 2005, the Company did not have any outstanding balances under
its Revolving Credit Facility.

The weighted average interest rate on borrowings during 2005 and 2004 was 6.33%
and 4.99%, respectively.

NOTE 11. ACCRUED LIABILITIES - OTHER

Accrued liabilities - other consist of the following:



                                                       December 31,
                                                     ---------------
                                                      2005     2004
                                                     ------   ------
                                                      (in thousands)
                                                        
Taxes (other than income) and insurance              $  483   $  805
Commissions                                             451      482
Accrued litigation and legal fees                       558    1,190
Other professional fees                                 484      689
Environmental                                         1,220    1,275
Warranty                                                851      921
Other                                                   973      915
Reclassified to other long-term liabilities            (927)    (989)
                                                     ------   ------
                                                     $4,093   $5,288
                                                     ======   ======


Included in the environmental accrual are estimates for all known costs believed
to be probable for sites, which the Company currently operates or had operated
at one time and which are explained more fully under Environmental (Note 13).

A summary of the Company's warranty reserve for 2005 and 2004 is as follows:



                                                        December 31,
                                                      --------------
                                                        2005    2004
                                                       -----   -----
                                                      (in thousands)
                                                         
Liability, beginning of year                           $ 921   $ 915
Expense for new warranties issued                        434     330
Expense related to accrual revisions for prior year     (161)     (4)
Warranty claims paid                                    (343)   (320)
                                                       -----   -----
Liability, end of period                               $ 851   $ 921
                                                       =====   =====



                                      F-20



NOTE 12. RETIREMENT PLANS AND DEFERRED COMPENSATION

The Company maintains three noncontributory, defined contribution pension plans
covering all of its full-time, US employees. The Company's contributions to
these plans are based on a percentage of employee contributions and/or plan year
gross wages, as defined. The Company's subsidiaries: Teal Electronics Corp.
("Teal"), Condor D.C. Power Supplies, Inc. ("Condor") and SL-Montevideo
Technology, Inc. ("SL-MTI"), as well as the corporate office provide
contributions to their plans based on a percentage of employee contributions.
Condor, SL-MTI and the corporate office also provide profit sharing
contributions annually, based on plan year gross wages, as does another
subsidiary, RFL Electronics Inc. ("RFL"). Costs incurred under these plans
during 2005, 2004 and 2003 amounted to approximately $1,049,000, $976,000 and
$1,131,000, respectively.

The Company has agreements with certain active and retired directors, officers
and key employees providing for supplemental retirement benefits. The liability
for supplemental retirement benefits is based on the most recent mortality
tables available and discount rates of 6% to 12%. The amount charged to income
in connection with these agreements amounted to $422,000, $358,000 and $411,000,
for 2005, 2004 and 2003, respectively.

The Company is the owner and beneficiary of life insurance policies on the lives
of some of the participants having a deferred compensation or supplemental
retirement agreement. As of December 31, 2005, the aggregate death benefit
totaled $586,000, with the corresponding cash surrender value of all policies
totaling $297,000.

As of December 31, 2005, certain agreements may restrict the Company from
utilizing cash surrender value of certain life insurance policies totaling
approximately $297,000 for purposes other than the satisfaction of the specific
underlying deferred compensation agreements, if benefits are not paid by the
Company. The Company nets the dividends realized from the life insurance
policies with premium expenses. Net expenses recorded in connection with these
policies amounted to $17,000, $9,000 and $0 for 2005, 2004 and 2003,
respectively.

NOTE 13. COMMITMENTS AND CONTINGENCIES

The Company leases certain facilities, equipment and vehicles from third parties
that expire through 2011. The minimum rental commitments as of December 31, 2005
are as follows:



                          Operating   Capital
                          ---------   -------
                             (in thousands)
                                
2006                        $1,157     $ 66
2007                           506       14
2008                           193       --
2009                           126       --
2010                           110       --
Thereafter                      94       --
                            ------     ----
Total minimum payments      $2,186     $ 80
                            ------     ----
Less: interest                          (15)
                                       ----
Total principal payable                $ 65
                                       ====



                                      F-21



For 2005, 2004 and 2003, rental expense applicable to continuing operations
aggregated approximately $1,456,000, $1,393,000 and $1,394,000, respectively.

LETTERS OF CREDIT: As of December 31, 2005 and 2004, the Company was
contingently liable for $634,000 and $605,000, respectively, under an
outstanding letter of credit issued for casualty insurance requirements.

LITIGATION: In the ordinary course of its business, the Company is subject to
loss contingencies pursuant to foreign and domestic federal, state and local
governmental laws and regulations and is also party to certain legal actions,
which may occur in the normal operations of the Company's business. It is
management's opinion that the impact of these legal actions will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company.

SL-MTI defended a cause of action brought against it in the fall of 2000 in the
federal district court for the western district of Michigan. The lawsuit was
filed by a customer, Eaton Aerospace, Inc. ("Eaton"), alleging breach of
contract and warranty in the defective design and manufacture of a high
precision motor and demanding compensatory damages of approximately $3,900,000.
On November 7, 2002, after a full trial of the facts, a jury awarded Eaton
damages of $650,000. In the second quarter of 2005, the Company paid the
judgment, together with interest, in the amount of $809,000.

The Company is the subject of certain lawsuits and actions relating to
environmental issues, including an administrative action in connection with a
chrome plating facility in Pennsauken, New Jersey formerly operated by SurfTech
(the "SurfTech Site"), which could subject the Company to, among other things,
$9,266,000 in collective reimbursements (with other parties) to the New Jersey
Department of Environmental Protection (the "NJDEP"). The Company believes that
it has significant defenses against all or any part of the claim and that any
material impact is unlikely.

On June 12, 2002, the Company and SurfTech were served with notice of class
action complaint filed in Superior Court of New Jersey for Camden County. The
Company and SurfTech are currently two of approximately 39 defendants in this
action. The complaint alleges, among other things, that plaintiffs suffered
personal injuries as a result of consuming water distributed from the Puchack
Wellfield in Pennsauken, New Jersey (which supplies Camden, New Jersey).

This case arises from the same factual circumstances as current administrative
actions involving the Puchack Wellfield, to which the Company is a party. The
administrative actions and the class action lawsuit both allege that SurfTech
and other defendants contaminated ground water through the disposal of hazardous
substances at the SurfTech site.

As with the administrative actions, the Company believes it has significant
defenses against the class action plaintiff's claims and intends to pursue them
vigorously. Technical data generated as part of remedial activities at the
SurfTech Site have not established offsite migration of contaminants. Based on
this and other technical factors, the Company has been advised by its outside
counsel that it has a strong defense against the claims alleged in the class
action plaintiffs' complaint, as well as the environmental administrative
actions.

It is management's opinion that the impact of legal actions brought against the
Company and its operations will not have a material adverse effect on its
financial position or results of operations.


                                      F-22



However, the ultimate outcome of these matters, as with litigation generally, is
inherently uncertain, and it is possible that some of these matters may be
resolved adversely to the Company. The adverse resolution of any one or more of
these matters could have a material adverse effect on the business, operating
results, financial condition or cash flows of the Company.

ENVIRONMENTAL: Loss contingencies include potential obligations to investigate
and eliminate or mitigate the effects on the environment of the disposal or
release of certain chemical substances at various sites, such as Superfund sites
and other facilities, whether or not they are currently in operation. The
Company is currently participating in environmental assessments and cleanups at
a number of sites under these laws and may in the future be involved in
additional environmental assessments and cleanups. Based upon investigations
completed by the Company and its independent engineering consulting firms to
date, management has provided an estimated accrual for all known costs believed
to be probable in the amount of $1,220,000. Of this amount the Company expects
to spend approximately $293,000 related to environmental matters in 2006.
However, it is in the nature of environmental contingencies that other
circumstances might arise, the costs of which are indeterminable at this time
due to such factors as changing government regulations and stricter standards,
the unknown magnitude of defense and cleanup costs, the unknown timing and
extent of the remedial actions that may be required, the determination of the
Company's liability in proportion to other responsible parties, and the extent,
if any, to which such costs are recoverable from other parties or from
insurance. Although these contingencies could result in additional expenses or
judgments, or off-sets thereto, at present such expenses or judgments are not
expected to have a material effect on the consolidated financial position or
results of operations of the Company. Most of the Company's environmental costs
relate to discontinued operations and all such appropriate costs have been
recorded in discontinued operations.

The Company has reported a ground water contamination plume on its property in
Camden, New Jersey. In January 2003, the Company submitted to the NJDEP a plan
to remediate the site, which is currently under review. Based upon the
preliminary evidence, the Company was advised that the cost to remediate the
site could amount to $560,000, which has been fully accrued as of December 31,
2005 and December 31, 2004 and has been recorded as part of discontinued
operations.

The Company has reported soil and groundwater contamination on SL-MTI's property
in Montevideo, Minnesota. SL-MTI has conducted analysis of the contamination and
performed remediation at the site. Further remediation efforts will be required
and the Company is engaged in discussions with the Minnesota Pollution Control
Agency to develop a remediation plan. Based on current information, the Company
believes it will incur remediation costs at this site of $220,000, which has
been accrued as of December 31, 2005. The accrual for this site was $268,000 at
December 31, 2004.

The Company filed claims with several of its insurers seeking reimbursement for
past and future environmental costs. In settlement of its claims, the Company
received aggregate cash payments of $2,800,000 prior to fiscal 2001, and
commitments from three insurers to pay for a portion of environmental costs
associated with the SurfTech site of 15% of costs up to $300,000, 15% of costs
up to $150,000 and 20% of costs up to $400,000, respectively. During 2005 and
2004, the Company billed these insurers a total of $131,000 and $654,000,
respectively, for their contingent commitments. Reimbursed cost related to these
billings is recorded in discontinued operations.

As of December 31, 2005 and 2004, the remaining environmental accruals of
$1,220,000 and $1,275,000, respectively, have been included in "Accrued
Liabilities - Other" (Note 11).


                                      F-23


EMPLOYMENT AGREEMENTS: The Company entered into severance agreements with
certain key employees in 2001 that provide for one-time payments in the event of
a change-in-control, as defined, if the employee is terminated within 12 months
of any such change-of-control. These payments range from three to 24 months of
the employee's base salary as of the termination date, as defined. If a
triggering event had taken place in 2005 and if these employees had been
terminated during the year, the payments would have aggregated approximately
$3,600,000 under the change-of-control agreements.

NOTE 14. STOCK OPTIONS AND CAPITAL STOCK

At the Company's 1993 Annual Meeting, the shareholders approved a Non-employee
Director Nonqualified Stock Option Plan (the "Director Plan"), which was
effective June 1, 1993. The Director Plan provides for the granting of
nonqualified options to purchase up to 250,000 shares of the Company's common
stock to non-employee directors of the Company in lieu of paying quarterly
retainer fees and regular quarterly meeting attendance fees, when elected. The
Director Plan enables the Company to grant options, with an exercise price per
share not less than fair market value of the Company's common stock on the date
of grant, which are exercisable at any time. Each option granted under the
Director Plan expires no later than ten years from date of grant and the
expiration date of the Director Plan was May 31, 2003. Information for 2005,
2004 and 2003 with respect to the Director Plan is as follows:



                                                          Shares                            Weighted Average
                                                      (in thousands)      Option Price       Exercise Price
                                                      --------------   ------------------   ----------------
                                                                                   
Outstanding and exercisable as of December 31, 2002         67         $3.5625 to $14.625         $8.57
Granted                                                     91           $6.00 to $6.00           $6.00
Exercised                                                  (18)          $6.00 to $6.00           $6.00
                                                           ---         ------------------         -----
Outstanding and exercisable as of December 31, 2003        140         $3.5625 to $14.625         $7.23
Granted                                                     39           $6.00 to $6.00           $6.00
Exercised                                                  (32)         $3.5625 to $6.00          $5.41
Cancelled                                                   (2)          $7.27 to $7.31           $7.30
                                                           ---         ------------------         -----
Outstanding and exercisable as of December 31, 2004        145          $4.75 to $14.625          $7.31
Exercised                                                  (11)         $4.75 to $8.5625          $6.15
                                                           ---         ------------------         -----
Outstanding and exercisable as of December 31, 2005        134          $6.00 to $14.625          $7.40
                                                           ===         ==================         =====


As of December 31, 2005, there are no shares available for grant.

At the Company's 1991 Annual Meeting, the shareholders approved the adoption of
a Long-Term Incentive Plan (the "1991 Plan"), which provided for the granting of
options to officers and key employees of the Company to purchase up to 500,000
shares of the Company's common stock. At various annual meetings, from 1995
through 1998, the shareholders approved amendments to increase the number of
shares subject to options to 1,522,650. The 1991 Plan enables the Company to
grant either nonqualified options, with an exercise price per share established
by the Board's Compensation Committee, or incentive stock options, with an
exercise price per share not less than the fair market value of the Company's
common stock on the date of grant, which are exercisable at any time. Each
option granted under the 1991 Plan expires no later than ten years from date of
grant. The Plan expired on September 25, 2001 and no future option can be
granted under the Plan.


                                      F-24



During 2005, the Company issued 25,000 options to a recently hired executive of
the Company in accordance with the rules and regulations of the SEC.

Information for 2005, 2004, 2003 related to the 1991 Plan and the options issued
in 2005 is as follows:



                                          Shares                          Weighted Average
                                      (in thousands)     Option Price      Exercise Price
                                      --------------   ----------------   ----------------
                                                                 
Outstanding as of December 31, 2002         741        $3.25 to $13.50         $10.37
Exercised                                   (10)        $5.75 to $5.75         $ 5.75
Cancelled                                   (59)       $3.25 to $13.50         $ 8.24
                                           ----        ----------------        ------
Outstanding as of December 31, 2003         672        $3.50 to $13.50         $10.62
Exercised                                   (33)       $5.75 to $12.175        $ 7.04
Cancelled                                   (39)       $3.50 to $13.50         $ 9.66
                                           ----        ----------------        ------
Outstanding as of December 31, 2004         600        $5.75 to $13.50         $10.84
Granted                                      25        $17.01 to $17.01        $17.01
Exercised                                  (126)       $5.75 to $13.50         $10.58
                                           ----        ----------------        ------
Outstanding as of December 31, 2005         499        $5.75 to $17.01         $11.21
                                           ====        ================        ======


The number of shares exercisable as of December 31, 2005, was 480,000.

Transactions from December 31, 2002 through December 31, 2005, under the above
plans, were as follows:



                                                                                                 Weighted
                                                                                               Average Life
                                          Shares                            Weighted Average     Remaining
                                      (in thousands)      Option Price       Exercise Price       (years)
                                      --------------   ------------------   ----------------   ------------
                                                                                   
Outstanding as of December 31, 2002         808         $3.25 to $14.625         $10.218           7.25
Granted                                      91          $6.00 to $6.00          $  6.00
Exercised                                   (28)         $5.75 to $6.00          $  5.91
Cancelled                                   (59)        $3.25 to $13.50          $  8.24
                                           ----        ------------------        -------           ----
Outstanding as of December 31, 2003         812         $3.50 to $14.625         $10.037           6.44
Granted                                      39          $6.00 to $6.00          $  6.00
Exercised                                   (65)       $3.5625 to $12.175        $  6.24
Cancelled                                   (41)        $3.50 to $13.50          $  9.57
                                           ----        ------------------        -------           ----
Outstanding as of December 31, 2004         745         $4.75 to $14.625         $10.154           5.52
Granted                                      25         $17.01 to $17.01         $ 17.01
Exercised                                  (137)        $4.75 to $13.50          $ 10.24
                                           ----        ------------------        -------           ----
Outstanding as of December 31, 2005         633         $5.75 to $17.01          $10.406           4.78
                                           ----        ------------------        -------           ----
Exercisable as of December 31, 2005         614         $5.75 to $17.01          $10.205
                                           ====        ==================        =======


The following tables segregate the outstanding options and exercisable options
as of December 31, 2005, into three ranges:


                                      F-25




                                                                      Weighted Average
Options Outstanding   Range of Option Prices per   Weighted Average    Life Remaining
   (in thousands)                Share              Exercise Price         (years)
-------------------   --------------------------   ----------------   ----------------
                                                             
        192                 $5.75 to $8.5625            $ 6.023             6.14
        326               $8.6875 to $12.9375           $11.664             4.06
        115                $13.0625 to $17.01           $14.199             4.58
        ---
        633
        ===




Options Exercisable   Range of Option Prices per   Weighted Average
   (in thousands)                Share              Exercise Price
-------------------   --------------------------   ----------------
                                             
        192                 $5.75 to $8.5625            $ 6.023
        326               $8.6875 to $12.9375           $11.664
         96                $13.0625 to $17.01           $13.646
        ---
        614
        ===


NOTE 15. CASH FLOW INFORMATION

Supplemental disclosures of cash flow information:



                    Years Ended December 31,
                    ------------------------
                      2005    2004    2003
                     ------   ----   ------
                         (in thousands)
                            
Interest paid        $  489   $321   $2,640
Income taxes paid    $1,480   $407   $  379
                     ======   ====   ======


On November 24, 2003, the Company sold substantially all the assets of SurfTech.
In conjunction with this sale, the Company received $600,000 in cash and
deconsolidated the net book value of assets sold of $782,000.

On January 6, 2003, the Company sold its wholly owned German subsidiary EME. In
conjunction with this sale, the Company received $7,000,000 in cash in 2003 and
deconsolidated the net book value of assets of $9,686,000. On April 2, 2004, the
Company received $1,000,000 as final cash payment from the sale of EME.

NOTE 16. INDUSTRY SEGMENTS

The Company currently operates under four business segments: Condor, Teal,
SL-MTI and RFL. In the second quarter of 2003, management decided to combine
Condor and Teal into one business unit classified as the Power Electronics
Group. Accordingly, for the years ended December 31, 2005, 2004 and 2003, the
Company's reportable segments consisted of Condor, Teal (The Power Electronics
Group), SL-MTI and RFL.

On November 24, 2003 the Company sold the operating assets of SurfTech.
Accordingly, the Company has classified this former operating segment as
discontinued for all periods presented. Condor produces a wide range of standard
and custom power supply products that convert AC or DC power to direct
electrical current to be used in customers' end products. Power supplies closely
regulate and monitor power outputs, using patented filter and other
technologies, resulting in little or no electrical


                                      F-26



interference. Teal is a leader in the design and manufacture of custom power
conditioning and power distribution units. Teal products are developed and
manufactured for custom electrical subsystems for original equipment
manufacturers of semiconductor, medical imaging, graphics, and
telecommunications systems. SL-MTI is a technological leader in the design and
manufacture of intelligent, high power density precision motors. These motor and
motion controls are used in numerous applications, including aerospace, medical,
and industrial products. RFL designs and manufactures communication and power
protection products/systems that are used to protect utility transmission lines
and apparatus by isolating faulty transmission lines from a transmission grid.
RFL also provides customer service and maintenance for all of its products. The
Other segment includes corporate related items, financing activities and other
costs not allocated to reportable segments, which includes but is not limited to
certain legal, litigation and public reporting charges and the results of
insignificant operations. The accounting policies of these business units are
the same as those described in the summary of significant accounting policies
(see Note 1 for additional information).

Business segment operations are conducted through domestic subsidiaries. For all
periods presented, sales between business segments were not material. No single
customer accounted for more than 10% of consolidated net sales during 2005, 2004
and 2003. Each of the segments has certain major customers, the loss of any of
which would have a material adverse effect on such segment.



                              Years Ended December 31,
                           ------------------------------
                             2005       2004       2003
                           --------   --------   --------
                                   (in thousands)
                                        
NET SALES
Power Electronics Group:

   Condor                  $ 43,233   $ 41,457   $ 39,450
   Teal                      32,777     30,265     20,393
                           --------   --------   --------
      Total                  76,010     71,722     59,843
                           --------   --------   --------
SL-MTI                       28,085     24,497     22,053
RFL                          22,778     22,585     23,388
                           --------   --------   --------
Consolidated               $126,873   $118,804   $105,284
                           ========   ========   ========



                                      F-27




                                                          Years Ended December 31,
                                                        ----------------------------
                                                          2005      2004      2003
                                                        -------   -------   --------
                                                               (in thousands)
                                                                   
INCOME FROM OPERATIONS
Power Electronics Group:
   Condor                                               $ 4,543   $ 3,789   $ 3,377
   Teal                                                   4,911     4,635     2,671
                                                        -------   -------   -------
      Total                                               9,454     8,424     6,048
                                                        -------   -------   -------
SL-MTI                                                    3,371     2,827     1,957
RFL                                                       2,284     2,091     2,236
Other                                                    (4,911)   (5,033)   (3,288)
Impairment of assets (a)                                     --        --      (275)
                                                        -------   -------   -------
Income from operations                                   10,198     8,309     6,678
                                                        -------   -------   -------
Amortization of deferred financing costs                   (485)     (447)     (447)
Interest income                                             216       102       172
Interest expense                                           (522)     (347)     (380)
                                                        -------   -------   -------
Income from continuing operations before income taxes   $ 9,407   $ 7,617   $ 6,023
                                                        =======   =======   =======


(a)  $275 related to a building owned by the Company, which was used by
     SurfTech.



                                                                     December 31,
                                                                  -----------------
                                                                    2005      2004
                                                                  -------   -------
                                                                    (in thousands)
                                                                      
TOTAL ASSETS
Power Electronics Group:
   Condor                                                         $13,330   $14,105
   Teal                                                            12,574    12,742
                                                                  -------   -------
      Total                                                        25,904    26,847
                                                                  -------   -------
SL-MTI                                                             12,495    10,849
RFL                                                                15,825    16,767
Other                                                              16,090     8,621
                                                                  -------   -------
Consolidated                                                      $70,314   $63,084
                                                                  =======   =======




                                                                     December 31,
                                                                  -----------------
                                                                    2005      2004
                                                                  -------   -------
                                                                    (in thousands)
                                                                      
INTANGIBLE ASSETS, NET
Teal                                                              $ 5,822   $ 5,906
SL-MTI                                                                 15        20
RFL                                                                 5,551     5,586
                                                                  -------   -------
Consolidated                                                      $11,388   $11,512
                                                                  =======   =======



                                      F-28





                                Years Ended December 31,
                                ------------------------
                                 2005     2004     2003
                                ------   ------   ------
                                     (in thousands)
                                         
CAPITAL EXPENDITURES
Power Electronics Group:
   Condor                       $  606   $  542   $  936
   Teal                            156      189       23
                                ------   ------   ------
      Total                        762      731      959
                                ------   ------   ------
SL-MTI                             515      476      201
RFL                                627      410      435
Other                               --       25       21
                                ------   ------   ------
Consolidated                    $1,904   $1,642   $1,616
                                ======   ======   ======




                                Years Ended December 31,
                                ------------------------
                                 2005     2004     2003
                                ------   ------   ------
                                     (in thousands)
                                         
DEPRECIATION AND AMORTIZATION
Power Electronics Group:
   Condor                       $  706   $  978   $  704
   Teal                            298      291      268
                                ------   ------   ------
      Total                      1,004    1,269      972
                                ------   ------   ------
SL-MTI                             355      289      304
RFL                                577      532      516
Other                               50       43       59
                                ------   ------   ------
Consolidated                    $1,986   $2,133   $1,851
                                ======   ======   ======


Financial information relating to the Company's segments by geographic area is
as follows:



                             Years Ended December 31,
                          ------------------------------
                            2005       2004       2003
                          --------   --------   --------
                                  (in thousands)
                                       
NET SALES (1)
   United States          $109,941   $103,141   $ 92,169
   Foreign                  16,932     15,663     13,115
                          --------   --------   --------
   Consolidated           $126,873   $118,804   $105,284
                          ========   ========   ========
LONG-LIVED ASSETS
   United States          $ 19,281   $ 18,637   $ 19,110
   Foreign                     861      1,384      1,720
                          --------   --------   --------
   Consolidated           $ 20,142   $ 20,021   $ 20,830
                          ========   ========   ========


(1)  Net sales are attributed to countries based on location of customer.


                                      F-29

NOTE 17. FOREIGN OPERATIONS

In addition to manufacturing operations in California, Minnesota and New Jersey,
the Company manufactures substantial quantities of products in leased premises
located in Mexicali and Matamoros, Mexico. The Company has outsourced the
manufacture of some of its products with contract manufacturers located in
Tecate, Mexico, Shanghai and Dongguan, China. These sources of supply present
risks of interruption for reasons beyond the Company's control, including
political and other uncertainties.

Condor manufactures most of its products in Mexico and incurs its labor costs
and supplies in Mexican pesos. Teal has moved a limited amount of its
manufacturing to Mexico. SL-MTI manufactures approximately 75% of its products
in Mexico and incurs related labor costs and supplies in Mexican pesos. Condor,
Teal and SL-MTI price their sales in United States dollars. The Mexican
subsidiaries of Condor and SL-MTI maintain their books and records in Mexican
pesos.

Generally, the Company's sales from continuing operations are priced in United
States dollars and its costs and expenses are priced in United States dollars
and Mexican pesos. Foreign sales comprised 13%, 13% and 12% of sales for 2005,
2004 and 2003, respectively. Accordingly, the competitiveness of the Company's
products relative to locally produced products may be affected by the
performance of the United States dollar compared with that of its foreign
customers' currencies. Additionally, the Company is exposed to foreign currency
transaction and translation losses that might result from adverse fluctuations
in the values of the Mexican peso. As of December 31, 2005 and 2004, the Company
had net liabilities of $639,000 and $286,000, respectively, subject to
fluctuations in the value of the Mexican peso. Fluctuations in the value of the
Mexican peso were not significant in 2005. However, there can be no assurance
that the value of the Mexican peso will continue to remain stable.

NOTE 18. RELATED PARTY TRANSACTIONS

RFL has an investment of $15,000 in RFL Communications PLC, ("RFL
Communications"), representing 4.5% of the outstanding equity thereof. RFL
Communications is a distributor of teleprotection and communication equipment
located in the United Kingdom. It is authorized to sell RFL products in
accordance with an international sales agreement. Sales to RFL Communications
for the years ended 2005, 2004 and 2003 were $954,000, $1,156,000 and $621,000,
respectively. Accounts receivable due from RFL Communications at December 31,
2005 and 2004 were $168,000 and $116,000, respectively.

As a result of certain services being provided to the Company by Steel Partners,
Ltd. ("SPL"), a company controlled by the Chairman of the Board of the Company,
Warren Lichtenstein, the Compensation Committee has approved fees for services
provided by SPL. These fees are the only consideration for the services of the
Chairman of the Board, Warren Lichtenstein and the Company's Vice Chairman, Glen
Kassan (effective August 10, 2005, Messrs. Lichtenstein and Kassan relinquished
their roles as Chief Executive Officer and President, respectively) and other
assistance from SPL. The services provided include management and advisory
services with respect to operations, strategic planning, finance and accounting,
merger, sale and acquisition activities and other aspects of the businesses of
the Company. Fees of $475,000 were expensed by the Company for SPL's services in


                                      F-30



2005, 2004 and 2003 pursuant to the Management Agreement dated as of January 23,
2002 by and between the Company and SPL. Approximately $40,000 and $290,000 were
payable at December 31, 2005 and December 31, 2004, respectively. An additional
payment of $250,000 was also awarded to SPL by the Compensation Committee on
account of SPL's services in 2004 in recognition of SPL's very significant
contributions to the Company's success, including the improvement in operating
performance and the reduction of indebtedness, as well as the improvement in
returns on invested capital and the Company's stock price, among other things.

During the period January 1, 2004 to June 9, 2004, the Company was billed
$81,000 in legal fees for services performed by Olshan Grundman Frome Rosenzweig
& Wolosky LLP ("Olshan"), a law firm in which a former director of the Company
is a senior partner. This director did not stand for reelection at the Company's
Annual Meeting of Shareholders held on June 9, 2004 and therefore is no longer
considered a related party. All fees incurred through June 9, 2004 for 2004
services had been paid by the Company as of December 31, 2004. The fees related
to general corporate and securities matters.

NOTE 19. SUBSEQUENT EVENTS

On January 26, 2006, the Company, through a wholly owned subsidiary, completed a
tender offer for Ault Incorporated ("Ault"). The Company acquired approximately
86.9% of the outstanding common stock of Ault at $2.90 per share. The Company
had previously purchased in the open market approximately 4.8% of the
outstanding common stock of Ault for $567,000. On January 26, 2006, the
Company's wholly-owned subsidiary was merged with and into Ault. As a result,
Ault became a wholly-owned subsidiary of the Company, and the shares not
tendered were converted into the right to receive $2.90 per share in cash,
without interest. The total purchase price for the common stock of Ault was
approximately $13,986,000, which includes the shares already owned by the
Company. The Company also paid approximately $2,079,000 to acquire all of the
outstanding shares of Ault's preferred stock. Ault is a leading manufacturer of
power conversion products and is a major supplier to the original equipment
manufactures of wireless and wire line communications infrastructure, computer
peripherals and handheld devices, medical, industrial, and printing/scanning
equipment. Ault is headquartered in Minneapolis, Minnesota and has an
engineering and sales office in Norwood, Massachusetts, and engineering, sales
and a manufacturing facility in the People's Republic of China. The purchase
price will be allocated to the underlying assets and liabilities based on their
estimated fair values, pending the results of appraisals and further financial
analysis. For the twelve months ended November 27, 2005, Ault had net sales of
$37,107,000 (unaudited) and net loss of $5,834,000 (unaudited), of which
$2,626,000 related to discontinued operations (unaudited). The source of funds
for the acquisition was a combination of the Company's available cash, as well
as borrowings from the Revolving Credit Facility.


                                      F-31



NOTE 20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)



                                          Three Months     Three Months      Three Months         Three Months
                                              Ended           Ended              Ended               Ended
                                         March 31, 2005   June 30, 2005   September 30, 2005   December 31, 2005
                                         --------------   -------------   ------------------   -----------------
                                                          (in thousands, except per share data)
                                                                                   
Net sales                                   $32,456          $31,259           $32,098              $31,060
Gross margin                                $11,861          $11,429           $11,167              $10,640
Income from continuing operations
   before income taxes                      $ 2,566          $ 1,955           $ 2,931              $ 1,955
Net income (a)                              $ 1,899          $ 1,127           $ 2,454              $ 1,667
Diluted net income per common share         $  0.34          $  0.20           $  0.42              $  0.29
(a) Includes loss from
   discontinued operations, net of tax         ($70)           ($231)             ($98)                ($74)




                                          Three Months     Three Months      Three Months         Three Months
                                              Ended           Ended              Ended               Ended
                                         March 31, 2004   June 30, 2004   September 30, 2004   December 31, 2004
                                         --------------   -------------   ------------------   -----------------
                                                          (in thousands, except per share data)
                                                                                   
Net sales                                    $26,641         $30,508           $30,910              $30,745
Gross margin                                 $ 9,596         $11,388           $11,280              $10,958
Income from continuing operations
   before income taxes                       $ 1,036         $ 2,135           $ 2,522              $ 1,924
Net income (a)                               $ 3,142         $ 1,579           $ 2,551              $ 1,400
Diluted net income per common share          $  0.52         $  0.26           $  0.43              $  0.25
(a) Includes income (loss) from
   discontinued operations, net of tax       $ 2,457         $    20               ($3)               ($103)



                                      F-32



                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS



                                                  Additions
                                            ---------------------
                               Balance at   Charged to    Charged                 Balance
                               Beginning    Costs and     to Other               at End of
         Description           of Period     Expenses     Accounts  Deductions    Period
         -----------           ----------   ----------    --------  ----------   ---------
                                                      (in thousands)
                                                                  
YEAR ENDED DECEMBER 31, 2005
Allowance for:
   Doubtful accounts              $472         $ 86       $ 38          $27         $569

YEAR ENDED DECEMBER 31, 2004
Allowance for:
   Doubtful accounts              $365         $136       $  3          $32         $472

YEAR ENDED DECEMBER 31, 2003
Allowance for:
   Doubtful accounts              $270         $ 76       $102(a)       $83         $365


(a)  Due to reclassifications.


                                      F-33