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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______

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 incorporation or organization) (I.R.S. Employer 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: American Stock Exchange
Common stock, $.20 par value Philadelphia Stock Exchange


Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the Company (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 Company'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. [X]

Indicate by check mark whether the registration is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ]No [X]

The aggregate market value of the voting stock held by non-affiliates of the
Company based on the closing price of the Common Stock on June 30, 2003, the
last business day of the Company's most recently completed second financial
quarter, as reported by the American Stock Exchange was approximately
$39,388,000.

The number of shares of common stock outstanding as of March 3, 2004, was
5,937,434.

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 2003 annual
meeting of stockholders.




TABLE OF CONTENTS



PAGE
----

PART I

Item 1 Description of Business ............................................ 2
Item 2 Properties.......................................................... 14
Item 3 Legal Proceedings................................................... 14
Item 4 Submission of Matters to a Vote of
Security Holders............................................. 17
PART II

Item 5 Market for Company's Common Equity
and Related Stockholder Matters............................. 17
Item 6 Selected Financial Data............................................. 18
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 19
Item 7A Quantitative and Qualitative Disclosures about
Market Risk.................................................... 32
Item 8 Financial Statements and Supplementary Data......................... 32
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................... 32
Item 9A Controls and Procedures............................................. 33

PART III

Item 10 Directors and Executive Officers of the Company..................... 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, Financial Statement Schedules and
Reports on Form 8-K............................................. 35

Signatures................................................................................ 36

Index to Financial Statements and Financial Statement Schedule............................ F1


i


PART I

ITEM 1. DESCRIPTION OF BUSINESS

(a) GENERAL DEVELOPMENT OF BUSINESS

The Company, through its subsidiaries, designs, manufactures and markets power
electronics, power motion, power protection equipment, teleprotection 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 May 11, 1999, the Company acquired 100% of the issued and outstanding shares
of capital stock of RFL Electronics Inc. ("RFL"). The Company paid $11,387,000
in cash and issued $75,000 in promissory notes at closing. In addition, the
Company paid a contingent payment of $1,000,000 in fiscal 1999 based upon the
financial performance of RFL for its fiscal year ended March 31, 1999. RFL is a
leading supplier of teleprotection and specialized communication equipment
primarily sold to the electric power utility industry.

On July 27, 1999, Condor D.C. Power Supplies, Inc. ("Condor"), a wholly-owned
subsidiary of the Company, acquired certain net operating assets of Todd
Products Corporation and Todd Power Corporation (together "Todd Products"). The
Company paid $7,430,000, comprised of cash of $3,700,000 and assumption of
approximately $3,730,000 of debt. Condor also entered into a ten-year Consulting
Agreement with the chief executive officer of Todd Products for an aggregate fee
of $1,275,000, which was paid in quarterly installments over three years. This
agreement was terminated by the Company during 2002. Todd Products was a leading
supplier of high quality power supplies to the datacom, telecommunications and
computer industries.

On September 6, 2001, the Company sold substantially all of the assets of SL
Waber, Inc. ("SL Waber") and all the stock of SL Waber's subsidiary, Waber de
Mexico S.A. de C.V. The Company received cash of $1,053,000 at closing. In
addition, the purchaser agreed to assume certain liabilities and ongoing
obligations of SL Waber. As a result of the transaction, the Company recorded a
pre-tax loss from the sale of discontinued operations of approximately
$2,745,000. The results of operations of SL Waber are presented as discontinued
operations for all periods presented in the financial statements set forth
herein.

In December 2001, the Company surrendered for cash substantially all of its life
insurance policies with a total surrender value of $11,109,000. Additional
policies with a cash surrender value of $447,000 were surrendered in February
2002. These policies insured the lives of former and present executives and key
employees and had been maintained as an internal mechanism to fund the Company's
obligations under its capital accumulation plan and deferred compensation plan.
Aggregate liabilities under those plans, which are owed to former and current
executives and key employees, amount to $4,230,000 as of December 31, 2003.
Proceeds from the life insurance policies were received in

Page 2


December 2001, January 2002 and March 2002 and were used to pay down bank debt.
Beneficiaries under the capital accumulation plan and deferred compensation plan
remain general unsecured creditors of the Company.

In December 2001, the Company sold back to the purchaser of a former subsidiary
a mortgage note in the outstanding principal amount of $2,200,000. The mortgage
note secured the real property of the former subsidiary. In January 2002, the
Company received cash proceeds of $1,600,000 from the sale of the mortgage note,
all of which were used to pay down bank debt.

On January 22, 2002, the Company held its annual meeting of shareholders for the
2001 calendar year. At that annual meeting, all eight members of the Board of
Directors stood for election. In addition, five nominees from a committee
comprised of representatives of two institutional shareholders (the "RORID
Committee"), stood for election to the Board of Directors. Upon the
certification of the election results on January 24, 2002, the five nominees of
the RORID Committee were elected (James Henderson, Glen Kassan, Warren
Lichtenstein, Mark Schwarz and Steven Wolosky), and three incumbent directors
were reelected (J. Dwane Baumgardner, Charles T. Hopkins and J. Edward
Odegaard). Shortly after the annual meeting, Messrs. Hopkins and Odegaard
resigned from the Board of Directors. Upon the election of the five RORID
Committee nominees, each of the executive officers of the Company, Owen Farren,
David Nuzzo, and Jacob Cherian, was entitled to payment under his respective
change-in-control agreement. As a result, in January 2002, the Company paid
Messrs. Farren, Nuzzo, and Cherian, respectively, $877,565, $352,556, and
$250,000 under such agreements.

At the initial meeting of the new Board of Directors on January 24, 2002, Warren
Lichtenstein was elected Chairman of the Board. On February 4, 2002, Warren
Lichtenstein was elected Chief Executive Officer and Glen Kassan was elected
President of the Company. Additionally, David Nuzzo was reelected Vice
President-Finance and Administration, Treasurer and Secretary. Owen Farren was
terminated as Chairman, Chief Executive Officer and President effective February
4, 2002. All senior management teams are continuing in their positions, other
than Jacob Cherian, who resigned, as Controller of the Company, effective April
26, 2002.

On March 8, 2002, Richard Smith was elected to the Board of Directors, filling
one of the two vacant directorships. On June 6, 2002, Avrum Gray was elected to
the Board of Directors to fill the last vacancy. In May 2003 Richard Smith
resigned from the Board of Directors. On May 29, 2003 James Risher was elected
to the Board of Directors to fill the vacancy created by the resignation of Mr.
Smith.

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% and matures April 3, 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. 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.

Page 3


On January 6, 2003, the Company entered into a three-year senior secured credit
facility with LaSalle Business Credit LLC. The credit facility provides for a
maximum indebtedness of $20,000,000, with a revolving tranche and a term debt
tranche. Outstanding indebtedness under this facility bears interest ranging
from the prime rate plus .5% to the prime rate plus 2%. The credit facility is
secured by all of the Company's assets and requires that the Company maintain
specified financial ratios. Loan proceeds at closing were used to retire the
Company's former bank debt, which matured on December 31, 2002, and for working
capital purposes.

On April 30, 2003, the Company de-listed its shares on the New York Stock
Exchange ("NYSE"), and listed its shares for trading on the American Stock
Exchange ("AMEX"). The Company's common stock began trading on the AMEX under
the symbol "SLI." Additionally, on April 30, 2003, the Company's symbol on the
Philadelphia Stock Exchange was changed from "SL" to "SLI." The Company had
received notification from the NYSE that it was below the market capitalization
and stockholders' equity requirements of the NYSE's listing standards. After it
was unable to make sufficient progress towards meeting the listing standards,
management made a determination to transfer the Company's listing to the AMEX.

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 all periods presented in the financial
statements.

(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

The Company currently operates 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, 2003, 2002 and 2001 the Company's reportable segments consisted of
Condor, Teal (collectively, The Power Electronics Group), SL-MTI, and RFL.

The Power Electronics Group consists of two segments:

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 ranges in power from
1 to 5000 watts, and are manufactured in either commercial or medical

Page 4


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,
2003, December 31, 2002 and December 31, 2001, net sales of Condor, as a
percentage of consolidated net sales from continuing operations, were 38%, 36%
and 44%, respectively.

TEAL - Teal designs and manufactures customized 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, 2003, December 31, 2002 and
December 31, 2001, net sales of Teal, as a percentage of consolidated net sales
from continuing operations, were 19%, 18% and 12%, 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, 2003, December 31, 2002 and December 31, 2001, net
sales of SL-MTI, as a percentage of consolidated net sales from continuing
operations, were 21%, 21% and 18%, respectively.

RFL - RFL designs and manufactures teleprotection 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 electric utility equipment
protection systems. For the years ended December 31, 2003, December 31, 2002 and
December 31, 2001, net sales of RFL, as a percentage of consolidated net sales
from continuing operations, were 22%, 25% and 26%, 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 years ended December 31, 2003, December 31, 2002 and December 31, 2001, net
sales of SurfTech were $1,840,000, $2,237,000 and $3,087,000, respectively.

EME - EME is based in Ingolstadt, Germany, with low cost manufacturing
operations in Paks, Hungary. It was a leader in electromechanical actuation
systems, power drive units and complex wire

Page 5


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. For the years ended December 31, 2002 and December 31, 2001,
net sales of EME were $27,700,000 and $25,600,000, respectively.

SL WABER - SL Waber manufactured surge suppressors that were sold to 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 on the Company's financial
statements as a discontinued operation for all periods presented. For the year
ended December 31, 2001, net sales of SL Waber were approximately $10,300,000.

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 the fourth quarter of 2000, the Company experienced shortages in the
supply of certain strategic components for power supplies. During 2003, 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 which 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. For additional
information related to the enforcement of the Company's patent rights, see Note
20 to the Notes to Consolidated Financial Statements, included in Part IV of
this Annual Report on Form 10-K.

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 Teal, Condor, 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 February 29, 2004, February 28, 2003 and March 3, 2002 was
$42,022,000, $41,544,000, and $41,674,000, respectively. The backlog remained
relatively unchanged at February 29, 2004, as compared to February 28, 2003.
There has been an increase in orders from OEMs in the

Page 6


telecommunications, semiconductor and medical imaging industries, offset in part
by a decrease in orders from electric power utility customers.

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 differentiate 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 near the Puchack Wellfield in
Pennsauken, New Jersey, and in Camden, New Jersey. Based on the Company's
investigation into the Pennsauken, New Jersey site, where it is one of several
parties alleged to be responsible for groundwater contamination, the Company
believes it has significant defenses against all or any part of the claims and
that any material adverse impact is unlikely. Regarding the Camden, New Jersey
site, the Company believes that the cost to remediate the property should not
exceed $500,000. The Company recorded a provision for this amount during the
first quarter of 2002. 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.

EMPLOYEES

As of December 31, 2003, the Company had approximately 1,257 employees. Of these
employees, approximately 150 are subject to collective bargaining agreements.

Page 7


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 and Matamoros, Mexico. In 2003, the Company began to
outsource some of its products with contract manufacturers located in Sushou 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 12%, 13% and 11% of net sales from continuing operations for the
years ended December 31, 2003, December 31, 2002 and December 31, 2001,
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, 2003 and December 31, 2002, the Company had net
liabilities of $233,000 and $277,000, respectively, subject to fluctuations in
the value of the Mexican peso. Fluctuations in the value of the foreign
currencies were not significant in 2003. There can be no assurance that the
value of the Mexican peso will continue to remain stable.

Condor manufactures substantially all of its products in Mexico and incurs its
labor costs and supplies in Mexican pesos. SL-MTI manufactures approximately 45%
of its products in Mexico and incurs related labor costs and supplies in Mexican
pesos. Both Condor 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. 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.

ADDITIONAL INFORMATION

Additional information regarding the development of the Company's businesses
during 2003 and 2002 is contained in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Part II
and Notes 1, 2, and 3 of the Notes to the Consolidated Financial Statements
included in Part IV of this Annual Report on Form 10-K.

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
has entered into a three-year

Page 8


senior secured credit facility with LaSalle Business Credit LLC and has borrowed
funds thereunder. At December 31, 2003, outstanding borrowed funds under the
credit facility were $2,902,000, with total availability thereunder of
$11,128,000. In addition, at December 31, 2003 the Company maintained a cash
balance of $3,501,000. If operating cash flows are not sufficient to meet
operating expenses, capital expenditures and debt service requirements as they
become due, the Company may be required, in order to meet its debt service
obligations, to delay or reduce capital expenditures or the introduction of new
products, to sell assets, and/or to forego business opportunities, including
research and development projects and product design enhancements.

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.

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, who 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

Page 9


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
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 suffered personal

Page 10


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 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.
One such claim was brought against the Company's subsidiary, SL-MTI, by a
customer seeking $3,900,000 in compensatory damages. On November 7, 2002, after
a full trial of the facts, a jury awarded this customer damages of $650,000,
which, when combined with pre-trial interest, amounts to a total claim of
$780,000. The customer has appealed various aspects of this decision, which
appeal, if determined adversely to the Company, could have a material adverse
impact upon the Company. 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 officers and key employees to manage operations successfully.

THE COMPANY'S FORMER USE OF ARTHUR ANDERSEN LLP AS ITS INDEPENDENT ACCOUNTANT
MAY POSE A RISK TO IT AND WILL LIMIT INVESTORS' ABILITY TO SEEK RECOVERIES FROM
THEM RELATED TO THEIR WORK.

On June 15, 2002, Arthur Andersen LLP, the Company's former independent
accountant, was convicted on a federal obstruction of justice charge. In July
2002, the Company's board of directors dismissed Arthur Andersen and engaged
Grant Thornton LLP as the Company's independent accountant based on the
recommendation of the audit committee of its board of directors.

The rules and regulations of the Securities and Exchange Commission ("SEC")
require the Company to present its audited financial statements in various SEC
filings, along with Arthur Andersen's consent to the inclusion of its audit
report in those filings. The SEC has provided regulatory relief designed to
allow companies that file reports with the SEC to dispense with the requirement
to file a consent of Arthur Andersen in certain circumstances. The Company had
not been able to obtain, after reasonable efforts, the written consent of Arthur
Andersen to its naming of them as an expert and as having audited the
Consolidated Financial Statements for the year ended December 31, 2001.
Notwithstanding the SEC's regulatory relief, the inability of Arthur Andersen to
provide their consent or to provide

Page 11


assurance services to the Company could negatively affect the Company's ability
to, among other things, access the public capital markets. Any delay or
inability to access the public markets as a result of this situation could have
a material adverse impact on the Company's business. Also, an investor's ability
to seek potential recoveries from Arthur Andersen related to any claims that an
investor may assert as a result of the work performed by Arthur Andersen will be
limited significantly in the absence of a consent and may be further limited by
the diminished amount of assets of Arthur Andersen that are or may in the future
be available for claims.

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

Page 12


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 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 increased economic uncertainty and instability following the terrorist
attacks in the United States on September 11, 2001 and the war with Iraq, the
global economic slowdown and interest rate and currency exchange rate
fluctuations and other future factors.

Page 13


ITEM 2. PROPERTIES

Set forth below are the properties where the Company conducted business as of
December 31, 2003.



Approx.
Square Owned or Leased And
Location General Character Footage Expiration Date
-------- ----------------- ------- ---------------

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

Matamoros, Mexico Manufacture of precision motors (SL-MTI) 15,200 Leased - 11/05/05

Oxnard, CA Manufacture and distribution of power supply 36,093 Leased - monthly
products (Condor)

Mexicali, Mexico Manufacture and distribution of power supply 95,872 Leased - 04/30/06
products (Condor) 11,000 Leased - monthly

San Diego, CA Manufacture of power distribution and conditioning 45,054 Leased - 03/22/07
units (Teal)

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 Industrial surface finishing warehouse (Other) (1) 6,000 Owned

Mt. Laurel, NJ Corporate office (Other) 4,200 Leased - 11/30/05


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

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.

Page 14


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 $8,655,000 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 $8,655,000 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 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 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.

Page 15


The Company's subsidiary, 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 Eaton Aerospace LLC ("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, which when combined with pre-trial interest amounts
to a total claim of $780,000, which has been accrued. Eaton has appealed this
judgment.

The Company has reported a ground water contamination plume on its property in
Camden, New Jersey. The Company's former subsidiary, SurfTech, conducted
operations at the Camden site. In January 2004, the Company submitted to the
NJDEP a proposed remediation action work plan, which is currently under review.
Based upon the preliminary evidence, the Company was advised that the cost to
remediate the site could amount to $500,000. The Company recorded a provision
for this amount during the first quarter of 2002. This provision has been
reclassified as discontinued operations, as a result of the sale of SurfTech on
November 24, 2003.

The Company is investigating possible soil and ground water contamination on
SL-MTI's property in Montevideo, Minnesota. Based upon the preliminary evidence,
the Company believes it will not incur material remediation costs at this site.

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 $2,400,000 prior to fiscal 1998 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. In addition, the
Company received $100,000 per year during fiscal 1998, 1999, 2000 and 2001, as
stipulated in the settlement agreement negotiated with one of the three
insurers.

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
$957,000. 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.

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.

Page 16


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. 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 2003, no matter was submitted to a vote of
the Company's security holders.

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is currently registered on both the American Stock
Exchange ("AMEX") and the Philadelphia Stock Exchange under the symbol "SLI."
The Company moved from the New York Stock Exchange ("NYSE") to the AMEX on April
30, 2003, as discussed in the narrative below. 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, Ended December 31,
2003 2002
------------------ ------------------
HIGH LOW HIGH LOW

Stock Prices
1st Quarter 6.90 5.29 8.30 4.99
2nd Quarter 7.25 5.35 8.05 6.60
3rd Quarter 8.00 6.08 7.30 5.05
4th Quarter 8.49 7.50 5.75 4.25


As of March 3, 2004, there were approximately 798 registered shareholders. The
Company suspended dividend payments during 2001 and has no present intention of
making dividend payments in the foreseeable future. On January 6, 2003, the
Company entered into a new senior credit facility, which has a term of three
years. This facility restricts the Company from paying dividends. Additional
information pertaining to the Company's senior 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.

On October 17, 2002, the Company received notification from the NYSE that it was
below the market capitalization and stockholders' equity requirements of the
NYSE's continued listing standards and, therefore, the Company's common stock
might be delisted. The Company had operated under a plan to address its
non-compliance issues with the NYSE and could not demonstrate compliance with
the NYSE's continued listing standards. Consequently, the Company moved its
common stock to the AMEX and began trading on the AMEX on April 30, 2003 under
the symbol "SLI." Additionally on April 30, 2003, the Company's symbol on the
Philadelphia Stock Exchange was changed from "SL" to "SLI."

Page 17


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, if and when the Company's management considers such
repurchases appropriate. The Company had not repurchased any of its shares as of
March 22, 2004.

For the "Equity Compensation Plan Information," please refer to the Company's
Proxy Statement for the 2003 Annual Meeting of Shareholders, which is
incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

Selected consolidated financial data with respect to the calendar years ended
December 31, 2003, 2002, 2001, 2000, and the Company's fiscal year ended July
31, 1999 are presented below.



Twelve Twelve Twelve Twelve Twelve
Months Months Months Months Months
Ended Ended Ended Ended Ended
December December December December July
2003 2002 2001 2000 1999
-------------------------------------------------------------
(amounts in thousands except per share data)
-------------------------------------------------------------

Net sales (1) $ 105,284 $ 107,912 $ 109,770 $ 123,026 $ 65,939
Income (loss) from continuing operations $ 3,742 $ 801 $ (8,452) $ 5,454 $ 4,435
Income (loss) from discontinued
operations $ (2,422) $ (1,271) $ (2,927) $ (3,754) $ 971
Net income (loss) (2) $ 1,320 $ (470) $ (11,379) $ 1,700 $ 5,406
Diluted net income (loss) per common
share $ 0.22 $ (0.08) $ (2.00) $ 0.30 $ 0.92
Shares used in computing diluted net
income (loss) per common share 5,956 5,867 5,698 5,757 5,876
Cash dividend per common share $ -- $ -- $ -- $ 0.10 $ 0.09
YEAR-END FINANCIAL POSITION
Working capital $ 16,612 $ 10,107 $ 12,132 $ 40,506 $ 12,451
Current ratio (3) 1.98 1.03 1.01 2.15 1.66
Total assets $ 58,421 $ 90,667 $ 109,911 $ 115,491 $ 112,686
Long-term debt $ 2,015 $ 0 $ 0 $ 35,671 $ 30,307
Shareholders' equity $ 34,581 $ 32,983 $ 33,204 $ 43,350 $ 42,842
Book value per share $ 5.82 $ 5.59 $ 5.81 $ 7.81 $ 7.61
OTHER
Capital expenditures (4) $ 1,616 $ 1,466 $ 1,039 $ 1,208 $ 1,398
Depreciation and amortization $ 1,851 $ 2,634 $ 3,670 $ 3,550 $ 3,410


(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 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. Fiscal 2000 includes income of $875,000 related to the settlement of a
class action suit against one of the Company's insurers, and pre-tax income of
$650,000 related to the reduction of a contingency reserve for environmental
costs and restructuring costs of $790,000 related to SL Waber.

(3) The current ratio for 2002 and 2001 includes all debt classified as current,
due to the December 31, 2002 maturity date of the Former Revolving Credit
Facility (see Item 7 - Financial Condition). The current ratio calculations for
all years exclude net current assets and liabilities held for sale.

(4) Excludes assets acquired in business combinations.

Page 18


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, power motion, power protection equipment, teleprotection 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, the Company has over the years increased its 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 Item 8 of this Annual Report on Form 10-K. Included in the
consolidated financial statements are the consolidated statements of operations,
consolidated statements of comprehensive income (loss), consolidated
shareholders' equity and consolidated 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 (loss) from continuing operations, net
assets and depreciation and amortization by industry segment. The Company's
Management Discussion and Analysis provides a more detailed discussion related
to business segments operations.

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
contributed to or reduced earnings and materially affected trends. Significant
transactions discussed in the Company's Management Discussion and Analysis for
fiscal 2003 include costs and charges recorded in discontinued operations of
(i) $750,000 related to the defense of a class action lawsuit regarding
environmental matters resulting from alleged activities of SurfTech; and (ii)
$428,000 related to certain machinery and equipment that was being utilized by
SurfTech. SurfTech was sold in November 2003 and is reported as discontinued
operations for all periods presented. Also included in the financial sections in
2003 is an asset impairment charge of $275,000, which was recorded against the
carrying value of the Company's property located in Camden, New Jersey. This
impairment charge is recorded in continuing operations.

In fiscal 2002, the Company recorded in selling, general, and administrative
expenses, $1,100,000 in litigation costs. In addition, the Company recorded
$500,000 for environmental matters, which is reported in discontinued
operations. In fiscal 2002, the Company also recorded $1,834,000 in special
charges related to change of control and proxy costs. Included in interest
expense for fiscal 2002 is a $780,000 facility fee. These significant costs do
not result from the Company's continuing operations.

Page 19


While these items are important in understanding and evaluating financial
results and trends, other transactions or events, such as disclosed later in
this Management Discussion and Analysis, may also 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.

CRITICAL ACCOUNTING POLICIES

In December 2001, 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 could be 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. 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

Page 20


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 adjusted 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, 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's income tax policy 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 generally
accepted guidelines regarding 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, 2003, the
Company had recorded total valuation allowances of $352,000 due to uncertainties
related to the utilization of some deferred tax assets, primarily consisting of
certain 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 that could materially impact its
consolidated financial position and results of operations.

The net deferred tax assets as of December 31, 2003 were $6,255,000, net of
valuation allowances of $352,000. The carrying value of the Company's net
deferred tax assets assumes that it 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 operations. Management evaluates the reliability of the deferred tax assets
and assesses the need for additional valuation allowances quarterly.

Page 21


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. Goodwill was also
tested for impairment in the fourth quarter of 2002. Due to, among other things,
the overall softening of the global economy and the related decline in operating
results of SurfTech, the Company recorded a goodwill impairment loss of
$556,000, which is reported as part of discontinued operations in 2002. The fair
value of the reporting unit giving rise to the transitional impairment loss was
estimated using the expected present value of future cash flows. Any further
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, on a discounted basis, 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-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

Page 22


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, nor are they 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.

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2003, the Company maintained a cash balance of $3,501,000, with
outstanding bank debt of $2,902,000. Availability under the Senior Credit
Facility was $11,128,000. During the year ended December 31, 2003 ("2003"), the
net cash provided by operating activities was $9,517,000, as compared to net
cash provided by operating activities of $8,774,000 during the year ended
December 31, 2002 ("2002"). The primary source of cash provided by operating
activities for 2003 were the reduction of accounts receivable primarily related
to the receipt of income tax refunds, reduction of inventory levels from the
prior year and positive income from continuing operations, offset primarily by
payments made under the Company's 2002 bonus and incentive programs. In the year
2002, net cash provided by operating activities was positively affected by the
reduction of accounts receivable, primarily due to the receipt of income tax
refunds, the reduction of inventory and positive income from continuing
operations, partially offset by payments under deferred compensation and
retirement plans and reductions in accounts payable.

During 2003, net cash provided by investing activities was $5,986,000, primarily
related to the cash proceeds of $7,000,000 received from the sale of EME and
$600,000 received from the sale of SurfTech, partially offset by $1,616,000 in
capital expenditures. During the year ended December 31, 2002, net cash provided
by investing activities was $9,378,000, which was primarily generated by the
proceeds of $10,676,000 from the surrender of life insurance policies.

Page 23


During 2003, net cash used in financing activities was $14,131,000, primarily
due to the payoff of the Company's former revolving credit facility of
$17,557,000. During 2002 net cash used in financing activities was $18,272,000,
primarily related to the pay down of bank debt in the net amount of $18,103,000,
and $1,141,000 related to debt refinancing costs.

On January 6, 2003, the Company entered into a three-year Senior Secured Credit
Facility (the "Senior Credit Facility") with LaSalle Business Credit LLC. The
Senior Credit Facility provides for a revolving loan facility and two term
loans, up to a maximum indebtedness of $20,000,000. The revolving loan of up to
$16,810,000 is based upon eligible receivables and inventory, as well as an over
advance amount of $1,500,000, which is amortized over a two-year term. The two
term loans of $2,350,000 and $840,000 are amortized over a three-year term. The
Senior Credit Facility restricts investments, acquisitions, capital expenditures
and dividends. It contains financial covenants relating to minimum levels of net
worth, fixed charge coverages, and EBITDA levels, as defined. The Company is
currently in compliance with all the restrictions and covenants of the Senior
Credit Facility. The Senior Credit Facility bears interest ranging from the
prime rate plus fifty basis points to prime rate plus 2%. The Senior Credit
Facility is secured by all of the Company's assets. At December 31, 2003, the
outstanding revolving loan balance was $327,000 and the outstanding term loan
balances were $1,992,000 and $583,000, or a total of $2,902,000. Availability
under the Senior Credit Facility at December 31, 2003 was $11,128,000.

During 2002, the Company was a party to a Second Amended and Restated Credit
Agreement, dated December 13, 2001, as amended (the "Former Credit Facility")
that allowed the Company to borrow for working capital and other purposes. The
Former Credit Facility contained certain financial and non-financial covenants,
including requirements to maintain certain minimum levels of net income and a
minimum fixed charge coverage ratio, as defined therein, on a quarterly basis.
As of December 31, 2001, the Company was in violation of the net income covenant
for the fourth quarter of 2001. In addition, on March 1, 2002, the Company was
notified that it was in default under the Former Credit Facility due to its
failure to meet the previously scheduled debt reduction to $25,500,000.

On May 23, 2002, the Company and its former lenders reached an agreement,
pursuant to which the lenders granted a waiver of default and amended the
violated financial covenants, so that the Company would be in full compliance
with the Former Credit Facility. The agreement provided, among other things, for
the Company to pay down outstanding borrowings by $689,000 to $25,500,000 and
for the payment to the lenders of an amendment fee of $130,000. The Former
Credit Facility provided for the payment of a facility fee of $780,000 in the
event that it was not repaid in full by October 31, 2002. The Company paid this
facility fee on November 4, 2002.

The Former Credit Facility matured on December 31, 2002. The Company retired the
Former Credit Facility on January 6, 2003, and therefore, was in technical
default thereunder at December 31, 2002.

As of December 31, 2002, outstanding borrowings under the Former Credit Facility
were $17,557,000. The weighted average interest rate on borrowings during the
year ended December 31, 2002 was 6.56% (with the $780,000 facility fee included
as interest expense, the weighted average interest rate was 10.01%). On January
6, 2003, the Company borrowed $10,359,000 under the Senior Credit Facility,
which together with the proceeds from the sale of EME and available cash
(including a $2,000,000 distribution from EME), was used to retire the Former
Credit Facility.

Page 24


On October 11, 2002, the Company filed a registration statement with the SEC
relating to an anticipated distribution to its shareholders of subscription
rights to purchase additional shares of common stock of the Company. The Company
subsequently filed an amendment to the Registration Statement with the SEC on
December 30, 2002. On March 28, 2003, following a thorough discussion and
review, the Company's Board of Directors decided not to proceed with the Rights
Offering and withdrew the Registration Statement with the SEC.

The Company's current ratio was 1.98 to 1 at December 31, 2003, and 1.03 to 1 at
December 31, 2002 (calculated without net assets and liabilities held for sale).
This ratio improved primarily due to a significant reduction of short-term debt.

As a percentage of total capitalization, consisting of debt and shareholders'
equity, total borrowings by the Company were 8% at December 31, 2003 and 35% at
December 31, 2002. At December 31, 2003, total borrowings, decreased by
$14,655,000, compared to December 31, 2002.

Capital expenditures of $1,616,000 were made in 2003, primarily related to
equipment purchases, a new management information system and building
improvements, compared to $1,466,000 in 2002. The capital expenditures made in
2002 primarily related to improvements in process technology, equipment and
building improvements.

The Company has been able to generate adequate amounts of cash to meet its
operating needs. During 2003, Condor, Teal, RFL and SL-MTI produced positive
cash flow, aggregating $9,268,000. SurfTech experienced negative cash flow for
the year due to poor operating results. SurfTech was sold on November 24, 2003,
and is classified as a discontinued operation for all periods presented.

With the exception of the segment reported as "Other" (which consists primarily
of corporate office expenses, financing activities and accruals not specifically
allocated to the reportable business segments) all of the Company's operating
segments were profitable at the operating profit level and are expected to
remain so in 2004.

CONTRACTUAL OBLIGATIONS

The following is a summary of the Company's contractual obligations at December
31, 2003, for the periods indicated:



Less than 1 to 3 4 to 5 After
1 Year Years Years 5 Years Total
------ ----- ----- ------- -----
(in thousands)

Operating Leases $1,344 $1,734 - - $3,078
Debt 887 2,015 - - 2,902
Capital Leases 170 379 - - 549
------ ------ ------ ------ ------
Total $2,401 $4,128 - - $6,529
====== ====== ====== ====== ======


Contractual obligations with respect to the two term loans under the Senior
Credit Facility are $887,000 due in less than one year and $2,015,000 due in one
to two years.

OFF-BALANCE SHEET ARRANGEMENTS

It is not the Company's usual business practice to enter into off-balance sheet
arrangements such as

Page 25


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, that 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 expenditures or capital
resources.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002



Year Ended December 31,
-----------------------
2003 2002
(as adjusted)
-----------------------
(in thousands)

NET SALES
Power Electronics Group:
Condor $ 39,450 $ 38,058
Teal 20,393 19,608
-------- --------
Total 59,843 57,666
-------- --------
SL-MTI 22,053 23,007
RFL 23,388 27,239
-------- --------
Consolidated $105,284 $107,912
======== ========




Year Ended December 31,
-----------------------
2003 2002
(as adjusted)
-----------------------
(in thousands)

INCOME FROM OPERATIONS
Power Electronics Group:
Condor $ 3,377 $ 1,457
Teal 2,671 1,873
------- -------
Total 6,048 3,330
------- -------
SL-MTI 1,957 1,873
RFL 2,236 3,435
Other expenses and Corporate office (3,563) (5,526)
------- -------
Consolidated $ 6,678 $ 3,112
======= =======


Consolidated net sales from continuing operations for 2003, compared to 2002
decreased by $2,628,000, or 2%. This decrease is primarily due to a significant
decrease in sales at RFL of $3,851,000, or 14%, and to a lesser extent a sales
decrease at SL-MTI of $954,000, or 4%. These decreases were partially offset by
an increase in sales at the Power Electronics Group of $2,177,000, or 4%.
Consolidated net sales for 2002 do not include net sales of $29,895,000,
relating to the combined sales of EME, SL Waber and SurfTech, which are
classified as discontinued operations. Net income from continuing operations in
2003 was $3,742,000, or $0.63 per diluted share, compared to net income from
continuing operations in 2002 of $801,000, or $0.14 per diluted share. The net
income in 2002 included restructuring costs at Condor within the Power
Electronics Group of $230,000 and special charges included in other expenses of
$1,834,000 related to change-of-control and proxy costs.

The Company's operating income increased to $6,678,000 in 2003, compared to
$3,112,000 in 2002. Other than RFL, all of the Company's business segments had
increases in operating income in 2003, as

Page 26


compared to 2002. RFL's operating income decreased $1,199,000, or 35%. The
Company's business segments and the components of operating expenses are
discussed more fully in the following sections.

The Power Electronics Group had an increase in sales of $2,177,000, or 4%, and
income from operations increased $2,718,000, or 82%, over the prior year. The
increase in sales within the Power Electronics Group is primarily attributable
to an increase in sales at Condor of $1,392,000, or 4%. This increase in sales
is related to an increase in sales to distributors of medical products. In
addition, there were lower returns from distributors in the 2003 period, as
compared to 2002, primarily due to a new distributor scrap program.

SL-MTI's net sales in 2003 decreased approximately $954,000, or 4%, while
operating income increased slightly by $84,000, or 4%, compared to net sales and
income from operations in 2002. Contributing to the decrease in net sales was a
significant decrease in the windings product line, which decreased by
$2,811,000, or 39%. This decrease was partially offset by an increase in sales
of DC brushless motors of $2,097,000, or 19%. The increase in income from
operations in 2003, as compared to 2002 is due primarily to an inventory
write-off of $387,000, which was recorded in 2002. Without this $387,000 charge,
operating income for 2003 would have been less than in 2002, which is reflective
of the decrease in sales.

RFL's net sales in 2003 decreased approximately $3,851,000, or 14%, and income
from operations decreased approximately $1,199,000, or 35%, compared to net
sales and operating income in 2002. RFL has experienced significant sales
decreases in its teleprotection and protective relaying product lines, which
decreased by $3,846,000, or 29%, and $1,498,000, or 56%, respectively. These
decreases were partially offset by an increase in its carrier communications
product line, which increased by $1,355,000, or 18%. RFL is experiencing
inconsistent procurement patterns from electric power utility companies, who are
the major purchasers of its teleprotection and protective relaying product
lines. In particular, the pendency of proposed federal energy legislation has
apparently deferred the procurement and capital investment decisions of many
electric power utility companies.

COST OF PRODUCTS SOLD

As a percentage of net sales, cost of products sold in 2003 was approximately
63%, as compared to approximately 64% in 2002. Although the cost of products
sold, as a percentage of sales remained relatively constant year-to-year, the
business segments' product mix changed considerably. The Power Electronics
Group cost of products sold percentage improved from 67% in 2002 to 63% in 2003.
This was due in part to the increase in sales. In addition, Condor made several
operational improvements to re-engineer its manufacturing facility in Mexicali,
Mexico that improved productivity at the facility. In the comparable period in
2002, significant inefficiencies and start up costs were incurred due to the
movement of Condor's remaining telecommunications product line from its Reynosa,
Mexico facility to its current manufacturing location in Mexicali, Mexico. The
improvement in SL-MTI's cost of products sold percentage is primarily due to an
inventory charge being taken in 2002 and a slight improvement in manufacturing
efficiency in 2003 at its Cedro, Mexico plant. RFL's increase in its cost of
products sold percentage is due to a significant reduction in sales.

ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES

Engineering and product development expenses in 2003 were $7,856,000, an
increase of approximately $401,000, or 5%, as compared to 2002. As a percentage
of net sales, engineering and product development expenses in 2003 and 2002 were
7% for both years. The increase of $401,000 was

Page 27


primarily generated by SL-MTI, which experienced higher net engineering costs in
the current year, as compared to 2002.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses in 2003 were $22,614,000, a
decrease of $662,000, or 3%, which is reflective of the decrease in sales,
compared to 2002. As a percentage of net sales, selling, general and
administrative expenses in 2003 and 2002 were approximately 21% for both years.

DEPRECIATION AND AMORTIZATION EXPENSES

Depreciation and amortization expenses in 2003 were $1,851,000, a decrease of
approximately $783,000, or 30%, compared to 2002. The reduction in 2003 is due
primarily to the Company's reduced fixed asset base.

AMORTIZATION OF DEFERRED FINANCING COSTS

In connection with entering into the Senior Credit Facility on January 6, 2003,
the Company incurred approximately $1,342,000 in costs. These costs have been
deferred and are being amortized over the three-year term of the Senior Credit
Facility. Amortization for 2003 was $447,000.

INTEREST INCOME (EXPENSE)

In 2003, interest income was $172,000, compared to $25,000 in 2002. Interest
expense in 2003 was $380,000, compared to $2,256,000 in 2002. Included in
interest expense in 2002 is the payment of a facility fee of $780,000 resulting
from the Company's inability to pay down in full the Former Credit Facility by
October 31, 2002. (See Note 10 in the Notes to Consolidated Financial Statements
included in Part IV of this Annual Report on Form 10-K). The decrease in
interest expense for 2003 is related to significantly reduced debt levels and
lower interest rates.

TAXES

The effective tax rate for 2003 was higher than the statutory rate due primarily
to the impact of state income taxes.

Page 28


RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001



Years Ended December 31,
-----------------------------
2002 2001
(as adjusted) (as adjusted)
-----------------------------
(in thousands)

NET SALES
Power Electronics Group:
Condor $ 38,058 $ 48,742
Teal 19,608 13,320
-------- --------
Total 57,666 62,062
-------- --------
SL-MTI 23,007 19,262
RFL 27,239 28,446
-------- --------
Consolidated $107,912 $109,770
======== ========




Year Ended December 31,
----------------------------
2002 2001
(as adjusted) (as adjusted)
----------------------------
(in thousands)

INCOME (LOSS) FROM OPERATIONS
Power Electronics Group:
Condor $ 1,457 $ (9,492)
Teal 1,873 603
-------- --------
Total 3,330 (8,889)
-------- --------
SL-MTI 1,873 1,981
RFL 3,435 3,230
Other expenses and Corporate office (5,526) (5,237)
-------- --------
Consolidated $ 3,112 $ (8,915)
======== ========


Consolidated net sales from continuing operations in 2002 of $107,912,000, a
decrease of approximately $1,858,000 (or 2%), as compared to consolidated net
sales from continuing operations in 2001. This decrease was due mainly to
decreases in the Power Electronics Group of $4,396,000, (or 7%). Within this
Group, Condor's net sales decreased approximately $10,684,000 (or 22%), while
Teal had an increase in sales of $6,288,000, or 47%. RFL had a decrease in sales
of approximately $1,207,000 (or 4%). These decreases were partially offset by an
increase in net sales at SL-MTI of $3,745,000 (or 19%). Consolidated net sales
for 2002 and 2001 do not include net sales of $29,895,000 and $39,012,000,
respectively, relating the combined sales of EME, SL Waber and SurfTech, which
are classified as discontinued operations. Net income from continuing operations
in 2002 was $801,000, (or $.14 per diluted share), compared to a net loss from
continuing operations in 2001 of $8,452,000, (or $1.48 per diluted share). The
net income in 2002 included restructuring costs at Condor of $230,000 and
special charges included in other expenses of $1,834,000 related to
change-of-control and proxy costs.

Although the Power Electronics Group's net sales decreased by $4,396,000 in
2002, operating income increased by $12,219,000, as compared to 2001. This
decrease in net sales is primarily related to Condor's withdrawal of a
significant portion of its telecommunications-related product line. Operating
results in 2002 includes a restructuring charge of $230,000 related to facility
consolidation at Condor's Brentwood, New York and Reynosa, Mexico facilities and
related severance payments. The 2001 operating results included charges in
connection with the write-down of telecommunications-related

Page 29


inventory in the amount of $2,890,000, the restructuring costs related to the
closing of the two facilities mentioned above of $3,683,000, and the impairment
of intangible assets in connection with the Todd Products acquisition in the
amount of $4,145,000.

SL-MTI's net sales in 2002 increased approximately $3,745,000 (or 19%), while
operating income decreased approximately $108,000 (or 5%), compared to net sales
and income from operations in 2001. Contributing to the increased net sales were
significant increases in net sales of DC brushless motors. The decrease in
income from operations was due primarily to poor operating efficiencies
associated with the rapid increase in sales and an inventory write-off of
$387,000.

RFL's net sales in 2002 decreased approximately $1,207,000 (or 4%), and income
from operations increased approximately $205,000 (or 6%), compared to net sales
and operating income in 2001. Contributing to the decrease in net sales was the
weak growth in the U.S. economy, which delayed the capital improvement plans of
several large customers in the electric power utility industry. Despite the
decrease in net sales, income from operations increased slightly, primarily due
to the non-amortization provision of goodwill adopted by the Company in 2002.

COST OF PRODUCTS SOLD

As a percentage of net sales, cost of products sold in 2002 was approximately
64%, as compared to approximately 68% in 2001. This improvement is primarily
related to the Power Electronics Group and in particular, Condor. Significant
improvements were made at Condor, which decreased its percentage of cost of
products sold from 73% in 2001 to 67% in 2002. Condor's cost of products sold
improved primarily as a result of the substantial reduction of its
telecommunications related product line, as well as improved manufacturing
efficiencies. The remaining business segments had a relatively constant
percentage of cost of products sold to sales on a comparative basis from 2002 to
2001.

ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES

Engineering and product development expenses in 2002 were $7,455,000, a decrease
of approximately $565,000 (or 7%), as compared to 2001. As a percentage of net
sales, engineering and product development expenses in 2002 and 2001 were 7% for
both years. The decrease of $565,000 was primarily due to the consolidation of
engineering facilities in the Power Electronics Group, which was completed
during 2002.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses in 2002 were $23,276,000, a
decrease of $842,000, (or 3%,) compared to 2001. As a percentage of net sales,
selling, general and administrative expenses in 2002 and 2001 were approximately
21% and 22%, respectively. Included in 2002 are additional accruals for
litigation of $1,100,000, and service fees of $400,000. In 2001, selling,
general and administrative expenses included $1,300,000 of professional fees
related to the possible sale of all or a portion of the Company's business
($765,000 of which was reversed in 2002), $700,000 of bank charges incurred as a
result of the default of financial covenants under the Former Credit Facility,
an increase of $450,000 in litigation reserves, $300,000 in expenses associated
with the contested election of directors and $90,000 in consulting costs related
to the restructuring of Condor.

DEPRECIATION AND AMORTIZATION EXPENSES

Depreciation and amortization expenses in 2002 were $2,634,000, a decrease of
approximately $1,036,000 (or 28%), compared to 2001. The reduction in 2002 is
due primarily to the Company's

Page 30



reduced asset base and the discontinuance of goodwill amortization. The
discontinuance of goodwill amortization, which amounted to $491,000 for the year
ended December 31, 2001, was the result of the adoption of SFAS No.142 during
2002.

RESTRUCTURING COSTS AND IMPAIRMENT CHARGES

At December 31, 2001, the Company had a restructuring reserve of $1,053,000
related to continuing operations. This restructuring reserve was established in
2001 to provide for anticipated costs associated with the downsizing of Condor.
During 2002, the reserve was increased by $230,000, comprised of $90,000 for
severance payments and $140,000 for certain exit costs related to the closure of
Condor's engineering and sales support office in Brentwood, New York and
manufacturing facility in Reynosa, Mexico. All of the restructuring costs were
either paid or applied to the write-down of assets during 2002. At December 31,
2002, no amount remained in the Company's restructuring reserve. A summary of
the principal components of the restructuring reserve from December 31, 2001 to
December 31, 2002, is as follows:



Restructuring December 31, December 31,
Accrual 2001 Increases (Decreases) 2002
- ------------------------------------------------------------------------------
(in thousands)

Facility costs $ 654 $ 15 $ (669) $ --
Asset write-off 250 125 (375) --
Professional fees 102 -- (102) --
Other 47 -- (47) --
Severance -- 90 (90) --
-------------------------------------------------------
Total $ 1,053 $ 230 $ (1,283) $ --
=======================================================


INTEREST INCOME (EXPENSE)

In 2002, interest income was $25,000, compared to $153,000 in 2001. Interest
expense in 2002 was $2,256,000, compared to $3,261,000 in 2001. Included in
interest expense in 2002 is the payment of a facility fee in the amount of
$780,000, due to the Company's inability to pay down in full the Former Credit
Facility by October 31, 2002. (See Note 10 in the Notes to Consolidated
Financial Statements included in Part IV of this Annual Report on Form 10-K).
The decrease in interest expense for 2002 is related to significantly reduced
debt levels and lower interest rates.

TAXES

The effective tax rate for 2002 was lower than the statutory rate due to the
recovery of certain tax benefits not previously recognized combined with
benefits received related to foreign sales.

NEW ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin 51, "Consolidated Financial Statements," for
entities that do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns,

Page 31



or both. FIN 46 applies immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. The Company's operations and financial
position have not been affected by the adoption of FIN 46. In December 2003, a
modification to FIN 46 was issued ("FIN 46R"), which delayed the effective date
until no later than fiscal periods ending after March 15, 2004, and provided
additional technical clarification to implementation issues. The Company
currently does not have any variable interest entities as defined in FIN 46R.

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, 2003, debt
consists primarily of the Senior Credit Facility, which bears interest at
interest rates ranging from prime rate plus fifty basis points to 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 the reported earnings for 2003
and are not expected to have a material impact on reported earnings for 2004.

See generally, "Item 1. Description of Business - Risk Factors" and "Item 1.
Description of 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 public accountants, are included in
Part IV of this Annual Report on Form 10-K.

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

On July 18, 2002, the Company announced that it dismissed Arthur Andersen LLP as
its independent accountants and engaged Grant Thornton LLP as its new
independent accountants. The decision to dismiss Arthur Andersen and to engage
Grant Thornton LLP was recommended by the Audit Committee of the Board of
Directors and approved by the Board of Directors.

Arthur Andersen's report on the Company's financial statements for the year
ended December 31, 2001 did not contain an adverse opinion or a disclaimer of
opinion, nor were they qualified or modified as to audit scope or accounting
principles. However, as a result of an impairment charge related to the
write-off of intangible assets of Condor at December 31, 2001, the Company was
in violation of its net income covenant for the fourth quarter of 2001 under the
Former Credit Facility. Additionally, on March 1, 2002, the Company received a
notice from its lenders under the Former Credit Facility stating that it was in
default due to its failure to meet a scheduled debt reduction.

Page 32



Consequently, Arthur Andersen's report for the period ended December 31, 2001
dated March 15, 2002 did contain the following paragraph: "The accompanying
financial statements have been prepared assuming that the Company will continue
as a going concern. As discussed in Note 1 to the consolidated financial
statements, the Company was in technical default under its revolving credit
facility at December 31, 2001 and an additional event of default occurred on
March 1, 2002. Due to these events of default, the lenders that provide the
revolving credit facility do not have to provide any further financing and have
the right to terminate the facility and demand repayment of all amounts
outstanding. The existence of these events of default raised substantial doubt
about the Company's ability to continue as a going concern."

On January 6, 2003, the Company entered into the Senior Credit Facility, which
provides for debt financing for a term of three years. See Note 10 in the Notes
to Consolidated Financial Statements included in Part IV of this Annual Report
on Form 10-K.

During the Company's fiscal year ended December 31, 2001 and through July 18,
2002, there were no disagreements with Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure which, if not resolved to Andersen's satisfaction, would have
caused them to make reference to the subject matter in connection with their
report on the Company's consolidated financial statements for the fiscal year
ended December 31, 2001, and there were no reportable events as defined in Item
304(a)(1)(v) of Regulation S-K.

The Company provided Arthur Andersen with a copy of the foregoing disclosures
and requested that Arthur Andersen furnish it a letter stating whether it agreed
with the statements herein. The Company has not received a response to that
letter and has not been able to obtain it after reasonable efforts. Accordingly,
pursuant to Item 304T of Regulation S-K, no response from Arthur Andersen is
filed as an exhibit hereto.

During the Company's fiscal year ended December 31, 2001, and the subsequent
interim periods through July 18, 2002, the Company did not consult with Grant
Thornton LLP regarding the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on its consolidated financial statements, or any other matters
or events as set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: The Company, under the
supervision and with the participation of the Company's management, including
the Company's 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, of this
Annual Report on Form 10-K. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures were effective, except as discussed below, as of the end
of the period covered by this Report to provide reasonable assurance that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms.

During the fourth quarter of 2003, management conducted an extensive review of
its consolidation procedures and accounting for investments, in particular as
they relate to a German holding company that held the Company's investment in
EME. After an extensive review by management, it was determined that a portion
of an expected income tax benefit had been recorded twice in 2001, once at the
German subsidiary and once at the parent company. Management disclosed this fact
to its independent auditors, Grant Thornton LLP. Grant Thornton subsequently
verified management's findings and concluded that this was a material weakness
in the system of internal controls in periods prior to the fourth quarter of
2003. Management has enhanced the system of internal controls to address this
matter. The audit committee of the Company's board of directors has been advised
of this matter.

CHANGES IN INTERNAL CONTROLS: Except as noted above, 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.

Page 33



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

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 2004 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 2004 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 2004 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 2004 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 2004 Annual Meeting
of Shareholders.

Page 34



PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) FINANCIAL STATEMENTS

The information required by this Item is included in Item 8 of Part II of this
Annual Report on Form 10-K.

(a) (2) FINANCIAL STATEMENT SCHEDULES

The following financial statement schedule for the years ended December 31,
2003, December 31, 2002, and December 31, 2001 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 called for by this section is listed in the Exhibit Index of
this Annual Report on Form 10-K.

(b) REPORTS ON FORM 8-K

The following reports on Form 8-K were filed by the Company during the quarter
ended December 31, 2003:

Current report on Form 8-K filed November 25, 2003 pursuant to Item 2
(Acquisition Or Disposition Of Assets) and Item 9 (Regulation FD Disclosure).

Current report on Form 8-K filed December 12, 2003 pursuant to Item 5 (Other
Events).

Page 35



SIGNATURES

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

SL INDUSTRIES, INC.
(Company)



By /s/ Warren Lichtenstein Date March 22, 2004
-----------------------
Warren 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 Lichtenstein Date March 22, 2004
--------------------------------------------
Warren Lichtenstein - Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)

By /s/ Glen Kassan Date March 22, 2004
--------------------------------------------
Glen Kassan - President and Director

By /s/ David R. Nuzzo Date March 22, 2004
--------------------------------------------
David R. Nuzzo - Vice President Finance
and Administration, Treasurer and Secretary
(Principal Financial Officer)

By /s/ J. Dwane Baumgardner Date March 22, 2004
--------------------------------------------
J. Dwane Baumgardner - Director

By /s/ Avrum Gray Date March 22, 2004
--------------------------------------------
Avrum Gray - Director

By /s/ James R. Henderson Date March 22, 2004
--------------------------------------------
James R. Henderson - Director

By /s/ James A. Risher Date March 22, 2004
--------------------------------------------
James A. Risher - Director

By /s/ Mark E. Schwarz Date March 22, 2004
--------------------------------------------
Mark E. Schwarz - Director

By /s/ Steven Wolosky Date March 22, 2004
--------------------------------------------
Steven Wolosky - 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.

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 Chairman's Executive Severance Agreement. Incorporated by reference
to Exhibit 10.2 to the Company's report on Form 8 dated November 9,
1990.

10.3 First Amendment to Chairman's Executive Severance Agreement and to
Supplemental Compensation Agreement. Incorporated by reference to
Exhibit 10.3.1 to the Company's report on Form 8 dated November 9,
1990.

10.4 Second Amendment to Chairman's Executive Severance Agreement and to
Supplemental Compensation Agreement. Incorporated by reference to
Exhibit 10.3.2 to the Company's report on Form 8 dated November 9,
1990.

10.5 Third Amendment to Chairman's Executive Severance Agreement and to
Supplemental Compensation Agreement. Incorporated by reference to
Exhibit 10.3.3 to the Company's report on Form 8 dated November 9,
1990.

10.6 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.

10.7 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.

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

10.9 Change-in-Control Agreement dated May 1, 2001 between the Company


Page 37





and James C. Taylor (transmitted herewith).

10.10 Bonus Agreement dated August 5, 2002 between the Company and James
C. Taylor (transmitted herewith).

10.11 Loan and Security Agreement dated effective January 6, 2003 among
LaSalle Business Credit LLC, the Agent for Lender, Standard Federal
National Association, the Lender, SL Industries, Inc. and SL
Delaware, Inc., Collectively, Borrowers and Condor D.C. Power
Supplies, Inc., Teal Electronics Corporation, RFL Electronics, Inc.,
SL Montevideo Technology, Inc., SL Surface Technologies, Inc., SL
Delaware Holdings, Inc., SL Auburn, Inc., Waber Power Ltd., SLW
Holdings, Inc., Condor Holdings, Inc. and Cedar Corporation,
Collectively, Guarantors.

10.12 Management's Agreement between the Company and Steel Partners, Ltd.
(transmitted herewith).

10.13 Lease Agreement.

14 Code of Conduct and Ethics (transmitted herewith).

21 Subsidiaries of the Company (transmitted herewith).

23 Consent of Independent Accountants (transmitted herewith).

31.1 Certification by Principal Executive Officer pursuant to Rule
13a-15(e) and 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.

31.2 Same as 31.1 except Principal Financial Officer.

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.


Page 38



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



Page number in
this report

Report of Independent Public Accountants F2
Previously Issued Arthur Anderson Report F3
Consolidated Balance Sheets F4
Consolidated Statements of Operations F5
Consolidated Statements of Comprehensive Income (Loss) F5
Consolidated Statements of Shareholders' Equity F6
Consolidated Statements of Cash Flows F7
Notes to Consolidated Financial Statements F8 to F38
Financial Statement Schedule:
II. Valuation and Qualifying Accounts F39


F-1


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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, 2003 and 2002, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
financial statements of SL Industries, Inc. and its subsidiaries as of and for
the years ended December 31, 2001, were audited by other auditors who have
ceased operations and whose report dated March 15, 2002 included an explanatory
paragraph that described certain uncertainties regarding the Company's ability
to continue as a going concern. As discussed in Note 3, the Company has restated
its financial statements for the year ended December 31, 2001 in the current
year. The other auditors expressed their opinion prior to such restatement.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
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 financial position of SL Industries, Inc.
and its subsidiaries at December 31, 2003 and 2002 and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.

As discussed in the first paragraph above, the consolidated financial statements
of SL Industries, Inc. and its subsidiaries as of December 31, 2001, and for the
year then ended were audited by other auditors who have ceased operations. As
described in Note 3, the financial statements for December 31, 2002 and 2001
have been restated for an accounting error and to present SL Surface
Technologies, Inc. as a discontinued operation. We audited the adjustments
described in Note 3 that were applied to restate the 2002 and 2001 financial
statements. In our opinion, such adjustments are appropriate and have been
properly applied. However, we were not engaged to audit, review, or apply any
procedures to the 2001 financial statements of the Company other than with
respect to such adjustments and, accordingly, we do not express an opinion or
any other form of assurance on the 2001 financial statements taken as a whole.

As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," on January 1, 2002.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements and financial statement schedule is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

GRANT THORNTON LLP

New York, New York
March 5, 2004




F-2



THIS IS A COPY OF A PREVIOUSLY ISSUED ARTHUR ANDERSEN LLP REPORT.
THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

THE FINANCIAL STATEMENTS REFERRED TO IN ARTHUR ANDERSEN'S REPORT HAVE BEEN
RESTATED SUBSEQUENT TO THE DATE OF THEIR REPORT FOR THE PRESENTATION OF CERTAIN
DISCONTINUED OPERATIONS OCCURRING DURING 2003 AND 2002. GRANT THORNTON LLP HAS
REPORTED ON THE RESTATEMENT ADJUSTMENTS. SEE GRANT THORNTON'S REPORT ON F-2,
INCLUDED HEREIN AND NOTE 3 IN THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INCLUDED IN PART IV OF THIS ANNUAL REPORT ON FORM 10-K.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To SL Industries, Inc.:

We have audited the accompanying consolidated balance sheets of SL Industries,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, comprehensive income (loss),
shareholders' equity and cash flows for the years ended December 31, 2001, and
2000 and July 31, 1999, and for the five months ended December 31, 1999. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SL Industries,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years ended December 31, 2001, and 2000
and July 31, 1999, and for the five months ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company was in technical default under
its revolving credit facility at December 31, 2001 and an additional event of
default occurred on March 1, 2002. Due to these events of default, the lenders
that provide the revolving credit facility do not have to provide any further
financing and have the right to terminate the facility and demand repayment of
all amounts outstanding. The existence of these events of default raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements and financial statement schedule is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
March 15, 2002

F-3



Item 1. Financial Statements

SL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS


December 31,
2003 2002
(as adjusted)
-------------- --------------

ASSETS

Current assets:

Cash and cash equivalents $ 3,501,000 $ 3,539,000

Receivables, net 13,064,000 17,572,000

Note receivable 1,000,000 -

Inventories, net 11,009,000 13,720,000

Prepaid expenses 1,066,000 654,000

Net current assets held for sale - 24,148,000

Deferred income taxes, net 3,947,000 2,690,000
-------------- --------------

Total current assets 33,587,000 62,323,000
-------------- --------------

Property, plant and equipment, net 9,547,000 10,113,000

Deferred income taxes, net 2,308,000 5,118,000

Goodwill, net 10,303,000 10,303,000

Other intangible assets, net 980,000 1,085,000

Other assets and deferred charges 1,696,000 1,725,000
-------------- --------------

Total assets $ 58,421,000 $ 90,667,000
============== ==============

LIABILITIES

Current liabilities:

Debt, current portion $ 887,000 $ 17,557,000

Accounts payable 3,818,000 5,297,000

Accrued income taxes 1,203,000 1,952,000

Net current liabilities held for sale - 15,033,000

Accrued liabilities:

Payroll and related costs 5,665,000 4,907,000

Other 5,402,000 7,470,000
-------------- --------------

Total current liabilities 16,975,000 52,216,000
-------------- --------------

Debt, less current portion 2,015,000 -

Deferred compensation and supplemental retirement benefits 3,904,000 3,875,000

Other liabilities 946,000 1,593,000
-------------- --------------

Total liabilities $ 23,840,000 $ 57,684,000
-------------- --------------

Commitments and contingencies (Note 13)

SHAREHOLDERS' EQUITY

Preferred stock, no par value; authorized, 6,000,000 shares; none
issued $ - $ -

Common stock, $.20 par value; authorized, 25,000,0000 shares;
issued 8,298,000 shares 1,660,000 1,660,000

Capital in excess of par value 38,863,000 38,820,000

Retained earnings 9,018,000 7,698,000

Treasury stock at cost, 2,356,000 and 2,398,000 shares, respectively (14,960,000) (15,195,000)
-------------- --------------
Total shareholders' equity 34,581,000 32,983,000
-------------- --------------
Total liabilities and shareholders' equity $ 58,421,000 $ 90,667,000
============== ==============


See accompanying notes to consolidated financial statements.

F-4



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



2003 2002 2001
(as adjusted) (as adjusted)

Net sales $ 105,284,000 $ 107,912,000 $ 109,770,000
-------------- -------------- --------------

Cost and expenses:

Cost of products sold 66,010,000 69,371,000 75,049,000
Engineering and product development 7,856,000 7,455,000 8,020,000
Selling, general and administrative 22,614,000 23,276,000 24,118,000
Depreciation and amortization 1,851,000 2,634,000 3,670,000
Restructuring costs - 230,000 3,683,000
Asset impairment 275,000 - 4,145,000
Special charges - 1,834,000 -
-------------- -------------- --------------
Total cost and expenses 98,606,000 104,800,000 118,685,000
-------------- -------------- --------------
Income (loss) from operations 6,678,000 3,112,000 (8,915,000)
-------------- -------------- --------------
Other income (expense):
Deferred financing costs (447,000) - -
Interest income 172,000 25,000 153,000
Interest expense (380,000) (2,256,000) (3,261,000)
-------------- -------------- --------------
Income (loss) from continuing operations before income taxes 6,023,000 881,000 (12,023,000)
Income tax provision (benefit) 2,281,000 80,000 (3,571,000)
-------------- -------------- --------------
Income (loss) from continuing operations 3,742,000 801,000 (8,452,000)
Loss from discontinued operations (net of tax) (2,422,000) (1,271,000) (2,927,000)
-------------- -------------- --------------
Net income (loss) $ 1,320,000 $ (470,000) $ (11,379,000)
============== ============== ==============

Basic net income (loss) per common share

Income (loss) from continuing operations $ 0.63 $ 0.14 $ (1.48)
Loss from discontinued operations (net of tax) (0.41) (0.22) (0.52)
-------------- -------------- --------------
Net income (loss) $ 0.22 $ (0.08) $ (2.00)
============== ============== ==============

Diluted net income (loss) per common share

Income (loss) from continuing operations $ 0.63 $ 0.14 $ (1.48)
Loss from discontinued operations (net of tax) (0.41) (0.22) (0.52)
-------------- -------------- --------------
Net income (loss) $ 0.22 $ (0.08) $ (2.00)
============== ============== ==============

Shares used in computing basic net income (loss)
per common share 5,917,000 5,867,000 5,698,000
Shares used in computing diluted net income (loss)
per common share 5,956,000 5,867,000 5,698,000


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



2003 2002 2001
-------------- -------------- --------------
(as adjusted) (as adjusted)

Net income (loss) $ 1,320,000 $ (470,000) $ (11,379,000)
Other comprehensive income (loss):
Currency translation adjustment (net of tax) - 5,000 (67,000)
-------------- -------------- --------------
Comprehensive income (loss) $ 1,320,000 $ (465,000) $ (11,446,000)
============== ============== ==============


See accompanying notes to consolidated financial statements.

F-5



SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY



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, 2000 8,298,000 $ 1,660,000 $ (2,639,000) $ (16,374,000) $ 38,455,000 $ 19,547,000 $ 62,000
Net loss (11,379,000)
Other, including exercise of
employee stock options and
related income tax benefits 440,000
Treasury stock sold 134,000 847,000 130,000
Treasury stock purchased (82,000) (846,000)
Current year translation
adjustment (67,000)
------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2001 8,298,000 $ 1,660,000 $ (2,587,000) $ (16,373,000) $ 39,025,000 $ 8,168,000 $ (5,000)
================================================================================================
Net loss (470,000)
Other, including exercise of
employee stock options and
related income tax benefits 171,000 1,089,000 (221,000)
Treasury stock sold 188,000 1,191,000 16,000
Treasury stock purchased (170,000) (1,102,000)
Reclassification of foreign
currency translation gain
realized upon the sale of
foreign entity (543,000)
Current year translation
adjustment 548,000
------------------------------------------------------------------------------------------------
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 $ -
================================================================================================


See accompanying notes to consolidated financial statements.

F-6



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



2003 2002 2001
---------------------------------------------
(as adjusted) (as adjusted)

OPERATING ACTIVITIES:
Income (loss) from continuing operations $ 3,742,000 $ 801,000 $ (8,452,000)
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by (used in) operating
activities:
Depreciation 1,654,000 1,997,000 2,180,000
Amortization 197,000 637,000 1,490,000
Non cash restructuring charges - 35,000 230,000
Impairment of intangibles 275,000 - 4,145,000
Write-down of inventory - - 2,890,000
Provisions for losses on accounts receivable 23,000 109,000 469,000
Additions to other assets (346,000) 257,000 26,000
Cash surrender value of life insurance policies 21,000 (31,000) (901,000)
Deferred compensation and supplemental retirement
benefits 458,000 516,000 509,000
Deferred compensation and supplemental retirement
benefit payments (545,000) (2,073,000) (439,000)
Decrease (increase) in deferred income taxes 2,122,000 819,000 (1,721,000)
Loss on sales of equipment 9,000 43,000 13,000
Investment in Kreiss Johnson - - 107,000
Changes in operating assets and liabilities, excluding
effects of business acquisitions and dispositions:
Accounts receivable 4,366,000 3,679,000 (2,560,000)
Inventories 2,711,000 2,763,000 1,970,000
Prepaid expenses (410,000) 54,000 302,000
Accounts payable (1,508,000) (2,801,000) (3,001,000)
Other accrued liabilities (1,940,000) 301,000 (755,000)
Accrued income taxes (1,312,000) 1,668,000 1,656,000
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 9,517,000 $ 8,774,000 $ (1,842,000)
------------- ------------- -------------
INVESTING ACTIVITIES:
Proceeds from sale of net assets of subsidiaries 7,600,000 - 1,053,000
Proceeds from sales of equipment - 167,000 -
Purchases of property, plant and equipment (1,616,000) (1,466,000) (1,039,000)
Decrease in notes receivable 2,000 1,000 14,000
Proceeds from cash surrender value of life insurance
policies - 10,676,000 880,000
------------- ------------- -------------
NET CASH PROVIDED BY INVESTING ACTIVITIES $ 5,986,000 $ 9,378,000 $ 908,000
------------- ------------- -------------
FINANCING ACTIVITIES:
Change in deferred financing charges 246,000 (1,141,000) -
Proceeds from life insurance policy - - 256,000
Net proceeds from Senior Credit Facility 3,518,000 18,800,000 24,447,000
Payments to Revolving Credit Facility (17,557,000) (36,903,000) (24,100,000)
Payments of term loans (616,000) - -
Proceeds from stock options exercised 149,000 867,000 440,000
Treasury stock (acquired) sold 129,000 105,000 131,000
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ (14,131,000) $ (18,272,000) $ 1,174,000
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS (1,410,000) 1,193,000 2,226,000
------------- ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (38,000) 1,073,000 2,466,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,539,000 2,466,000 -
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,501,000 $ 3,539,000 $ 2,466,000
============= ============= =============


See accompanying notes to consolidated financial statements.

F-7



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,
power motion, power protection equipment, teleprotection 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.

LIQUIDITY: On January 6, 2003, the Company entered into a three-year senior
secured credit facility (the "Senior Credit Facility") with LaSalle Business
Credit LLC. The Senior Credit Facility provides for a revolving loan and two
term loans, up to a maximum indebtedness of $20,000,000. The Senior Credit
Facility restricts investments, acquisitions, capital expenditures and
dividends. It contains financial covenants relating to minimum levels of net
worth, fixed charge coverages and EBITDA levels, as defined. The Company is
currently in compliance with all the restrictions and covenants of the Senior
Credit Facility (see Note 10). The proceeds at closing from the Senior Credit
Facility were used to repay the Company's former credit facility and for working
capital needs. At December 31, 2003, the outstanding balance under the Senior
Credit Facility was $2,902,000, with borrowing availability thereunder of
$11,128,000. In addition, at December 31, 2003 the Company maintained a cash
balance of $3,501,000.

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.

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, 2003 and December 31,
2002, cash and cash equivalents were held principally at two financial
institutions.

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 $365,000 and $270,000 for 2003 and 2002, 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

F-8



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 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 have to
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 and 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. Effective January 1, 2002, the Company adopted SFAS No. 142 and
implemented certain provisions, specifically the discontinuation of goodwill
amortization, and implemented the remaining provisions during 2002.

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

F-9



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
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, which approximate the interest
method of amortization.

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 2003, 2002 and 2001, these costs were $423,000, $605,000, and
$727,000, respectively.

ADVERTISING COSTS: Advertising costs are expensed as incurred. For 2003, 2002
and 2001, these costs were $296,000, $310,000, and $416,000, respectively.

RESEARCH AND DEVELOPMENT COSTS: Research and development costs are expensed as
incurred. For 2003, 2002 and 2001, these costs were $2,659,000, $2,572,000, and
$2,549,000, 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. A
provision has been made for US and state income taxes for the anticipated
repatriation of certain earnings of foreign subsidiaries of the Company. The
Company considers the undistributed earnings of its foreign subsidiaries above
the amount already provided to be permanently reinvested. As of December 31,
2003, $694,000 of such undistributed earnings were expected to be permanently
reinvested.

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 operations. Through November 2001, a foreign currency loan was
used to hedge the value of the investment in the Company's German operating
subsidiary. Gains and losses on the translation of this foreign currency loan to
U.S. dollars were not included in the statement of operations but shown as a
separate component of shareholders' equity. The Company's German subsidiary was
sold on January 6, 2003. Accordingly, gains or losses related to its currency
translation included in shareholders' equity had been included with the sale of
that subsidiary in discontinued operations.

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.

F-10



NET INCOME (LOSS) PER COMMON SHARE: The Company determines net income (loss) per
share in accordance with Statement of Financial Accounting Standard No. 128
"Earnings per Share." Basic earnings per share is computed by dividing reported
earnings available to common shareholders by weighted average shares
outstanding. Diluted earnings per share is computed by dividing reported
earnings available to common shareholders by weighted average shares outstanding
plus the effect of outstanding dilutive stock options, using the treasury
method.

The following table reconciles the numerators and denominators of the basic and
diluted net income (loss) per common share calculations:



Income (loss) Shares Per share amount

For the Year Ended December 31, 2003:
Basic net income per common share $ 1,320,000 5,917,000 $ 0.22
Effect of dilutive securities -- 39,000 --
----------------------------------------------
Dilutive net income per common share $ 1,320,000 5,956,000 $ 0.22

For the Year Ended December 31, 2002:
Basic net loss per common share $ (470,000) 5,867,000 $ (0.08)
Effect of dilutive securities -- -- --
----------------------------------------------
Dilutive net loss per common share $ (470,000) 5,867,000 $ (0.08)

For the Year Ended December 31, 2001:
Basic net loss per common share $ (11,379,000) 5,698,000 $ (2.00)
Effect of dilutive securities -- -- --
----------------------------------------------
Dilutive net loss per common share $ (11,379,000) 5,698,000 $ (2.00)
----------------------------------------------


For the year ended December 31, 2003, 490,000 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. For the years ended
December 31, 2002 and December 31, 2001, 533,000 and 1,268,000 stock options,
respectively, were excluded from the dilutive computations because their effect
would have been anti-dilutive.

STOCK BASED COMPENSATION: The Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB Opinion No.
25") and related interpretations in accounting for its plans and complies with
the disclosure provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). 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 $290,000 in compensation expense related
to stock option arrangements.

Had compensation cost for the Company's stock option plans been determined based
upon the fair value at the grant date for awards under these plans consistent
with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income (loss) and net income (loss) per common
share would have been as follows:

F-11





Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
(as adjusted)
--------------------------------------------------

Net income (loss), as reported $ 1,320,000 $ (470,000) $ (11,379,000)
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects -- -- --
--------------------------------------------------

Deduct: Total stock-based employee
compensation expense determined under fair value
based method for awards granted, modified, or
settled, net of related tax effects (612,000) (684,000) (739,000)
--------------------------------------------------
Pro forma net income (loss) $ 708,000 $ (1,154,000) $ (12,118,000)
==================================================

Earnings (loss) per share:
Basic - as reported $ 0.22 $ (0.08) $ (2.00)
Basic - pro forma $ 0.12 $ (0.20) $ (2.13)

Diluted - as reported $ 0.22 $ (0.08) $ (2.00)
Diluted - pro forma $ 0.12 $ (0.20) $ (2.13)
==================================================


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:



Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
--------------------------------------------

Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 66.18% 62.55% 45.95%
Risk-free interest rate 2.69% 4.28% 5.0%
Expected life of stock option 5 years 5 years 7 years
============================================


RECENT ACCOUNTING PRONOUNCEMENTS: In August 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS No. 143"), which provides
the accounting requirements for retirement obligations associated with tangible
long-lived assets. This statement requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. At the beginning of the year 2003, the Company adopted this statement,
which did not have an impact on its consolidated financial position or results
of operations.

In April 2002, the FASB adopted SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS No. 145"). This Statement rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and amends, SFAS No. 64, "Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements." This

F-12



Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers" and amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. SFAS No. 145 is effective for fiscal years beginning after May 15,
2002. At the beginning of the year 2003, the Company adopted the provisions of
this statement, which did not have an impact on its consolidated financial
position or results of operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issues No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)"
("Issue 94-3"). The principal difference between this Statement and Issue 94-3
relates to its requirements for recognition of a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was
recognized at the date of an entity's commitment to an exit plan. The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002. At the beginning of the year 2003, the
Company adopted the provisions of this statement, which did not have an impact
on the Company's financial position.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that the
liability be recorded in the guarantor's balance sheet upon the issuance of a
guarantee. In addition, FIN 45 requires disclosure about the guarantees that an
entity has issued, including a reconciliation of changes in the entity's product
warranty liabilities (see Note 11). The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company has adopted the
provisions of FIN 45, which did not have an impact on its consolidated financial
position or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin 51, "Consolidated Financial Statements," for
entities that do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after
December 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The Company has
determined that adoption of the provisions of FIN 46 did not have an impact on
its consolidated financial position or results of operations. In December 2003,
a modification to FIN 46 was issued ("FIN 46R") which delayed the effective date
until no later than fiscal periods ending after March 15, 2004 and

F-13



provided additional technical clarification to implementation issues. The
Company currently does not have any variable interest entities as defined in FIN
46R.

In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables," ("Issue No. 00-21") which requires the
revenue from sales with multiple deliverables be accounted for based on a
determination of whether the multiple deliverables qualify to be accounted for
as separate units of accounting. The consensus is effective prospectively for
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company has determined that adoption of Issue No. 00-21 did not have a material
impact on its consolidated financial position or results of operations.

In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 149 is
effective prospectively for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. The
exception to these requirements are the provisions of SFAS No. 149 related to
SFAS No. 133 implementation issues that have been effective for fiscal quarters
that began prior to June 15, 2003, and should continue to be applied in
accordance with their respective effective dates. In addition, paragraphs 7(a)
and 23(a), which relate to forward purchases or sales of when-issued securities
or other securities that do not yet exist, should be applied to both existing
contracts and new contracts entered into after June 30, 2003. Adoption of SFAS
No. 149 had no impact on the Company's consolidated financial position or
results of operations.

NOTE 2. BUSINESS ACQUISITIONS

RFL ELECTRONICS INC.

On May 11, 1999, the Company acquired 100% of the issued and outstanding shares
of capital stock of RFL Electronics Inc. ("RFL"). The Company paid $11,387,000
in cash and issued $75,000 of promissory notes. In addition, in fiscal 1999 the
Company paid a contingent payment of $1,000,000 based upon the financial
performance of RFL for its fiscal year ended March 31, 1999. RFL is a leading
supplier of teleprotection and specialized communication equipment. The
acquisition was accounted for using the purchase method. Accordingly, the
aggregate purchase price was allocated to the net assets acquired based on their
respective fair values at the date of acquisition. The excess of the aggregate
purchase price over the fair value of net tangible assets acquired of $5,838,000
has been allocated to goodwill and was being amortized on a straight-line basis
over 30 years through December 31, 2001. The results of operations of RFL, since
the acquisition date, are included in the accompanying consolidated financial
statements.

CONDOR D.C. POWER SUPPLIES, INC.

On July 27, 1999, Condor D.C. Power Supplies, Inc. ("Condor"), a wholly-owned
subsidiary of the Company, acquired certain of the net operating assets of Todd
Products Corporation and Todd Power Corporation (together, "Todd Products"). The
Company paid $7,430,000 comprised of $3,700,000 in cash and assumption of debt
equal to approximately $3,730,000. Condor also entered into a ten-year
consulting agreement with the chief executive officer of Todd Products for an
aggregate consulting fee of $1,275,000 to be paid in quarterly installments over
three years. Todd Products was a leading supplier of high quality power supplies
to the datacom, telecommunications and computer industries. The acquisition was
accounted for using the purchase method. Accordingly, the aggregate purchase
price was

F-14



allocated to the net assets acquired, based on their respective fair values at
the date of acquisition. The excess of the aggregate purchase price over the
fair value of net tangible assets acquired of $4,665,000, with $3,390,000
allocated to goodwill and $1,275,000 allocated to the consulting agreement.
During 2001, an evaluation of the remaining value of the Company's goodwill and
the consulting agreement related to Todd Products was undertaken, resulting in
the write-off of the remaining unamortized balance of $4,145,000 due to the
impairment of assets, including the consulting agreement acquired in connection
with the acquisition of Todd Products (see Notes 16 and 18).

NOTE 3. DISCONTINUED OPERATIONS AND RESTATEMENT

SL WABER - Discontinued Operations

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. were 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 operations under discontinued
operations for all periods presented. There was no activity from operations of
SLW Holdings during the fourth quarter of 2001 and hereafter. Net sales from
discontinued operations for the year ended 2001 was $10,316,000. The after-tax
operating loss from discontinued operations for 2001 was $3,947,000. The
provision for income or loss from discontinued operations reflected in the
accompanying consolidated statements of operations includes the loss recognized
in 2001 from the sale of the assets of SL Waber of $2,745,000 and the income or
losses of the subsidiary's operations during all periods presented through
December 31, 2001, net of the expected tax benefits applicable thereto.

ELEKTRO-METALL EXPORT GMBH - Discontinued Operations

On January 6, 2003, the Company sold its wholly-owned, indirect German
subsidiary, Elektro-Metall Export GmbH ("EME"). EME is 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 Company prior
to closing. The purchaser notes are 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 bears interest at an annual rate of 12% and
matures April 3, 2004.

In December 2002, the Board of Directors authorized the sale of EME, which was a
separate reportable segment of the Company. EME is distinguishable as a
component of the Company and met the criteria as held for sale under SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Accordingly,
related operating results of EME have been reported as discontinued operations
for the years ended December 31, 2002 and 2001. At December 31, 2002, the
Company recorded a provision of $1,631,000 ($.28 per share), net of related
income taxes, to reduce the carrying value of EME to its fair value less costs
to dispose.

F-15



Revenue and net income before income taxes from the discontinued operations of
EME (exclusive of the impairment provision) were as follows:



Years Ended December 31,
------------------------
2002 2001
------------------------
(in thousands)

Revenues $ 27,658 $ 25,610
Net income before income taxes $ 3,049 $ 3,436
========================


EME - RESTATEMENTS

During the fourth quarter of 2003, the Company identified an accounting error
that requires restatement related to its consolidated statement of operations
for the year ended December 31, 2001 and the consolidated balance sheet for the
year ended December 31, 2002. This matter relates to an income tax benefit of
$729,000 and recoverable income tax asset recorded in 2001 related to EME. EME
was sold on January 6, 2003, and has been classified as discontinued operations
for all periods presented. The above adjustment is currently reflected in
discontinued operations for 2001. The effect of the adjustment on the December
31, 2002 consolidated balance sheet was not material. The prior periods affected
have also been restated to reflect the sale of SurfTech, which has been
reclassified as discontinued operations for all periods presented, in accordance
with the provisions of SFAS 144. Below is a summary of the correction:



As previously reported Restated
---------------------- --------------

Net loss $ 10,650,000 $ 11,379,000
Recoverable income taxes 4,355,000 3,626,000


SL SURFACE TECHNOLOGIES, INC. - Discontinued Operations

During the third quarter of 2003, the Company completed a strategic review of
its subsidiary, SL Surface Technologies, Inc. ("SurfTech"). As a result of that
review, an impairment charge of $703,000 was recorded during the quarter ending
September 30, 2003. Included in the $703,000 is a charge of $275,000, which was
recorded against the carrying value of the real property where SurfTech
conducted operations, as determined by an independent third party appraiser. An
impairment charge of $428,000 was also recorded during that quarter against
certain machinery and equipment being utilized by SurfTech.

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
reclassified the $428,000 asset impairment charge described above 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.

F-16



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



Years Ended December 31,
--------------------------------------
2003 2002 2001
--------------------------------------
(in thousands)

Revenues $ 1,840 $ 2,237 $ 3,087
--------------------------------------
Net (loss) before income taxes $ (2,941) $ (1,994) $ (1,423)
======================================


The following table represents the restatement required to present EME and
SurfTech as a discontinued operation for the periods presented.

ASSETS AND LIABILITIES HELD FOR SALE INCLUDE THE FOLLOWING:



December 31,
2002
(in thousands)
--------------

Assets:
Cash $ 3,089
Accounts receivable 6,004
Inventory 4,895
Property and equipment, net 7,467
Other 2,693
------------
$ 24,148

Liabilities:
Accounts payable 3,659
Accrued liabilities 7,293
Debt 4,081
------------
$ 15,033
============


F-17



DECEMBER 31, 2002



As Previously SurfTech EME
Reported Adjustment Restatement As Adjusted
(in thousands)
-----------------------------------------------------------------

Current assets $ 38,634 $ (459) $ -- $ 38,175
Assets held for sale 22,950 1,198 -- 24,148
Long lived and other assets 29,083 (739) -- 28,344
-----------------------------------------------------------------
Total assets $ 90,667 $ -- $ -- $ 90,667

Current liabilities $ 36,537 $ (83) $ 729 $ 37,183
Liabilities held for sale 14,950 83 -- 15,033
Long term liabilities 5,468 -- -- 5,468
-----------------------------------------------------------------
Total liabilities $ 56,955 $ -- $ 729 $ 57,684

Equity 33,712 -- (729) 32,983
Total equity and liabilities $ 90,667 $ -- $ -- $ 90,667
=================================================================


YEAR ENDING DECEMBER, 31 2002



As Previously SurfTech Environmental
Reported Adjustment Reclassification As Adjusted
(in thousands)
-----------------------------------------------------------------

Net sales $ 110,149 $ (2,237) $ -- $ 107,912
Costs and expenses 109,722 (3,976) (946) 104,800
-----------------------------------------------------------------
Income from operations 427 1,739 946 3,112
Other income (expense) (2,429) 198 -- (2,231)
-----------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (2,002) 1,937 946 881
Income tax provision (benefit) (755) 449 386 80
-----------------------------------------------------------------
Income (loss) from continuing operations (1,247) 1,488 560 801
Income (loss) from discontinued operations 777 (1,488) (560) (1,271)
-----------------------------------------------------------------
Net (loss) $ (470) $ -- $ -- $ (470)
=================================================================


YEAR ENDING DECEMBER, 31 2001



As Previously SurfTech Environmental EME
Reported Adjustment Reclassification Restatement As Adjusted
(in thousands)
-----------------------------------------------------------------------------

Net sales $ 112,857 $ (3,087) $ -- $ -- $ 109,770
Costs and expenses 123,826 (4,808) (333) -- 118,685
-----------------------------------------------------------------------------
Income from operations (10,969) 1,721 333 -- (8,915)
Other income (expense) (3,108) -- -- -- (3,108)
-----------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes (14,077) 1,721 333 -- (12,023)
Income tax provision (benefit) (4,382) 675 136 -- (3,571)
-----------------------------------------------------------------------------
Income (loss) from continuing
operations (9,695) 1,046 197 -- (8,452)
(Loss) from discontinued operations (955) (1,046) (197) (729) (2,927)
-----------------------------------------------------------------------------
Net (loss) $ (10,650) $ -- $ -- $ (729) $ (11,379)
=============================================================================


F-18



NOTE 4. INCOME TAXES

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



Years Ended December 31,
---------------------------------------------
2002 2001
2003 (as adjusted) (as adjusted)
---------------------------------------------
(in thousands)

U.S. $ 5,724 $ 407 $ (13,972)
Non-U.S. 299 474 1,949
---------------------------------------------
$ 6,023 $ 881 $ (12,023)
=============================================


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



Years Ended December 31,
---------------------------------------------
2002 2001
2003 (as adjusted) (as adjusted)
---------------------------------------------
(in thousands)

Current:
Federal $ 32 $ (691) $ 367
International 144 283 636
State 158 30 487
Deferred:
Federal 1,576 567 (4,176)
International -- -- --
State 371 (109) (885)
--------------------------------------------
$ 2,281 $ 80 $ (3,571)
============================================


The pre-tax domestic loss incurred in 2002 was carried back to prior years
resulting in recoverable income taxes of approximately $1,992,000.

Income tax benefits related to discontinued operations for 2003 and 2001 were
$1,097,000 and $1,065,000, respectively. The provision for income taxes related
to discontinued operations for 2002 was $113,000.

Significant components of the Company's deferred tax assets and liabilities as
of December 31, 2003 and December 31, 2002 are as follows:

F-19





December 31,
December 31, 2002
2003 (as adjusted)
-----------------------------
(in thousands)

Deferred Tax Assets:
Deferred compensation $ 1,836 $ 1,888
Inventory valuation 925 1,014
Tax loss carryforwards 701 1,178
Tax credit carryforwards 1,427 911
Other 964 3,311
----------------------------
5,853 8,302

Less valuation allowances (352) (46)
----------------------------
5,501 8,256
Deferred Tax Liabilities:
Accelerated depreciation and amortization 803 908
----------------------------
4,698 7,348
----------------------------
Assets and Liabilities Related to Discontinued Operations, net 1,557 460
----------------------------
$ 6,255 $ 7,808
============================


As of December 31, 2003, the Company had net operating loss carryforwards for
both U.S. federal and state income tax purposes. As of December 31, 2003, the
Company's net operating loss carryforwards were $1,705,000 for U.S. federal
income tax purposes. These losses can be carried forward 20 years and will
expire in 2022.

The tax benefits of the U.S. Federal loss carryforwards at the current statutory
rate were $580,000 as of December 31, 2003. The tax benefits of the state loss
carryforwards at the current statutory rates were $121,000. The tax benefits for
state loss carryforwards will begin expiring in 2012.

As of December 31, 2003 and December 31, 2002, the Company's gross foreign tax
credits totaled approximately $1,167,000 and $911,000, respectively. These
credits can be carried forward for five years, and will expire between 2004 and
2008.

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 $6,255,000 of net deferred tax assets
as of December 31, 2003 will be realized. The Company has an allowance of
$352,000 provided against the gross deferred tax asset.

F-20



Following is a reconciliation of income tax expense (benefit) at the applicable
federal statutory rate and the effective rates:



Years Ended December 31,
--------------------------------------
2002 2001
2003 (as adjusted) (as adjusted)
--------------------------------------

Statutory rate 34% 34% (34%)
Tax rate differential on Foreign Sales
Corporation/Extraterritorial Income Exclusion
benefit earnings (2) (15) 1
International rate differences 1 8 --
State income taxes, net of federal income tax 5 -- (2)
Taxable gain from surrender of life insurance
policies -- -- 9
Other -- (18) (4)
--------------------------------------
38% 9% (30%)
======================================


NOTE 5. RECEIVABLES

Receivables consist of the following:



December 31, December 31,
2003 2002
(as adjusted)
-----------------------------
(in thousands)

Trade receivables $ 12,656 $ 13,874
Less allowances for doubtful accounts (365) (270)
----------------------------
12,291 13,604
Recoverable income taxes 406 1,992
Other 367 1,976
----------------------------
$ 13,064 $ 17,572
============================


Recoverable income taxes of $1,949,000 were received during 2003 along with
$1,654,000 recorded as other receivables, primarily related to tax refunds from
EME.

NOTE 6. 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-21

NOTE 7. INVENTORIES

Inventories consist of the following:




December 31,
December 31, 2002
2003 (as adjusted)
----------- ------------
(in thousands)

Raw materials $ 8,384 $ 9,924
Work in process 3,769 4,014
Finished goods 1,494 2,367
----------- ------------
13,647 16,305
Less allowances (2,638) (2,585)
----------- ------------
$ 11,009 $ 13,720
============ ============


The above includes certain inventories, which are valued using the LIFO method,
which aggregated $3,307,000 and $3,469,000 as of December 31, 2003 and December
31, 2002, respectively. The excess of FIFO cost over LIFO cost as of December
31, 2003 and December 31, 2002 was approximately $457,000 and $265,000,
respectively.

NOTE 8. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:



December 31,
December 31, 2002
2003 (as adjusted)
----------- ------------
(in thousands)

Land $ 1,149 $ 1,149
Buildings and leasehold improvements 6,772 6,894
Equipment and other property 15,194 13,970
------------ ------------
23,115 22,013
Less accumulated depreciation (13,568) (11,900)
------------ ------------
$ 9,547 $ 10,113
============ ============


F-22



NOTE 9. GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consist of the following:



December 31, 2003 December 31, 2002
------------------------------------ ------------------------------------
Gross Accumulated Gross Accumulated
Value Amortization Net Value Value Amortization Net Value
---------- ------------ ---------- ---------- ------------ ---------
(in thousands)

Goodwill $ 12,167 $ 1,864 $ 10,303 $ 12,167 $ 1,864 $ 10,303
---------- ---------- ---------- ---------- ---------- ----------
Patents 946 594 352 938 523 415
Covenant Not To Compete 110 110 -- 2,980 2,980 --
Trademarks 922 319 603 922 282 640
Other 501 476 25 501 471 30
---------- ---------- ---------- ---------- ---------- ----------
Other Intangible Assets 2,479 1,499 980 5,341 4,256 1,085
---------- ---------- ---------- ---------- ---------- ----------
$ 14,646 $ 3,363 $ 11,283 $ 17,508 $ 6,120 $ 11,388
========== ========== ========== ========== ========== ==========


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. The Company
also tested goodwill for impairment in the fourth quarter of 2002 and recorded a
charge to reduce goodwill in the amount of $556,000 related to SurfTech. This
charge has been reclassified to discontinued operations for fiscal 2002. There
were no impairment charges related to goodwill and intangible assets recorded
during 2003.

In addition, the goodwill related to EME in the amount of $2,431,000 was
included in the basis of the loss calculation related to the sale of that
subsidiary, classified as discontinued operations. The assets and liabilities of
EME are classified as held for sale for the period ended December 31, 2002 and
are excluded from the intangible asset table.

The other intangible assets are all amortizable and have original estimated
useful lives as follows: patents are amortized over approximately 13 years and
trademarks over approximately 25 years. Amortization expense for intangible
assets subject to amortization in each of the next five fiscal years is
estimated to be $111,000 per year.

Amortization expense for 2003, 2002, and 2001 was $113,000, $431,000 and
$398,000, respectively.

The following table reflects the adjustment to exclude goodwill amortization
expense (including related tax effects) recognized in the prior periods as
presented (in thousands, except per share amounts):

F-23




Years Ended December 31,
2003 2002 2001
(as adjusted) (as adjusted)
---------- ------------- ------------
(in thousands)

Reported net income (loss) $ 1,320 $ (470) $ (11,379)
Add back goodwill amortization -- -- 491
---------- ---------- ----------
Adjusted net income (loss) $ 1,320 $ (470) $ (10,888)
---------- ---------- ----------
Income (loss) per share - basic
Reported net income (loss) $ 0.22 $ (0.08) $ (2.00)
Goodwill amortization -- -- 0.09
---------- ---------- ----------
Adjusted net income (loss) $ 0.22 $ (0.08) $ (1.91)
---------- ---------- ----------
Income (loss) per share - diluted
Reported net income (loss) $ 0.22 $ (0.08) $ (2.00)
Goodwill amortization -- -- 0.09
---------- ---------- ----------
Adjusted net income (loss) $ 0.22 $ (0.08) $ (1.91)
========== ========== ==========


NOTE 10. DEBT

Debt consists of the following:



December 31, December 31,
2003 2002
----------- ------------
(in thousands)

Revolving line of credit $ 327 $ 17,557
Term Loan A 1,992 --
Term Loan B 583 --
-------- --------
2,902 17,557

Less current portion (887) (17,557)
-------- --------
Long term debt $ 2,015 $ --
======== ========


During 2002, the Company was a party to a Second Amended and Restated Credit
Agreement dated as of December 13, 2001, as amended (the "Former Credit
Facility"), that allowed the Company to borrow for working capital and other
purposes. The Former Credit Facility contained certain financial and
non-financial covenants, including requirements for certain minimum levels of
net income and a minimum fixed charge coverage ratio, as defined therein, on a
quarterly basis.

The Former Credit Facility provided for payment of a facility fee of $780,000 in
the event that it was not paid in full by October 31, 2002. The Company paid the
facility fee on November 4, 2002. The Company recorded the facility fee as
interest expense during 2002.

As of December 31, 2002, outstanding borrowings under the Former Credit Facility
were $17,557,000. The weighted average interest rate on borrowings during 2002
was 6.56% (weighted average interest rate was 10.01% after factoring in the
facility fee of $780,000). The Former Credit Facility matured on December 31,
2002. The Company did not retire the Former Credit Facility until January 6,
2003, and therefore, was in technical default thereunder at December 31, 2002.

On January 6, 2003, the Company entered into the Senior Credit Facility with
LaSalle Business Credit LLC. The Senior Credit Facility provides 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 is based upon eligible receivables and
inventory and an original overadvance amount of $1,500,000, which is reduced
pro-rata over a two-year term. The two term loans of $2,350,000 and $840,000 are
paid down over a three-year

F-24


term. The Senior Credit Facility restricts investments, acquisitions, capital
expenditures and dividends. The Senior Credit Facility contains financial
covenants relating to minimum levels of net worth, fixed charge coverages,
"EBITDA" levels and maximum levels of capital expenditures, as defined. The
Company is currently in compliance with all the restrictions and covenants of
the Senior Credit Facility. The Senior Credit Facility bears interest ranging
from the prime rate plus fifty basis (.5%) points to the prime rate plus 2%. The
Senior Credit Facility is secured by all of the Company's assets. The Senior
Credit Facility also provides for certain reserves for outstanding letters of
credit and other contingencies, which have reduced the Company's availability
under the revolving loan portion of the Senior Credit Facility. At December 31,
2003, the outstanding revolving loan balance was $327,000 and the outstanding
term loan balances were $1,992,000 and $583,000, or a total of $2,902,000.
Availability under the Senior Credit Facility at December 31, 2003 was
$11,128,000.

The schedule of payments on long-term debt is as follows:



December 31, 2003
-----------------
(in thousands)

2004 $ 887
2005 560
2006 1,455
--------
$ 2,902

Less-current portion 887
--------
Total long-term debt $ 2,015
========


The weighted average interest rate on borrowings during 2003 was 5.09%.

NOTE 11. ACCRUED LIABILITIES AND OTHER

Accrued liabilities and other consist of the following:



December 31,
December 31, 2002
2003 (as adjusted)
----------- -----------
(in thousands)

Taxes other than income and insurance $ 1,062 $ 972
Commissions 484 371
Accrued litigation and legal 1,109 1,391
Professional fees and other expenses 269 1,171
Financing costs --- 714
Environmental 957 875
Warranty 915 897
Other 606 1,079
-------- --------
$ 5,402 $ 7,470
======== ========



Included in professional fees and financing costs above are costs related to the
Company's refinancing of its debt (Note 10), which were paid in 2003. 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).

F-25


A summary of the Company's warranty reserve for 2003 and 2002 are as follows:



December 31,
December 31, 2002
2003 (as adjusted)
----------- ------------
(in thousands)

Liability, beginning of year $ 897 $ 898
Expense for new warranties issued 423 605
Expense related to accrual revisions for prior
year warranties - (341)
Warranty claims (405) (265)
-------- --------
Liability, end of year $ 915 $ 897
======== ========


NOTE 12. RETIREMENT PLANS AND DEFERRED COMPENSATION

The Company maintains three noncontributory defined contribution pension plans
covering substantially all employees. The Company's contributions to these plans
are based on a percentage of employee elective contributions and, in one plan,
plan year gross wages, as defined. Contributions to plans maintained by Teal
Electronics Corporation ("Teal") and RFL are based on a percentage of employee
elective contributions. RFL has also made a profit sharing contribution
annually. Costs incurred under these plans during 2003, 2002 and 2001 amounted
to approximately $1,131,000, $1,232,000 and $1,302,000, 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 $411,000, $334,000 and $396,000,
for 2003, 2002 and 2001, 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, 2003, the aggregate death benefit
totaled $636,000, with the corresponding cash surrender value of all policies
totaling $254,000.

As of December 31, 2001, life insurance policies with a cash surrender value of
approximately $11,109,000 were surrendered to the life insurance company in
exchange for the cash proceeds from the build up of cash surrender value in the
policies. In December 2001 and January 2002, the Company received approximately
$880,000 and $10,229,000, respectively, from the surrender of these policies.
These funds were used to pay down bank debt.

As of December 31, 2003, certain agreements may restrict the Company from
utilizing cash surrender value of certain life insurance policies totaling
approximately $254,000 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 credits (expenses) included in income in
connection with the policies amounted to $0, ($18,000) and $789,000 for 2003,
2002 and 2001, respectively.

F-26



NOTE 13. COMMITMENTS AND CONTINGENCIES

The Company leases certain facilities, equipment and vehicles from third parties
that expire through 2007. The minimum rental commitments as of December 31, 2003
are as follows:



Operating Capital
--------- -------
(in thousands)

2004 $ 1,344 $ 170
2005 833 168
2006 716 153
2007 185 58
2008 - -
Thereafter - -
------- -----
Total minimum payments $ 3,078 $ 549
------- -----
Less: interest on capital leases (82)
-----
Total principal payable on capital leases $467
=====



For 2003, 2002 and 2001, rental expense applicable to continuing operations
aggregated approximately $1,394,000, $1,027,000, and $1,348,000, respectively.

LETTERS OF CREDIT: As of December 31, 2003 and 2002, the Company was
contingently liable for $604,000 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.

The Company's subsidiary, SL Montevideo Technology, Inc. ("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, which when
combined with pre-trial interest brings the total claim to $780,000 which is
fully reserved. Eaton is appealing the decision.

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 are discussed below. 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. SurfTech once operated a chrome-plating facility in
Pennsauken, New Jersey (the "SurfTech Site").

F-27


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. 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 $957,000. 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.
Substantially all of the Company's environmental costs relate to discontinued
operations and all such costs have been recorded in discontinued operations.

The Company is the subject of various other lawsuits and actions relating to
environmental issues, including an administrative action in connection with 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.

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 $500,000. The Company recorded a provision for this amount
during the first quarter of 2002, which is now recorded as part of discontinued
operations.

The Company is investigating possible soil and ground water contamination on
SL-MTI's property in Montevideo, Minnesota. Based upon the preliminary evidence,
the Company does not believe it will incur material remediation costs at this
site.

F-28


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 $2,400,000 prior to fiscal 1998 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. In addition, the
Company received $100,000 per year during fiscal 1998, 1999, 2000 and 2001, as
stipulated in the settlement agreement negotiated with one of the three
insurers. As of December 31, 2003 and 2002, the remaining environmental accruals
of $957,000 and $875,000, respectively, have been included in "Accrued
Liabilities."

EMPLOYMENT AGREEMENTS: Following election of the five new directors, the Company
made payments to certain executive officers under change-of-control agreements
totaling approximately $1,480,000, which is reported as a component of special
charges in the statement of operations in 2002.

The Company also 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 these employees had been
terminated during 2003 and such termination was effective within 12 months of a
change of control, the payments would have aggregated approximately $3,500,000
under the change of control agreements. All senior divisional management teams
are continuing in their positions.

NOTE 14. STOCK OPTIONS AND CAPITAL STOCK

At the Company's 1993 Annual Meeting, the shareholders approved a Nonemployee
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 no options
can be granted under the Director Plan after its May 31, 2003 expiration date.
Information for 2003, 2002 and 2001 with respect to the Director Plan is as
follows:

F-29




WEIGHTED
AVERAGE EXERCISE
SHARES OPTION PRICE PRICE
-----------------------------------------------------
(in thousands, except for option price)
-----------------------------------------------------

Outstanding and exercisable as of December 31, 2000 94 $3.5625 to $14.625 $ 10.05
Granted 16 $6.80 to $14.65 $ 9.73
Exercised (6) $9.1875 to $11.25 $ 10.52
----- ------------------- -------
Outstanding and exercisable as of December 31, 2001 104 $3.5625 to $14.625 $ 9.98
Granted 5 $7.15 to $8.20 $ 7.70
Cancelled (42) $6.80 to $14.625 $ 12.00
----- ------------------- -------
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
===== =================== =======


As of December 31, 2003, 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 the 1995 Annual Meeting, the
shareholders approved an amendment to increase the number of shares subject to
options under the 1991 Plan from 500,000 to 922,650. At the 1998 Annual Meeting,
the shareholders approved an amendment to increase the number of shares subject
to options under the 1991 Plan from 922,650 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, and no future options can be granted under the 1991 Plan as
a result of its expiration on September 25, 2001.

Information for 2003, 2002 and 2001 with respect to the 1991 Plan is as follows:




WEIGHTED
SHARES OPTION PRICE AVERAGE PRICE
-----------------------------------------------------
(in thousands, except for option price)
-----------------------------------------------------

Outstanding as of December 31, 2000 623 $3.25 to $13.50 $ 11.07
Granted 486 $5.75 to $12.175 $ 8.91
Exercised (35) $6.875 to $13.50 $ 10.98
Cancelled (18) $3.25 to $13.50 $ 11.47
----- ---------------- --------
Outstanding as of December 31, 2001 1,056 $3.25 to $13.50 $ 10.08
Exercised (63) $7.55 to $7.85 $ 4.92
Cancelled (252) $3.50 to $13.50 $ 10.39
----- ---------------- --------
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
===== ================ ========


The number of shares exercisable as of December 31, 2003, was 570,000. There
were no shares available for grant as of December 31, 2003.

F-30


Transactions from December 31, 2000 through December 31, 2003, under the above
plans, were as follows:



Number of
Shares Option Price Weighted Weighted Average Life Remaining
(in thousands) per Share Average Price (years)
------------- ---------------- ------------ -------------------------------

Outstanding as of December 31, 2000 825 $3.25 to $14.625 $ 10.06 6.64
Granted 502 $5.75 to $12.175 $ 8.94
Exercised (41) $6.875 to $13.50 $ 10.92
Cancelled (18) $3.25 to $13.50 $ 11.47
------ ---------------- -------- ----
Outstanding as of December 31, 2001 1,268 $3.25 to $14.625 $ 9.56 7.98
------ ---------------- -------- ----
Granted 5 $7.15 to $8.20 $ 7.70
Exercised (171) $3.25 to $6.875 $ 4.42
Cancelled (294) $3.50 to $14.625 $ 10.519
------ ---------------- -------- ----
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
------ ---------------- -------- ----
Exercisable as of December 31, 2003 710 $3.50 to $14.625 $ 10.102
====== ================ ======== ====


The following tables segregate the outstanding options and exercisable options
as of December 31, 2003, into five ranges:



Options Outstanding Range of Option Prices Weighted Weighted Average Life Remaining
(in thousands) per Share Average Price (years)
- ------------------- ---------------------- ------------- --------------------------------

167 $3.50 to $5.75 $ 5.624 7.03
226 $6.00 to $11.125 $ 8.807 6.26
92 $11.156 to $12.156 $11.871 5.59
187 $12.175 to $12.175 $12.175 7.38
140 $12.25 to $14.625 $13.247 5.31
---
812
---




Options Exercisable Range of Option Prices Weighted
(in thousands) per Share Average Price
- ------------------- ---------------------- -------------

129 $3.50 to $5.75 $ 5.587
216 $6.00 to $11.125 $ 8.730
83 $11.156 to $12.156 $11.857
142 $12.175 to $12.175 $12.175
140 $12.25 to $14.625 $13.247
---
710
---


F-31


NOTE 15. CASH FLOW INFORMATION

Supplemental disclosures of cash flow information:



Years Ended December 31,
2002 2001
2003 (as adjusted) (as adjusted)
--------------------------------------------------------------
(in thousands)

Interest paid $321 $2,640 $3,230
Income taxes paid $407 $ 379 $ 461
==============================================================


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.

During 2001, the Company sold substantially all the assets of SL Waber and the
stock of Waber de Mexico S.A. de C.V. The Company received $1,053,000 in cash in
2001 and deconsolidated the net book value of assets sold of $3,798,000.

NOTE 16. INDUSTRY SEGMENTS

The Company currently operates under four business segments: Condor, Teal, RFL
and SL-MTI. 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, 2003, 2002 and 2001, the Company's
reportable segments consisted of Condor, Teal (The Power Electronics Group),
SL-MTI, and RFL.

At December 31, 2002 and 2001, the Company was comprised of five and six
operating business units, respectively. With the sale of EME on January 6, 2003,
the Company has classified this operating segment as discontinued for all
periods presented. On November 24, 2003 the Company sold the operating assets of
SurfTech, accordingly the Company has classified this 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 interference. Teal is a
leader in the design and manufacture of customized 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. New motor and motion controls are used in numerous
applications, including aerospace, medical, and industrial products. RFL designs
and manufactures teleprotection 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 electric utility equipment protection systems. The Other segment includes
corporate related items, financing activities and other costs not allocated to
reportable segments, which includes but not limited to certain legal, litigation
and public

F-32


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 2003, 2002
and 2001. Each of the segments has certain major customers, the loss of any of
which would have a material adverse effect on such entity.



Years Ended December 31,
2003 2002 2001
(as adjusted) (as adjusted)
---------- -------------- -------------
(in thousands)

NET SALES
Power Electronics Group:
Condor $ 39,450 $ 38,058 $ 48,742
Teal 20,393 19,608 13,320
---------- ---------- ----------
Total 59,843 57,666 62,062
---------- ---------- ----------
SL-MTI 22,053 23,007 19,262
RFL 23,388 27,239 28,446
---------- ---------- ----------
Consolidated $ 105,284 $ 107,912 $ 109,770
========== ========== ==========




Years Ended December 31,
2003 2002 2001
(as adjusted) (as adjusted)
---------- -------------- -------------
(in thousands)

INCOME (LOSS) FROM CONTINUING OPERATIONS
Power Electronics Group:
Condor $ 3,377 $ 1,687 $ 1,226
Teal 2,671 1,873 603
---------- ---------- ----------
Total 6,048 3,560 1,829
---------- ---------- ----------
SL-MTI 1,957 1,873 1,981
RFL 2,236 3,435 3,230
Other expenses and Corporate office (3,288) (3,692) (5,237)
Write-down of inventory (a) -- -- (2,890)
Restructuring charges (b) -- (230) (3,683)
Impairment of assets (c) (275) -- (4,145)
Special charges -- (1,834) --
---------- ---------- ----------
Income (loss) from operations 6,678 3,112 (8,915)
Deferred financing costs (447) -- --
Interest income 172 25 153
Interest expense (380) (2,256) (3,261)
---------- ---------- ----------
Income (loss) from continuing operations before taxes $ 6,023 $ 881 $ (12,023)
========== ========== ==========


(a) Includes $2,890 related to Condor (see Note 18).

(b) Includes $3,683 related to Condor (see Note 18).

(c) Includes $275 related to a building owned by the Company which was used by
SurfTech and $4,145 related to Condor for 2001 (see Note 18).

F-33




December 31, 2002
December 31, 2003 (as adjusted)
----------------- -----------------
(in thousands)

TOTAL ASSETS
Power Electronics Group:
Condor $11,439 $16,817
Teal 9,665 10,045
------- -------
Total 21,104 26,862
------- -------
SL-MTI 9,255 9,691
RFL 16,512 16,322
Other including Corporate Office 11,550 37,792
------- -------
Consolidated $58,421 $90,667
======= =======




December 31, 2002
December 31, 2003 (as adjusted)
----------------- -----------------
(in thousands)

INTANGIBLE ASSETS (NET)
Teal $ 6,009 $ 6,107
SL-MTI 25 30
RFL 5,249 5,251
------- -------
Consolidated $11,283 $11,388
======= =======




Years Ended December 31,
2003 2002 2001
(as adjusted) (as adjusted)
--------- ------------ ------------
(in thousands)

CAPITAL EXPENDITURES
Power Electronics Group:
Condor $ 936 $ 511 $ 578
Teal 23 143 11
--------- ---------- ----------
Total 959 654 589
--------- ---------- ----------
SL-MTI 201 206 196
RFL 435 606 195
Other including Corporate Office 21 -- 59
--------- ---------- ----------
Consolidated $ 1,616 $ 1,466 $ 1,039
========= ========== ==========


F-34





Years Ended December 31,
2002 2001
2003 (as adjusted) (as adjusted)
-------------------------------------------
(in thousands)

DEPRECIATION AND AMORTIZATION
Power Electronics Group:
Condor $ 704 $ 1,181 $ 1,745
Teal 268 474 762
------ ------- -------
Total 972 1,655 2,507
------ ------- -------
SL-MTI 304 375 395
RFL 516 562 795
Other including Corporate Office 59 42 (27)
------ ------- -------
Consolidated $1,851 $ 2,634 $ 3,670
====== ======= =======


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



Years Ended December 31,
2003 2002 2001
(as adjusted) (as adjusted)
-------- ------------- -------------
(in thousands)

NET SALES (1)
United States $ 92,169 $ 94,112 $ 97,739
Foreign 13,115 13,800 12,031
-------- -------- --------
Consolidated $105,284 $107,912 $109,770
======== ======== ========
LONG-LIVED ASSETS
United States $19,110 $ 20,200 $ 21,380
Foreign 1,720 1,301 1,814
-------- -------- --------
Consolidated $ 20,830 $ 21,501 $ 23,194
======== ======== ========


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

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. In 2003, the Company began to
outsource some of its products with contract manufacturers located in Sushou and
Dongguan, China. These sources of supply present risks of interruption for
reasons beyond the Company's control, including political and other
uncertainties. During 2002 and 2001, the Company manufactured products in
Ingolstadt, Germany and Paks, Hungary. The locations in Germany and Hungary were
transferred as part of the sale of EME on January 6, 2003. In addition the
Condor plant in Reynosa, Mexico, was closed in March 2002. During 2001, the
Company manufactured products in Nogales, Mexico, which was transferred as part
of the sale of SL Waber in September 2001.

Condor manufactures substantially all of its products in Mexico and incurs its
labor costs and supplies in Mexican pesos. SL-MTI manufactures approximately 45%
of its products in Mexico and incurs related labor costs and supplies in Mexican
pesos. Both Condor 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

F-35


12%, 13% and 11% of sales for 2003, 2002 and 2001, 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 which might
result from adverse fluctuations in the values of the Mexican peso. As of
December 31, 2003, the Company had net liabilities of $233,000 subject to
fluctuations in the value of the Mexican peso. Fluctuations in the value of the
Mexican peso were not significant in 2002 and 2001. However, there can be no
assurance that the value of the Mexican peso will continue to remain stable.

NOTE 18. RESTRUCTURING COSTS AND IMPAIRMENT CHARGES

At December 31, 2001, the Company had a restructuring reserve of $1,053,000
related to continuing operations. This restructuring reserve was established in
2001 to provide for anticipated costs associated with the downsizing of Condor.
During 2002, additional restructuring costs of $230,000 were recorded and were
comprised primarily of $90,000 for severance payments and $140,000 for certain
exit costs related to the closure of Condor's engineering and sales support
office in Brentwood, New York and the manufacturing facility in Reynosa, Mexico.
During 2002 all of the accrued restructuring costs as of December 31, 2001 were
either paid or applied to the write-down of assets during the year. At December
31, 2002 no amount remained in the Company's restructuring reserve. A summary of
the principal components of the restructuring reserve from December 31, 2001 to
December 31, 2002 is set forth below:




Restructuring Accrual December 31, 2001 Increases (Decreases)
- --------------------- ----------------- --------- -----------
(in thousands)


Facility costs $ 654 $ 15 $ (669)
Asset write-off 250 125 (375)
Professional fees 102 -- (102)
Other 47 -- (47)
Severance -- 90 (90)
------ ---- --------
Total $1,053 $230 $ (1,283)
====== ==== ========


The Company recorded restructuring, impairment charges, and inventory
write-downs during 2001 as follows:



Impairment Inventory
Restructuring of Write-
Costs Intangibles Downs
------ ----------- ---------
(in thousands)

Year ended December 31, 2001
Condor - intangible asset impairment $ -- $ 4,145 $ --
Condor - workforce reduction and other 3,683 -- --
Condor - inventory write-off -- -- 2,890
------ -------- --------
Total restructuring and impairment
charges $3,683 $ 4,145 $2,890
====== ======== ========


During 2001, the Company implemented a plan to restructure certain of its
operations as a result of a significant reduction in the demand for products by
telecommunications equipment manufacturers. The

F-36


sharp decrease in orders for telecommunications-related products occurred
abruptly in the first quarter and continued to the end of 2001.

The restructuring plan was designed to reduce fixed costs in line with lower
anticipated sales in a manner that would not overburden personnel and monetary
resources. It consisted of the following actions:

- the closure of Condor's engineering and sales support facility in
Brentwood, New York;

- the closure of Condor's manufacturing facility in Reynosa, Mexico; and

- the substantial reduction of Condor's employees and staff at Condor's
manufacturing facility in Mexicali, Mexico and headquarters in Oxnard,
California.

The charge for facility closures relates primarily to the write-off of equipment
and other fixed assets to be disposed of or abandoned. A portion of the charge
represented management's estimate of the future lease commitments and buyout
options for closed facilities.

The restructuring plan included the termination of approximately 828 employees,
and the payment of related severance benefits. Approximately 810 employees were
terminated during 2001. The remaining terminations and associated termination
payments were made in the first quarter of 2002.

The $2,890,000 inventory write-down in 2001, which was not part of the
restructuring reserve, consisted of Condor's telecommunications-related product
inventory line. The inventory was evaluated based on current backlog and sales
forecasts. Following this evaluation, the Company considered the inventory to
have limited value. The Company disposed of approximately $2,100,000 of this
inventory during 2001.

NOTE 19. RELATED PARTY TRANSACTIONS

As discussed in Note 3 the Company sold EME on January 6, 2003. The Company had
engaged Imperial Capital, LLC to explore the sale of the Company or one or more
of its subsidiaries. Imperial Capital, LLC contacted over four hundred potential
buyers with respect to the sale of the Company and its subsidiaries, and in the
process received several indications of interest to acquire EME. After
negotiations, the Company's Board of Directors determined that in light of the
circumstances including but not limited to the maturity of the Company's Former
Credit Facility on December 31, 2002 and its need for additional capital at that
time, it was in the best interest of the Company to pursue the offer received
for EME from the ultimate purchaser. A principal of the buyer of EME is a
limited partner in Steel Partners II, L.P. ("Steel"), an investment partnership.
The Company's Chairman of the Board and Chief Executive Officer is the sole
executive officer and managing member of Steel.

The Company has paid approximately $334,000 and $340,000 in 2003 and 2002, for
services performed by Olshan Grundman Frome Rosenzweig & Wolosky LLP, a law firm
in which a director of the Company is a senior partner. The fees were related to
the sale of EME, the preparation, filing and amending a Registration Statement
regarding a potential Rights Offering, matters related to the Company's
continuing listing on the New York Stock Exchange and eventual listing on the
American Stock Exchange and general corporate matters. At December 31, 2003 and
2002, approximately $5,000 and $320,000 were payable at the respective year
ends.

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 and Chief
Executive Officer of the Company, Warren Lichtenstein, the Compensation
Committee engaged an independent firm to provide a report and advice regarding
the amount of management fees that should be payable to SPL. These fees are the
only consideration for the services of the Chairman of the Board and Chief
Executive Officer, Warren Lichtenstein, the Company's President, Glen Kassan,
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. A fee of $475,000 and $362,000 was expensed by the
Company for SPL's 2003 and 2002 services. At December 31, 2003 and 2002,
approximately $40,000 and $362,000 were payable at the respective year ends.


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

F-37


the years ended 2003, 2002 and 2001 were $621,000, $978,000 and $ 941,000,
respectively. Accounts receivable due from RFL Communications at December 31,
2003 was $53,000.

NOTE 20. SUBSEQUENT EVENTS

In 1997, the Company, through a wholly-owned subsidiary, commenced a patent
infringement action against American Power Conversion Corporation ("APC") in the
United States District Court for the Southern District of New Jersey. The
complaint alleged that APC infringed a patent held by the subsidiary, and sought
damages resulting from APC's infringement. On February 3, 2004, the Company and
APC executed a Settlement Agreement that provided, among other things, for the
release of all claims against APC and the granting to APC a paid-up license, in
return for the payment to the Company of $4,000,000. The Settlement Agreement
was conditioned on the dismissal with prejudice of the lawsuit. On March 5,
2004, the District Court dismissed the lawsuit with prejudice and the settlement
fee was paid to the Company. A third party has threatened certain claims against
the Company relating to this matter for a portion of the payment. The Company
disputes such claims and intends to defend them vigorously.

NOTE 21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)



Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
March 31, 2003 June 30, 2003 September 30, 2003 December 31, 2003
(as adjusted) (as adjusted) (as adjusted) (as adjusted)
-------------- ------------- ------------------ -----------------
(in thousands, except per share data)

YEAR ENDED DECEMBER 31, 2003
Net sales (a) $ 25,710 $ 26,927 $ 26,243 $ 26,404
Gross margin (b) $ 8,996 $ 10,287 $ 9,639 $ 10,352
Income (loss) from continuing operations $ 818 $ 1,706 $ 1,415 $ 2,084
before income taxes (c)
Net income (loss) (d) $ 186 $ 699 $ 155 $ 280
Diluted net income per common share $ 0.03 $ 0.12 $ 0.03 $ 0.05

(a) Excludes net sales from discontinued $ 508 $ 517 $ 489 $ 326
operations of
(b) Excludes gross margin from $ 103 $ 139 $ (21) $ 82
discontinued operations of
(c) Excludes income (losses) before $ (445) $ (648) $ (1,030) $ (1,461)
income taxes from discontinued
operations of
(d) Includes income (losses) from $ (285) $ (428) $ (706) $ (1,003)
discontinued operations net of tax


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Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002
(as adjusted) (as adjusted) (as adjusted) (as adjusted)
-------------- ------------- ------------------ -----------------
(in thousands, except per share data)

YEAR ENDED DECEMBER 31, 2002
Net sales (e) $ 26,919 $ 27,350 $ 26,532 $ 27,111
Gross margin (f) $ 10,430 $ 9,262 $ 9,776 $ 9,073
Income from continuing operations $ (730) $ 328 $ (157) $ 1,440
before income taxes (g)
Net income (loss)(h) $ (376) $ 331 $ 549 $ (974)
Diluted net income per common share $ (0.07) $ 0.06 $ 0.10 $ (0.17)

(e) Excludes net sales from $ 6,029 $ 7,059 $ 8,048 $ 8,759
discontinued operations of
(f) Excludes gross margin from $ 1,185 $ 1,777 $ 2,188 $ 2,483
discontinued operations of
(g) Excludes income (losses) before $ (111) $ 18 $ 691 $ (1,757)
income taxes from discontinued
operations of
(h) Includes income (losses) from $ (47) $ 2 $ 422 $ (1,648)
discontinued operations net of tax


SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS



Additions
---------------------------
Balance at Charged to Charged
Beginning of Costs and to Other Balance at
Description Period Expenses Accounts Deductions End of Period
----------- ------------ ---------- -------- ---------- -------------
(In thousands)

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

YEAR ENDED DECEMBER 31, 2002
Allowance for:
Doubtful accounts $ 538 $ 109 $ -- $ 377(b) $ 270

YEAR ENDED DECEMBER 31, 2001
Allowance for:
Doubtful accounts $ 331 $ 447 $ -- $ 240(b) $ 538


(a) Due to reclassifications.

(b) Accounts receivable written off, net of recoveries.

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