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

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

OR

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

Commission file number 1-4987

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

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

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

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

N/A
- --------------------------------------------------------------------------------
(Former name, former address and formal fiscal year, if changed since last
report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant 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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The number of shares of common stock outstanding as of May 3, 2005 were
5,513,912.



TABLE OF CONTENTS



PAGE
----

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2005 (Unaudited) and December 31, 2004............ 1
Consolidated Statements of Operations and Comprehensive Income
Three Months Ended March 31, 2005 and 2004 (Unaudited)...... 2
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2005 and 2004 (Unaudited)...... 3

Notes to Consolidated Financial Statements (Unaudited)......... 4

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 16

Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 27

Item 4. Controls and Procedures........................................... 27

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds............................................ 27

Item 6. Exhibits.......................................................... 28

SIGNATURES.................................................................... 29





Item 1. Financial Statements

SL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS



March 31, December 31,
2005 2004
------------ ------------
(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 1,926,000 $ 2,659,000
Marketable securities ........................................... 433,000 -
Receivables, net ................................................ 17,611,000 15,734,000
Inventories, net ................................................ 15,248,000 15,839,000
Prepaid expenses ................................................ 1,059,000 714,000
Deferred income taxes, net....................................... 3,139,000 3,044,000
------------ ------------
Total current assets................................... 39,416,000 37,990,000
------------ ------------

Property, plant and equipment, net ..................................... 8,379,000 8,509,000
Deferred income taxes, net ............................................. 3,001,000 3,280,000
Goodwill, net .......................................................... 10,303,000 10,303,000
Other intangible assets, net ........................................... 1,181,000 1,209,000
Other assets and deferred charges ...................................... 1,635,000 1,793,000
------------ ------------
Total assets........................................... $ 63,915,000 $ 63,084,000
============ ============

LIABILITIES

Current liabilities:
Debt, current portion ........................................... $ 1,828,000 $ 559,000
Accounts payable................................................. 5,158,000 5,626,000
Accrued income taxes ............................................ 1,208,000 962,000
Accrued liabilities
Payroll and related costs.................................... 5,484,000 6,059,000
Other........................................................ 4,923,000 5,288,000
------------ ------------
Total current liabilities ............................. 18,601,000 18,494,000
------------ ------------
Debt, less current portion ............................................. - 1,456,000
Deferred compensation and supplemental retirement benefits ............. 3,819,000 3,858,000
Other liabilities....................................................... 1,556,000 1,589,000
------------ ------------
Total liabilities ..................................... 23,976,000 25,397,000
------------ ------------

Commitments and contingencies (Note 11)

SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized, 6,000,000 shares;
none issued........................................................... $ - $ -
Common stock, $.20 par value; authorized, 25,000,000 shares;
issued, 8,298,000 shares ............................................. 1,660,000 1,660,000
Capital in excess of par value ......................................... 39,306,000 39,210,000
Accumulated other comprehensive income ................................. 13,000 -
Retained earnings ...................................................... 19,589,000 17,690,000
Treasury stock at cost, 2,810,000 and 2,844,000 shares, respectively ... (20,629,000) (20,873,000)
------------ ------------
Total shareholders' equity ............................ 39,939,000 37,687,000
------------ ------------
Total liabilities and shareholders' equity ............ $ 63,915,000 $ 63,084,000
============ ============


See accompanying notes to consolidated financial statements.

1


SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)



Three Months Ended
March 31,
2005 2004
------------ ------------

Net sales .................................................... $ 32,456,000 $ 26,641,000
Cost and expenses:
Cost of products sold .................................... 20,595,000 17,045,000
Engineering and product development ...................... 2,323,000 2,208,000
Selling, general and administrative ...................... 6,327,000 5,720,000
Depreciation and amortization ............................ 474,000 474,000
------------ ------------
Total costs and expenses ..................................... 29,719,000 25,447,000
------------ ------------
Income from operations ....................................... 2,737,000 1,194,000
Other income (expense):
Amortization of deferred financing costs ................. (112,000) (112,000)
Interest income .......................................... 29,000 43,000
Interest expense ......................................... (88,000) (89,000)
------------ ------------
Income from continuing operations before income taxes ........ 2,566,000 1,036,000
Income tax provision ......................................... 597,000 351,000
------------ ------------
Income from continuing operations ............................ 1,969,000 685,000
Income (loss) from discontinued operations (net of tax) ...... (70,000) 2,457,000
------------ ------------
Net income ................................................... $ 1,899,000 $ 3,142,000
============ ============

BASIC NET INCOME (LOSS) PER COMMON SHARE
Income from continuing operations ........................ $ 0.36 $ 0.12
Income (loss) from discontinued operations
(net of tax)........................................... $ (0.01) 0.41
------------ ------------
Net income ............................................... $ 0.35 $ 0.53
============ ============

DILUTED NET INCOME (LOSS) PER COMMON SHARE
Income from continuing operations ..................... $ 0.35 $ 0.11
Income (loss) from discontinued operations
(net of tax)........................................ $ (0.01) 0.41
------------ ------------
Net income ............................................ $ 0.34 $ 0.52
============ ============

Shares used in computing basic net income (loss)
per common share ......................................... 5,473,000 5,939,000
Shares used in computing diluted net income (loss)
per common share ......................................... 5,624,000 6,032,000


SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)



Three Months Ended
March 31,
2005 2004
------------ ------------

Net Income ............................. $ 1,899,000 $ 3,142,000
Other comprehensive income, net of tax:
Unrealized gain on securities.... 13,000 -
------------ ------------
Comprehensive income ................... $ 1,912,000 $ 3,142,000
============ ============


See accompanying notes to consolidated financial statements.

2


SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004
(Unaudited)


2005 2004*
----------- -----------

OPERATING ACTIVITIES:
Income from continuing operations ........................................................ $ 1,969,000 $ 685,000
Adjustments to reconcile income from continuing operations
to net cash used in operating activities:
Depreciation........................................................................... 379,000 406,000
Amortization........................................................................... 95,000 68,000
Amortization of deferred financing costs .............................................. 112,000 112,000
Non-cash compensation (benefit) expense ............................................... (8,000) 394,000
Provisions for losses on accounts receivable .......................................... 24,000 (5,000)
Deferred compensation and supplemental retirement benefits ............................ 99,000 114,000
Deferred compensation and supplemental retirement benefit payments .................... (135,000) (137,000)
(Increase) decrease in deferred income taxes .......................................... (9,000) 35,000
Changes in operating assets and liabilities, excluding effects of business disposition:
Accounts receivable ................................................................ (1,989,000) (2,139,000)
Inventories......................................................................... 591,000 (1,488,000)
Prepaid expenses ................................................................... (357,000) (326,000)
Other assets ....................................................................... (20,000) (46,000)
Accounts payable ................................................................... (468,000) 2,549,000
Accrued liabilities ................................................................ (824,000) (1,679,000)
Accrued income taxes ............................................................... 272,000 (162,000)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES....................................................... (269,000) (1,619,000)
----------- -----------

INVESTING ACTIVITIES:
Purchases of property, plant and equipment................................................ (263,000) (351,000)
Purchases of securities available for sale ............................................... (413,000) -
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ...................................................... (676,000) (351,000)
----------- -----------

FINANCING ACTIVITIES:
Payments of term loans ................................................................... (187,000) (141,000)
Payments to Revolving Credit Facility, net................................................ - (187,000)
Proceeds from stock options exercised..................................................... 275,000 75,000
Treasury stock sales (purchases) ......................................................... 65,000 (150,000)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........................................ 153,000 (403,000)
----------- -----------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS ............................................... 59,000 3,870,000
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................................................... (733,000) 1,497,000
----------- -----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................................... 2,659,000 3,501,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................. $ 1,926,000 $ 4,998,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .............................................................................. $ 154,000 $ 92,000
Income taxes .......................................................................... $ 135,000 $ 234,000


* Reclassified for comparative purposes.


See accompanying notes to consolidated financial statements.



3


SL INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying financial
statements contain all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation. Operating results for interim
periods are not necessarily indicative of the results that may be expected for
the year ending December 31, 2005. These financial statements should be read in
conjunction with the Company's audited financial statements and notes thereon
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2004.

2. MARKETABLE SECURITIES

The Company has classified its investments in marketable securities as
"available-for-sale" in accordance with the provisions of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). The investments, which have a cost basis of $413,000,
are carried at fair value determined by currently available market prices. The
unrealized gain, net of tax, in the amount of $13,000, is reported in
accumulated other comprehensive income as a component of shareholders' equity
until realized.

3. RECEIVABLES

Receivables at March 31, 2005 and December 31, 2004 consisted of the following:



March 31, December 31,
2005 2004
-------- --------
(in thousands)

Trade receivables ................... $ 17,860 $ 15,771
Less allowances for doubtful
accounts............................ (503) (472)
-------- --------
17,357 15,299
Recoverable income taxes ............ 45 82
Other ............................... 209 353
-------- --------
$ 17,611 $ 15,734
======== ========


4


4. INVENTORIES

Inventories at March 31, 2005 and December 31, 2004 consisted of the following:



March 31, December 31,
2005 2004
------- -------
(in thousands)
-------------------

Raw materials $ 9,914 $ 9,669
Work in process 5,572 5,000
Finished goods 2,533 3,633
-------- --------
18,019 18,302
Less allowances (2,771) (2,463)
-------- --------
$ 15,248 $ 15,839
======== ========


5. INCOME PER SHARE

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

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



Three Months Ended March 31,
2005 2004
------------------------- -----------------------------
(in thousands, except per share amounts)
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------

Basic net income per
common share $1,899 5,473 $0.35 $3,142 5,939 $0.53
Effect of dilutive
securities - 151 ($0.01) - 93 ($0.01)
------ ----- ----- ------- ----- -----
Diluted net income per
common share $1,899 5,624 $0.34 $3,142 6,032 $0.52
====== ===== ===== ====== ===== =====


For the three-month periods ended March 31, 2005 and March 31, 2004, common
stock options of 79,503 and 454,779, respectively, were excluded from the
diluted computations because the option exercise prices were greater than the
average market price of the Company's common stock during these periods.

STOCK-BASED COMPENSATION

In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure"
("SFAS No. 148"), an amendment of SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123").

5


SFAS No. 148 provides alternative methods for a voluntary change to the fair
value method of accounting for stock-based employee compensation and amends the
disclosure requirements of SFAS No. 123. The Company has elected to continue to
account for its stock-based employee compensation plans under Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB
No. 25") and related interpretations. The following disclosures are provided in
accordance with SFAS No. 148.

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 ($8,000) and $244,000 in the
three-month periods ended March 31, 2005 and March 31, 2004, respectively, in
compensation (benefit) expense related to certain stock based compensation
arrangements.

The exercise price of all stock options generally equals the market price of the
Company's common stock on the date of grant. Compensation cost has been
recognized for the Company's stock option plans as noted in the table below. Had
compensation cost for the Company's stock option plans been determined based
upon the fair value at the grant date for awards under these plans, consistent
with the methodology prescribed under SFAS No. 123, the Company's net income and
net income per common share would have been as follows:



Three Months Ended
March 31,
2005 2004
------- ---------
(in thousands, except
per share amounts)

Net income, as reported $ 1,899 $ 3,142
Add: Stock-based employee compensation
(benefit) expense included in reported net
income, net of related tax effects (5) 190
------- ---------
1,894 3,332
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for awards granted,
modified, or settled, net of related tax effects (22) (257)
------- ---------
Pro forma net income $ 1,872 $ 3,075
======= =========
Earnings per common share:
Basic - as reported $ 0.35 $ 0.53
Basic - pro forma $ 0.34 $ 0.52

Diluted - as reported $ 0.34 $ 0.52
Diluted - pro forma $ 0.33 $ 0.51


In December 2004, the FASB revised SFAS No. 123 by issuing SFAS 123(R),
"Share-Based Payment" (Note 7).

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:

6




Three Months Three Months
Ended Ended
March 31 March 31,
2005 2004
------------ -----------

Expected dividend yield 0.0% 0.0%
Expected stock price volatility 45.40% 63.56%
Risk-free interest rate 4.13% 2.81%
Expected life of stock option 5 years 5 years
------------ -----------


The fair value of the above stock-based compensation costs was determined using
the Black-Scholes option valuation model. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options,
which have no vesting restrictions, are fully transferable and do not include a
discount for large block trades. In addition, option valuation models require
the input of highly subjective assumptions, including the expected stock price
volatility, expected life of the option and other estimates.

6. INCOME TAX

The following is a reconciliation of income tax expense at the applicable
federal statutory rate and the effective rates:



Three Months Ended March 31,
----------------------------
2005 2004
---- ----

Statutory rate 34% 34%
Tax rate differential on extraterritorial
income exclusion benefit earnings (1%) (3%)
Tax rate differential on domestic
manufacturing deduction (1%) --
International rate differences 1% (1%)
State income taxes, net of federal income tax benefit 4% 5%
Research and development tax credits (10%) (1%)
Other (4%) 0%
--- --
23% 34%
=== ==


During the quarter ended March 31, 2005, the Company recorded additional
benefits from research and development tax credits of $267,000 primarily related
to the prior year. As of March 31, 2005, the Company's gross research and
development tax credits totaled approximately $2,863,000. Of these credits,
approximately $2,317,000 can be carried forward for fifteen years and expire
between 2013 and 2020, while $546,000 will carry over indefinitely.

7. RECENT AND PROPOSED ACCOUNTING PRONOUNCEMENTS

In November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4" ("SFAS No.
151"). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage) and requires
these costs be treated as current period charges. In addition, SFAS No. 151
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. These
provisions of SFAS No. 151 are effective

7


for inventory costs incurred during fiscal years beginning after June 15, 2005.
We are currently evaluating the impact of SFAS No. 151 on our financial position
and results of operations.

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

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

8



8. GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consist of the following:



March 31, 2005 December 31, 2004
-------------------------------------- --------------------------------------
Accumulated Accumulated
Gross Value Amortization Net Value Gross Value Amortization Net Value
----------- ------------ --------- ----------- ------------ ---------
(in thousands)

Goodwill $12,167 $ 1,864 $10,303 $12,167 $ 1,864 $10,303
------- ------- ------- ------- ------- -------
Other Intangible Assets:
Patents 946 684 262 946 666 280
Covenant Not to Compete 110 110 - 110 110 -
Trademarks 922 350 572 922 350 572
Licensing Fees 355 27 328 355 18 337
Other 437 418 19 437 417 20
------- ------- ------- ------- ------- -------
Total Other Intangible Assets 2,770 1,589 1,181 2,770 1,561 1,209
------- ------- ------- ------- ------- -------
$14,937 $ 3,453 $11,484 $14,937 $ 3,425 $11,512
======= ======= ======= ======= ======= =======


The other intangible assets that have definite lives are all amortizable and
have original estimated useful lives as follows: patents are amortized over
approximately 13 years and licensing fees over approximately 10 years.
Amortization expense for intangible assets for each of the three-month periods
ended March 31, 2005 and March 31, 2004 was $28,000. Amortization expense for
intangible assets subject to amortization in each of the next five fiscal years
is estimated to be $113,000 for the next three years, $68,000 in the fourth year
and $41,000 in the fifth year. Intangible assets subject to amortization have a
weighted average life of approximately 12 years.

9. DEBT

Debt consists of the following:



March 31, December 31,
2005 2004
------- -------
(in thousands)
----------------------

Term loan A $ 1,469 $ 1,600
Term loan B 359 415
------- -------
1,828 2,015
Less current portion (1,828) (559)
------- -------
Total long-term debt $ - $ 1,456
======= =======


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 revolving loan of up to $16,810,000 is
based upon eligible receivables and inventory, as well as an overadvance amount
of $1,500,000. The overadvance amount was fully paid down on April 7, 2004. The
two term loans of $2,350,000 and $840,000 are being paid down over a three-year
term. The Senior Credit Facility restricts investments, acquisitions, capital
expenditures and dividends. The Senior Credit Facility also contains financial
covenants relating to minimum levels of net worth, fixed charge coverages,
levels of earnings before interest, taxes, depreciation and amortization and
maximum levels of capital expenditures, as defined.

9


The Company's Senior Credit Facility bears interest ranging from the prime rate
plus fifty basis 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 March 31, 2005, the outstanding term loan
balances were $1,469,000 and $359,000, or a total of $1,828,000. The entire
amount of the loan balances have been classified as current debt for 2005 since
the Senior Credit Facility expires on January 6, 2006. The outstanding term loan
balances bore interest at an annual rate of 6.25%. Availability under the Senior
Credit Facility at March 31, 2005 was $13,176,000. The Company is in discussions
with a commercial bank to refinance the Senior Credit Facility before its
expiration date.

10. ACCRUED LIABILITIES - OTHER

Accrued Liabilities - Other consist of the following:



March 31, December 31,
2005 2004
-------- -----------
(in thousands)
-------------------------

Taxes (other than income) and insurance $ 720 $ 805
Commissions 437 482
Accrued litigation and legal fees 1,213 1,190
Other professional fees 340 689
Environmental 1,197 1,275
Warranty 958 921
Other 1,047 915
Reclassified to long-term liabilities (989) (989)
------- -------
$ 4,923 $ 5,288
======= =======


The Company's warranty reserve, which is included in "Accrued Liabilities -
Other" above, for the period ended March 31, 2005, is as follows:



March 31,
2005
--------------
(in thousands)
--------------

Liability, beginning of year $ 921
Expense for new warranties issued 302
Expense related to accrual revisions for prior year 14
Warranty claims (279)
-----
Liability, end of period $ 958
=====


11. COMMITMENTS AND CONTINGENCIES

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.

10


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 United States
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 approximately
$800,000. After an appeal by Eaton, the Unites States Court of Appeals for the
Sixth Circuit recently upheld the judgment of the trial court.

On February 3, 2004, the Company and American Power Conversion Corporation
("APC") executed a settlement agreement in connection with a lawsuit brought by
the Company against APC. Among other things the settlement agreement provided
for the payment to the Company of $4,000,000, which was paid on March 5, 2004. A
third party had threatened certain claims against the Company relating to this
matter for a portion of the payment. In March 2005, the Company agreed to a
mutual settlement with the third party of this matter, which had been fully
accrued at December 31, 2004 and did not have a material impact on the Company's
financial position and results of operations.

On June 12, 2002, the Company and its wholly owned subsidiary, SL Surface
Technologies, Inc. ("SurfTech"), were served with notice of a class action
complaint filed in Superior Court of New Jersey for Camden County.
(Substantially all of the operating assets of SurfTech were sold in November
2003). The Company and SurfTech are currently two of approximately 39 defendants
in this action. The complaint alleges, among other things, that the plaintiffs
suffered personal injuries as a result of consuming water distributed from the
Puchack Wellfield in Pennsauken, New Jersey (which supplied 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").

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 and there
are several other technical factors and defenses available to the Company. Based
on the foregoing, 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

11


adverse effect on the business, operating results, financial condition or cash
flows of the Company.

ENVIRONMENTAL

Loss contingencies include potential obligations to investigate and eliminate or
mitigate the effects on the environment of the disposal or release of certain
chemical substances at various sites, such as Superfund sites and other
facilities, whether or not they are currently in operation. The Company is
currently participating in environmental assessments and cleanups at a number of
sites under these laws and may in the future be involved in additional
environmental assessments and cleanups. Based upon investigations completed by
the Company and its independent engineering-consulting firms to date, management
has provided an estimated accrual for all known costs believed to be probable in
the amount of $1,197,000. 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"). Technical data generated
as part of remedial activities at the SurfTech Site have not established offsite
migration of contaminants and there are other technical factors and defenses
available to the Company. Based on the foregoing, the Company has been advised
by its outside counsel 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 on the information
so far, the Company believes that the cost to remediate the property should not
exceed approximately $560,000, which has been fully reserved.

The Company is investigating soil and ground water contamination on SL-MTI's
property in Montevideo, Minnesota. The Company has submitted to the Minnesota
Department of Environmental Protection a plan to remediate the site, which is
currently under review. The Company currently has an accrual of $197,000 for all
known costs believed to be probable related to 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 $2,800,000 prior to fiscal 2001 and
contingent 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,

12


15% of costs up to $150,000 and 20% of costs up to $400,000, respectively.
Through March 31, 2005, the Company received from these three insurers a total
of $654,000 as payment of their contingent commitments through 2004, which are
recorded in discontinued operations.

As of March 31, 2005 and December 31, 2004, the Company has accrued $1,197,000
and $1,275,000, respectively, for known costs believed to be probable related to
environmental matters, and have been included in "Accrued Liabilities - Other"
(Note 10).

12. SEGMENT INFORMATION

The Company currently operates under four business segments: Condor D.C. Power
Supplies, Inc. ("Condor"), Teal Electronics Corp. ("Teal"), SL Montevideo
Technology, Inc. ("SL-MTI") and RFL Electronics Inc. ("RFL"). Since the second
quarter of 2003, management has combined Condor and Teal into one business unit
classified as the Power Electronics Group.

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 include but are not limited to certain legal, litigation and
public reporting charges and the results of insignificant operations.

The unaudited comparative results for the three-month periods ended March 31,
2005 and March 31, 2004 are as follows:



Three Months Ended
March 31,
2005 2004
------- ------
(in thousands)
---------------------

NET SALES
Power Electronics Group:
Condor $11,318 $ 7,863
Teal 7,552 7,393
------- -------
Total 18,870 15,256
------- -------
SL-MTI 6,770 5,896
RFL 6,816 5,489
------- -------
Consolidated $32,456 $26,641
======= =======


13




Three Months Ended
March 31,
2005 2004
------- --------
(in thousands)
----------------------

INCOME FROM OPERATIONS
Power Electronics Group:
Condor $ 1,132 ($ 124)
Teal 1,071 1,334
------- -------
Total 2,203 1,210
------- --------
SL-MTI 979 640
RFL 823 424
Other (1,268) (1,080)
------- -------
Consolidated $ 2,737 $ 1,194
======= =======





March 31, December 31,
2005 2004
-------- -----------
(in thousands)
------------------------

TOTAL ASSETS
Power Electronics Group:
Condor $14,398 $14,105
Teal 13,469 12,742
------- -------
Total 27,867 26,847
------- -------
SL-MTI 11,237 10,849
RFL 16,486 16,767
Other 8,325 8,621
------- -------
Consolidated $63,915 $63,084
======= =======




March 31, December 31,
2005 2004
-------- -----------
(in thousands)
-----------------------

INTANGIBLE ASSETS, NET
Teal $ 5,888 $ 5,906
SL-MTI 19 20
RFL 5,577 5,586
------- -------
Consolidated $11,484 $11,512
======= =======


13. DISCONTINUED OPERATIONS

SL WABER

In August, 2001, SL Waber, Inc. ("SL Waber") sold substantially all of its
assets including the stock of Waber de Mexico S.A. de C.V. 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, SL
Waber changed its name to SLW Holdings, Inc. ("SLW Holdings"). There was no
activity from operations of SLW Holdings during the fourth quarter of 2001 and
thereafter and the net income or losses of SLW Holdings are included in the

14


consolidated statements of operations under discontinued operations for all
periods presented. In 1997, SL Waber commenced patent infringement litigation
against APC, the rights to which were retained by SL Waber after the sale. In
February 2004, the Company and APC executed a settlement agreement that
provided, among other things, for a release of all claims against APC and
granted 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 settlement fee was paid to the
Company. The settlement fee, net of tax, in the amount of $2,516,000 is recorded
as part of discontinued operations in the Company's consolidated statements of
operations and cash flows for the three months ended March 31, 2004. A third
party had threatened certain claims against the Company relating to this matter
for a portion of the payment. On March 22, 2005, the Company paid a settlement
fee to that third party related to this matter (see Note 11), which had been
fully reserved. The cash effect of the payment is recorded in the cash flow
statement as part of discontinued operations.

ELEKTRO-METALL EXPORT GMBH

On January 6, 2003, the Company sold its wholly-owned, indirect German
subsidiary, Elektro-Metall Export GmbH ("EME"). Part of the proceeds of sale
included a $1,000,000 unsecured note and which was paid in full in April 2004.
All cash proceeds relating to the purchase price for the sale of EME have been
received by the Company.

SL SURFACE TECHNOLOGIES, INC.

In November 2003, the Company sold the operating assets, including current
assets and equipment, of 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. The Company paid all of the severance and all
closing costs related to the sale in the fourth quarter of 2003 but continues to
make payments related to its withdrawal liability from the pension plan in which
SurfTech was a participant. There has not been any operational activity related
to SurfTech since the sale in November 2003.

14. RETIREMENT PLANS AND DEFERRED COMPENSATION

The Company maintains three noncontributory, defined contribution pension plans
covering all of its full-time, US employees. The Company's contributions to
these plans are based on a percentage of employee contributions and/or plan year
gross wages, as defined. Teal, SL-MTI, Condor and the Corporate office provide
contributions to their plans based on a percentage of employee contributions.
RFL, SL-MTI, Condor and the Corporate office also provide profit sharing
contributions annually, based on plan year gross wages. Costs incurred under
these plans amounted to $321,000 and $272,000 during the three-month period
ended March 31, 2005 and March 31, 2004, 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 at discount rates ranging from 6% to 12%. The amount charged to
income in connection with these agreements amounted to $73,000 and $82,000 for
the three-month periods ended March 31, 2005 and March 31, 2004, respectively.

15


15. RELATED PARTY TRANSACTIONS

The compensation committee has approved the payment of certain fees from the
Company to Steel Partners, Ltd. ("SPL"), a company controlled by the Chairman of
the Board and Chief Executive Officer of the Company, Warren Lichtenstein. These
fees are in consideration for the services of Mr. Lichtenstein and the Company's
President, Glen Kassan, as well as other assistance provided by SPL from time to
time. During the three-month period ended March 31, 2005, the Company has
expensed $119,000 for SPL services, none of which remained payable at March 31,
2005. The Company expensed $119,000 for services performed for the three-month
period ended March 31, 2004.

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 each of the three-month periods ended March 31, 2005 and March 31, 2004 were
$285,000 and $595,000, respectively. Accounts receivable due from RFL
Communications at March 31, 2005 were $244,000.

ITEM 2. 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, 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, over the years the Company has 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.

The Company's business strategy has been to enhance the growth and profitability
of each of its businesses by way of accelerated growth through the penetration
of attractive new market niches, further improvement of operations and expansion
of global capabilities. The Company expects to achieve these goals through
organic growth and strategic acquisitions. The Company also continues to pursue
strategic alternatives to maximize the value of its businesses. Some of these
alternatives have included, and will continue to include, selective
acquisitions, divestitures and sales of certain assets. The Company has
provided, and may from time to time in the future provide, information to
interested parties regarding portions of its businesses for such purposes.

CRITICAL ACCOUNTING POLICIES

The Company's Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States. These
generally accepted accounting principles require 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 Consolidated
Financial Statements and the reported amounts of net sales and expenses during
the reporting period.

16


The Company's significant accounting policies are described in Note 1 in the
Notes to Consolidated Financial Statements included in Part IV of the Company's
Annual Report on Form 10-K. Not all of these significant accounting policies
require management to make difficult, subjective or complex judgments or
estimates. However, the following policies are deemed to be critical, as that
term is defined by the Securities and Exchange Commission.

REVENUE RECOGNITION

Revenue from product sales is recognized at the time the product is shipped,
with provisions established for estimated product returns and returns related to
one business segment's stock scrap program with distributors. Upon shipment, the
Company provides for the estimated cost that may be incurred for product
warranties. Rebates and other sales incentives offered by the Company are
recorded as a reduction of sales at the time of shipment. Revenue recognition is
significant because net sales is a key component of results of operations. In
addition, revenue recognition determines the timing of certain expenses, such as
commissions and royalties. The Company follows generally accepted guidelines in
measuring revenue. Revenue is recorded in accordance with Staff Accounting
Bulletin ("SAB") No. 104. However, certain judgments affect the application of
its revenue policy. 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 re-evaluated and adjusted as additional information
is received that impacts the amount reserved. Second, a general reserve is
established for all customers based on several factors, including historical
write-offs as a percentage of sales. If circumstances change (i.e., higher than
expected defaults or an unexpected material adverse change in a major customer's
ability to meet its financial obligation), the Company's estimates of the
recoverability of amounts due could be reduced by a material amount.

INVENTORIES

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

17


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

Significant management judgment is required in determining the provision for
income taxes, the deferred tax assets and liabilities and any valuation
allowance recorded against deferred tax assets. As of March 31, 2005 and
December 31, 2004, the Company had recorded total valuation allowances of
$3,362,000 and $3,267,000, respectively, due to uncertainties related to the
utilization of some deferred tax assets, primarily consisting of certain
research and development tax credits, loss carryforwards and foreign tax
credits, before they expire. The valuation allowance is based on estimates of
taxable income by jurisdiction in which the Company operates and the period over
which deferred tax assets will be recoverable. In the event that actual results
differ from these estimates or these estimates are adjusted in future periods,
the Company may need to establish an additional valuation allowance that could
materially impact its consolidated financial position and results of operations.

The net deferred tax assets as of March 31, 2005 and December 31, 2004 were
$6,140,000 and $6,324,000, net of valuation allowances of $3,362,000 and
$3,267,000, respectively. The carrying value of the Company's net deferred tax
assets assumes that the Company will be able to generate sufficient future
taxable income in certain tax jurisdictions, based on estimates and assumptions.
If these estimates and related assumptions change in the future, the Company may
be required to record additional valuation allowances against its deferred tax
assets resulting in additional income tax expense in the consolidated statement
of operations. Management evaluates the reliability of the deferred tax assets
and assesses the need for additional valuation allowances quarterly.

The Company's effective tax rate includes the impact of certain undistributed
foreign earnings for which no U.S. taxes have been provided because such
earnings are planned to be reinvested indefinitely outside the United States.
The Company's results do not reflect the impact of the American Jobs Creation
Act of 2004 (the "Jobs Act"). The Company has completed the process of
re-evaluating its position with respect to the indefinite reinvestment of
foreign earnings to take

18


into account the possible election of the repatriation provisions contained in
the Jobs Act and has determined that it will have no impact on the Company.

LEGAL CONTINGENCIES

The Company is currently involved in certain legal proceedings. As discussed in
Note 11 in the Notes to the Consolidated Financial Statements included in Part I
to this Quarterly Report on Form 10-Q, 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. Impairment losses recorded
in the future could have a material adverse impact on the Company's financial
condition and results of operations.

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

19


ENVIRONMENTAL EXPENDITURES

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

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

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

LIQUIDITY AND CAPITAL RESOURCES



March 31, December 31,
2005 2004 $ Variance % Variance
------- ------ ---------- ----------
(in thousands)
----------------------------------------------------

Cash and cash equivalents $ 1,926 $ 2,659 ($ 733) (28%)
Bank debt $ 1,828 $ 2,015 ($ 187) (9%)
Working capital $20,815 $19,496 $1,319 7%
Shareholders' equity $39,939 $37,687 $2,252 6%
======= ======= ====== ==


At March 31, 2005, the Company maintained a cash balance of $1,926,000, with
outstanding bank debt of $1,828,000. Availability under the Senior Credit
Facility was $13,176,000. During the three-month period ended March 31, 2005,
the net cash used in operating activities was $269,000, as compared to net cash
used in operating activities of $1,619,000 during the three-month period ended
March 31, 2004. The primary uses of cash from operating activities for the
three-month period ended March 31, 2005 were an increase in accounts receivable
in the amount of $1,989,000, primarily related to Condor and Teal due to the
timing of sales in the quarter ended March 31, 2005 compared to the quarter
ended December 31, 2004. Also, accrued

20


liabilities decreased by $824,000 primarily due to payments made in March 2005
related to the Company's executive bonus program. These uses of cash were
partially offset by a significant increase in net income from continuing
operations and a decrease in inventories of $591,000 from year-end levels. In
the three-month period ended March 31, 2004, net cash used in operating
activities was $1,619,000. The primary uses of cash from operating activities
for the first quarter of 2004 were an increase in accounts receivable in the
amount of $2,139,000, an increase in inventory of $1,488,000 and a decrease in
other accrued liabilities of $1,435,000. These uses were partially offset by
increases in accounts payable of $2,549,000 and income from continuing
operations.

During the three-month period ended March 31, 2005, net cash used in investing
activities was $676,000. The uses of cash in investing activities was related to
purchases of securities available for sale in the amount of $413,000 and the
purchase of machinery and equipment in the amount of $263,000. During the
three-month period ended March 31, 2004, net cash used in investing activities
was $351,000, which was related to the purchases of machinery and equipment.

During the three-month period ended March 31, 2005, net cash provided by
financing activities was $153,000, principally due to the proceeds from the
exercise of stock options of $275,000. These sources of cash were partially
offset by payments made against the Senior Credit Facility in the amount of
$187,000. During the three-month period ended March 31, 2004, net cash used in
financing activities was $403,000, primarily due to the payment of the fixed
portion of debt under the Senior Credit Facility.

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
overadvance amount of $1,500,000, which was repaid in full on April 7, 2004. 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 coverage and EBITDA levels, as defined. 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. The Company is in discussions with a commercial bank to
refinance the Senior Credit Facility before its expiration date.

The Company's current ratio was 2.12 to 1 at March 31, 2005 and 2.05 to 1 at
December 31, 2004. The current ratio remained relatively constant. However,
accounts receivable increased by $1,989,000 and current debt increased by
$1,269,000 due to the Senior Credit Facility being classified as current debt
for the period ended March 31, 2005. The Senior Credit Facility expires on
January 6, 2006.

As a percentage of total capitalization, consisting of debt and shareholders'
equity, total borrowings by the Company were 4% at March 31, 2005 and 5% at
December 31, 2004. During the first three months of 2005, total debt decreased
by $187,000.

Capital expenditures of $263,000 were made during the first three months of
2005. These expenditures primarily related to computer equipment and factory
machinery and equipment.

21


Capital expenditures for the period represent an $88,000 decrease from the
comparable period in 2004.

During the first three months of 2005, the Company was able to generate adequate
amounts of cash to meet its operating needs, reduce total borrowings by
$187,000, purchase machinery and equipment in the amount of $263,000 and
purchase securities available for sale in the amount of $413,000. All of the
operating segments had income from operations for the quarter-ended March 31,
2005.

CONTRACTUAL OBLIGATIONS

The following is a summary of the Company's contractual obligations that existed
as of March 31, 2005:



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

Operating Leases $ 801,000 $ 964,000 $ - $ - $1,765,000
Debt 1,828,000 - - - 1,828,000
Capital Leases 69,000 47,000 - - 116,000
Other Obligations 49,000 167,000 130,000 217,000 563,000
---------- ---------- ---------- ---------- ----------
$2,747,000 $1,178,000 $ 130,000 $ 217,000 $4,272,000
========== ========== ========== ========== ==========


OFF-BALANCE SHEET ARRANGEMENTS

It is not the Company's usual business practice to enter into off-balance sheet
arrangements, such as guarantees on loans and financial commitments,
indemnification arrangements, and retained interests in assets transferred to an
unconsolidated entity for securitization purposes. Consequently, the Company has
no off-balance sheet arrangements, except for operating lease commitments
disclosed in the table above, 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.

Assuming no further significant slowdown of economic activity in the Company's
served markets, management believes that cash from operations and funds expected
to be available under the Senior Credit Facility will be sufficient to fund the
Company's operations and working capital requirements.

22


RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2005, COMPARED WITH THREE MONTHS ENDED MARCH 31,
2004

The table below shows the comparison of net sales for the quarter ended March
31, 2005 and the quarter ended March 31, 2004:



Three Months Three Months $ Variance % Variance
Ended Ended Over Over
March 31, March 31, Same Quarter Same Quarter
2005 2004 Last Year Last Year
------- ------- -------- ---------
(in thousands)
-------------------------------------------------

Power Electronics Group:
Condor $11,318 $ 7,863 $ 3,455 44%
Teal 7,552 7,393 159 2%
------- ------- ------- --
Total 18,870 15,256 3,614 24%
------- ------- ------- --
SL-MTI 6,770 5,896 874 15%
RFL 6,816 5,489 1,327 24%
------- ------- ------- --
Total $32,456 $26,641 $ 5,815 22%
======= ======= ======= ==


The table below shows the comparison of income from operations for the quarter
ended March 31, 2005 and the quarter ended March 31, 2004:



Three Months Three Months $ Variance % Variance
Ended Ended Over Over
March 31, March 31, Same Quarter Same Quarter
2005 2004 Last Year Last Year
------- ------- --------- ---------
(in thousands)
----------------------------------------------------

Power Electronics Group:
Condor $ 1,132 ($ 124) $ 1,256 1,013%
Teal 1,071 1,334 (263) (20%)
------- ------- ------- -----
Total 2,203 1,210 993 82%
------- ------- ------- -----
SL-MTI 979 640 339 53%
RFL 823 424 399 94%
Other (1,268) (1,080) (188) (17%)
------- ------- ------- -----
Total $ 2,737 $ 1,194 $ 1,543 129%
======= ======= ======= =====


Consolidated net sales for the three-month period ended March 31, 2005 increased
by $5,815,000, or 22%, compared to the same period in 2004. Condor recorded
increased sales over 2004 of $3,455,000, or 44%. Teal experienced a sales
increase from 2004 of $159,000, or 2%. SL-MTI had a sales increase of $874,000,
or 15%, while RFL recorded a sales increase of $1,327,000, or 24%.

The Company had income from operations of $2,737,000 for the three-month period
ended March 31, 2005 as compared to income from operations of $1,194,000 for the
corresponding period last year, an increase of $1,543,000, or 129%.

23


Income from continuing operations was $1,969,000, or $0.35 per diluted share,
compared to $685,000, or $0.11 per diluted share, in 2004. Net income from
continuing operations increased $1,284,000, or 187%. Income from continuing
operations benefited by approximately $257,000, or $0.05 per diluted share, due
to research and development tax credits recorded during the period. The
Company's business segments and the components of operating expenses are
discussed more fully in the following sections.

The Power Electronics Group, which is comprised of Condor and Teal, recorded a
sales increase of $3,614,000, or 24%, and an increase in income from operations
of $993,000, or 82%. Condor experienced an increase in sales of $3,455,000, or
44%, and an increase in income from operations of $1,256,000, or 1,013%. Teal
also experienced a sales increase of $159,000, or 2%, and a decrease in income
from operations of $263,000, or 20%. Condor experienced increased sales in all
of its product lines, in particular the medical product line which increased
approximately $2,575,000, or 62%, from 2004. Condor's international sales
increased approximately 96% aided by sales to two international customers due to
new product designs. Condor's increase in income from operations is primarily
due to its increase in sales volume, improved manufacturing efficiencies at its
manufacturing facility located in Mexicali, Mexico and an increased supply of
products manufactured offshore. Teal's sales increase was attributable to
increases in its medical imaging product line. Teal's decrease in income from
operations is primarily due to reduced margins caused primarily by higher raw
material costs.

SL-MTI's sales increased $874,000, or 15%, while income from operations
increased $339,000, or 53%. The increase in sales were primarily driven by
increases in sales to the defense industry. The increase in income from
operations is due to a combination of an increase in sales and improved
efficiency experienced at its manufacturing facility in Cedro, Mexico. These
manufacturing efficiencies contributed to improved gross margins in 2005
compared to 2004.

RFL's sales increased $1,327,000, or 24%, during the first quarter of 2005,
compared to the first quarter of 2004 and income from operations increased by
$399,000, or 94%, for the comparable periods. The increase in sales is primarily
attributable to increased sales of its carrier communication product line sold
to international customers. The increase in income from operations is due
primarily to the increase in sales compared to 2004 as the percentage of cost of
products sold remained comparable to 2004.

COST OF PRODUCTS SOLD

As a percentage of net sales, cost of products sold in each of the three-month
periods ended March 31, 2005 and March 31, 2004 was approximately 64%. Although
the cost of products sold as a percentage of net sales remained relatively
constant for the comparative quarters, the mix within the Company's business
segments changed. The cost of products sold percentage for the Power Electronics
Group remained constant. Within the Power Electronics Group, Condor's cost of
products sold percentage decreased significantly due primarily to increased
sales, manufacturing efficiencies and an increased supply of products
manufactured offshore which reduced product cost. Teal's cost of products sold
percentage increased primarily due to increases in the costs of raw materials.
SL-MTI decreased its cost of products sold percentage in the first quarter of
2005 as compared to the same period last year, due to an increase in sales
volume and improved operating efficiencies at its manufacturing facility in
Cedro, Mexico. RFL's cost of products sold as a percentage of sales remained
relatively constant in 2005, compared to 2004.

24


ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES

Engineering and product development expenses for the three month periods ended
March 31, 2005 and March 31, 2004 were approximately 7% and 8% of net sales,
respectively. Engineering and product development expenses increased $115,000,
or 5%, in the first quarter of 2005, as compared to the same period in 2004. All
of the Company's business segments increased their engineering and product
development expenditures in 2005, compared to 2004 except RFL which had incurred
significant engineering and product development expenses in 2004. SL-MTI had the
most significant increase in engineering and product development cost. SL-MTI is
working on several new products and product enhancements at a greater rate in
2005 compared to 2004.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for each of the first quarters in
2005 and 2004 were approximately 20% and 22% of sales, respectively. These
expenses increased by $607,000, or 11%, largely as the result of costs related
to the 22% sales increase over 2004. The most significant increases in selling,
general and administrative costs were experienced by Condor and RFL due
primarily to corresponding increases in sales volume of $3,455,000, or 44%, and
$1,327,000, or 24%, respectively, which caused sales related costs to increase.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expenses remained relatively constant at
approximately 2% of sales for each of the first quarters of 2005 and 2004.

AMORTIZATION OF DEFERRED FINANCING COSTS

In connection with entering into the Senior Credit Facility on January 6, 2003,
the Company incurred costs of approximately $1,342,000. These costs have been
deferred and are being amortized over the three-year term of the Senior Credit
Facility. For each of the quarters ended March 31, 2005 and March 31, 2004,
amortization of these deferred financing assets was $112,000 and $112,000,
respectively.

INTEREST INCOME (EXPENSE)

Interest income for the three-month period ended March 31, 2005 was $29,000, as
compared to $43,000 in the same period last year. Interest expense decreased
slightly as compared to the same period last year.

TAXES

The effective tax rate for the three-month period ended March 31, 2005 was
approximately 23%. The effective tax rate reflects the statutory rate after
adjustments for state and international tax provisions, offset by the recording
of benefits from research and development tax credits primarily related to the
prior year. The effective tax rate for the comparable period in 2004 was
approximately 34%, which was not significantly impacted by tax credits recorded
in the period.

DISCONTINUED OPERATIONS

For the three months ended March 31, 2005, the Company recorded a loss from
discontinued operations, net of tax, of $70,000. This amount includes current
legal and litigation charges related to discontinued operations. For the three
months ended March 31, 2004, the Company recorded income from discontinued
operations, net of tax, of $2,457,000. This amount consisted primarily of the
Settlement Agreement executed by the Company and APC as discussed in Note 13.

25


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 that address activities, events or
developments that the Company expects or anticipates will or may occur in the
future, such as expansion and growth of the Company's business, future capital
expenditures and the Company's prospects and strategy. In reviewing such
information, it should be kept in mind that actual results may differ materially
from those projected or suggested in such forward-looking information. This
forward-looking information is based on various factors and was derived
utilizing numerous assumptions. Many of these factors previously have been
identified in filings or statements made by or on behalf of the Company.

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

26


For a further description of future factors that could cause actual results to
differ materially from such forward-looking statements, see the discussion in
the Company's Annual Report on Form 10-K for the year ended December 31, 2004,
Part I, Item 1 - Risk Factors.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in quantitative and qualitative market risk
from the disclosure contained in Item 7A of the Company's Annual Report on Form
10-K for the year ended December 31, 2004, which is incorporated herein by
reference.

ITEM 4. 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-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934,
as amended, (the "Exchange Act") as of this Quarterly Report on Form 10-Q (this
"Report"). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this Report to
provide reasonable assurance that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. 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.

A 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.

PART II - OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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 common stock
of the Company. Any repurchases are to be made on the open market or in
negotiated transactions. For the three months ended March 31, 2005, the Company
did not purchase any shares pursuant to the repurchase program, however, it did
purchase 1,700 shares through its deferred compensation plans during the three
months ended March 31, 2005.

27

ISSUER PURCHASES OF EQUITY SECURITIES



Total Number Maximum Number
of Shares of Shares That May
Total Purchased as Part Yet Be Purchased
Number of Average of Publicly under Publicly
Shares Price Paid Announced Plans Announced Plans or
Period Purchased per Share or Programs Programs
- --------------------- ------------- ------------ ---------------- ------------------

January 1 - 31, 2005 - $ 0.00 - 48,024
February 1 - 28, 2005 - $ 0.00 - 48,024
March 1 - 31, 2005 1,700(1) $ 13.50 - 48,024
------------- ------- ----- ------
Total 1,700 $ 13.50 -
============= ======= =====


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

ITEM 6. EXHIBITS

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

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

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

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

28


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date: May 9, 2005 SL INDUSTRIES, INC.
-------------------
(Registrant)

By: /s/ Warren G. Lichtenstein
--------------------------
Warren G. Lichtenstein
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)

By: /s/ David R. Nuzzo
--------------------------
David R. Nuzzo
Chief Financial Officer
(Principal Accounting Officer)

29