ORBIT FR INC
GENERAL       ORBIT/FR, Inc. ("ORBIT/FR" or the "Company") develops, markets and supports sophisticated automated microwave test and measurement systems for the aerospace/defense, wireless communications, satellite and automotive industries and manufactures anechoic foam, a microwave absorbing material that is an external component of microwave test and measurement systems. Military antennas, cellular phones, satellites, radars, radio transmitters, and global positioning system ("GPS") receivers all depend upon the reliable and efficient transmission and reception of microwave signals in order to communicate. By utilizing the Company's systems to test and measure the critical performance characteristics of antennas, microwave signals, wireless manufacturers and service providers within these industries can improve quality and time-to-market, lower the risk of failure and underperformance and reduce costs.       Since its founding, the Company has expanded from distributing individual microwave test and measurement components to providing a wide range of fully integrated microwave test and measurement solutions. Components of an ORBIT/FR automated microwave test and measurement system include proprietary software and hardware products, which can be combined into standard or customized configurations to meet a customer's specific needs.       The Company markets and sells its systems to customers in the United States and throughout the world. Within its targeted industries, the Company's customers include aerospace/defense systems integrators and product manufacturers that incorporate microwave technology, such as Lockheed Martin, Raytheon, Northrop Grumman, BAE, L3 Communications, Alenia, Astrium, Lufthansa and Boeing; manufacturers of wireless systems and products, such as Motorola, Nokia, Ericsson, Samsung, Sony and Qualcomm; telecommunications service providers that rely on microwave technology, such as AT&T, NTT and British Telecom; and automobile and automotive subassembly manufacturers such as Daimler-Chrysler, Ford, BMW and Hyundai. The Company's customers also include the United States government and several foreign governments.       The Company's objective is to strengthen its position in automated microwave test and measurement systems while developing products and systems for a broader range of microwave applications. The principal elements of the Company's strategy to reach its objectives are: (i) offering comprehensive high quality solutions to customers, (ii) maintaining its technological leadership, (iii) focusing on standard systems and proprietary off-the-shelf products, (iv) pursuing growth in international markets and (v) leveraging its technological expertise to expand into complementary markets.                                          4         The Company's principal offices are located at 506 Prudential Road, Horsham, Pennsylvania 19044. Its telephone number is (215) 674-5100, its e-mail address is mail@orbitfr.com and its World Wide Web home page is located at www.orbitfr.com.  HISTORY       The Company was incorporated in Delaware in December 1996. The Company is the holding company for Orbit Advanced Technologies, Inc., a Delaware corporation ("Technologies") and its wholly owned subsidiary, Flam & Russell, Inc., a Delaware corporation ("Flam & Russell"), Orbit FR Engineering, Ltd., an Israeli corporation ("Engineering"), Orbit FR Europe, GmbH, a German corporation ("GmbH") and Advanced ElectroMagnetics, Inc. ("AEMI") a California corporation. The Company's parent, Orbit-Alchut Technologies, Ltd., is a publicly traded company in Israel which was founded in 1950 ("Alchut"). In addition to its ownership interest in the Company (approximately 62%), Alchut has ownership interests in companies operating in the avionics, tracking and telemetry markets.       Technologies was incorporated in 1985 as a wholly-owned subsidiary of Alchut to provide sales and customer support for Alchut's products in the United States, including positioning subsystems. In 1991, Technologies began to focus on the development and design of its own proprietary microwave test and measurement products and systems. In 1994, Technologies recognized the potential for providing customers with fully integrated microwave test and measurement solutions and began incorporating its software technology with hardware from third-party manufacturers, including Alchut. Technologies continues to subcontract certain production services to Alchut through Engineering but retains the right to select any other production subcontractor.       Engineering was incorporated in Israel in December 1996 as a wholly-owned subsidiary of Alchut at which time Alchut transferred all of the assets relating to its microwave test and measurement business to Engineering. Engineering is principally responsible for overseeing the development, design and production of ORBIT/FR's electro-mechanical products. Along with providing electro-mechanical products internally, Engineering is responsible for sales, marketing and customer support to the Asian market.       In October 1997, Orbit FR Europe, GmbH was incorporated in Germany. The GmbH develops compact range measurement systems and components, and is responsible for sales, marketing and customer support to the European market.       On June 28, 1996, Technologies purchased all of the issued and outstanding shares of Flam & Russell for approximately $1,043,000. The acquisition of Flam & Russell augmented the Company's product mix, staff of microwave and software engineers and customer base. Flam & Russell has been active in the microwave test and measurement field since 1981.       On June 17, 1997, the Company purchased all of the issued and outstanding shares of AEMI, contemporaneously with the completion of its initial public offering, for approximately $1.2 million. One-half of the purchase price was payable in cash and the other half was payable by issuance of shares of the Company's Common Stock at the initial offering price of $8.25 per share. AEMI manufactures anechoic foam, a microwave absorbing material that is an integral component of microwave test and measurement systems.       On September 13, 1999, the Company announced that it had reached a Plea Agreement with the U.S. Attorney's Office to settle an investigation of the Company's export practices. As a result of the plea, the Company's export license applications for munitions list products became subject to a denial policy under the International Traffic in Arms Regulations (ITAR) effective as of November 2, 1999. On September 6, 2005, the Company announced that it had reached a final settlement with the Office of Defense Trade Controls Compliance, Directorate of Defense Trade Control (DDTC) of the                                          5    United States Department of State, terminating as of August 29, 2005 the statutory debarment that prohibited the Company's direct or indirect participation in exports subject to the International Traffic in Arms Regulations (ITAR). Accordingly, under the terms of the agreement DDTC will resume the normal processing of license applications involving the Company.       On March 6, 2000, the Company received notification, effective March 1, 2000 from the U.S. Department of State, that a Commodity Jurisdiction request submitted by the Company in 1998 had been approved, and the vast majority of the Company's basic Antenna Measurement Software products and systems were removed from the U.S. Munitions List. These products now fall under the jurisdiction of the U.S. Department of Commerce and therefore would not be subject to the Department of State's non-discretionary policy of denying the Company's license applications. The Company's Radar Cross Section ("RCS") and Radome measurement systems remain on the U.S. Department of State's Munitions list.  INDUSTRY OVERVIEW       The need for microwave and antenna test and measurement systems and products expanded rapidly during the 1960's and 1970's in conjunction with the growth and increased sophistication of the aerospace/defense industry in the United States and Western Europe. In the last 25 years, this need for test and measurement products and systems has expanded beyond aerospace/defense applications to all aspects of modern telecommunications, including personal wireless communications devices, satellite-based communications systems and "smart" automobiles. This expansion has occurred in conjunction with a growing desire among companies to focus on their core competencies and outsource many non-core functions such as the development and manufacture of microwave test and measurement systems.       Within the wireless communications, satellite, automotive and aerospace/defense industries, test and measurement products and systems are used during all stages of a product's life cycle, including product development, pre-production qualification, production testing and product maintenance. Given the broad scope of testing procedures, it is not uncommon for a manufacturer or service provider to own and operate more than one microwave test and measurement system.       AEROSPACE/DEFENSE. The need within the aerospace/defense community for accurate and secure communications and tracking systems led to the emergence of microwave test and measurement companies in the 1960's. Recent growth in Homeland Security and Department of Defense budgets are expected to provide additional opportunities for the Company.       The industry's tracking requirements, such as air traffic control, precision guided weapons, and data links and stealth aircraft, led to the development of Radar Cross Section (RCS) and the test and measurement of radomes. RCS involves the transmission of microwave signals towards a passive target, such as an aircraft or missile, and then the creation of an "image" of the target by measuring the energy reflected back towards the transmit source. Radome testing evaluates the impact of a radome (the dome-shaped casing that is placed on the leading edge of an aircraft or missile to protect the radar and direction-finding equipment) on the microwave signals that pass through it.       WIRELESS COMMUNICATIONS. The wireless communications industry has grown in recent years as a result of the development of cost-effective digital technologies and the gradual global deregulation of the telecommunications industry. Wireless communications products include cellular/PCS handsets and base stations, pagers, wireless PDAs, and Bluetooth, Wi-Fi and Wi-Max products, and RFIDs (RF tags). The Company expects continued growth within the wireless communications industry in the future due to an increase in available spectrum, new generations of cellular systems, the adoption of efficient new digital technologies and the development of "smart" antennas.                                          6         Growing worldwide demand for wireless communications products and services has generated a need among wireless manufacturers and service providers for systems and products that address their specific microwave test and measurement needs. These companies operate in highly-competitive, rapidly changing markets in which the performance and reliability of their systems and products are essential to achieve and maintain competitive advantage. The accurate transmission and reception of microwave signals are fundamental to the performance of wireless systems and products. To ensure the successful transfer of voice or data from one point to another and to minimize poor reception, cross talk and dropped calls, manufacturers and service providers conduct extensive testing of both cellular handsets and wireless base stations for signal quality, direction, strength and interference.       SATELLITE. Satellite-related markets have grown over the past several years, driven by the emergence of advanced communication technologies offering cost-effective global voice, video and data transmission, GPS, internet access and tracking capabilities. Satellites provide several advantages over terrestrial communications networks, including rapid installation and deployment, no incremental cost as distances increase and higher rates of data transmission.       To ensure that satellite-based communications systems are effective and reliable, it is essential that both satellites and "earth stations" transmit and receive microwave signals accurately. The accuracy requirements for these satellite systems are critical and failure to detect a design error could result in a satellite's "footprint" not covering its intended geographic area. Satellite manufacturers cannot afford to make this kind of error since the cost to manufacture, launch and insure a satellite can exceed approximately $200 million. Accordingly, sophisticated microwave test and measurement systems are critical to satellite and earth station manufacturers, as well as their subcontractors and sub-assembly manufacturers, to ensure that their products work properly.       AUTOMOTIVE. The world's major manufacturers of automobiles and automotive sub-assemblies, driven by competitive pressures, are designing new generations of "smart" cars and trucks. These vehicles incorporate the latest communications and safety devices including cellular, GPS-based, navigation and anti-theft systems, satellite radios (e.g. XM, Sirius), data transfer, digital TV and collision-avoidance systems. Each of these features requires a specialized, highly-accurate microwave transmission and reception system. To ensure the performance of these various systems and to assess how they are impacted by the electromagnetic properties of the car itself, automotive manufacturers must test the car and these devices as a unit using a microwave test and measurement system designed for automotive applications.  THE ORBIT/FR SOLUTION       ORBIT/FR provides its customers with flexible and reliable solutions for their complex microwave test and measurement needs. The Company focuses its efforts and resources on developing state-of-the-art microwave test and measurement systems and products that incorporate specialized technologies and expertise. The Company's customers have a need for microwave test and measurement systems and products but often do not have the in-house capabilities to develop, or the desire to develop, such systems and products themselves. ORBIT/FR's systems and products provide customers with cost- effective and user-friendly solutions to their microwave test and measurement needs, thus allowing them to remain focused on their core competencies. The Company's systems and products incorporate technological expertise developed and acquired by the Company over many years.       The Company offers a wide range of standard and custom microwave test and measurement solutions for specialized aerospace/defense-related testing, cellular/PCS handset testing, cellular base station testing, satellite testing and automotive testing. The Company's products include test and measurement software, microwave receivers, positioner subsystems and controllers, as well as other microwave products, and a full line of RF absorbing materials, all of which are typically incorporated into the Company's systems. The Company's proprietary software supports the Company's own test and measurement products as well as those manufactured by third parties. The Company's engineers and                                          7    other technical staff use their broad expertise to assess and understand their customers' specific microwave test and measurement needs, process orders quickly, keep delivery time to a minimum, provide comprehensive customer support and release new software on a regular basis.  THE ORBIT/FR STRATEGY       The Company's objective is to strengthen its leadership position in automated microwave test and measurement systems while developing products and systems for a broader range of microwave applications. The principal elements of the Company's strategy to reach its objective are:       OFFERING COMPREHENSIVE TURNKEY SOLUTIONS TO CUSTOMERS. Within the microwave test and measurement market, new and existing customers increasingly desire to purchase comprehensive, turnkey test and measurement systems from a single provider. The Company addresses this desire by providing engineering and project management services, by offering an increasingly broad product line and by maintaining close relationships with outside component suppliers. Additionally, the Company may periodically acquire companies with complementary products and services that can be integrated with the Company's existing or proposed products and systems, as it has with its acquisitions of Flam & Russell and AEMI. By acquiring suppliers of key components of microwave test and measurement systems that the Company does not already provide, the Company believes, but cannot assure that it will be able to increase gross margins.       MAINTAINING TECHNOLOGICAL LEADERSHIP. The Company believes that it has sophisticated and diversified technological capabilities and intends to strengthen its technologies by continuously designing and developing new software releases and hardware upgrades which offer greater performance and higher precision.       FOCUSING ON STANDARD PRODUCTS AND PROPRIETARY OFF-THE SHELF PRODUCTS. Given the diversified needs of the Company's customers, no two microwave test and measurement systems are identical. However, the Company seeks to keep the costs of customization to a minimum by designing and delivering specific types of systems that maximize the use of the Company's proprietary off-the-shelf products. This approach enables the Company to optimize its margins while offering its customers tailor-made solutions built around proven high-quality and reliable products.       CONTINUED FOCUS ON EXPANDING U.S. AEROSPACE/DEFENSE MARKET. As a result of its reputation and diverse product line, the Company maintains strong relationships with the U.S. Government and several of the leading defense contractors. With expected increases in Homeland Security and Department of Defense budgets, the Company expects to expand this relationship.       PURSUING GROWTH IN INTERNATIONAL MARKETS. Approximately 40% and 41% of the Company's revenues during 2005 and 2004, respectively, were derived from international customers. The Company believes that in addition to domestic growth as a result of increases in Department of Defense and Homeland Security budgets, the international microwave test and measurement marketplace will also grow over the next several years, due in large part to worldwide economic development, governmental policies aimed at improving the communications infrastructure in developing countries and the increasing globalization of commerce. The Company has devoted and intends to continue to devote significant efforts to increasing its share of the international market for microwave test and measurement systems by strengthening and expanding its sales network through the establishment of foreign sales and customer service centers and the appointment of additional international sales representatives. In addition, the Company believes it has a competitive advantage due to the duty-free status of its products manufactured in Israel and sold into the European Union.       LEVERAGING TECHNOLOGICAL EXPERTISE TO EXPAND INTO COMPLIMENTARY MARKETS. The Company intends to leverage its technological expertise in microwave test and measurement systems to expand                                          8    into complementary markets that the Company believes offer high growth potential and where the Company's technology provides competitive advantages.       MICROWAVE PRODUCTS. The Company believes that opportunities exist to apply the Company's core technologies to the design, manufacture and marketing of products that incorporate microwave technology. The Company intends to continue marketing its radial power combiners, amplifiers, antennas and mixers, and plans to develop and sell additional microwave-based products in the future. The Company believes its large customer base will give it a competitive advantage in marketing these products.  SYSTEMS AND PRODUCTS       Since its founding, the Company has expanded from distributing individual microwave test and measurement components to providing turnkey solutions, which can include chamber design, RF absorbing materials, antenna measurement and/or RCS subsystems, RF test equipment and software suites, and a wide range of microwave test and measurement solutions. Components of an ORBIT/FR automated microwave test and measurement system include proprietary software and hardware products which can be combined into standard or customized configurations to meet customers' specific needs. The Company believes that one of its principal strengths is its experienced design team that solves complex technical and practical problems.       MICROWAVE TEST AND MEASUREMENT SYSTEMS. The Company designs, manufactures and markets automated microwave test and measurement systems. In addition to providing most of these systems' component parts, the Company also integrates the systems and trains its customers in use of the systems. Although most customers purchase fully integrated turnkey microwave test and measurement systems, the Company also sells its hardware and software products individually as replacement parts or components of custom-designed systems. The Company offers seven types of microwave test and measurement systems. The first, antenna measurement systems, are generic systems that can be adapted for many uses, and the other types are designed and sold in response to well-defined microwave test and measurement needs within specific industries. Prices for a typical ORBIT/FR system range from $50,000 to $500,000, but large systems have been sold for over $3 million.       Antenna Measurement Systems. All products and systems that receive or transmit microwave signals rely on antennas. Accordingly, items such as microwave radios, GPS receivers, cellular handsets and base-stations, field service/delivery equipment, satellite earth stations and radios, precision guided missiles, radar and commercial and military aircraft need to have their antennas tested to ensure satisfactory performance characteristics. The Company's antenna measurement systems offer both manufacturers and service providers user-friendly and cost-effective solutions for their antenna measurement needs. The systems test for signal quality, direction, strength and interference and can be adapted to perform testing in each of the stages of a product's life: development, qualification, production and maintenance. Although antenna measurement systems differ significantly from one application to another, all of the Company's systems incorporate a personal computer running specialized proprietary software, a microwave receiver, a positioning subsystem and at least one additional antenna or probe. The systems can be designed for use in a wide variety of different test environments, ranging from a small anechoic chamber to an outdoor range covering several acres. The Company offers three types of antenna measurement methods:     Far-field:       Traditional method generally used outdoors Near-field:      Cost-effective indoor method using mathematical conversion tools Compact Range:   High-end indoor method using a microwave reflector        The Company also has developed advanced systems that combine these measurement methods, such as far-field and near-field, in a single chamber.                                          9         Cellular/PCS/Pager Systems. ORBIT/FR believes it is a leader in the design and delivery of high-performance test and measurement systems for manufacturers of cellular/PCS handsets, pagers, and PDAs. The Company has developed a standard system called "PowerCell" based on its spherical near-field technology that the Company sells as a turnkey off-the-shelf product. The system consists of a Dielectric Belt Driven Rotator (DBDR) positioning system, and the Company's software and receiver, constructed in a small anechoic chamber. The positioning subsystem allows a probe to trace a sphere around the handset or pager held by a mannequin, thus fully sampling the complete microwave properties of the device under test. The PowerCell system is in the final stages of certification and is compliant with the CTIA standards.       Cellular/PCS Base Station Systems. The Company develops and sells test and measurement systems used to assess the microwave performance characteristics of cellular/PCS base stations and "smart" antennas. These systems enable cellular/PCS base station antenna manufacturers to design and build efficient and reliable products, and allow wireless communications service providers to monitor more efficiently the performance of their base stations. The existing system design is based on the Company's cylindrical near-field technology and is designed for indoor use.       Satellite Systems. The Company develops and sells microwave test and measurement systems for satellites which test many aspects of satellite performance, including beam location (to assess the satellite's "footprint"), channel purity and intermodulation, gain, G/T, pattern, EIRP and TMA/TDMA microwave timing. These systems also test the transmit and receive characteristics of the active array antennas used on most modern satellites and can have the ability to identify and diagnose malfunctions within these complex antennas. The Company's satellite test systems utilize either near-field or compact range technology. Both technologies are equally effective from a test and measurement viewpoint, but each offers certain benefits. A near-field system offers diagnostic capabilities and is generally less expensive than a comparably equipped compact range system, but a compact range system is faster and easier to use.       Automotive Systems. ORBIT/FR believes it is a leader in the design and delivery of high-performance test and measurement systems for automobile manufacturers and manufacturers of automotive sub-assemblies. The Company's systems incorporate both near-field and far-field technologies and are thus capable of microwave sampling over a wide range of frequencies. A typical system includes a large mechanical arm that sweeps over a large turntable. The car being tested rests on the turntable, and both the turntable and the mechanical arm are set in motion based upon instructions received from the Company's measurement software. The systems' broad capabilities are essential given a growing trend by automobile manufacturers to integrate advanced microwave technologies such as cellular/PCS, GPS-based navigation system, satellite radios, digital TV and collision-avoidance systems into their advanced new generation cars.       RCS Systems. The Company's Radar Cross Section measurement systems transmit microwave signals towards a passive target and then measure the energy reflected back towards the transmit source. In an RCS system, the passive target is typically a model or full scale aircraft or missile that is mounted on a special "low-RCS" testing pylon capable of rotating the target. Data collected at various rotation angles and frequencies can be processed to form an electromagnetic "image" of the target. This type of information enables the design engineer to assess more accurately the detailed radar signature of the target. The Company believes that it is a market leader in this field.       Radome Systems. A radome is a dome-shaped casing that is placed on the leading edge of a commercial of military aircraft or missile to protect the radar and direction-finding equipment. A radome is typically manufactured using fiberglass or other materials that are designed to be "transparent" to microwave signals. Testing is performed periodically to ensure that microwave signals are not degraded or deflected as they pass through the radome. The Company's systems are designed to measure radome performance by analyzing the path of microwave signals as they pass through the radome and then                                          10    comparing it to the propagation path when the radome is not present. Radome systems use far-field measurement methods but rely on high positioning accuracy normally required by near-field systems.       Custom Systems. From time to time, the Company designs and manufactures custom microwave test and measurement systems for a wide variety of uses and applications worldwide. The Company's broad microwave and antenna expertise has enabled it to obtain these contracts, and the Company intends to bid for similar jobs in the future if the expertise gained in designing such systems is deemed to be of strategic value to the Company.       MICROWAVE TEST AND MEASUREMENT SOFTWARE PRODUCTS. Through its 959Spectrum and MiDAS software packages, ORBIT/FR offers automatic measurement software for microwave test and measurement systems. The Company's software products are Windows-based programs that provide the customer with a consistent user-friendly interface with the test and measurement system. The software products have a robust and modular structure that enables the Company to easily add features for current and future customers. The software uses far-field and/or near-field algorithms to generate accurate results, and the computational methodologies used have gained acceptance throughout the microwave test and measurement community. The software supports the Company's own measurement equipment as well as equipment manufactured by third parties. The Company's software products are designed to be "off-the-shelf," but are versatile and can be customized by the Company's or the customer's technical personnel to suit specific needs.       Although software can vary between systems, it always consists of three primary modules: data acquisition, data analysis and report writing. The software's data acquisition module records actual measurements as it controls the microwave measurement equipment, the positioning subsystem, and often the source antenna and/or the antenna being measured. Variables such as frequency, power level, amplitude, phase, rotary and/or linear motion, polarization, transmit/receive switching, electrical beam pointing and polarization switching are all controlled by the Company's measurement software. The multidimensional results obtained are stored in a computer file for subsequent analysis. The software's data analysis module processes the acquired data using sophisticated microwave and signal processing algorithms developed by the Company and the National Institute of Standards and Technology. The data analysis module transforms the acquired data into easily-understood numerical information and graphic representations, thus providing the customer with the data required to satisfy its internal requirements and those of its own customers. The software's report writing module can be customized to meet each customer's needs.       POSITIONER SUBSYSTEMS. The positioner subsystem is the collection of equipment that holds the device under test and causes it to be moved according to the needs of the test. A typical positioner subsystem may include the following components:       Positioners. A positioner is the item upon which the device under test is placed while it is being tested. The Company's positioners are rugged, yet highly precise, devices that adjust themselves in accordance with the positioning instructions received from the measurement software. Special circuitry and mechanical design features built into the positioner enable the data acquired from the antenna under test to travel efficiently through the positioner to the computer to be analyzed. The Company's simple positioners rotate around a single axis, while the Company's more elaborate positioners incorporate up to three axes. An automated microwave test and measurement system requires one or more positioners. The Company offers over 200 different positioner models and believes that its positioners are among the most accurate.       Positioner Controllers and Power Control Units. The Company manufactures positioner controllers and power control units (PCUs) as well as models that combine these two products into one component. Working together, the positioner controller and the PCU act as the "translators" between the measurement software and the positioner. The positioner controller receives digital instructions from the microwave software and translates them into analog signals understood by the PCU. These analog                                          11    signals are then amplified by the PCU to provide precisely calibrated DC power to the positioner's electric motors, which then operate at a user-defined speed to move the antenna or device under test through the desired positions. The Company offers four positioner controller models, two PCU models and four models that combine both positioner controller and PCU. During 2004 the Company added the 4806-3C positioner controller to its product line.       Planar Scanners. A planar scanner is a rectangular device that enables a probe antenna to be moved along an x- and y-axis so that its position at any time is known and can be exactly replicated. Planar scanners are mounted to enable the probe to be moved throughout the height and width dimensions of the scanner. Scanners enable test engineers to accurately and reliably analyze many aspects of the microwave signals radiating from the antenna or device under test. The Company offers 24 standard scanners ranging in size from 3 feet by 3 feet to over 100 feet by 100 feet.       Pylons and Model Towers. Pylons and model towers are used in many microwave test and measurement applications and range in size from very large to very small. Large pylons can carry substantial loads in indoor or outdoor environments, and certain models can even support a full-sized aircraft. Pylons designed to minimize measurement interference are almost always used in RCS systems.       OTHER MICROWAVE PRODUCTS. The Company has developed several microwave products used in the larger microwave industry.       Radial Power Combiners. The Company's radial power combiners offer a highly efficient electromagnetic mechanism to combine several identical low-energy signals together to make a single high-energy signal. Radial power combiners have many uses, but their most common application is in high-power microwave transmitters.       Antennas, Probes and Other Microwave Accessories. The Company designs and manufactures antennas, probes and other microwave accessories. These products are used in the Company's microwave test and measurement systems, and they are also sold to customers as stand-alone items.  SALES AND MARKETING       The Company markets and sells its products in the United States through direct regional sales managers and through independent sales representatives that target specific geographic and strategic markets. Internationally, the Company has established sales and customer service centers in Israel and Germany and has a network of distributors, agents and representatives for sales, marketing and customer support throughout Europe and Asia.       The Company's engineers and other technical staff support the efforts of the sales force. Since a customer's engineers typically play an important role in the procurement decision, the Company's engineers work closely with them to help them understand the advantages of the Company's products and systems. Additional business from existing customers is pursued through the joint efforts of both the sales force and the engineers and other technical staff who have worked closely with the customer's engineers and who understand the customer's needs. If a customer has already purchased a microwave test and measurement system from ORBIT/FR, the Company believes it has an advantage over competitors in obtaining orders for system upgrades as well as any additional systems that the customer may wish to purchase at a later date. Typically, a substantial portion of the Company's revenues in a given year is generated by customers for whom the Company has previously provided products or systems.       The Company generates sales leads for new customers through referrals from existing customers and other industry suppliers, its reputation in the industry, its on-line catalog (found at www.orbitfr.com), advertising in trade publications, participation in conferences and trade shows, and on the World Wide Web.                                          12   CUSTOMER SUPPORT       The Company is committed to providing customer satisfaction through superior service and support of its products. Through its Customer Service Response Center the Company handles warranty support, field service, technical support, training, service contracts, spare parts and user documentation issues. Through a trained customer service representative and direct phone support the Company believes it is positioned to provide rapid solutions upon request. ORBIT/FR's customer service capabilities are achieved by providing comprehensive training through offices located in the U.S., Europe and Israel.  CUSTOMERS       The Company has performed several hundred world-wide installations for customers in the aerospace/defense, wireless communications, satellite and automotive industries. Representative customers that have purchased systems from the Company include:     Aerospace/Defense.............   Aerospatiale, Allgon, Ball Aerospace, Boeing,                                  Chelton, BAE Systems, Dassault, Elta, Ericsson                                  Microwave, General Electric, Israel Aircraft                                  Industry, ITT Avionics, JPL, L3 Communications,                                  Lockheed Martin/Loral, Lufthansa, Mitsubishi                                  Heavy Industries, NASA, Northrop-Grumman,                                  Nurad, Pratt & Whitney, Racal Avionics,                                  Raphael, Raytheon, Rockwell International, SAAB                                  Missiles, SPAR Aerospace, Texas Instruments,                                  and the United States Air Force, Army and Navy.  Wireless Communications.......   Alcatel, Andrew, AT&T, Bell Atlantic, BAE,                                  Bosch, Celwave, Chelton, Daewoo, Ericsson, GTE,                                  IBM, Intel, ITT, Korea Mobile Telecom, Lucent                                  Technologies, Motorola, NEC, Nokia, Northern                                  Telecom, NTT, Probrand, Qualcomm, RCA, Samsung,                                  SiemensPlessey, Thales Antennas, Telebras and                                  Tenovis.  Satellite.....................   Astrium, DASA, EADS, Elenia Spazio, Harris,                                  Lockheed Martin, Space Systems/Loral, Raytheon                                  and TRW.  Automotive....................   Blaupunkt, BMW, Daimler-Chrysler, Ford, Fuba,                                  Hyundai, Mitsubishi, SAAB, and Toyota.  University....................   Georgia Tech, University of Hawaii, University                                  of Hong Kong, University of Utah, UCLA,                                  University of Illinois, Texas A&M University,                                  and Villanova University.        The Company's customers are located in the Americas (the United States, Canada, Brazil and Argentina), Europe (the United Kingdom, France, Germany, Israel, Italy, Holland, Spain, Austria, Denmark, Belgium, Poland, Finland, Norway, Sweden, Switzerland, Turkey and Portugal) and throughout the rest of the world (Japan, Korea, Thailand, Taiwan, Singapore, Indonesia, Australia, China, and South Africa). See Note 7 of the Notes to Consolidated Financial Statements for a discussion of the geographic concentration of the Company's revenues. For the year ended December 31, 2005, no single customer accounted for more than 10% of consolidated revenues, while Northrop Grumman accounted for 16% of the Company's 2004 revenues.  PRODUCTION AND SUPPLIERS                                          13         The Company's engineers, based in the United States, Germany and Israel, are responsible for product design and development and for overseeing the production of the Company's products. Although the Company maintains a production facility in Horsham, PA, most of the production of the Company's products is performed by subcontractors. Alchut is currently the Company's principal subcontractor for electro-mechanical production, primarily in connection with the manufacturing of positioners. The Company believes that Alchut currently offers the best available combination of quality, reliability and price. By giving three months notice, the Company has the right to select any other subcontractor. Through its wholly-owned subsidiary Advanced ElectroMagnetics, Inc., the Company manufactures anechoic foam absorbing material, an integral component of the microwave test and measurement system environment.       Although the Company produces most of the component parts for its microwave test and measurement systems, it purchases certain components from outside vendors for turnkey microwave test and measurement systems, including personal computers, shielded enclosures and microwave absorbers.  BACKLOG       At December 31, 2005 and 2004, the Company's backlog was approximately $25.8 million and $13.1 million, respectively. December 2005 backlog includes approximately $9 million related to its contract with Alenia Aeronautica S.p.A., which the Company announced on July 22, 2005. The Company includes in backlog only those orders for which it has received and accepted a completed purchase order. Such orders are generally subject to cancellation by the customer with payment of a specified charge. The delivery lead time on the Company's products and systems generally three to six months, but can be as short as a few days and as long as 18 months or more. Because of the possibility of customer changes in delivery schedules, cancellation of orders and potential shipment delays, the Company's backlog as of any particular date may not be representative of actual sales for any succeeding period.  RESEARCH AND DEVELOPMENT       The Company believes that its future success depends on its ability to adapt to rapidly changing technological circumstances within the industries it serves and to continue to meet the needs of its customers. Accordingly, the timely development and introduction of new products is essential to maintain the Company's competitive position. Using its internal research and development staff, augmented by external consultants, the Company develops most of its products in-house. A significant portion of the Company's research and development efforts has been conducted in direct response to the specific requirements of customers' orders, and, accordingly, such amounts are included in the cost of sales when incurred and the related funding is included in net revenues at such time. Research and development expenses of the Company for fiscal years ended December 31, 2005, 2004 and 2003 were $1,118,000, $1,008,000 and $1,132,000, respectively.  COMPETITION       The Company believes that its current systems and products compete effectively with the systems and products offered by its competitors on the basis of product functionality, speed and accuracy, reliability, price, ease of use and technical support. The market for automated microwave test and measurement products, systems and services, however, is highly competitive and is characterized by continuing advances in products and technologies. Some of the Company's competitors have established relationships with current and potential customers of the Company. The Company also competes, on a limited basis, with the internal development groups of its existing and potential customers, many of whom design and develop parts of their own microwave test and measurement systems. The Company's business, operating results and financial condition could be materially adversely affected by such competition. The Company's primary competitors in the microwave test and measurement market are MI Technology, Nearfield Systems, Inc., ETS, March Microwave and Satimo.                                          14    PROPRIETARY RIGHTS       The Company is heavily dependent on its proprietary technology. The Company relies on a combination of confidentiality agreements with its employees, license agreements, copyrights, trademarks and trade secret laws to establish and protect rights to its proprietary technology. The Company does not hold any material patents. All of the Company's software is shipped with a security lock which limits software access to authorized users. Generally, the Company does not license or release its source code. Effective copyright and trade secret protection of the Company's proprietary technology may be unavailable or limited in certain foreign countries.  EMPLOYEES       As of December 31, 2005, the Company had a total of 100 employees. The Company considers its relations with its employees to be good.
RAPID TECHNOLOGICAL CHANGE. The microwave test and measurement industry is characterized by rapid technological change. The Company's future success will depend upon its ability continually to enhance its current products and to develop and introduce new products that keep pace with the increasingly sophisticated needs of its customers and the technological advancements of its competitors. There can be no assurance that the Company will be successful in developing and marketing product enhancements or new products that will adequately meet the requirements of the marketplace.       DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success is heavily dependent upon its proprietary technology. The Company does not currently have any material patents and relies principally on trade secret and copyright laws to protect its technology. However, there can be no assurance that these steps will prevent misappropriation of its technology. Moreover, third parties could independently develop technologies that compete with the Company's technologies. Although the Company believes that its products and proprietary rights do not infringe patents and proprietary rights of third parties, there can be no assurance that infringement claims, regardless of merit, will not be asserted against the Company. In addition, effective copyright and trade secret protection of the Company's proprietary technology may be unavailable or limited in certain foreign countries.       DEPENDENCE ON ALCHUT; OPERATIONS IN ISRAEL. The Company maintains and will continue to maintain a number of relationships with Alchut, the major stockholder of the Company. Alchut is the Company's principal subcontractor for electro-mechanical production, primarily in connection with the production of positioners. In addition, Alchut provides general and administrative services for the Company's operations in Israel. Effective January 1, 2004, the Company and Alchut entered into an agreement under which Alchut will continue to provide these services for at least one year. Alchut maintains its production operations, and the Company maintains part of its engineering operations, in Israel. As a result, the Company may be directly influenced by the political, economic and military conditions affecting Israel.       RISKS OF FIXED-PRICE CONTRACTS. Virtually all of the Company's contracts for its systems and products are on a fixed-price basis. The profitability of such contracts is subject to inherent uncertainties as to the cost of completion. In addition to possible errors or omissions in making initial estimates, cost overruns may be incurred as a result of unforeseen obstacles, including both physical conditions and unexpected problems in engineering, design or testing. Since the Company's business may at certain times be concentrated in a limited number of large contracts, a significant cost overrun on any one contract could have a material adverse effect on the Company's business, operating results and financial condition.                                          15         RISKS ASSOCIATED WITH ENTERING NEW MARKETS. The Company has identified and is evaluating whether to enter into certain complementary markets. The Company's success in these markets will depend on, among other factors, the Company's ability to identify markets and develop technologies for such markets on a timely basis, hire and retain skilled management, financial, marketing and engineering personnel, successfully manage growth and obtain capital sufficient to finance such expansion. There can be no assurance that the Company will successfully enter these markets.       MANAGEMENT OF GROWTH. The Company believes that growth will be required to maintain the Company's competitive position. Future growth, coupled with the rapid evolution of the Company's markets, has placed, and is likely to continue to place, significant strains on its management, administrative, operating and financial resources, as well as increased demands on its internal systems, procedures and controls. The Company's ability to manage future growth will require the Company to continue to improve its financial and management controls, reporting systems and procedures on a timely basis, to implement new systems as necessary and to expand, train, motivate and manage its sales and technical personnel. There can be no assurance that the Company will be able to manage its growth successfully. Failure to do so could have a material adverse effect on the Company's business, operating results and financial condition.       RISKS ASSOCIATED WITH INTERNATIONAL SALES. In 2005 and 2004, international sales comprised approximately 40% and 41% of the Company's total sales, and the Company expects its international business to continue to account for a material part of its revenues. International sales are subject to numerous risks, including political and economic instability in foreign markets, restrictive trade policies of foreign governments, inconsistent product regulation by foreign agencies or governments, imposition of product tariffs and burdens and costs of complying with a wide variety of international and U.S. export laws and regulatory requirements. The non-discretionary three year denial policy for Munitions List items stemming from the U.S. Customs plea agreement, further restricts future exports. This action was materially limited, when on March 5, 2000, the Department of State notified the Company that it's Commodities Jurisdiction request submitted in 1998 was approved. The approval removes the vast majority of the Company's antenna measurement software products and systems from the US Munitions List. These products now fall under the jurisdiction of the Department of Commerce and therefore would not be subject to the Department of State's non-discretionary policy of denying license applications. Although the export process will become much more efficient under Commerce regulations effective March 1, 2000, there can be no assurance that the Company will be able to continue to compete successfully in international markets or that its international sales will be profitable. Approximately 77% of the Company's sales in 2005 were denominated in U.S. dollars. Accordingly, the Company believes that it does not have significant exposure to fluctuations in currency. However, fluctuations in currency could adversely affect the Company's customers.       POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company's operating results have varied from quarter to quarter in the past and may vary significantly in the future depending on factors such as the size and timing of significant contracts, the mix of third party products and the Company's proprietary products included in a particular contract, customers' budgetary constraints, increased competition, the timing of new product announcements and changes in pricing policies by the Company or its competitors, market acceptance of new and enhanced versions of the Company's products, changes in operating expenses and changes in general economic factors and export license delays and denials. The Company's expense levels are based, in part, on its expectations as to future revenue levels. If the Company's revenue levels were to be below expectations, the Company's operating results would likely be materially adversely affected.       DEPENDENCE ON QUALIFIED TECHNICAL PERSONNEL. The Company's operating results depend in large part upon the efforts of its microwave, software and systems engineers. The success of the Company's business therefore depends on its ability to attract and retain engineers and other technical personnel. There are a limited number of microwave engineers, and such individuals are sought both by                                          16    microwave test and measurement companies such as the Company and by manufacturers of wireless products and telecommunications service providers. Competition for such personnel is intense. The Company has at times experienced difficulty in recruiting and retaining technical personnel, and there can be no assurance that the Company will not experience difficulties in the future in attracting and in retaining technical personnel.       DEPENDENCE ON KEY PERSONNEL. The success of the Company depends to a significant degree upon the contribution of its executive officers and other key personnel. There can be no assurance that the Company will be able to retain its managerial and other key personnel or to attract additional managerial and other key personnel if required.       PRODUCT LIABILITY; RISK OF PRODUCT DEFECTS. The sale of products and systems by the Company may entail the risk of product liability and related claims. A product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results and financial condition. Complex software and system products, such as those offered by the Company, may contain defects or failures when introduced or when new versions are released. There can be no assurance that, despite testing by the Company, errors will not be found in new products after commencement of commercial shipments, resulting in loss of market share or failure to achieve market acceptance. The Company maintains product liability insurance in the amount of $5.0 million and errors and omissions insurance in the amount of $1.0 million, although there can be no assurance that such coverage will be applicable to a particular claim or that the amounts of such insurance will be adequate if the Company experiences a significant claim. Although the Company has not experienced any significant claims to date related to its systems or products, the occurrence of such a claim could have a material adverse effect upon the Company's business, operating results and financial condition.       COMPETITION. The market for automated microwave test and measurement products, systems and services is highly competitive and is characterized by continuing advances in products and technologies. In general, competition in this market comes from major microwave test and measurement vendors, some of which have a longer operating history, significantly greater financial, technical and marketing resources, greater name recognition and a larger installed customer base than the Company. These companies also have established relationships with current and potential customers of the Company. The Company also competes, on a limited basis, with the internal development groups of its existing and potential customers, who may design and develop parts of their own microwave test and measurement systems. The Company's business, operating results and financial condition could be materially adversely affected by such competition.       FLUCTUATIONS IN CAPITAL SPENDING. The Company is dependent upon the wireless communications, satellite, automotive and aerospace/defense industries. Because these industries are characterized by technological change, pricing and gross margin pressure and, particularly in the aerospace/defense industry, government budget constraints, they have from time to time experienced sudden economic downturns. During these periods, capital spending is frequently curtailed and the number of design projects often decreases. Since the Company's revenues are dependent upon capital spending trends and new design projects, negative factors affecting these industries could have a material adverse effect on the Company's business, operating results and financial condition.       NO DIVIDENDS. The Company has never paid cash dividends on its Common Stock and does not anticipate that any cash dividends will be declared or paid in the foreseeable future.       ISSUANCE OF PREFERRED STOCK AND COMMON STOCK; ANTI-TAKEOVER PROVISIONS. Pursuant to its Amended and Restated Certificate of Incorporation, the Company has an authorized class of 2,000,000 shares of Preferred Stock which may be issued by the Board of Directors with such terms and such rights, preferences and designations as the Board may determine and without any vote of the stockholders, unless otherwise required by law. Issuance of such Preferred Stock, depending upon the rights, preferences and designations thereof, may have the effect of delaying, deterring or preventing a                                          17    change in control of the Company. Issuance of additional shares of Common Stock could result in dilution of the voting power of the Common Stock purchased in this offering. In addition, certain "anti-takeover" provisions of the Delaware General Corporation Law among other things, may restrict the ability of the stockholders to approve a merger or business combination or obtain control of the Company.       MARKET FOR COMMON STOCK. The Company's Common Stock is traded on the OTCBB, which limits exposure to market analysts and, in turn, may limit volume of trading. Investors may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Company's common stock than would otherwise be the case were the Company's Common Stock listed on a more recognized stock exchange or quotation service. In addition, trading in the Company's common stock is currently subject to certain rules under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a "penny stock." Penny stocks are generally non-Nasdaq equity securities with a market price less than $5.00 per share. The penny stock rules require broker-dealers selling penny stocks to make certain disclosures about such stocks to purchasers thereof, and impose sales practice restrictions on broker-dealers in certain penny stock transactions. The additional burdens imposed upon broker-dealers by these rules may discourage them from effecting transactions in the Company's common stock, which could limit the liquidity of the common stock and the ability of the Company's stockholders to sell their stock in the secondary market.
None.
The Company occupies approximately 18,000 square feet of space at its headquarters in Horsham, Pennsylvania under a lease expiring in October 2008. The current annual base rent is approximately $133,000. The Company also maintains sales, engineering, technical support and program management facilities in Israel and Germany, and its manufacturing facilities in Santee, California. The Company's current aggregate annual rental expenses for these additional facilities are approximately $439,000.
During June 1998, the Company reported it was subject to a pending investigation by the U.S. Customs Service related to its past export practices. In September 1999, the U.S. District Court accepted the Company's guilty plea pursuant to a plea agreement (the "Plea Agreement") with the U.S. Attorney's Office to two counts of violating the Arms Control Act arising from its export to China of a defense article and defense services without the required export licenses, in or about November 1997 and January 1998. In March 2000, the U.S. District Court granted final approval of the agreed upon fine of $600,000 under the Plea Agreement and the fine was paid. The Court did not impose any probation on the Company.       In November 1999, the Company announced that pursuant to Section 38(g)(4) of the Arms Export Control Act, its export license applications for Munitions List products were subject to a denial policy under the International Traffic in Arms Regulations (ITAR), effective as of November 2, 1999, as a result of the Plea Agreement. As a result of the U.S. Department of State's approval of the Company's Commodity Jurisdiction, the vast majority of the Company's products are not subject to the State Department's non-discretionary policy of denying license applications. The Company has submitted a formal request seeking reinstatement of its export privileges.                                          18         On September 6, 2005, the Company announced that it has reached a final settlement with the Office of Defense Trade Controls Compliance, Directorate of Defense Trade Control (DDTC) of the United States Department of State, terminating as of August 29, 2005 the statutory debarment that prohibited the Company's direct or indirect participation in exports subject to the International Traffic in Arms Regulations (ITAR). Accordingly, under the terms of the agreement DDTC will resume the normal processing of license applications involving the Company.       The Company is not currently subject to any additional material legal proceedings and is not aware of any other threatened litigation unasserted claims or assessments that could have a material adverse effect on the Company's business, operating results, or financial condition.
The following table sets forth certain information regarding the Company's executive officers, and certain key employees.          NAME         AGE                       POSITION       ----         ---                       --------    Ze'ev Stein         53   Chairman Israel Adan         55   President, Chief Executive Officer Dave Lubbe          42   Chief Financial Officer John Aubin          52   Vice President, Chief Technology Officer Moshe Pinkasy       55   Managing Director, Engineering Marcel Boumans      47   Managing Director, GmbH Mark Bates          35   Vice President, Software Development - USA William Campbell    50   Vice President Engineering and Program Management        Ze'ev Stein has served as Chairman of the Board since October 1998. Mr. Stein served as acting Chief Executive Officer of the Company from October 1998 to October 2001. He has also served as a Director of the Company and its predecessor since March 1996. Since July 1994, Mr. Stein has served as a Director of Alchut and since September 1996, Mr. Stein has also served as the Vice-President of Operations of Alchut. From 1991 to 1996, Mr. Stein was the General Manager of Stein Special Art, Ltd., located in Ra'anana, Israel.       Israel Adan was named President and Chief Executive Officer in October 2001. From March 2001 through October 2001, Mr. Adan served as the President of FireMedia Communications Inc., From 1999 to 2001 Mr. Adan was senior vice president of SigmaOne Communications Corp. where he was responsible for the worldwide development of wireless location technologies and services. Prior to that Mr. Adan served as President of Tadiran (USA), a leading telecommunications equipment and systems provider, operating in numerous capacities during his 15 years at the company.       Dave Lubbe was named Chief Financial Officer in July 2000. From 1997 to 2000, Mr. Lubbe served as the Company's Controller.       John Aubin was named Vice President Business Development and Chief Technology Officer in 2002, and served as Vice President of Measurement Systems since 1996 to 2001. From 1991 to 1996, Mr. Aubin was Vice President in charge of the Antenna Measurement Business Area for Flam & Russell.                                          19         Moshe Pinkasy has served as the Managing Director of Engineering since January 1997. From February 1996 to December 1996, Mr. Pinkasy was Alchut's Manager of the Microwave Test and Measurement Business in Israel. From 1992 to 1996, Mr. Pinkasy served, in various capacities, as the Mechanical Engineering Department Manager for Alchut.       Marcel Boumans has served as the Managing Director of GmbH since March 1997. Since January 1, 2000, Mr. Boumans has been responsible for sales and customer support for Europe. From June 1995 to March 1997, Mr. Boumans was a Systems Design Engineer for Dornier Satelliten Systeme GmbH, the satellite systems subsidiary of Daimler-Benz Aerospace. From 1990 to 1995, Mr. Boumans was a Systems Design Engineer for Dornier GmbH, the communications and defense subsidiary of Daimler-Benz Aerospace.       Mark Bates was named the Company's Vice President of Software Development, U.S.A. in January 2000, and has served in several software development capacities since joining the Company in 1995.       William Campbell joined the Company as Vice President, Engineering and Program Management in December 2002. Mr. Campbell managed Optical Transponder development and production activities at JDS Uniphase Transmission Systems Division from 2000 to 2002. Prior to that, Mr. Campbell worked for BAE systems where he served as Business Area Director of High Power Transmission Systems, and other various program management activities during his 13 years at the company.                                          20                                         PART II
On April 11, 2003, the Company's Common Stock was delisted from the Nasdaq Stock Market and began trading on the electronic over-the-counter quotation system of the National Association of Securities Dealers (the "NASD"), the Over-the-Counter Bulletin Board (the "OTCBB") under the symbol "ORFR." The OTCBB is a regulated quotation service for subscribing members of the NASD that displays the real-time quotes, last-sale prices and volume information in over-the-counter securities. The OTCBB market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.       The following table sets forth the high and low bid prices per share for the Common Stock for the periods indicated below as reported to the NASD by the NASD's member firms. For the first quarter of 2003 the table includes the high and low sale prices per share for the Common Stock reported by Nasdaq.                                   2005            2004                           -------------   ------------- YEAR ENDED DECEMBER 31,    HIGH    LOW     HIGH    LOW - -----------------------   -----   -----   -----   -----         First Quarter          $2.87   $1.78   $1.77   $1.00    Second Quarter         $1.90   $1.35   $1.60   $1.06    Third Quarter          $1.89   $1.25   $1.50   $0.68    Fourth Quarter         $1.95   $1.56   $4.00   $1.20        On March 10, 2006, there were 33 holders of record of the Company's Common Stock. Based on information received by the Company from its stock transfer agent, the Company believes that there are approximately 2,000 beneficial owners of its Common Stock.       The Company has never paid any cash dividends on its Common Stock and does not intend to pay cash dividends on its Common Stock in the foreseeable future. The Company currently intends to reinvest its earnings, if any, in the development and expansion of the Company's business. Any future declaration of cash dividends will be at the discretion of the Company's Board of Directors and will depend upon the earnings, capital requirements and financial position of the Company, general economic conditions and other pertinent factors.                                          21
Consolidated Statement of Operations Data:                                                                         Year Ended December 31,                                                          -----------------------------------------------                                                            2005      2004      2003      2002      2001                                                          -------   -------   -------   -------   -------       (amounts in thousands, except per share data) Contract revenues                                        $22,905   $21,185   $15,966   $13,053   $18,612 Cost of revenues                                          15,540    13,567    10,682     9,312    13,589                                                          -------   -------   -------   -------   ------- Gross profit                                               7,365     7,618     5,284     3,741     5,023                                                          -------   -------   -------   -------   ------- General and administrative                                 2,427     2,618     2,554     2,764     3,197 Sales and marketing                                        3,325     2,901     2,726     2,324     2,093 Research and development                                   1,118     1,008     1,132     1,144     1,142                                                          -------   -------   -------   -------   ------- Total operating expenses                                   6,940     6,527     6,412     6,232     6,432                                                          -------   -------   -------   -------   ------- Operating income (loss), net                                 425     1,091    (1,128)   (2,491)   (1,409) Other income (loss), net                                     (51)     (108)      (73)       59        82                                                          -------   -------   -------   -------   ------- Income (loss) before income taxes                            374       983    (1,201)   (2,432)   (1,327) Income tax expense                                          (244)       31       134       145       669                                                          -------   -------   -------   -------   ------- Net income (loss) before cumulative effect of    change in accounting principle                            618       952    (1,335)   (2,577)   (1,996) Cumulative effect of change in    accounting principle                                       --        --        --      (301)       --                                                          -------   -------   -------   -------   ------- Net income (loss)                                        $   618   $   952   $(1,335)  $(2,878)  $(1,996)                                                          =======   =======   =======   =======   ======= Basic and diluted income (loss) per share before    cumulative effect of change in accounting principle   $  0.10   $  0.16   $ (0.22)  $ (0.43)  $ (0.33)                                                          =======   =======   =======   =======   ======= Basic and diluted income (loss) per share                $  0.10   $  0.16   $ (0.22)  $ (0.48)  $ (0.33)                                                          =======   =======   =======   =======   =======   Consolidated Balance Sheet Data:                                               December 31,                          -----------------------------------------------                           2005       2004      2003      2002      2001                          -------   -------   -------   -------   -------       (amounts in thousands) Working capital          $ 4,598   $ 4,185   $ 3,221   $ 4,749   $ 7,037 Total assets             $14,531   $13,116   $11,260   $11,875   $14,126 Stockholders' equity     $ 6,718   $ 6,100   $ 5,148   $ 6,483   $ 9,361
CRITICAL ACCOUNTING POLICIES                                          22         Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates that affect the amounts reported in the financial statements and accompanying notes. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, intangible assets, income taxes, financing operations, warranty obligations, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.  The following accounting policies are the most critical and could impact our results of operations.       Revenue Recognition. The Company recognizes revenue and profit as work progresses on long-term, fixed price contracts using the percentage-of-completion method, which measures the percentage of costs incurred to date to the estimated total costs for each contract when such costs can be reasonably estimated. The Company follows this method since reasonably dependable estimates of the costs applicable to various stages of a contract can be made. Recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known.       Bad Debts. The Company maintains an allowance for estimated losses resulting from the non-payment of accounts receivable. If the estimate is not sufficient to cover actual losses, the Company is required to take additional charges to its earnings.       Deferred Taxes. The Company recorded a deferred tax valuation allowance due to uncertainty with regard to the Company's ability to generate sufficient taxable income in the future to realize the deferred tax asset. However, during 2005, the Company reduced its deferred tax valuation allowance as a result of the positive financial results during the last two years and based upon the Company's projected ability to generate taxable income in the future.       Recent Events. During 2004, the Israeli Ministry of Defense implemented a policy temporarily suspending the export of all Israeli military and commercial use products to certain countries in the Far East, affecting our Israeli subsidiary's ability to deliver products manufactured totaling approximately $1.2 million. Although this delay could lead to a cancellation of the contract to purchase the products, the Company anticipates the suspension will be lifted during 2006 and believes that the customers will accept delivery of the products at that time. On September 6, 2005, the Company announced that it has reached a final settlement with the Office of Defense Trade Controls Compliance, Directorate of Defense Trade Control (DDTC) of the United States Department of State, terminating as of August 29, 2005 the statutory debarment that prohibited the Company's direct or indirect participation in exports subject to the International Traffic in Arms Regulations (ITAR). Accordingly, under the terms of the agreement DDTC will resume the normal processing of license applications involving the Company.  RESULTS OF OPERATIONS  YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004       Revenues. Revenues for the year ended December 31, 2005 were approximately $22.9 million compared to approximately $21.2 million for the year ended December 31, 2004, an increase of approximately $1.7 million or 8%. Revenues from the wireless and EMC markets increased approximately $2.5 million and $368,000, respectively, while revenues from the defense, automotive, and satellite markets decreased approximately $678,000, $329,000 and $105,000, respectively. Geographically, revenues from                                          23    Asia and North America increased approximately $1.4 million and $1.3 million, respectively, while revenues from the European market decreased approximately $1.0 million.       Cost of revenues. Cost of revenues for the year ended December 31, 2005 were approximately $15.5 million compared to approximately $13.6 million for the year ended December 31, 2004. Gross margin percentage for the year ended December 31, 2005 decreased to 32.2% from 36.0% for the year ended December 31, 2004. The decreased margins are due primarily to lower margins realized on larger contracts where the Company utilizes subcontractors to deliver significant portions of the contract.       General and administrative expenses. General and administrative expenses for the year ended December 31, 2005 were approximately $2.4 million, compared to approximately $2.6 million for the year ended December 31, 2004. As a percentage of revenues, general and administrative expenses for the year ended December 31, 2005 decreased to 10.6% in 2005, down from 12.4% for the year ended December 31, 2004. This cost decrease is largely a result of a reductions in export compliance costs incurred during the year ended December 31, 2005.       Sales and marketing expenses. Sales and marketing expenses for the year ended December 31, 2005 were approximately $3.3 million compared to approximately $2.9 million for the year ended December 31, 2004. The current year increase is primarily the result of the Company's increased worldwide marketing efforts, and increased sales commissions. As a percentage of revenues, sales and marketing expenses increased to 14.5% for the year ended December 31, 2005, from 13.7% for the year ended December 31, 2004.       Research and development expenses. Research and development expenses for the year ended December 31, 2005 were approximately $1.2 million, compared to approximately $1.0 million for the year ended December 31, 2004. These costs represent the Company's continuing efforts in the development of its 959Spectrum and MiDAS software suites, the development of the Company's 4806-3C motion controller, and other products. As a percentage of revenues, research and development expenses increased to 5.2% for the year ended December 31, 2005, from 4.8% for the year ended December 31, 2004.       Other loss net. Other loss, net, for the year ended December 31, 2005 was approximately $51,000 compared to approximately $108,000 for the year ended December 31, 2004, a decrease of approximately $57,000. The decrease in loss is primarily due to the settlement of the Company's relocation claim as a result of its 2003 relocation of its manufacturing facility in Santee, CA.       Income taxes. Income tax benefit for the year ended December 31, 2005 was approximately $244,000 compared to an income tax expense of approximately $31,000 for the year ended December 31, 2004, a decrease in expense of $275,000. The Company records income tax expense on profitable operations and income tax benefits on losses recorded by its foreign subsidiaries where applicable. As a result of its continuing profitable operations, the Company reduced its valuation allowance related to net operating loss carry forwards by approximately $699,000 at December 31, 2005.  YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003       Revenues. Revenues for the year ended December 31, 2004 were approximately $21.2 million compared to approximately $16.0 million for the year ended December 31, 2003, an increase of approximately $5.2 million or 33%. Revenues from the defense, satellite, automotive, Electromagnetic Compatibility (EMC), and University markets increased approximately $4.3 million, $918,000, $332,000, $180,000 and $110,000, respectively. Revenues from the wireless market decreased approximately $591,000. Geographically, revenues from North America and Europe increased $4.8 million and $1.4 million, respectively. Revenues from the Asian market decreased approximately $994,000. Increased 2004 defense revenues were a largely result of significant completion of large U.S. defense contracts.                                          24         Cost of revenues. Cost of revenues for the year ended December 31, 2004 were approximately $13.6 million compared to approximately $10.7 million for the year ended December 31, 2003. Gross margin percentage for the year ended December 31, 2004 increased to 36.0% from 33.1% for the year ended December 31, 2003. The increased margins are due primarily to increased volume, increased sales of high margin software, and improvements in the Company's contract bid and program management functions.       General and administrative expenses. General and administrative expenses for each of the years ended December 31, 2004 and 2003 totaled approximately $2.6 million. As a percentage of revenues, general and administrative expenses decreased to 12.4% for the year ended December 31, 2004, from 16.0% for the year ended December 31, 2003.       Sales and marketing expenses. Sales and marketing expenses for the year ended December 31, 2004 were approximately $2.9 million compared to approximately $2.7 million for the year ended December 31, 2003. The current year increase is primarily the result of the Company's increased worldwide marketing efforts, and increased sales commissions. As a percentage of revenues, sales and marketing expenses decreased to 13.7% for the year ended December 31, 2004, from 17.1% for the year ended December 31, 2003.       Research and development expenses. Research and development expenses for the year ended December 31, 2004 were approximately $1.0 million, compared to approximately $1.1 million for the year ended December 31, 2003. These costs represent the Company's continuing efforts in the development of its 959Spectrum software suite and improvement of its existing compact range technology. As a percentage of revenues, research and development expenses decreased to 4.8% for the year ended December 31, 2004, from 7.1% for the year ended December 31, 2003.       Other loss net. Other loss, net, for the year ended December 31, 2004 was a loss of approximately $108,000 compared to a loss of approximately $73,000 for the year ended December 31, 2003, an increase of approximately $35,000. The additional loss is primarily due to the settlement of the Company's relocation claim as a result of its 2003 relocation of its manufacturing facility in Santee, CA.       Income taxes. Income tax expense for the year ended December 31, 2004 was approximately $31,000 compared to approximately $134,000 of income tax expense for the year ended December 31, 2003, a decrease in expense of $103,000. The Company records income tax expense on profitable operations and income tax benefits on losses recorded by its foreign subsidiaries where applicable. Income tax expense was not recorded during the year ended December 31, 2004 on the Company's profitable domestic operations as previously recorded deferred income tax benefits on losses were reserved for.  LIQUIDITY AND CAPITAL RESOURCES       During recent years the Company has satisfied its working capital requirements through cash flows from operations.       Net cash provided by operating activities during the year ended December 31, 2005 was approximately $581,000, compared to approximately $783,000 provided during the year ended December 31, 2004. The most significant contribution of cash provided by operating activities during the year ended December 31, 2005 came from the Company's $582,000 net income compared to $952,000 of net income recognized in the year ended December 31, 2004. Another significant contribution to cash provided by operating activities during the year ended December 31, 2005 resulted from an increase in billings in excess of costs and estimated earnings on uncompleted contracts of $952,000. Significant uses of cash in operating activities consists of increases in accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts of $330,000 and $277,000, respectively.                                          25         Net cash used in investing activities for the purchase of property and equipment during the year ended December 31, 2005 was $207,000. Net cash used in investing activities for the purchase of property, plant and equipment during the year ended December 31, 2004 amounted to $382,000.       The Company has exposure to currency fluctuations as a result of billing certain of its contracts in foreign currency. When selling to customers in countries with less stable currencies, the Company bills in U.S. dollars. For the year ended December 31, 2005, approximately 77% of the Company's revenues were billed in U.S. dollars. Most of the costs of the Company's contracts, including costs subcontracted to the Parent, have been, and will continue to be, U.S. dollar-denominated except for wages for employees of the Company's Israeli and German subsidiaries, which are denominated in local currency. The Company intends to continue to enter into U.S. dollar-denominated contracts.  INFLATION AND SEASONALITY       The Company does not believe that inflation or seasonality has had a significant effect on the Company's operations to date.  IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS       In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement No. 154, "Accounting Changes and Corrections - A replacement of APB No. 29 and FASB No. 3." The statement changes the requirements for the accounting for and reporting of a change in accounting principles. This Statement applies to all voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions those provisions should be followed.       Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable.       The Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this statement is issued.       In December 2004, the FASB issued a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation". This statements supersedes APB Opinion No. 25, Accounting for Stock Issused to Employees", and its related implementation guidance. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entity's equity investments or that may be settled by the issuance of those equity instruments. This statement focuses primarily on accounting transactions in which an entity obtains employee services in share-based payment transactions. This statement requires all share based payments to employees, including grants of employee stock options, to be recognized in                                          26    the financial statements. The proforma disclosures previously permitted will no longer be an alternative to financial statement recognition. We will adopt the new standard effective for the first quarter of 2006. Future compensation expense may be impacted by various factors including the number of awards granted and their related fair value at the date of grant.       In December 2004, the FASB issued Statement No. 153 "Exchange of Nonmonetary Assets - an amendment to APB Opinion No. 29". The guidance in APB No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchange of nonmonetary assets should be measured on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This statement amends APB Opinion No. 29 to eliminate the exception for the 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 the commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this statement are effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after December, 2004. Management does not believe the adoption of this Statement will have any material impact on the Company.       In November 2004, the FASB issued Statement No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4". This statement 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). Paragraph 5 of ARB 43, Chapter 4, previously stated that "under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges." This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 24, 2004. Management does not believe the adoption of this Statement will have any material impact on the Company.  CONTRACTUAL OBLIGATIONS:                                                                      Payments Due by Period                                                   ------------------------------------------------------                                                                  Less        One       Three      After                                                                Than One   to Three    to Five     Five Description                                          Total       Year       Years      Years      Years - -----------                                       ----------   --------   --------   --------   --------       Capital lease obligations .....................   $   92,544   $ 30,466   $ 52,204   $  9,874 Operating lease obligations ...................    1,781,731    458,651    748,483    353,659   $220,938 Purchase obligations ..........................                                                   ----------   --------   --------   --------   -------- Other Long-Term Liabilities Reflected on the    Registrant's Balance Sheet under GAAP                                                   ----------   --------   --------   --------   -------- Total .........................................   $1,874,275   $489,117   $800,687   $363,533   $220,938                                                   ==========   ========   ========   ========   ========                                           27
None.
The reports of independent auditors and consolidated financial statements and schedule are set forth in this report beginning on page F-1.
None.
(a) Evaluation of disclosure controls and procedures. The Company's disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed by us in the reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Securities Exchange Act of 1934 is accumulated and communicated to our management on a timely basis to allow decisions regarding required disclosure. The Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2005. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2005, these controls and procedures were effective.  b) Change in Internal Controls. There have been no changes in internal control over financial reporting identified in connection with the foregoing evaluation that occurred during the Company's fiscal quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
None.                                          28                                        PART III
The following table sets forth the name, age and principal occupation of each director.                        DIRECTOR     NAME      AGE     SINCE                  PRINCIPAL OCCUPATION     ----      ---   --------                 --------------------     Ze'ev Stein    53     1996     Chairman of the Board of Directors of the Company Uri Jenach     52     1999     General Manager of SophistiPak Ltd., Netanya,                                Israel Doron Ginat    37     2002     General Manager of Netivey Gemel Ltd., Israel Dan Goffer     54     2003     Managing partner of Goffer, Guilman & Co., CPAs        Ze'ev Stein has served as a director of the Company and its predecessor since March 1996 and began serving as Chairman of the Board of Directors in October 1998. Since July 1994, Mr. Stein has served as a Director of Alchut and since September 1996, Mr. Stein has also served as the Vice-President of Operations of Alchut. From 1991 to 1996, Mr. Stein was the General Manager of Stein Special Art, Ltd., located in Ra'anana, Israel.       Uri Jenach was named a director in November 1999, and has served as the General Manager of SophistiPak LTD, an engineering and packaging consulting company since 1993. Mr. Jenach has served as a Director of ORBIT/FR, Engineering, Ltd., a subsidiary of the Company, since 1996. Mr. Jenach also serves as a Director of Orbit Avionics, Ltd.       Doron Ginat has served as the General Manager of Netivey Gemel Ltd. since December 2000. From 1997 to December 2000, Mr. Ginat was the General Manager of the Pension & Insurance Fund of the Construction Workers. Prior to 1997, Mr. Ginat was an Economic Advisor of the General Manager of the Israeli Ministry of Infrastructure, along with serving in the Israeli Military.       Dan Goffer is the managing partner of Goffer, Guilman & Co., CPAs of Tel Aviv, Israel. Mr. Goffer specializes in analytical auditing and computer consulting implementations.  BOARD OF DIRECTORS       The Board of Directors met three times during the last fiscal year. There were no directors who, during the last full fiscal year, attended in person or by phone fewer than 75% of the meetings of the Board of Directors.       The Company's Amended and Restated Certificate of Incorporation provides that the Board of Directors shall consist of not less than three nor more than thirteen members, the exact number to be fixed and determined from time to time by the Board. The Company's whole Board of Directors consists of four (4) directors.  COMMITTEES OF THE BOARD       The Board of Directors has maintained a Compensation Committee and an Audit Committee since 1997, and an Executive Committee since June 6, 2002. The current members of the Executive Committee, Compensation Committee and Audit Committee were appointed by the Company's Board of Directors in June 2002.       The Compensation Committee of the Board of Directors, subject to the approval of the Board of Directors, determines the compensation of the Company's executive officers and oversees the                                          29    administration of executive compensation programs. The Compensation Committee did not meet during 2005. Mr. Ginat, Mr. Jenach and Mr. Goffer were independent, non-employee directors.       The Audit Committee recommends outside accountants, reviews the results and scope of the annual audit, the services provided by the Company's independent auditors and the recommendations of the auditors with respect to the Company's accounting systems and controls. During 2005, the Audit Committee conducted one meeting via conference call. Mr. Ginat, Mr. Jenach and Mr. Goffer, all of whom are independent, non-employee directors, participated in the call. Mr. Goffer is considered an audit committee financial expert by the Board of Directors within the meaning of the rules of the Securities and Exchange Commission. Representatives of the Company's independent auditing firm, Hoberman, Miller, Goldstein, and Lesser, P.C., "Hoberman, Miller," participated in these meetings and discussed their reviews of the Company's financial statements.       The Executive Committee, which consists of Mr. Jenach has, and may exercise, all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation to the fullest extent permitted by Delaware General Corporation Law. The Executive Committee did not meet during 2005. Mr. Jenach is an independent, non-employee director.  SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE       Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers and directors and persons who own more than ten percent (10%) of the Company's Common Stock to file initial reports of ownership and reports of change of ownership with the SEC. The reporting persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to it, the Company believes that, during the year ended December 31, 2005, the executive officers and directors and persons who own more than ten percent (10%) of the Company's Common Stock then subject to Section 16(a) complied with all Section 16(a) filing requirements.  EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY       Information concerning Executive Officers and Key Employees is set forth in Item 4.1 of this Annual Report on Form 10-K.       The Company has adopted an ethics policy for all employees, including members of management, which has been filed as an exhibit to this Form 10-K.
The following Summary Compensation Table summarizes the compensation of the Chief Executive Officer and the other Named Executive Officers of the Company for fiscal years 2005, 2004 and 2003 (the "Named Executive Officers").                                          30    SUMMARY COMPENSATION TABLE                                                              Long Term                                                          Compensation                                 Annual Compensation       Securities    All other Name and Principal           -------------------------    Underlying     Compen- Position                     Year    Salary     Bonus     Options(#)     sation - ------------------           ----   --------   -------   ------------   ---------       Israel Adan                  2005   $169,600   $74,250          --      $2,199(1) President, Chief Executive   2004    162,618    33,620      60,000       1,554(2) Officer                      2003    160,010        --          --       3,774(3)  John Aubin                   2005    124,400    12,110          --       2,417(4) Vice President - Chief       2004    121,992    21,608          --       1,393(5) Technology Officer           2003    119,995     3,700          --       2,993(6)  William Campbell             2005    116,392    12,500          --       1,273(7) Vice President,              2004    113,984    20,000          --         671(8) Engineering and Program      2003    109,990     5,000          --       1,542(9) Management  Dave Lubbe                   2005    106,207     8,110          --       2,160(10) Chief Financial Officer      2004    104,000    10,000          --       1,241(11)                              2003    101,464        --          --       2,546(12)  Gabriel Sanchez              2005    107,211     2,000          --         970(13) Former President             2004    108,215     5,000          --       2,593(14) AEMI.                        2003    121,813        --          --       3,655(15)   (1)  Represents premiums of $810 paid by the Company for group term life      insurance, and a matching contribution by the Company of $1,389 under the      Company's 401(k) savings plan.  (2)  Represents premiums of $408 paid by the Company for group term life      insurance, and a matching contribution by the Company of $1,146 under the      Company's 401(k) savings plan.  (3)  Represents premiums of $408 paid by the Company for group term life      insurance, and a matching contribution by the Company of $3,366 under the      Company's 401(k) savings plan.  (4)  Represents premiums of $810 paid by the Company for group term life      insurance, and a matching contribution by the Company of $1,607 under our      401(k) savings plan.  (5)  Represents premiums of $408 paid by the Company for group term life      insurance, and a matching contribution by the Company of $985 under our      401(k) savings plan.  (6)  Represents premiums of $408 paid by the Company for group term life      insurance, and a matching contribution by the Company of $2,585 under our      401(k) savings plan.  (7)  Represents premiums of $810 paid by the Company for group term life      insurance, and a matching contribution by the Company of $463 under our      401(k) savings plan.  (8)  Represents premiums of $408 paid by the Company for group term life      insurance, and a matching contribution by the Company of $263 under our      401(k) savings plan.  (9)  Represents premiums of $408 paid by the Company for group term life      insurance, and a matching contribution by the Company of $1,134 under our      401(k) savings plan.  (10) Represents premiums of $810 paid by the Company for group term life      insurance and a matching contribution by the Company of $1,350 under our      401(k) savings plan.                                          31    (11) Represents premiums of $361 paid by the Company for group term life      insurance, and a matching contribution by the Company of $880 under our      401(k) savings plan.  (12) Represents premiums of $361 paid by the Company for group term life      insurance, and a matching contribution by the Company of $2,185 under our      401(k) savings plan.  (13) Represents premiums of $781 paid by the Company for group term life      insurance, and a matching contribution by the Company of $189 under our      401(k) savings plan  (14) Represents premiums of $408 paid by the Company for group term life      insurance, and a matching contribution by the Company of $2,185 under our      401(k) savings plan  (15) Represents premiums of $408 paid by the Company for group term life      insurance, and a matching contribution by the Company of $3,247 under our      401(k) savings plan  STOCK OPTION GRANTS       No stock options were granted to the Named Executive Officers of the Company during 2005.  AGGREGATED FISCAL YEAR-END OPTION VALUES       The table below shows 2005 year-end amounts and value of shares of Common Stock underlying outstanding options. None of the Named Executive Officers exercised any stock options in 2005.                          Number of Securities          Value of Unexercised                      Underlying Unexercised             In-the-Money                            Options at                    Options at                        December 31, 2005            December 31, 2005(1)                   ---------------------------   --------------------------- Name              Exercisable   Unexercisable   Exercisable   Unexercisable - ----              -----------   -------------   -----------   -------------      Israel Adan (2)     120,000           --             --             -- John Aubin           20,000           --             --             -- Bill Campbell        15,000           --             --             -- Dave Lubbe           25,000           --             --             -- Gabriel Sanchez      22,800           --             --             --   (1)  Based on the closing price of $1.66 on the OTCBB on December 31, 2005.  (2)  In connection with the grant of these options in June 2002, the Company      agreed to pay to Mr. Adan, upon and with respect to each share of the      Company's stock for which these options are exercised, a bonus equal to the      difference between $3.00 and $0.72, the per share exercise price for the      options.  EMPLOYMENT AGREEMENTS       Ze'ev Stein. Effective January 1, 2003, the Company entered into a management services agreement with an Israeli corporation wholly owned by Mr. Stein. In consideration for services provided by Mr. Stein as Chairman of the Board of Directors of the Company, the agreement calls for the management company to receive annual fees of $133,000, payable in monthly installments of $11,083 (plus VAT if applicable). The management services agreement replaces Mr. Stein's employment agreement with the Company and may be terminated by either party upon appropriate written notice. Pursuant to an existing employment agreement, Mr. Stein continues to act as Chairman of the Board of the Company's wholly owned subsidiary, ORBIT/FR, Engineering, Ltd. whereby Mr. Stein is paid a base salary of $60,000 annually. Under both agreements, Mr. Stein is subject to certain non-disclosure, non-solicitation and non-competitive covenants.       Israel Adan. Effective October 15, 2001, the Company entered into an employment agreement with Israel Adan, pursuant to which Mr. Adan was named President and Chief Executive Officer of the                                          32    Company. The agreement calls for Mr. Adan to receive a base salary of $150,000, and provides that Mr. Adan may be entitled to an annual bonus upon achievement of certain annual objectives established by the Company's Board of Directors. Mr. Adan was also granted an option to purchase 60,000 shares of common stock at exercise prices of $3.00 per share. Mr. Adan's employment agreement may be terminated by the Company for cause, which is defined as the material breach of the employment agreement by Mr. Adan or if Mr. Adan commits a material act of dishonesty or a material breach of trust or a fiduciary obligation with respect to the Company. Under the employment agreement, Mr. Adan is subject to certain non-disclosure, non-solicitation and non-competitive covenants. Effective June 20, 2004 Mr. Adan's employment agreement was amended and restated to provide Mr. Adan with the right to receive a bonus payment in certain circumstances in the event of a change in control as defined in the agreement, or the sale of one or more of the Company's business units.  COMPENSATION OF DIRECTORS       Directors not receiving compensation as an officer or employee of the Company, or under a specific agreement, receive $5,000 per year plus stock options upon being named a director. These Directors are entitled to receive up to $750 per meeting. All Director's options were vested at December 31, 2005. Mr. Jenach, Mr. Goffer, and Mr. Ginat earned fees totaling $8,000, $6,750 and $8,750, respectively, for serving on the Company's Board of Directors during 2005.  COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION       Our compensation program generally is designed to motivate and reward our executive officers and other personnel responsible for attaining financial objectives that will contribute to the overall goal of enhancing stockholder value. In administering the program, the Compensation Committee assesses the performance of our business and our employees relative to those objectives. Our compensation program generally provides incentives to achieve annual and longer term objectives. The principal elements of the compensation plan include base salary, cash bonus awards and stock awards in the form of grants of stock options. These elements generally are blended in order to provide compensation packages which provide competitive pay, reward the achievement of financial objectives and align the interests of our executive officers and other high level personnel with those of our stockholders.       Base Salary. In setting base salaries for officers and employees, we consider the experience of the individual, the scope and complexity of the position, our size and growth rate, profitability, and the compensation paid by our competitors.       Bonuses. An incentive plan for all executives was established by the Compensation Committee of the Board of Directors for the year 2005. It is meant to incent executives for attaining predetermined profit levels for both individual business units and for the Company overall. The plan is calculated annually after year end results are audited and executives must be employed by the Company on December 31st.       Stock Awards. To promote our long-term objectives, stock awards are made to directors, officers and employees who are in a position to make a significant contribution to our long-term success. The stock awards are made to directors, employees and consultants pursuant to our 1997 Stock Option Plan, in the form of qualified and nonqualified stock options.       The Compensation Committee has discretion to determine which employees and consultants will be granted stock options, the number of shares to be optioned and the terms and conditions of such options. The full Board of Directors conducts the administration of the option plan with respect to options granted to directors or to officers subject to section 16 of the Exchange Act. The compensation committee, or the Board of Directors, as applicable, also has discretion to make adjustments to options in the event of a change in control or other corporate event including, without limitation, the discretion to accelerate the vesting of options or waive our repurchase right. Options currently outstanding                                          33    generally vest over a five year period. Effective December 31, 2005, the Board of Directors approved the acceleration of the vesting of all outstanding unvested options so that all such options shall be deemed fully vested as of that date.       In selecting recipients and the size of grants, the Compensation Committee considers various factors such as the potential of the recipient, the salary of the recipient and competitive factors affecting our ability to attract and retain employees, prior grants, a comparison of awards made to officers in comparable positions at similar companies and the performance of our business.       During 2005, Mr. Stein was paid a base salary of $80,000 for serving as the Chairman of the Board of Directors of Orbit/FR, Engineering Ltd. In addition Ze'ev Stein Properties, Ltd, an Israeli corporation wholly-owned by Mr. Stein, was paid $133,000 under a management services agreement along with a $52,500 bonus in recognition of the financial results of the Company's 2004 operations. In addition the Board of Directors of the Company approved a bonus payment to Mr. Stein, in his position as Chairman of the Board of the Company, in the amount of $45,000 in recognition of the financial results of the Company's operations in 2005.       The preceding report has been furnished by the following members of the compensations committee: Uri Jenach, Doron Ginat, and Dan Goffer.  COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION       During 2005, the Company had a Compensation Committee comprised of Mr. Ginat, Mr. Jenach and Mr. Goffer, previously described under "Committees of the Board." Mr. Ginat, Mr. Jenach and Mr. Goffer were independent, non employee directors. No interlocking relationship exists between any member of the Company's Board of Directors or compensation committee of any other company.                                          34                                STOCK PERFORMANCE GRAPH       The graph below compares the cumulative total stockholder return on the Company's Common Stock for the period from December 31, 2000 to December 31, 2005, with the cumulative total return of the NASDAQ Composite Index. Since historical peer group and industry or line-of-business data is not available, the graph below compares the cumulative total stockholder return on the Company's Common Stock with the cumulative total return of Schmitt Industries, Inc., a publicly traded manufacturer of electronic and mechanical components for machine tool products and laser-measurement systems that has a market capitalization similar to that of the Company. The comparison assumes $100 was invested on December 31, 2000 in the Company's Common Stock and in the foregoing index and assumes reinvestment of dividends.                       COMPARISON OF CUMULATIVE TOTAL RETURNS                                (PERFORMANCE GRAPH)                               (PLOT POINTS TO COME)                                          35
The following table sets forth as of March 29, 2006 certain information with regard to beneficial ownership (as determined in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of outstanding shares of the Company's Common Stock by (i) each person known by the Company to beneficially own five percent (5%) or more of the outstanding shares of the Company's Common Stock, (ii) each director and Named Executive Officer (as defined below) individually, and (iii) all executive officers and directors of the Company as a group:                                           TOTAL NUMBER OF SHARES   PERCENTAGE OF CLASS OF NAME AND ADDRESS OF                        OF COMMON STOCK           COMMON STOCK BENEFICIAL OWNER                        BENEFICIALLY OWNED(1)    BENEFICIALLY OWNED(1) - -------------------                    ----------------------   ----------------------    Orbit-Alchut Technologies, Ltd. (2)           3,700,000                  61.8% P.O. Box 3171 Industrial Zone Netanya 42131 Israel  Ze'ev Stein (3)                               3,730,000                  61.8% P.O. Box 3171 Industrial Zone Netanya 42131 Israel  Uri Jenach (4)                                   30,000                   * c/o Orbit/FR, Inc. 506 Prudential Road Horsham, PA 19044  Doron Ginat (5)                                  30,000                   * c/o Orbit/FR, Inc. 506 Prudential Road Horsham, PA 19044  Dan Goffer (6)                                   30,000                   * Orbit/FR, Inc. 506 Prudential Road Horsham, Pennsylvania 19044  Israel Adan (7)                                 120,000                   * c/o Orbit/FR, Inc. 506 Prudential Road Horsham, PA 19044  John Aubin (8)                                   20,000                   * Orbit/FR, Inc. 506 Prudential Road Horsham, Pennsylvania 19044  William Campbell (9)                             15,000                   * Orbit/FR, Inc. 506 Prudential Road                                           36       Horsham, Pennsylvania 19044  Dave Lubbe (10)                                  25,000                   * Orbit/FR, Inc. 506 Prudential Road Horsham, Pennsylvania 19044  Gabe Sanchez (11)                                91,773                   * Orbit/FR, Inc. 506 Prudential Road Horsham, Pennsylvania 19044  All executive officers and directors          4,101,073                  68.3% as a group (12 persons) (12)   *    Less than 1% of the outstanding Common Stock.  (1)  The securities "beneficially owned" by an individual are determined in      accordance with the definition of "beneficial ownership" set forth in the      regulations of the Securities and Exchange Commission (the "SEC").      Accordingly, they may include securities owned by or for, among others, the      spouse and/or minor children of the individual and any other relative who      has the same home as such individual, as well as other securities as to      which the individual has or shares voting or investment power or has the      right to acquire under outstanding stock options within 60 days after the      date of this report. Beneficial ownership may be disclaimed as to certain      of the securities.  (2)  Represents shares beneficially owned after the Company's initial public      offering effective June 17, 1997.  (3)  Represents 3,700,000 shares held by Alchut. Mr. Stein is a director and 57%      beneficial stockholder of Alchut. Also includes 30,000 shares of Common      Stock issuable upon the exercise of options granted to Mr. Stein, which      options became exercisable prior to the date of this Report on Form 10K.  (4)  Represents 30,000 shares of Common Stock issuable upon the exercise of      options granted to Mr. Jenach, which options became exercisable prior to      the date of this Report on Form 10K.  (5)  Represents 30,000 shares of Common Stock issuable upon the exercise of      options granted to Mr. Ginat, which options became exercisable prior to the      date of this Report on Form 10K.  (6)  Represents 30,000 shares of Common Stock issuable upon the exercise of      options granted to Mr. Goffer, which options became exercisable prior to      the date of this Report on Form 10K.  (7)  Represents 120,000 shares of Common Stock issuable upon the exercise of      options granted to Mr. Adan, which options became exercisable prior to the      date of this Report on Form 10K.  (8)  Includes 20,000 shares of Common Stock issuable upon the exercise of      options granted to Mr. Aubin, which options became exercisable prior to the      date of this Report on Form 10K.  (9)  Includes 15,000 shares of Common Stock issuable upon the exercise of      options granted to Mr. Campbell, which options became exercisable prior to      the date of this report.  (10) Includes 25,000 shares of Common Stock issuable upon the exercise of      options granted to Mr. Lubbe, which options became exercisable prior to the      date of this Report on Form 10K.                                          37    (11) Includes 22,800 shares of Common Stock issuable upon the exercise of      options granted to Mr. Sanchez, which options became exercisable prior to      the date of this Report on Form 10K.  (12) Includes the information contained in the notes above, as applicable.  EQUITY COMPENSATION PLAN INFORMATION       The following table sets forth information, as of the end of the fiscal year ended December 31, 2005, with respect to compensation plans under which the Company is authorized to issue shares of Common Stock.                                    Number of Shares to be    Weighted-Average Exercise   Number of Shares Remaining Available                                 Issued Upon Exercise of     Price of Outstanding        for Future Issuance under Equity                                  Outstanding Options,       Options, Warrants and         Compensation Plans (excluding Plan Category                     Warrants and Rights              Rights              securities reflected in 1st column) - -------------                   -----------------------   -------------------------   ------------------------------------     Equity compensation plan(s) approved by security holders (1)                                      682,700                    $2.95                            117,300 Equity compensation plan(s) not approved by security holders                                       --                       --                                 -- Total                                    682,700                    $2.95                            117,300   - ---------- (1)  This plan consists of the Orbit/FR, Inc. 1997 Stock Option Plan.
Orbit/FR Engineering, Ltd. ("Engineering"), the Company's wholly-owned Israeli subsidiary, and Alchut have an agreement, whereby Engineering purchases from Alchut electrical and mechanical production services. Engineering pays Alchut for these services based upon a rate of cost plus 5%, totaling approximately $1,069,000 for the year ended December 31, 2005. In addition, Alchut provided other administrative services to Engineering, including but not limited to, bookkeeping, computer, legal, accounting, cost management, information systems, and production support, which amounted to approximately $200,000 in 2005. These agreements are evaluated on an annual basis.                                          38                                        PART IV
ACCOUNTANT FEES       The following table presents fees for professional services rendered in the United States by Hoberman Miller, and in Israel by Kost Ferer Gabbay & Kaiserer for the audit of the Company's annual financial statements, the review of the its interim financial statementsthe preparation of its tax returns, and fees for consulting and other professional services rendered for 2005 and 2004.                           2005       2004                      --------   -------    Audit Fees           $100,000   $42,191 Audit-Related Fees      2,545       -0- Tax Fees               12,500    20,000 All Other Fees            -0-       -0-   AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES       The Company's Audit Committee policies and procedures require the pre-approval by the Audit Committee of all fees paid to, and all services performed by, the Company's independent accounting firm. The Audit Committee approves the proposed services, including the nature, type, and scope of services contemplated and the related fees, to be rendered by the Company's independent accounting firm during the year. In addition, Audit Committee pre-approval is also required for those engagements that may arise during the course of the year that are outside the scope of the initial services and fees pre-approved by the Audit Committee.       Pursuant to the Sarbanes-Oxley Act of 2002, the fees and services provided as noted in the table above were authorized and approved by the Audit Committee in compliance with the pre-approval policies and procedures described herein.
(a)(1) Consolidated Financial Statements                 Independent Auditors' Report                 Auditors' Report to the Shareholders of ORBIT/FR Engineering,                LTD.                 Consolidated Balance Sheets at December 31, 2005 and 2004                 Consolidated Statements of Operations for the years ended                December 31, 2005, 2004, and 2003                 Consolidated Statements of Stockholders' Equity for the years                ended December 31, 2005, 2004, and 2003                                          39                   Consolidated Statements of Cash Flows for the years ended                December 31, 2005, 2004, and 2003                 Notes to Consolidated Financial Statements       (a)(2) Financial Statement Schedule filed as part of this report.                 II Valuation and Qualifying Accounts                 The financial statement schedule should be read in conjunction                with the consolidated financial statements. Financial statement                schedules not included have been omitted because they are not                applicable as the required information is shown in the                consolidated financial statements. (electronic filing only.)       (a)(3) Exhibits                 The exhibits filed as part of this report are listed under                exhibits as subsection (c) of this Item 15.       (b)  Exhibits            2.1  Stock Purchase Agreement dated March 31, 1997 by and among                Advanced ElectroMagnetics, Inc., Anechoic Systems, Inc., Gabriel                A. Sanchez, Barbara Sanchez and the Company. (1)            2.2  Share Exchange Agreement dated December 31, 1996 by and among                Orbit-Alchut Technologies, Ltd., Orbit Advanced Systems, Ltd. and                the Company. (1)            2.3  Asset Acquisition Agreement dated December 31, 1996 by and                between Orbit-Alchut Technologies, Ltd. and Orbit F.R.                Engineering, Ltd. (1)            2.4  Inventory Acquisition Agreement dated January 1, 1997 by and                between Orbit-Alchut Technologies, Ltd. and Orbit F.R.                Engineering, Ltd. (1)            2.5  Stock Purchase Agreement dated June 28, 1996 by and among Orbit                Advanced Technologies, Inc., The Samuel T. Russell Trust, Richard                P. Flam, Rickey E. Hartman, Lois A. R. Charles, Dorothy Russell,                John Aubin, Norma D. Kegg and Flam & Russell, Inc. (1)            3.1  Amended and Restated Certificate of Incorporation of the Company.                (2)            3.2  Bylaws of the Company. (2)            4.1  Specimen Common Stock Certificate of the Company. (2)            10.1 Employment Agreement dated February 15, 1997 by and between the                Company and Aryeh Trabelsi. (1)            10.2 Employment Agreement dated January 1, 1997 by and between the                Company and Moshe Pinkasy. (1)            10.3 1997 Equity Incentive Plan. (1)            10.4 Services Agreement dated January 1, 1997 by and among                Orbit-Alchut Technologies, Ltd., Orbit F.R. Engineering, Ltd. and                the Company. (1)            10.5 ORBIT/FR Inc. non-debarment agreement dated February 15, 2000 (4)            10.6 Consulting agreement dated July 24, 2002 by and between the                Company and Gurion Meltzer. (5)            10.7 Employment Agreement dated September 5, 2002 by and between the                Company and Ze'ev Stein. (5)            10.8 Amended and Restated Employment Agreement dated June 20, 2003 by                and between the Company and Israel Adan (5)            10.9 Management Agreement dated January 1, 2003 by and between the                Company and Ze'ev Stein Properties, LTD. (6)                                          40              10.10 Consent Agreement            14.1 Employee Ethics Policy. (6)            21.1 Subsidiaries of the Registrant. (3)            24.1 Power of Attorney (included on signature page).            31.1 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to                Section 302 of the Sarbanes-Oxley Act of 2003, of Israel Adan,                President and Chief Executive Officer.            31.2 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to                Section 302 of the Sarbanes-Oxley Act of 2003, of Dave Lubbe,                Chief Financial Officer.            32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted                pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, of                Israel Adan, President and Chief Executive Officer            32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted                pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, of                Dave Lubbe, Chief Financial Officer.  (1)  Incorporated by reference to the Company's Registration Statement on Form      S-1 (File No. 333-25015), filed with the Commission on April 11, 1997  (2)  Incorporated by reference to Amendment 1 of the Company's Registration      Statement on Form S-1 (File No. 333-25015), filed with the Commission on      May 19, 1997  (3)  Incorporated by reference to Amendment 2 of the Company's Registration      Statement on Form S-1 (File No. 333-25015), filed with the Commission on      June 5, 1997  (4)  Incorporate by reference to Company's Annual report on Form 10-K filed on      March 30, 2001  (5)  Incorporate by reference to Company's Annual report on Form 10-K filed on      March 31, 2003  (6)  Incorporate by reference to Company's Annual report on Form 10-K filed on      March 30, 2004                                          41                                     ORBIT/FR, INC.                                    SIGNATURES       Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.                                          ORBIT/FR, INC   Date: March 29, 2006                    /s/ Ze'ev Stein                                         ----------------------------------------                                         Ze'ev Stein                                         Chairman of the Board       KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ze'ev Stein and each of them, his true and lawful attorney-in-fact and agent with full power of substitution or resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to file the same, with all exhibits thereto, and other documentation in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.       Pursuant to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the 30th day of March 2006.    Name                                Title - ----                                -----     /s/ Ze'ev Stein                     Chairman of the Board - --------------------------------- Ze'ev Stein   /s/ Israel Adan                     President and Chief Executive Officer - ---------------------------------   (principal executive officer) Israel Adan   /s/ Dave Lubbe                      Chief Financial Officer - ---------------------------------   (principal accounting and financial officer) Dave Lubbe   /s/ Uri Jenach                      Director - --------------------------------- Uri Jenach   /s/ Doron Ginat                     Director - --------------------------------- Doron Ginat   /s/ Dan Goffer                      Director - --------------------------------- Dan Goffer                                          42                                 ACKNOWLEDGMENT BY AGENT  I, Ze'ev Stein, have read the above power of attorney and am the person identified as the attorney-in-fact and agent for the principals whose signatures appear above. I hereby acknowledge that in the absence of a specific provision to the contrary in the power of attorney or in the Pennsylvania Probate, Estates and Fiduciaries Code (20 Pa. C.S.) when I act as an attorney-in-fact and agent:       I shall exercise the power for the benefit of the principals.       I shall keep the assets of the principals separate from my assets.       I shall exercise reasonable caution and prudence.       I shall keep a full and accurate record of all actions, receipts and      disbursements on behalf of the principals.  March 29, 2006   /s/ Ze'ev Stein - ------------------------------------- Ze'ev Stein Attorney-in-fact                                          43   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Stockholders and Board of Directors Orbit/FR, Inc.  We have audited the consolidated balance sheets of Orbit/FR, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audit also included the financial statement schedule listed in the index at 15(a). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We did not audit the financial statements of Orbit/FR Engineering, Ltd., a wholly owned subsidiary, which statements reflect total assets of $5,503,000 and $5,396,000 as of December 31, 2005 and 2004, respectively, and total revenues of $9,160,000 and $10,318,000, and $7,505,000 for each of the three years in the period ended December 31, 2005. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Orbit/FR Engineering, Ltd., is based solely on the report of the other auditors.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United Sates). Those standards require that we plan and perform the audits 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 and the report of the other auditors provide a reasonable basis for our opinion.  In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orbit/FR, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.                  HOBERMAN, MILLER, GOLDSTEIN, LESSER, CPA'S, P.C.  March 5, 2006 New York, NY                                         F-1    (ERNST & YOUNG LOGO)                    -    KOST FORER GABBAY & KASIERER   -    Phone: 972-3-6232525                        3 Aminadav St.                      Fax: 972-3-5622555                        Tel-Aviv 67067, Israel  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF  ORBIT/FR ENGINEERING, LTD.       We have audited the accompanying balance sheets of Orbit/Fr Engineering, Ltd. ("the Company") as of December 31, 2005 and 2004, and the related statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2005. 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.       We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.       In our opinion, based on our audit the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles   Tel-Aviv, Israel                        /S/ KOST FORER GABBAY & KASIERER March 5, 2006                           ----------------------------------------                                         A Member of Ernst & Young Global                                         F-2                                     ORBIT/FR, INC.                            CONSOLIDATED BALANCE SHEETS                     (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)                                                                 DECEMBER 31,                                                           -----------------                                                             2005      2004                                                           -------   -------                            ASSETS  Current assets:    Cash and cash equivalents                              $ 3,188   $ 2,814    Accounts receivable, less allowance of $168 and $164       in 2005 and 2004, respectively                        4,812     4,482    Inventory                                                2,351     2,265    Costs and estimated earnings in excess of billings       on uncompleted contracts                                936       659    Income tax refunds receivable                              422       241    Deferred income taxes                                      302       293    Other                                                      400       447                                                           -------   ------- Total current assets                                       12,411    11,201 Property and equipment, net                                 1,129     1,376 Deferred income taxes                                         610       158 Cost in excess of net assets acquired                         381       381                                                           -------   ------- Total assets                                              $14,531   $13,116                                                           =======   =======           LIABILITIES AND STOCKHOLDERS' EQUITY  Current liabilities:    Accounts payable                                       $ 1,324   $ 1,167    Accounts payable--Parent                                   462       521    Accrued expenses                                         2,390     2,674    Customer advances                                          776       764    Income taxes payable                                        39        20    Billings in excess of costs and estimated earnings       on uncompleted contracts                              2,697     1,745    Deferred income taxes                                      125       125                                                           -------   ------- Total liabilities, all current                              7,813     7,016                                                           -------   -------  Stockholders' equity:    Preferred stock: $.01 par value:       Authorized shares--2,000,000       Issued and outstanding shares--none                      --        --    Common stock: $.01 par value:       Authorized shares--10,000,000       Issued shares--6,084,473                                 61        61    Additional paid-in capital                              15,173    15,173    Accumulated deficit                                     (8,273)   (8,891)    Treasury stock--82,900 shares                             (243)     (243)                                                           -------   ------- Total stockholders' equity                                  6,718     6,100                                                           -------   ------- Total liabilities and stockholders' equity                $14,531   $13,116                                                           =======   =======                                See accompanying notes.                                         F-3                                     ORBIT/FR, INC.                       CONSOLIDATED STATEMENTS OF OPERATIONS              (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)                                                      YEARS ENDED DECEMBER 31,                                             ------------------------------------                                                2005         2004         2003                                             ----------   ----------   ----------     Contract revenues                           $   22,905   $   21,185   $   15,966 Cost of revenues                                15,540       13,567       10,682                                             ----------   ----------   ---------- Gross profit                                     7,365        7,618        5,284                                             ----------   ----------   ---------- Operating expenses:    General and administrative                    2,427        2,618        2,554    Sales and marketing                           3,325        2,901        2,726    Research and development                      1,188        1,008        1,132                                             ----------   ----------   ---------- Total operating expenses                         6,940        6,527        6,412                                             ----------   ----------   ---------- Operating income (loss)                            425        1,091       (1,128) Other loss, net                                    (51)        (108)         (73)                                             ----------   ----------   ---------- Income (loss) before income taxes                  374          983       (1,201) Income tax  (benefit) expense                     (244)          31          134                                             ----------   ----------   ---------- Net income (loss)                           $      618   $      952   $   (1,335)                                             ==========   ==========   ========== Basic and diluted income (loss) per share   $     0.10   $     0.16   $    (0.22)                                             ==========   ==========   ========== Weighted average number    common shares - basic and diluted         6,001,573    6,001,573    6,001,573                                             ==========   ==========   ==========                                See accompanying notes.                                         F-4                                    ORBIT/FR, INC.                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                              (AMOUNTS IN THOUSANDS)                                   Common Stock    Additional                  Treasury Stock       Total                              ---------------     Paid-in    Accumulated   ---------------   Stockholders'                              Shares   Amount     Capital      Deficit     Shares   Amount       Equity                              ------   ------   ----------   -----------   ------   ------   -------------         Balance, January 1, 2003      6,084     $61      $15,173      $(8,508)      83     $(243)      $ 6,483    Net loss                      --      --           --       (1,335)      --        --        (1,335)                               -----     ---      -------      -------      ---     -----       ------- Balance, December 31, 2003    6,084      61       15,173       (9,843)      83      (243)        5,148    Net income                    --      --           --          952       --        --           952                               -----     ---      -------      -------      ---     -----       ------- Balance, December 31, 2004    6,084      61       15,173       (8,891)      83      (243)        6,100    Net income                    --      --           --          618       --        --           618                               -----     ---      -------      -------      ---     -----       ------- Balance, December 31, 2005    6,084     $61      $15,173      $(8,273)      83     $(243)      $ 6,718                               =====     ===      =======      =======      ===     =====       =======                                See accompanying notes.                                          F-5                                     ORBIT/FR, INC.                       CONSOLIDATED STATEMENTS OF CASH FLOWS                              (AMOUNTS IN THOUSANDS)                                                                      YEAR ENDED DECEMBER 31,                                                                  -------------------------                                                                   2005     2004      2003                                                                  ------   ------   -------     Cash flows from operating activities: Net income (loss)                                                $  618   $  952   $(1,335) Adjustments to reconcile net income (loss) to net    cash provided by (used in) operating activities:       Depreciation                                                  454      407       400       Deferred income tax provision                                (461)     (31)      (58)       Changes in operating assets and liabilities:          Accounts receivable                                       (330)    (744)      422          Inventory                                                  (86)    (716)       31          Costs and estimated earnings in excess of billings on             uncompleted contracts                                  (277)     (54)       78          Income tax refunds receivable                             (181)     (21)     (220)          Other                                                       47       86      (231)          Accounts payable and accrued expenses                     (127)     383       584          Accounts payable--Parent                                   (59)     324      (410)          Income taxes payable                                        19        1       (24)          Customer advances                                           12      308       297          Billings in excess of costs and estimated earnings on             uncompleted contracts                                   952     (112)      431                                                                  ------   ------   ------- Net cash provided by (used in) operating activities                 581      783       (35)                                                                  ------   ------   ------- Cash flows from investing activities:    Purchase of property and equipment                              (207)    (382)     (634)                                                                  ------   ------   ------- Net cash used in investing activities                              (207)    (382)     (634)                                                                  ------   ------   ------- Cash flows from financing activities    Net repayments of note receivable                                 --       --        52                                                                  ------   ------   ------- Net cash provided by financing activities                            --       --        52                                                                  ------   ------   ------- Net increase (decrease) in cash and cash equivalents                374      401      (617) Cash and cash equivalents at beginning of year                    2,814    2,413     3,030                                                                  ------   ------   ------- Cash and cash equivalents at end of year                         $3,188   $2,814   $ 2,413                                                                  ======   ======   ======= Supplemental disclosures of cash flow information: Net cash paid during the year for income taxes                   $  271   $  227   $   299                                                                  ======   ======   =======                                See accompanying notes.                                          F-6                                   ORBIT / FR, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)  1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Ownership and Basis of Presentation       ORBIT/FR, Inc. (the "Company"), was incorporated in Delaware on December 9, 1996, as a wholly-owned subsidiary of Orbit-Alchut Technologies, Ltd., an Israeli publicly traded corporation (hereinafter referred to as the "Parent"). The Company develops, markets, and supports sophisticated automated microwave test and measurement systems for wireless communications, satellite, automotive, and aerospace/defense industries and manufactures anechoic foam, a microwave absorbing material that is an integral component of microwave test and measurement systems. ORBIT/FR, Inc., a holding company, supports its world wide customers through its subsidiaries ORBIT/FR Engineering, LTD (hereinafter referred to as "Engineering", Israel), ORBIT/FR Europe, (Germany), Advanced ElectroMagnetics, Inc. ("AEMI", San Diego, CA), and Orbit Advanced Technologies, Inc. and Flam and Russell, Inc, (Horsham, PA).  Principles of Consolidation       The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions of the Company and its wholly-owned subsidiaries have been eliminated in consolidation.  Use of Estimates       The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.  Cash and Cash Equivalents       The Company classifies as cash equivalents all highly liquid instruments with original maturities of three months or less at the time of purchase.  Accounts Receivable       The Company accounts for potential losses in accounts receivable utilizing the allowance method. In reviewing aged receivables, management considers their knowledge of customers, historical losses and current economic conditions in establishing the allowance for doubtful accounts.  Inventory       Inventory is stated at the lower of cost (first-in, first-out method) or market.                                         F-7                                    ORBIT / FR, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)  1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  Property and Equipment       Property and equipment are recorded at cost. Depreciation is computed on accelerated methods for both financial reporting and income tax reporting purposes over the estimated useful lives as follows: office equipment -- 5-7 years; lab equipment -- 5 years; furniture and fixtures -- 7 years; transportation equipment -- 5 years; leasehold improvements -- 5 years.  Cost in Excess of Net Assets Acquired       Cost in excess of net assets acquired, ("goodwill") represents the excess of costs over the fair value of the net assets of businesses acquired in connection with the Company's acquisition of Advanced ElectroMagnetics, Inc. (AEMI) in 1997.       The Company tested the goodwill of AEMI for impairment at December 31, 2005, 2004 and 2003 using the present value of future cash flow valuation method and found that no adjustment for the value of goodwill was necessary.  Revenue and Cost Recognition       The Company's principal sources of contract revenues are from engineering and design services and the production of electro-mechanical equipment. Revenues from long-term fixed-price development contracts performed principally under the Company's control are recognized on the percentage-of- completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract when such costs can be reasonably estimated. Contract costs include all direct material, labor and subcontractor costs and those indirect costs related to contract performance such as indirect labor, supplies and tool costs. General and administrative costs are charged to expense as incurred. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and revenue and are recognized in the period in which the revisions are determined. Revenues from electro-mechanical equipment sold to customers which are not part of a larger contract are recognized when the contract is substantially completed. Revenues recognized in excess of amounts billed are classified under current assets as costs and estimated earnings in excess of billings on uncompleted contracts. Amounts received from clients in excess of revenues recognized to date are classified under current liabilities as billings in excess of costs and estimated earnings on uncompleted contracts.  Research and Development       Internally funded research and development costs are charged to operations as incurred. Included in cost of revenues are customer-funded research and development costs of approximately $145, $80, and $280 for the years ended December 31, 2005, 2004, and 2003, respectively.  Concentrations of Credit Risk and Significant Customers       Financial instruments, which potentially subject the Company to a concentration of credit risk, consist principally of cash and accounts receivable. To reduce credit risk relating to the Company's sales in the U.S. and overseas, the Company performs ongoing credit evaluations of its commercial customers'                                         F-8                                    ORBIT / FR, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)  1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  financial condition, but generally does not require collateral for government and domestic commercial customers. For certain foreign commercial customers, the Company generally requires irrevocable letters of credit in the amount of the total contract. At December 31, 2005, there was one bank guarantee in place for a foreign customer. For the year ended December 31, 2005 no customer accounted for over 10% of the Company's revenue while for the years ended December 31, 2004 and 2003 one customer accounted for 16% and 11% of the Company's revenues. The Company does not anticipate credit risk in connection with its concentration of cash.  Warranty Expense       The Company provides for warranty costs on sales of its own product. Product warranty periods generally extend for one year from the date of sale.  Income Taxes  The Company uses the liability method to account for income taxes. Accordingly, deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts reportable for income tax purposes. The Company files a consolidated federal income tax return with its domestic subsidiaries.  Foreign Currency Translation       The Company's functional currency for operations in Israel is the U.S. dollar. The Company's functional currency for operations of its German subsidiary is the local currency. Foreign currency transaction gains and losses, are recognized currently in the consolidated statements of operations and are not material to operations.       For the years ended December 31, 2005, and 2004, approximately 23% and 19%, respectively, of the Company's revenue was billed in currencies other than the U.S. dollar. Substantially all of the costs of the Company's contracts, including costs subcontracted to the Parent, have been U.S. dollar denominated transactions.  Income (Loss) Per Share       Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted average common shares outstanding for the period. Diluted income (loss) per share is calculated by dividing net income (loss) by the weighted average common shares outstanding for the period plus the dilutive effect of stock options. The dilutive effect of stock options is not included in 2005, 2004, and 2003 as inclusion of such options is anti-dilutive.  Stock-Based Compensation       The Company follows APB Opinion No. 25, Accounting for Stock Issued to Employees, ("APB 25") and the related interpretations in accounting for its stock-based compensation plans. Note 12 includes the required disclosures and pro forma information provided under FASB Statement No. 123 Accounting for Stock-Based Compensation ("SFAS 123"). Under APB 25, because the exercise price of the                                          F-9                                    ORBIT / FR, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)  1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  Company's stock options equals the market price of the underlying common stock at the date of grant, no compensation expense is recognized.       Effective 2006, FAS 123R supersedes APB 25 (see impact of Recent Accounting Pronouncements below).  Fair Value of Financial Instruments       Cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses reported in the consolidated balance sheets equal or approximate fair value due to their short maturities.  Impact of Recent Accounting Pronouncements       In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement No. 154, "Accounting Changes and Corrections - A Replacement of APB No. 29 and FASB No. 3." The statement changes the requirements for the accounting for and reporting of a change in accounting principles. This Statement applies to all voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions those provisions should be followed.       Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable.       The Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued.       In December 2004, the FASB issued a revision of ASB Statement No. 123, "Accounting for Stock-Based Compensation". This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees", and its related implementation guidance. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entity's equity investments or that may be settled by the issuance of those equity instruments. This statement focuses primarily on accounting transactions in which an entity obtains employee services in share-based payment transactions. This statement requires                                         F-10                                    ORBIT / FR, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)  all share based payments to employees including grants of employee stock options, to be recognized in the financial statements. The proforma disclosures previously permitted will no longer be an alternative to financial statement recognition. For public entities that file as small business issuers, this statement is effective as of the beginning of the first interim period or annual reporting period that begins after December 31, 2005. We will adopt this new standard effective for the first quarter of 2006. Future compensation expense may be impacted by various factors including the number of options granted and their related fair value at the date of grant.       In December, 2004, the FASB issued Statement No. 153 "Exchange of Nonmonetary Assets - an amendment to APB Opinion No. 29". The guidance in APB No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This statement amends Opinion 29 to eliminate the exception for the 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 this statement are effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. Management does not believe the adoption of this statement will have any material effect on the Company.       In November, 2004, the FASB issued Statement No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4". This statement 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). Paragraph 5 of ARB 43, Chapter 4, previously stated that "under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges." This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not believe the adoption of this statement will have any material effect on the Company.  2. INVENTORY  Inventory consists of the following:                             DECEMBER 31,                        ---------------                         2005     2004                        ------   ------    Work-in-process        $1,304   $1,460 Parts and components    1,047      805                        ------   ------                        $2,351   $2,265                        ======   ======                                          F-11                                    ORBIT / FR, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)  3. PROPERTY AND EQUIPMENT  Property and equipment consists of the following:                                      DECEMBER 31,                                 ---------------                                  2005     2004                                 ------   ------    Lab and computer equipment      $2,308   $2,292 Office equipment                   943      963 Transportation equipment           458      396 Furniture and fixtures              15       15 Leasehold improvements             294      290                                 ------   ------                                  4,018    3,956 Less accumulated depreciation    2,889    2,580                                 ------   ------ Property and equipment, net     $1,129   $1,376                                 ======   ======   4. ACCRUED EXPENSES  Accrued expenses consists of the following:                                     DECEMBER 31,                                ---------------                                 2005     2004                                ------   ------    Accrued contract costs         $  209   $  602 Accrued compensation            1,257    1,038 Accrued commissions               235      206 Accrued royalties                  59       87 Accrued warranty                  319      413 Accrued DTC settlement costs       67      100 Other accruals                    244      228                                ------   ------                                $2,390   $2,674                                ======   ======                                          F-12                                   ORBIT / FR, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)  5. RELATED PARTY TRANSACTIONS       Engineering and the Parent have an agreement, whereby Engineering purchases from the Parent electrical and mechanical production services. In addition, the Parent provides other administrative services, including but not limited to, bookkeeping, computer, legal, accounting, cost management, information systems, and production support. Engineering pays the Parent for these services based upon a rate of cost of production services plus 20%. Engineering is leasing office space from the Parent on an annual basis, for a rental of $71 per year. These agreements are to be evaluated on an annual basis, and are intended to be at market value.       The Company was charged $200, $266 and $245 in 2005, 2004 and 2003, respectively, by the Parent for administrative services. Ze'ev Stein Properties, Ltd, an Israeli corporation wholly-owned by the Company's Chairman of the Board, charged $178 and $185 to the Company under a management services agreement in 2005 and 2004, respectively.       Included in cost of revenues for the years ended December 31, 2005, 2004 and 2003 are approximately $1,069, $1,414, and $1,212, respectively, relating to the production services provided by the Parent.  6. COMMITMENTS AND CONTINGENCIES       The Company leases its operating facilities and certain equipment under noncancelable operating lease agreements which expire in various years through 2012. Rent expense for the years ended December 31, 2005, 2004 and 2003 was approximately $559, $567, and $609, respectively. Future minimum lease payments under noncancelable operating leases with initial terms of one year or more are as follows at December 31, 2005: $459 in 2006; $447 in 2007; $302 in 2008; $177 in 2009; $177 in 2010, and $221 thereafter.       As a result of the Company's Consent Agreement with the Office of Defense Trade Controls Compliance, Director of Defense Trade Controls, (DDTC), which settled its statutory debarment prohibiting direct and indirect exports of International Trade in Arms Regulations products, the Company has agreed to pay a penalty of $100 in three equal annual installments. In 2005 the Company made a $33 payment. The remaining $66 has been accrued. In addition, the Company was assessed a penalty of $200 for remedial compliance costs to be incurred by the Company over the three years of the consent agreement.       At December 31, 2005, the Company has outstanding letters of credit totaling $654, and an outstanding line of credit of $313.                                         F-13                                    ORBIT / FR, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)  7. SEGMENT AND GEOGRAPHIC INFORMATION       The Company operates exclusively in one industry segment, the business of developing, marketing and supporting sophisticated automated microwave test and measurement systems. In addition to its principal operations and markets in the United States, the Company conducts sales, customer support and service operations out of other geographic locations in Europe, Asia, and North America. The following table represents financial information by geographic region for the years ended December 31, 2005, 2004, and 2003:                                                  North                                              America   Europe    Asia     Total                                              -------   ------   ------   -------      2005    Sales to unaffiliated customers           $13,767   $2,980   $6,158   $22,905    Cost of Sales to unaffiliated customers     9,361    2,176    4,003    15,540                                              -------   ------   ------   -------    Gross profit unaffiliated customers       $ 4,406   $  804   $2,155   $ 7,365                                              =======   ======   ======   =======    Net property and equipment                $   533   $  596   $   --   $ 1,129                                              =======   ======   ======   =======    Total assets                              $ 9,054   $5,660   $   --   $14,714                                              =======   ======   ======   =======  2004    Sales to unaffiliated customers           $12,428   $4,010   $4,747   $21,185    Cost of Sales to unaffiliated customers     8,317    2,370    2,880    13,567                                              -------   ------   ------   -------    Gross profit unaffiliated customers       $ 4,111   $1,640   $1,867   $ 7,618                                              =======   ======   ======   =======    Net property and equipment                $   603   $  773   $   --   $ 1,376                                              =======   ======   ======   =======    Total assets                              $ 6,973   $6,143   $   --   $13,116                                              =======   ======   ======   =======  2003    Sales to unaffiliated customers           $ 7,630   $2,595   $5,741   $15,966    Cost of Sales to unaffiliated customers     5,226    2,067    3,389    10,682                                              -------   ------   ------   -------    Gross profit unaffiliated customers       $ 2,404   $  528   $2,352   $ 5,284                                              =======   ======   ======   =======    Net property and equipment                $   548   $  853   $   --   $ 1,401                                              =======   ======   ======   =======       Total assets                           $ 5,730   $5,530   $   --   $11,260                                              =======   ======   ======   =======        In table above "North America" includes all domestic operations, and "Europe" includes subsidiaries in Germany and Israel.  8. Income Taxes       Pretax income (loss) for the years ended December 31 was taxed in the following jurisdictions:               2005   2004     2003            ----   ----   -------     Domestic   $360   $778   $  (831) Foreign      14    205      (370)            ----   ----   -------            $374   $983   $(1,201)            ====   ====   =======                                          F-14                                    ORBIT / FR, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)  8. INCOME TAXES (CONTINUED)       The tax effects of temporary differences that give rise to a significant portion of deferred tax assets and liabilities consist of the following:                                                        DECEMBER 31,                                                  -----------------                                                    2005      2004                                                  -------   -------    Deferred tax assets:    Net operating loss and credit carryforwards   $ 1,883   $ 2,566    Long-term contracts                               735       189    Accrued compensation                               69        55    Foreign and reserves, including German       net operating loss carryforwards               935     1,033    Goodwill                                           45        62                                                  -------   ------- Total deferred tax assets                          3,667     3,905  Deferred tax liabilities:    Purchase accounting basis differences            (124)     (124)                                                  -------   ------- Net deferred tax asset                             3,543     3,781 Valuation allowance                               (2,756)   (3,455)                                                  -------   ------- Net deferred tax asset                           $   787   $   326                                                  =======   =======        As of December 31, 2005, the Company has net operating loss carryforwards of approximately $5,490 for federal income tax purposes which expire through 2023. The Company also has a German net operating loss carryforward of approximately $1,814 which will be available indefinitely.       As of December 31, 2005, the Company has net operating loss carryforwards of approximately $283 and tax credits of approximately $114, which the Company acquired in its acquisition of Flam & Russell, Inc. The tax benefit of these losses and credits may be limited both in time and amount due to limitations imposed by Section 382 of the Internal Revenue Code. These net operating loss and credit carryforwards expire during various dates through 2009.       The Company decreased its valuation allowance on its deferred tax asset $699 during 2005 as a result of the Company reporting taxable income during 2005 and 2004 and projected future taxable income. At December 31, 2005 the valuation allowance totals $2,756. Management has determined to maintain a valuation allowance due to the uncertainty with regard to the Company's ability to continue to generate sufficient taxable income in the U.S. and Germany in the future to realize this deferred tax asset.                                         F-15                                    ORBIT / FR, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)  8. INCOME TAXES (CONTINUED)  The components of income tax expense (benefit) are as follows:                                             YEAR ENDED                                          DECEMBER 31,                                      -------------------                                       2005   2004   2003                                      -----   ----   ----     Current:    Federal                           $  99   $ --   $ 26    Foreign                              63     61    166                                      -----   ----   ----                                        162     61    192                                      -----   ----   ----  Deferred:    Federal                            (450)    --     --    State                                --     --     --    Foreign                              44    (30)   (58)                                      -----   ----   ----                                       (406)   (30)   (58)                                      -----   ----   ---- Total income tax (benefit) expense   $(244)  $ 31   $134                                      =====   ====   ====        A reconciliation of income tax expense at the U.S. Federal statutory tax rate and the actual income tax expense is as follows:                                                      YEAR ENDED                                                   DECEMBER 31,                                              ---------------------                                               2005    2004    2003                                              -----   -----   -----     Statutory U.S. Federal rate                  $ 125   $ 334   $(408) Utilization of loss carryforwards               --    (115)     -- Book/tax differences                           325    (150)     97 Increase (decrease) in valuation allowance    (699)    (41)    424 Foreign rate difference                         --       2      60 Other, net                                       5       1     (39)                                              -----   -----   -----                                              $(244)  $  31   $ 134                                              =====   =====   =====   9. RESEARCH AND DEVELOPMENT       Under the terms of the Chief Scientist grant, the Company is obligated to pay royalties at a rate of 2% of revenues generated from the sale of certain products up to the amount of the grant. For the years ended December 31, 2005, 2004, and 2003, royalties under this program were approximately $10, $56 and $60, respectively. At December 31, 2005 the Company had an outstanding contingent obligation to the Chief Scientist of $59. Such contingent obligation is payable in future periods based upon annual sales of products developed under the grants.                                         F-16                                   ORBIT / FR, Inc.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)  10. RETIREMENT PLANS       The Company has retirement plans which cover substantially all employees who have attained the age of 21 and have completed 3 months of service. Eligible employees make voluntary contributions to the plans up to specified percentages of their annual compensation as defined in the plans. Under the plans, the Company makes discretionary matching contributions determinable each plan year and additional contributions based on annual eligible compensation for each participant. The plans are funded on a current basis. For the years ended December 31, 2005, 2004 and 2003, the Company's contributions to the plans were $27, $72 and $71, respectively.  11. LONG-TERM CONTRACTS       Long-term contracts in process accounted for using the percentage-of-completion method are as follows:                                                           DECEMBER 31,                                                     -----------------                                                       2005      2004                                                     -------   -------    Accumulated expenditures on uncompleted contracts   $ 8,410   $ 9,578 Estimated earnings thereon                            2,290     2,477                                                     -------   -------                                                      10,700    12,055 Less: applicable progress billings                   12,461    13,141                                                     -------   -------    Total                                            $(1,761)  $(1,086)                                                     =======   =======   The long-term contracts are shown in the accompanying balance sheets as follows:      Costs and estimated earnings on uncompleted    contracts in excess of billings               $   936   $   659 Billings on uncompleted contracts in excess of    costs and estimated earnings                   (2,697)   (1,745)                                                  -------   -------                                                  $(1,761)  $(1,086)                                                  =======   =======   12. STOCK OPTION PLAN       During March 1997, the Board of Directors adopted, and the Company's Stockholders approved, the Company's 1997 Equity Incentive Plan (the "Incentive Plan") which provides for awards of 800,000 shares of the Company's stock. Options granted generally vest over five years and typically have a life of ten years. The purpose of the Incentive Plan is to promote the long-term retention of the Company's key employees and certain other persons who are in a position to make significant contributions to the success of the Company. The Incentive Plan permits grants of incentive stock options ("ISOs"), options not intended to qualify as ISOs ("nonqualified options"), stock appreciation rights ("SARs"), restricted, unrestricted and deferred stock awards, performance awards, loans and supplemental cash awards, and combinations of the foregoing (all referred to as "Awards").       Effective December 31, 2005, the Board of Directors approved acceleration of the vesting of all outstanding unvested options so that all such options shall be deemed fully vested as of that date.                                         F-17                                    ORBIT / FR, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)  12. STOCK OPTION PLAN (CONTINUED)       Detail information concerning the Incentive Plan is as follows at December 31:                                              2005                  2004                 2003                                    ------------------   -------------------   ------------------                                              Weighted              Weighted             Weighted                                               Average               Average              Average                                              Exercise              Exercise             Exercise                                    Options     Price     Options     Price    Options     Price                                    -------   --------   --------   --------   -------   --------        Options Authorized                 800,000               800,000              800,000                                    =======              ========              ======= Outstanding, beginning of year     647,200     $2.93     717,350     $3.26    743,850     $3.30 Options granted                     39,500      3.00      60,000      1.35         -- Options forfeited                   (4,000)     3.00    (130,150)     3.78    (26,500)     4.10                                    -------     -----    --------     -----    -------     ----- Options outstanding, end of year   682,700     $2.95     647,200     $2.93    717,350     $3.23                                    =======     =====    ========     =====    =======     ===== Options exercisable, end of year   682,700     $2.95     480,975     $3.10    491,588     $3.26                                    =======     =====    ========     =====    =======     =====                                              2005          2004         2003                                       -----------   -----------   ----------     Weighted average remaining    contractual life (years)                  4.76          5.43         6.07                                       ===========   ===========   ========== Weighted average fair    value of options granted    at market value                    $        --   $        --   $       --                                       ===========   ===========   ========== Range of exercise prices per share,   options outstanding                 $1.35-$6.63   $1.35-$6.63   $3.00-6.63                                       ===========   ===========   ==========        The Company has elected to follow APB 25 and the related interpretations in accounting for stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123, requires the use of option valuation models that were not developed for use in valuing stock options. Under APB 25, because the exercise price of the Company's stock options equals or exceeds the market price of the underlying common stock on the date of grant, no compensation expense is recognized.       Pro-forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for stock options under the fair value method of SFAS 123. The fair value for the Company's stock options granted is estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2005, 2004 and 2003; risk-free interest rate of 5.5%; no expected dividend payments; volatility factor of the expected price of the Company's common stock, based on historical volatility, of 101.0%; and a weighted-average expected life of the option of 7 years.                                         F-18                                    ORBIT / FR, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)  12. STOCK OPTION PLAN (CONTINUED)       The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Option models require the input of highly subjective assumptions including future stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimates, in management's opinion, the Black-Scholes model does not necessarily provide a reliable measure of the fair value the Company's stock options.       For purposes of pro-forma disclosure under FASB 123, the estimated fair value of the Company's options is amortized over the options vesting period. The Company's pro-forma information is as follows:                                                          YEAR ENDED DECEMBER 31,                                                       -----------------------                                                        2005    2004     2003                                                       -----   -----   -------     Net income (loss) as reported under APB 25            $ 618   $ 952   $(1,335) Stock option expense per FASB 123                      (141)    (59)     (167)                                                       -----   -----   ------- Pro-forma net income (loss)                           $ 477   $ 893   $(1,502)                                                       =====   =====   ======= Pro-forma basic and diluted income (loss) per share   $0.08   $0.15   $ (0.25)                                                       =====   =====   =======   13. STOCKHOLDERS' EQUITY  Common Stock       The holders of shares of Common Stock are entitled to one vote for each share on record on any matters to be voted on by the stockholders. The holders of Common Stock are entitled to receive dividends if declared by the Board of Directors and to share ratably in the assets of the Company legally available for distribution to its stockholders in the event of liquidation, dissolution or winding-up of the Company. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights.  Preferred Stock       The Company's Board of Directors may, without further action by the Company's stockholders, from time to time, direct the issuance of shares of Preferred Stock in series and may, at the time of issuance, determine the rights, preferences and limitations of each series. The holders of Preferred Stock would normally be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of the Common Stock. The issuance of Preferred Stock could decrease the amount of earnings and assets available for distribution to the holders of Common Stock or could adversely affect the rights and powers, including voting rights, of the holders of Common Stock.                                         F-19                                   ORBIT / FR, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)  13. STOCKHOLDERS' EQUITY (CONTINUED)  Treasury Stock       On June 24, 1998, the Company's Board approved the repurchase of up to 300,000 shares of its stock. The Company repurchased 82,900 shares for $243 as of December 31, 2005. The treasury shares have been recorded at cost.  14. QUARTERLY FINANCIAL DATA (UNAUDITED)  Selected unaudited quarterly financial data is as follows:                                                        Quarter Ended                                        ---------------------------------------                                        March 31   June 30   Sept. 30   Dec. 31                                          2005       2005      2005       2005                                        --------   -------   --------   -------      Contract revenues                       $6,213    $5,331     $4,926     $6,435 Gross profit                             1,924     1,604      1,719      2,118 Net income (loss)                          142       (48)       (26)       550 Income per share - basic and diluted      0.02     (0.01)     (0.00)      0.09                                                        Quarter Ended                                        ---------------------------------------                                        March 31   June 30   Sept. 30   Dec. 31                                          2004       2004      2004       2004                                        --------   -------   --------   -------      Contract revenues                       $4,624     $5,468    $4,977     $6,116 Gross profit                             1,564      2,039     1,864      2,151 Net income                                  13        407       427        105 Income per share - basic and diluted      0.00       0.07      0.07       0.02                                          F-20    Schedule II - Valuation and Qualifying Accounts ORBIT/FR, Inc. and Subsidiaries December 31, 2005                                         Balance at   Charged to                Balance at                                       Beginning    Costs and                  End of                                       of period    Expenses    Deductions     period                                      ----------   ----------   ----------   ----------      Year ended December 31, 2005    Allowance for doubtful accounts    $166,376     $ 30,581     $ 28,581     $168,376 Year ended December 31, 2004    Allowance for doubtful accounts     187,426      180,988      202,038      166,376 Year ended December 31, 2003    Allowance for doubtful accounts    $254,047     $ 72,828     $139,449     $187,426     EX-10.10 2 w19080exv10w10.txt CONSENT AGREEMENT                                                                       Exhibit 10.10                          UNITED STATES DEPARTMENT OF STATE                       BUREAU OF POLITICAL-MILITARY AFFAIRS                              WASHINGTON, D.C. 20520  In the Matter of:  ORBIT/FR INCORPORATED         Delaware  Respondent                                  CONSENT AGREEMENT  WHEREAS, the Office of Defense Trade Controls Compliance, Directorate of Defense Trade Controls ("DDTC"), Bureau of Political-Military Affairs, U.S. Department of State ("Department") has notified the Respondent, Orbit/FR, Inc. ("Orbit/FR"), of its intent to institute an administrative proceeding pursuant to the Arms Export Control Act ("Act") (22 U.S.C. 2778(e)) and its implementing regulations, the International Traffic in Arms Regulations ("Regulations") (22 CFR Parts 120- l3O), based on allegations of violations of Section 38 of the Act and Section 127 of the Regulations arising from activities of Orbit/FR, Inc. involving the unauthorized export of a defense article and a defense service, as set forth in a draft Charging Letter attached hereto and incorporated by reference herein;  WHEREAS, the Respondent wishes to dispose of all civil charges, penalties and sanctions arising from the draft Charging Letter by entering into this Consent Agreement;  WHEREAS, these civil charges arise from the same transactions for which the Respondent, pursuant to a 1999 guilty plea agreement, was convicted in March 2000 of two counts of violating the Act and paid a $600,000 penalty and, as a consequence of the conviction, has been subject to statutory debarment under Section 127.7 of the Regulations;  WHEREAS, the Department acknowledges that Respondent's parent company, Orbit-Alchut Technologies Ltd. ("Orbit-Alchut") located in Israel, was not charged or involved in the criminal proceeding or matters set forth in the draft Charging Letter, but nevertheless Orbit-Alchut agrees to the undertakings and other provisions set forth herein to further the implementation of effective organization-wide export control compliance policies and procedures;  WHEREAS, the Respondent and Orbit-Alchut have reviewed the draft Charging Letter and this Consent Agreement, fully understand these documents and enter into this Agreement voluntarily and with full knowledge of their rights;  WHEREAS, the Parties agree to be bound by this Consent Agreement and a related Administrative Order ("Order") (attached) to be entered and approved by the Assistant Secretary of State for Political-Military Affairs;  Now, WHEREFORE, the Department and the Respondent and Orbit-Alchut agree as follows:  Parties  (1) The Parties to this Consent Agreement are the Department, the Respondent, and Orbit-Alchut.  Jurisdiction  (2) The Department has jurisdiction over Orbit/FR under the Act and the Regulations in connection with the matters identified in the draft Charging Letter.  Penalty  (3) The Respondent agrees that it shall pay in fines and remedial compliance measures a civil penalty in the amount of $500,000 (five hundred thousand dollars) in a complete settlement of the alleged civil violations as set forth in the draft Charging Letter. The Respondent agrees that the effect of any statutory limitation to the collection of the civil penalty    imposed by this Agreement will be tolled until the last payment is made and all terms of the Consent Agreement are satisfied.  The civil penalty shall consist of cash, remedial measures and suspended portions as follows:  (a) A penalty of $100,000 (one hundred thousand dollars) is hereby assessed of which $33,333.34 (thirty-three thousand dollars and thirty- four cents) shall be paid within ten (10) days of the signing of the Order and the balance shall be paid in two installments on the first and second anniversary of the date of the signing of the Order in the amount of $33,333.33 (thirty-three thousand dollars and thirty-three cents) each.  (b) A penalty of $200,000 (two hundred thousand dollars) is hereby assessed for remedial compliance measures. This amount shall be applied over the three (3) years of this Consent Agreement for the purpose of defraying a portion of the costs associated with the remedial compliance measures specified herein and in the Annex of Compliance Measures attached hereto and incorporated by reference herein, including costs associated with the Special Compliance Official ("SCO") and the implementation of that official's recommendations.  (c) A penalty of $200,000 (two hundred thousand dollars) is hereby assessed, but shall be suspended on condition that Respondent and Orbit-Alchut comply with the undertakings set forth in paragraph 10.  The Respondent shall provide annually to the Department on the anniversary of the date of the Order a written accounting of the expenditures associated with paragraph 3(b) and certification that such expenditures meet the requirements of that paragraph. The accounting shall be accompanied by the . recommendation of the SCO as to whether the expenditures meet the requirements of paragraph 3(b) and shall include a separate accounting by the SCO of expenses incurred under paragraph 4(f) of the Annex of Compliance Measures.  The Respondent is prohibited from applying or claiming any of the amounts expended for remedial compliance measures under this paragraph as reimbursable or recoverable costs in any contract with any agency of the U.S. Government (including any subcontract with respect to such a contract). In the event the Respondent violates this prohibition, the Department will deem it a "failure to apply funds appropriately for the required purposes." Each written accounting to the Department shall include a specific certification by Respondent that it has complied with this prohibition.  Any failure to apply funds appropriately for the required purposes or to provide a satisfactory accounting shall be deemed by the Department to be a failure to comply with the requirements of paragraph 3(b) and the Respondent shall be required immediately to pay to the Department the amount specified in that paragraph, less credit for amounts the Department deems to have been properly applied and accounted for expenditures in compliance with this Agreement.  In the event of any failure to comply with the undertakings in paragraph 10, Respondent shall pay immediately to the Department the amount specified in paragraph 3(C).  Debarment and Policy of Denial  (10) Based on its March 2000 conviction for violations of the Act and the Regulations, the Respondent has been subject to statutory debarment under Section 127.7 of the Regulations. Under this debarment, the Department has imposed a policy whereby it has generally denied applications for licenses or other approvals involving the Respondent's subsidiaries and other affiliates.  The Respondent has acknowledged the seriousness of those violations as well as those cited in the draft Charging Letter. The Respondent also notes its cooperation with the Government in resolving the criminal charges; its and its affiliates' loss of substantial business while under debarment and the policy of denial; its significant efforts and costs incurred to establish and strengthen its export control program; its willingness to make amends by paying the civil cash penalty and implementing the significant remedial compliance actions specified in this Consent Agreement; and the cooperation of its parent Orbit-Alchut in signing this Agreement. For these reasons, the Department has determined that an administrative debarment of Respondent based on the civil charges in the draft charging letter is not appropriate at this time and has further determined to terminate the statutory debarment of Respondent and to resume normal processing of license applications involving Respondent and its affiliates upon payment of the portion of the civil penalty due within ten (10) days of the signing of the Order.    The Department reserves the right to consider imposing additional sanctions, including debarment under the Regulations, against the Respondent or any subsidiary or other affiliate, if it does not fulfill the provisions of this Consent Agreement or is responsible for other compliance or law enforcement concerns under the Act or other statutes specified in Section 120.27 of the Regulations.  Defense Service and Defense Articles  (5) Respondent and Orbit-Alchut acknowledge their understanding and accept the definition of defense services in the Regulations that the Regulations require written authorization before such services are furnished to foreign persons regardless of whether the underlying defense article is of U.S. or foreign origin and even when no technical data is involved (e.g., all the information relied upon in furnishing the defense service to a foreign person is in the public domain); that furnishing technical assistance to a foreign person to modify, adapt or configure a non-defense article for a military purpose would constitute a defense service and may also render such article a defense article; and that a foreign defense article in the United States is subject to the export license and approval requirements of the Regulations.  Appointment of a Special Compliance Official  (6) The Respondent shall appoint a SCO for a period of three (3) years, the position to be filled during the first two years by a qualified professional who has had no past nor will have any future relationship to Respondent, its parent company, Orbit-Alchut, or any of their subsidiaries or other affiliates. The authorities and responsibilities for monitoring, oversight and reporting on the implementation of provisions of the Consent Agreement are set forth herein and in the attached Annex of Compliance Measures.  Other Compliance Measures  (7) The Respondent and Orbit-Alchut shall also implement the other requirements of this Consent Agreement, as set forth herein and in the attached Annex of Compliance Measures, including restricting certain exports by Respondent's foreign affiliates; strengthening compliance policies, procedures and training; providing legal oversight; establishing a hotline for reporting possible violations; and conducting certain audits.  The Respondent and Orbit-Alchut acknowledge the need to include in their and their affiliates' compliance policies and procedures measures to ensure the documentation and tracking of all U.S.-origin defense articles, including technical data, and U.S.-finished defense services and to prevent any re- export, re-transfer, or use of the same that is not authorized in writing by the Department.  On-Site Audits by the Department  (8) For the purpose of assessing compliance with the provisions of the Act, the Regulations, this Consent Agreement, and future munitions licenses and authorizations, Respondent agrees to arrange and facilitate, within minimum advance notice, on-site audits by the Department for three (3) years commencing on the date of the signing of the Order of itself, its direct and indirect subsidiaries, and other affiliates covered by the Respondent's restructured registration under the Regulations. To this end, Orbit-Alchut also agrees to arrange and facilitate such audits of itself and its non-Orbit/FR direct and indirect subsidiaries that are involved in activities subject to the Act, the Regulations and this Consent Agreement.  Understandings  (9) No agreement, understanding, representation or interpretation not contained in this Agreement may be used to vary or otherwise affect the terms of this Agreement or the Order, when entered, nor shall this Agreement serve to bind, constrain, or otherwise limit any action by any agency or department of the United States Government with respect to the facts and circumstances addressed herein, except as otherwise noted. Respondent acknowledges and accepts that there is no understanding expressed or implied through this Agreement with respect to any decision by the Department of State concerning its interest in the approval of export licenses or other U.S. Government authorizations necessary to past, pending or future munitions license applications or other authorizations. The Department agrees, assuming    Respondent and Orbit-Alchut adhere to the terms of this Agreement, that decisions concerning future applications for export licenses and other authorizations involving the Respondent and its affiliates will be made on the basis of the national security and foreign policy interests of the United States and without reference to the facts alleged in the draft Charging Letter and the Department's previously expressed concerns regarding the Respondent's reliability, which are considered to be appropriately mitigated through the faithful operation of this Consent Agreement.  (10) Orbit-Alchut and Respondent acknowledge their obligation, including that of their U.S. and foreign affiliates, to comply fully with the Act and Regulations and the need to further strengthen their compliance program, including by implementing the measures specified in this Consent Agreement. As further measures, Orbit-Alchut and Respondent make the following additional undertakings:  (a) During the three (3) year term of this Consent Agreement Orbit-Alchut agrees that it and its direct and indirect foreign subsidiaries, will not make any new export (including any re-export or re-transfer) of any foreign defense article as defined by Section 120.6 and 121.1 of the Regulations or furnish any foreign defense service, even if such defense article or defense service has no U.S. content or the export or transfer of which would otherwise have no U.S. involvement, to any country subject to Part 126 of the Regulations. Following such three year term, Orbit-Alchut agrees that it will submit to the Director of the Office Defense Trade Controls Compliance (Director DTCC) a copy of its measures designed to ensure full compliance with the Act and the Regulations before engaging in any activity described in this subparagraph (a).  (b) For the three (3) year term of this Consent Agreement and thereafter for an additional three (3) years, Respondent agrees that its direct and indirect foreign subsidiaries will not make any new export (including any re-export or re-transfer) of any foreign defense article as defined by Section 120.6 and 121.1 of the Regulations or furnish any foreign defense service, even if such defense article or defense service has no U.S. content or the export or transfer of which would otherwise have no US. involvement, to any country subject to Part 126 of the Regulations. Following such six (6) year term, Respondent agrees that it will submit to the Director of the Office Defense Trade Controls Compliance (Director DTCC) a copy of its measures designed to ensure full compliance with the Act and the Regulations before engaging in any activity described in this subparagraph (b).  (c) An exception to the provisions of subparagraphs (a) or (b) may be granted only by the Assistant Secretary of State for Political-Military Affairs.  (11) The Parties agree that this Consent Agreement is for settlement purposes only. For purposes of this Agreement, the Respondent admits the allegations in the draft Charging Letter, which are based on the criminal charges of violations of the Act and the Regulations with respect to which the Respondent pled guilty and was convicted. Respondent acknowledges the nature and seriousness of the offenses alleged by the Department in the draft Charging Letter, including the risk of harm to the national security and foreign policy interests of the United States, and wishes to resolve this matter by undertaking the obligations set forth in this Consent Agreement, including payment of a cash penalty and establishment of an effective compliance program that will prevent any future actions such as those addressed in the draft Charging Letter. If this Consent Agreement is not approved pursuant to an Order entered into by the Assistant Secretary for Political-Military Affairs, the Parties agree that they may not use this Agreement in any administrative or judicial proceeding and that neither party shall be bound by the settlement terms contained in this Agreement in any subsequent administrative or judicial proceeding.  (12) The Department agrees that, upon signing of the Order and entry into force of this Agreement, this Consent Agreement resolves with respect to the Respondent any civil penalties or sanctions imposed with respect to violations of Section 38 of the Act or the Regulations alleged in the draft Charging Letter or arising from facts that have been identified in the draft Charging Letter.  Waiver  (13) The Respondent and Orbit-Alchut agree that, upon signing of the Order and entry into force of this Consent Agreement, they waive all rights to any further procedural steps in this matter, including an administrative hearing pursuant to Part 128 of the Regulations (except with respect to any alleged violations of this Consent Agreement or Order). The Respondent and Orbit- Alchut also waive all rights to seek administrative or judicial review or to otherwise    contest the validity of this Consent Agreement or the Order, including any action that may be bought for the enforcement of any civil fine, penalty or forfeiture in connection with this Consent Agreement or Order.  Documents to be Made Public  (14) The Respondent and Orbit-Alchut understand that the Department will make this Agreement, including the Annex of Compliance Measures, the draft Charging Letter, and the Order, when entered, available to the public.  When Order Becomes Effective  (15) This Consent Agreement Shall become binding on the Department only when the Assistant Secretary for Political-Military Affairs approves it by entering the Order, which will have the same force and effect as a decision and Order issued after full administrative hearing on the record.                              U.S. Department of State  Rose M. Likins Acting Assistant Secretary for Political-Military Affairs 8/29/05                                   Orbit/FR, Inc.  Israel Adan Orbit/FR, Inc. President and CEO 3/22/05                           Orbit-Alchut Technologies Ltd.  Shlomo Yariv President Orbit-Alchut Technologies Ltd. 3/20/05  Michael C. Poliner Attorney at Law Counsel for Orbit, FR, Inc. and Orbit-Alchut Technologies Ltd. 4/7/05                              ANNEX OF COMPLIANCE MEASURES  Orbit/FR, Inc. ("Orbit/FR") and its parent Orbit-Alchut Technologies, Ltd. ("Orbit-Alchut"), reflecting their commitment to conduct the business of Orbit/FR and its affiliates (i.e., entities controlling, controlled by or under common control with Orbit/FR, including Orbit-Alchut, the direct and indirect subsidiaries of Orbit/FR and the non-Orbit/FR direct and indirect subsidiaries of Orbit-Alchut) in full compliance with the Arms Export Control Act ("Act" or "AECA") and the International Traffic in Arms Regulations ("Regulations" or "ITAR), and in order to ensure, in particular, that there is no unauthorized use, export, re-export, transfer or re-transfer of U.S.-origin defense articles (including technical data) or defense services (including any technical assistance whatsoever), agree to implement the following remedial measures and such additional measures as may be mutually agreed upon by Orbit/FR, Orbit-Alchut, the Special Compliance Official and the Director, Office of Defense Trade Controls Compliance ("DTCC"). These measures apply for a period of three (3) years, except where otherwise noted.  Appointment of a Special Compliance Official  (I) The President & CEO of Orbit/FR shall, with the concurrence of the Director, DTCC, appoint a qualified individual from outside of Orbit/FR and its affiliates, to serve as a Special Compliance Official ("SCO") for an initial term of two (2) years to be succeeded by an individual from inside Orbit/FR who will serve for an additional one (1) year, in both instances reporting to Orbit/FR's President & CEO, the Director of Compliance and Board of Directors and to the Director, DDTC as set forth herein.  (2) The outside SCO shall not have been employed in any prior capacity by or previously represented 0l;bitlFR or any of its affiliates, past or present, and, as a condition of appointment as SCO, shall agree to forsake for all time any such future employment or representation. The appointment shall be made within thirty (30) days of the signing of the accompanying Order and, unless agreed to by the parties to this settlement prior to or at the time of settlement, the appointment shall be subject to the written approval of the Director, DTCC.  (3) The SCO shall have three principal areas of responsibility regarding the future conduct of Orbit/FR:  (a) Strengthening the export compliance program of Orbit/FR and its subsidiaries with primary attention to enhancing corporate oversight and compliance infrastructure of Orbit/FR (including those business units associated with the violations alleged in the draft Charging Letter), as well as the direct or indirect U.S. subsidiaries of Orbit-Alchut whose registrations under the ITAR have been consolidated under that of Orbit/FR, and to improving written policies and procedures for AECAIITAR-regulated activities carried out by Orbit/FR and its affiliates;  (b) Overseeing the audit referred to in paragraph 8 below and ensuring that Orbit/FR and its affiliates perform their responsibilities in a timely and satisfactory manner as required by this Agreement and the accompanying Order; and  (c) Monitoring all AECAIITAR-regulated activities of Orbit/FR and its affiliates for the period covered by this Consent Agreement.  Both Orbit/FR and Orbit-Alchut acknowledge and accept their obligation to ensure that they have and continue to maintain effective export control oversight, infrastructure, policies and procedures for the AECAIITAR- regulated activities of Orbit/FR and its affiliates. To this end, Orbit/FR and Orbit Alchut undertake to ensure that there will be appropriate cooperation and coordination between and among the President & CEO, the Director of Compliance of Orbit/FR, the SCO and senior officials of Orbit-Alchut and all other Orbit/FR affiliates.  The SCO may also be requested to perform additional export oversight, monitoring and coordination activities as agreed by Orbit/FR's President & CEO and the Director, DTCC.  In fulfilling the responsibilities set forth in this Consent Agreement, the SCO may at his/her sole discretion present any disagreement with Orbit/FR's employees or management involved in export regulated activities directly to any or all of Orbit/FR's President & CEO and Board of Directors or the Director, DTCC.  (4) The Board of Directors of Orbit/FR shall consent to the following terms and conditions regarding the power, duties, authorities, and responsibilities of the SCO and receive reports on SCO findings and recommendations:    (a) The SCO shall have the power and authority to monitor compliance by Orbit/FR (including its affiliates) with the terms of this Consent Agreement and accompanying Order and shall exercise such power and authority and carry out the duties and responsibilities of the SCO as set forth herein in a manner consistent with this Consent Agreement, the accompanying Order, the specific terms and conditions of munitions licenses and other authorizations within the scope of paragraph 3 above with respect to which Orbit/FR or any subsidiary or other business unit or affiliate is an applicant, end-user or otherwise involved other activities subject to the Regulations and the Act, and shall do so in consultation with the Office of DTCC.  (b) Within fifteen (15) days of the appointment of the SCO, Orbit/FR shall confer on this individual all rights and powers necessary to permit the SCO to monitor, oversee and promote Orbit/FR's compliance with the terms of this Agreement in a manner consistent with the purposes of this Agreement and the Order, and the specific terms and conditions of pertinent (i.e., covered by paragraph 3 above) munitions license authorizations and other activities subject to the Act and the Regulations. Such rights and powers shall be conferred in writing; they shall be made in writing and made known throughout Orbit/FR and its affiliates; and a certified copy of the resolution of the Board of Directors shall be deposited with the Office of DTCC by the forty-sixth (46th) day after the signing of the Order.  (c) The outside SCO shall serve for a two (2) year period from the date of his or her appointment. If for any reason the appointed SCO is unable to serve the full period of his/her appointment, the President & CEO of Orbit/FR may recommend a successor acceptable to the Director, DTCC, the latter's agreement to the replacement to be confirmed and provided in writing. Such a recommendation shall be made at least thirty (30) days in advance of a new appointment. If the SCO for any reason is unable to carry out the responsibilities described herein on a temporary basis (i.e., not to exceed thirty (30) days), then the Director of Compliance of Orbit/FR shall assume the power and authority of SCO in the interim. The conferring of rights and powers described in subparagraph (b) above shall make provision for this event. Within twenty-one (21) months of appointment, the SCO, after consultations with Orbit/FR's President & CEO and Director of Compliance shall recommend a successor SCO acceptable to Orbit/FR and the Director, DTCC, who shall serve for the remaining one (I) year period, the latter's agreement to the replacement to be confirmed and provided in writing. The successor SCO shall be an employee of Orbit/FR and capable of performing the responsibilities of the SCO, including all authorities applicable to the outside SCO. The term of an SCO may not be extended without written approval of the Director, DTCC. The Director, DTCC shall have the authority to recommend removal of the SCO in the event the Department determine the SCO is not fulfilling the responsibilities of the SCO position in a satisfactory manner.  (d) The SCO shall have full and complete access to Orbit/FR's and its affiliates' personnel, books, records, documents, facilities and technical information relating to compliance with this Consent Agreement, Order, including pertinent munitions authorizations, licenses, guidance and the like relating to the use, export and re- export, transfer, re-transfer of defense articles and defense services associated with Orbit/FR's business and that of its affiliates.  (e) Orbit/FR and its affiliates shall cooperate with any reasonable request of the SCO, including any request for assistance to obtain any necessary security clearances, and shall take no action to interfere with or impede the SCO's ability to monitor Orbit/FR's compliance with this Agreement, the Act and the Regulations or to carry out his/her other responsibilities set forth in this Agreement.  (f) The SCO, with Orbit/FR's consent, which shall not be unreasonably withheld, and subject to the written approval of the Director, DTCC, shall have the authority to employ, at the expense of Orbit/FR, such assistants and other professional staff as are reasonably necessary to carry out the SCO's duties and responsibilities in connection with this Consent Agreement and Order. Such expenses, including salaries and expenses of the SCO, may be counted toward the penalty for remedial measures described in paragraph 3(B) of the Consent Agreement.  (g) The Office of DTCC may, on its own initiative or at the request of the SCO, issue such guidance as may be necessary or appropriate to ensure compliance with the Act and the explanations and the terms and conditions of licenses and other authorizations DTCC has provided to Orbit/FR. Upon a showing of good cause by the SCO and the President & CEO of Orbit/FR, the Director of DTCC may grant an extension of time to ensure full implementation of the compliance measures specified herein. The SCO and the President of Orbit/FR may request relief from other provisions of the Consent Agreement by submitting such a request, including justification and supporting documentation, to the Director, DTCC.    (h) The SCO shall provide reports to the President & CEO, the Director of Compliance and Board of Directors of Orbit/FR, Inc., as well as to the Director, DTCC, concerning Orbit/FR's and its affiliates' compliance with this Agreement and Order, including pertinent (i.e., covered by paragraph 3 above) U. S. Government munitions licenses and authorizations, guidance and the like then in force pertaining to Orbit/FR's and its affiliates' activities regulated by the Act and the Regulations. These reports shall include conclusions and any recommendations necessary to ensure compliance with the Act and Regulations and the Consent Agreement, including the Annex of Compliance Measures, and shall specifically address compliance with paragraph 10 of the Agreement; state whether the SCO has encountered any difficulties in exercising the duties and responsibilities assigned herein; describe any and all instances of non-compliance without waiving Orbit/FR's ability to submit voluntary disclosures; and advise on progress in implementing previous recommendations advanced by the SCO. These reports may, in a separate annex, also include any relevant comments or input by Orbit/FR's President & CEO and the Director of Compliance. The reports shall be provided:  Every sixty (60) days for a period of six months from the date of the signing of the Order; and Every ninety (90) days thereafter during the remainder of the SCO's period of appointment.  To further the objectives of this paragraph and the Consent Agreement generally, Orbit-Alchut undertakes that it and its non-Orbit/FR subsidiaries will cooperate with the SCO, including by complying with requests made by the SCO for documents and other information necessary to carry out the SCO's responsibilities. To this end, Orbit- Alchut shall provide an appropriate written authorization and directive to its non-Orbit/FR direct and indirect subsidiaries, a copy of which shall be deposited with the Office of DTCC by the forty-sixth (46th) day after the signing of the Order.  Strengthened Compliance Policies, Procedures, Training  (5) Within 120 days of the signing of the Order, Orbit/FR shall have reviewed and instituted strengthened export compliance policies, procedures and training focusing primarily on Orbit/FR, its direct and indirect subsidiaries, and the U.S. subsidiaries of Orbit-Alchut whose registrations under the ITAR will be consolidated under that of Orbit/FR. Within the same time period, Orbit-Alchut shall also have reviewed and instituted strengthened export compliance procedures and training appropriate to itself and its non-Orbit/FR direct and indirect subsidiaries whose registrations under the ITAR will not be consolidated under that of Orbit/FR (which shall be primarily responsible for their compliance with the AECA and ITAR and the provisions of the Consent Agreement). Orbit/FR shall ensure that by the 120" day:  (a) All employees involved in AECAIITAR-regulated activities of Orbit/ FR and its affiliates are familiar with the AECA and ITAR, Orbit/FR policies and procedures for compliance with the AECNITAR, and their and Orbit/FR's and its affiliates' responsibilities under the AECAIITAR;  (b) All persons responsible for supervising those employees and all officers and other senior managers of Orbit/FR and its affiliates are knowledgeable about the underlying policies and principles of the AECA and the ITAR and Orbit/FR, Inch policies and procedures;  (c) There are records maintained of the names of the employees and other personnel trained, the trainers, and area of training received (i.e., determination of what is a US.-origin defense article, including technical data, and U.S.-furnished defense service, the applicability of AECNITAR requirements to Israeli defense articles incorporating or produced from U.S. defense articles, including technical data, and defense services) and copies of training materials used. Compliance policies, procedures and training will ensure that "defense services" and defense articles will be treated consistent with the definitions of those terms and requirements for approvals in the Regulations, as provided in paragraph 5 of the Consent Agreement. To this end, U.S. and foreign product and service lines shall be reviewed within thel20-day period referred to above to determine or confirm which are defense articles or defense services; thereafter, any new products and services shall be reviewed as developed; Commodity Jurisdiction determinations with respect to U.S. product or service lines under Section 120.4 of the Regulations and shall be requested in appropriate circumstances, e.g., to clarify uncertain regulatory status (for the purposes of paragraph 11 of the Annex, requests as to whether foreign products or services are defense articles or defense services, shall be submitted to the Office of DTCC).  Legal Oversight    (6) Within thirty (30) days of signing the Order, Orbit/FR shall establish measures such that Orbit/FR's president & CEO and/or Director of Compliance, with the assistance of legal counsel, will provide oversight and support to Orbit/FR and its affiliates for all matters involving compliance with export control laws and regulations, including the Act and the Regulations. These measures shall be structured to achieve consistent application of the Act and Regulations by Orbit/FR and its affiliates. The President & CEO and/or the Director of Compliance, with the assistance of legal counsel, shall consider and implement those improvements in the compliance program for Orbit/FR and its affiliates recommended by the SCO. In addition, the SCO and the President & CEO and/or Director of Compliance, with the assistance of legal counsel, shall also have the opportunity for input in performance reviews of the appropriate personnel responsible for compliance with the Act and Regulations.  Hotline for AECA and ITAR  (7) Within thirty (30) days of the signing of the Order, Orbit/FR shall publicize the availability of an Ethics Hotline for reporting possible violations of export control laws and regulations, including the AECA and the ITAR, to enable personnel of Orbit/FR and its affiliates to readily report via this channel, without fear of recrimination or retaliation. Hotline calls about export matters will be directed to the SCO and the Director of Compliance. Based on consultations with Orbit/FR's President & CEO and legal counsel, the Director of Compliance or the President will be responsible for responding to such calls. Orbit/FR's Director of Compliance shall also advise the President & CEO of Orbit-Alchut, or his designated representative, of any Ethics Hotline calls involving Orbit-Alchut, including any of non-Orbit direct or indirect subsidiaries. In such circumstances, the President & CEO of Orbit-Alchut shall have the opportunity to participate in the consultation described above in prepare the response to such calls. The SCO shall prepare a quarterly report assessing the effectiveness of the hotline system. A copy of the report shall be provided to the President and Director of Compliance of Orbit/FR and to the Director, DTCC. This written report shall contain sufficient detail such that the Department may, consistent with its responsibilities under the law and regulations, form an opinion about the seriousness of any alleged violations, without disclosing employee confidentiality.  Audit  (8) No later than twelve (12) months after the signing of the Order, Orbit/FR, in coordination with the SCO, shall commence a thorough audit and assessment of Orbit/FR's and its affiliates' implementation of all measures set forth in the Consent Agreement and this Annex of & compliance Measures, with the primary focus on those undertaken to address the problems illustrated in the draft Charging Letter, the policies, procedures and training established for Orbit/FR, its subsidiaries, affiliates covered under Orbit/FR's restructured registration, and such other areas as may be identified by the SCO or the Director, DTCC. The draft audit plan shall be submitted to the Director, DTCC for his review, comment and approval prior to the start of the audit. No later than the second anniversary of the signing of the Order, Orbit/FR shall submit a written report containing audit findings and recommendations for improvements with respect to the aforesaid measures and compliance with the Act and Regulations more generally to the Orbit/FR's President & CEO and legal counsel and to the Director DTCC. Recommended compliance program improvements identified in the report shall be incorporated in compliance policies, procedures and training applicable to Orbit/FR and its affiliates (see paragraph 5 of the Annex). Orbit-Alchut shall ensure that it and its non-Orbit/FR direct and indirect subsidiaries cooperate with the audit and implement recommended compliance program improvements.  Costs Counted Toward Penalty for Remedial Measures  (9) Orbit/FR's costs associated with increasing in-house export control personnel associated with additional export compliance enhancements, as required, including auditor(s) and attorney(s), Orbit/FR's export compliance manual, internal web site, and other export control compliance procedures and documents, as well as consultants and experts from outside Orbit/FR to support the above described activities may be counted toward the penalty imposed under paragraph 3(B) of the Consent Agreement. Such costs incurred by Orbit-Alchut and its non-Orbit/FR direct and indirect subsidiaries toward implementing the requirements of the Consent : Agreement and the Annex Compliance Measures shall also count toward such penalty.  Certifications  (10) At the conclusion of the three (3) year term of this Consent Agreement, the President & CEO and SCO of, Orbit/FR and the President & CEO of Orbit-Alchut shall each submit to the Director, DTCC a written certification that    all aspects of the Consent Agreement have been implemented and that they have assessed its current compliance program and attest that it is adequate to prevent and identify violations of the AECA and the ITAR. Such certification shall specifically address compliance with paragraphs 3 and paragraph 10 of the Consent Agreement.    EX-31.1 3 w19080exv31w1.txt CERTIFICATION OF ISRAEL ADAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER                                                                        Exhibit 31.1  CERTIFICATION PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002  I, Israel Adan, Chief Executive Officer of ORBIT/FR, Inc., certify that:       1. I have reviewed this Annual report on Form 10-K of ORBIT/FR, Inc.;       2. Based on my knowledge, this Annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual report;       3. Based on my knowledge, the financial statements, and other financial information included in this Annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual report;       4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:            a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;            b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report (the "Evaluation Date") based on such evaluation; and            c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and         5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):            a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and            b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.   Date: March 29, 2006                    /s/ Israel Adan                                         ----------------------------------------                                         Israel Adan Chief Executive Officer    EX-31.2 4 w19080exv31w2.txt CERTIFICATION OF DAVE LUBBE, CHIEF FINANCIAL OFFICER                                                                        Exhibit 31.2  CERTIFICATION PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002  I, Dave Lubbe, Chief Financial Officer of ORBIT/FR, Inc., certify that:  1. I have reviewed this Annual report on Form 10-K of ORBIT/FR, Inc.;  2. Based on my knowledge, this Annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual report;  3. Based on my knowledge, the financial statements, and other financial information included in this Annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual report;  4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:       a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;       b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report (the "Evaluation Date") based on such evaluation; and       c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and    5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):       a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and       b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.   Date: March 29, 2006                    /s/ Dave Lubbe                                         ----------------------------------------                                         Dave Lubbe                                         Chief Financial Officer    EX-32.1 5 w19080exv32w1.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 OF ISRAEL ADAN, PRESIDENT AND CHIEFEXECUTIVE OFFICER                                                                        Exhibit 32.1                              CERTIFICATION PURSUANT TO                              18 U.S.C. SECTION 1350,                              AS ADOPTED PURSUANT TO                   SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002       In connection with the Annual Report of Orbit/FR, Inc. (the "Company") on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Israel Adan, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:       (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and       (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.  March 29, 2006   /s/ Israel Adan - ------------------------------------- Israel Adan President and Chief Executive Officer    EX-32.2 6 w19080exv32w2.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 OF DAVE LUBBE, CHIEF FINANCIAL OFFICER                                                                        Exhibit 32.2                              CERTIFICATION PURSUANT TO                              18 U.S.C. SECTION 1350,                              AS ADOPTED PURSUANT TO                   SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002       In connection with the Annual Report of Orbit/FR, Inc. (the "Company") on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dave Lubbe, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:       (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and       (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.  March 29, 2006   /s/ Dave Lubbe - ------------------------------------ Dave Lubbe Chief Financial Officer    -----END PRIVACY-ENHANCED MESSAGE-----