MEASUREMENT SPECIALTIES INC - 10-Q Quarterly Report

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

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002.

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

COMMISSION FILE NUMBER: 1-11906

MEASUREMENT SPECIALTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEW JERSEY 22-2378738
- ------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

80 LITTLE FALLS ROAD, FAIRFIELD, NEW JERSEY 07004
---------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(973) 808-1819
--------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT.)

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: 11,912,958 shares
of common stock, no par value per share, at November 12, 2002.

PART I. FINANCIAL INFORMATION ...................................................................................3
ITEM 1. FINANCIAL STATEMENTS ..................................................................................3
Condensed Consolidated Balance Sheets (Unaudited), September 30, 2002 and March 31, 2002 ..............3
Condensed Consolidated Statements of Operations (Unaudited), Three and Six Months Ended
September 30, 2002 and 2001 .........................................................................5
Condensed Consolidated Statements of Shareholders' Equity (Unaudited), Six Months Ended
September 30, 2002 and Fiscal Year Ended March 31, 2002 .............................................6
Condensed Consolidated Statements of Cash Flows (Unaudited), Six Months Ended
September 30, 2002 and 2001 .........................................................................7
Notes to Condensed Consolidated Financial Statements (Unaudited) ......................................8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................39
ITEM 4. CONTROLS AND PROCEDURES...............................................................................40

PART II. OTHER INFORMATION.......................................................................................41
ITEM 1. LEGAL PROCEEDINGS.....................................................................................41
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................................44
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................................44
SIGNATURES.......................................................................................................47

MEASUREMENT SPECIALTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

See Notes to Condensed Consolidated Financial Statements

3

MEASUREMENT SPECIALTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

See Notes to Condensed Consolidated Financial Statements

4

MEASUREMENT SPECIALTIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

See Notes to Condensed Consolidated Financial Statements

5

MEASUREMENT SPECIALTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 2002, AND THE SIX MONTHS ENDED SEPTEMBER 30, 2002

See Notes to Condensed Consolidated Financial Statements

6

MEASUREMENT SPECIALTIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See Notes to Condensed Consolidated Financial Statements

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. INTERIM FINANCIAL STATEMENTS:

Basis of presentation:

These interim financial statements were prepared pursuant to accounting
principles for interim financial information, the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X of the Rules and Regulations of the Securities and
Exchange Commission. Accordingly, while they conform with the measurement and
classification provisions of accounting principles generally accepted in the
United States, they do not include the footnote information required by
accounting principles generally accepted in the United States for annual
financial statements. Preparation of these financial statements requires
management to make estimates and assumptions, which affect the amounts reported.
Actual results could differ from those estimates. In the opinion of management,
all accrual adjustments and disclosures necessary to make these interim
financial statements not misleading have been included. Reference is made to the
annual financial statements included in the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 2002. Operating results for the six months
ended September 30, 2002 are not necessarily indicative of the results that may
be expected for the year ending March 31, 2003.

Description of business:

Measurement Specialties, Inc., a New Jersey Corporation, ("MSI" or "the
Company") is a designer and manufacturer of sensors and sensor-based consumer
products. The Company produces a wide variety of sensors that use advanced
technologies to measure precise ranges of physical characteristics, including
pressure, motion, force, displacement, angle, flow and distance. The Company has
a Sensor segment and a Consumer Products segment. The Sensor segment designs and
manufactures sensors for leading original equipment manufacturers for
electronic, automotive, medical, military and industrial applications. Sensor
products include pressure sensors, custom microstructures and accelerometers.
The Consumer Products segment designs and manufactures sensor based consumer
products which are sold to leading retailers and distributors in both the United
States and Europe. Consumer products include bathroom and kitchen scales, tire
pressure gauges, and distance estimators.

Current Developments:

In February 2002, the Company, at its own initiative, contacted the staff of the
SEC after discovering that its former Chief Financial Officer made the
misrepresentation to senior management, the Board of Directors and the Company's
auditors that a waiver of the Company's covenant default under its credit
agreement had been obtained when the lenders had, in fact, refused to grant such
a waiver. Since February 2002, the Company and a Special Committee formed by the
Company's Board of Directors have been cooperating with the staff of the SEC. In
June 2002, the staff of the Division of Enforcement of the SEC informed the
Company that the SEC is conducting a formal investigation relating to matters
reported in the Company's quarterly report on Form 10-Q for the quarter ended
December 31, 2001. The Company cannot predict how long the SEC investigation
will continue or its outcome.

Liquidity and Going Concern:

The Company has incurred a net loss of $29,047 for the year ended March 31,
2002, a net loss of $6,744 for the six months ended September 30, 2002 and
anticipates incurring additional losses for the next several quarters. From
September 30, 2001 until October 31, 2002, the Company was in default of certain
financial covenants in its credit agreement and, as a result of the restatement
of previously issued

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financial statements, the Company was also in default of certain financial
covenants for earlier periods. The Company sought, but did not obtain, a waiver
of such events of default from its lenders (see Note 10).

As a result of the significant losses for the last several reporting periods and
the Company's inability to make the required payments under the Company's loan
agreement, management and the Board of Directors approved a restructuring
program with the aim of reducing costs, streamlining operations and generating
cash to repay the Company's lenders. As of March 31, 2002, excluding the effects
of the Terraillon and Schaevitz UK dispositions, the Company has reduced its
workforce by 138 employees as compared to its workforce as of June 30, 2001.
Additionally, as of June 30, 2002, the Company had reduced its workforce by an
additional 49 employees as compared to its workforce as of March 31, 2002. The
Company expects this workforce reduction to result in a cost savings of
approximately $5,000 for the fiscal year ending March 31, 2003. The Company is
currently examining the possibility of further workforce reductions. In
addition, the Company (i) discontinued its operations in the United Kingdom,
(ii) sold the assets related to its silicon wafer fab manufacturing operations
in Milpitas, California, which were part of the Company's IC Sensors division
for approximately $5,250 in July 2002, (iii) sold all of the outstanding stock
of Terraillon Holdings Limited, the Company's European subsidiary, for
approximately $22,300, and (iv) consolidated Valley Forge operations to Hampton.
Approximately $2,282 of the Terraillon sales price will be held in escrow until
January 24, 2003 to secure payment of certain purchase price adjustments, if
any, or any right of the purchaser to set off as a result of breaches of the
Company's representations and warranties in the stock purchase agreement. Of the
$2,282 held in escrow, the Company has assumed that a portion of the escrow will
be used to satisfy certain purchase price adjustments. The gain on sale reflects
these anticipated purchase price adjustments (see Note 6).

The Company is currently in the process of responding to the claims made in the
class action lawsuit (see Note 9). The Company intends to defend the foregoing
lawsuit vigorously, but cannot predict the outcome and is not currently able to
evaluate the likelihood of its success or the range of potential loss, if any.
However, if the Company were to lose this lawsuit, the judgment would likely
have a material adverse effect on its consolidated financial position, results
of operations and cash flows. The Company has Directors and Officers insurance
policies that provide an aggregate coverage of $10,000 for the period during
which the lawsuit was filed, but cannot evaluate at this time whether such
coverage will be available or adequate to cover losses, if any, arising out of
this lawsuit.

The Company is also the subject of a formal investigation being conducted by the
Division of Enforcement of the United States Securities and Exchange Commission
related to matters reported in the Company's quarterly report on Form 10-Q for
the quarter ended December 31, 2001. The United States Attorney for the District
of New Jersey is also conducting an inquiry into the matters being investigated
by the SEC. In addition, the trading of the Company's common stock on the
American Stock Exchange ("AMEX") was suspended from July 15, 2002 until November
1, 2002. On August 21, 2002, the Company received a letter from the AMEX
indicating that it no longer complied with AMEX listing guidelines due to the
Company's failure to furnish certain reports and information to shareholders and
that the Company's common stock is, therefore, subject to being delisted from
the AMEX. The hearing with the AMEX to appeal the determination of the AMEX to
delist the Company's common stock has been postponed indefinitely.

These factors raise substantial doubt about the Company's ability to continue as
a going concern. The Company has been pursuing and will continue to pursue,
among other initiatives, i) negotiating with an asset based lender regarding a
revolving credit facility, ii) seeking additional sales opportunities within its
core business, iii) reducing expenses to a level that would provide the Company
with sufficient cash flow to meet its obligations, and/or iv) a combination of
any of the foregoing. Although there can be no assurances that the Company will
be able to achieve any of the foregoing initiatives, the financial

9

statements included in this report do not contain any adjustments that might be
necessary if the Company is unable to continue as a going concern.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of consolidation:

The consolidated financial statements include the accounts of MSI and its
wholly-owned subsidiaries (the "Subsidiaries"): Measurement Limited, organized
in Hong Kong ("ML"); Jingliang Electronics (Shenzhen) Co. Ltd. ("JL"), organized
in the People's Republic of China ("China"); IC Sensors Inc. ("IC Sensors");
Measurement Specialties, U.K. Limited ("Schaevitz, UK"), organized in the United
Kingdom; and Terraillon Holdings Limited, organized in Ireland, and its
wholly-owned subsidiaries ("Terraillon"); all collectively referred to as the
"Company." As discussed in Note 6, the Company placed Schaevitz UK in
receivership in June 2002 and sold Terraillon in September 2002; accordingly,
the results from these operations are reflected as discontinued operations. All
significant intercompany balances and transactions have been eliminated.

Reclassifications:

Certain reclassifications have been made to conform prior years to the current
period's presentation.

Derivative Instruments:

The Company adopted SFAS 133, as amended, as of April 1, 2001. The cumulative
effect of the adoption of the accounting principle was $248 and was recorded in
the first quarter of the fiscal year ended 2002.

Recent Accounting Pronouncements:

On July 29, 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The standard requires companies to recognize costs associated with
exit or disposal activities when they are incurred, rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by the
standard include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. SFAS 146 is required to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Company is currently evaluating the impact of this standard.

The Company's current policy is to accrue restructuring and other costs at
commitment date of a plan in accordance with the provisions of Emerging Issues
Task Force ("EITF") No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity" and Staff Accounting
Bulletin No. 100, "Restructuring and Impairment Charges." Accordingly, the
Company has provided for certain restructuring costs during the year ended March
31, 2002 and the six months ended September 30, 2002 (see note 4).

The Company adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13 and Technical Corrections," effective May
15, 2002. The Statement rescinds SFAS No. 4 which required all gains and losses
from extinguishment of debt to be aggregated and, when material, classified as
an extraordinary item net of related income tax effect. SFAS No. 145 also amends
Statement 13 to require that certain lease modifications having economic effects
similar to sale-leaseback

10

transactions be accounted for in the same manner as sale-leaseback transactions.
The Company does not expect this Statement will have a material effect on its
financial position or results of operations.

The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," effective April 1, 2002. This standard supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The standard retains the previously existing
accounting requirements related to the recognition and measurement of the
impairment of long-lived assets to be held and used while expanding the
measurement requirements of long-lived assets to be disposed of by sale to
include discontinued operations. It also expands on the previously existing
reporting requirements for discontinued operations to include a component of an
entity that either has been disposed of or is classified as held for sale.

The Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations,"
effective April 1, 2002. This standard addresses financial accounting and
reporting for obligations associated with retirement of tangible long-lived
assets and the associated assets' retirement costs.

3. RESTATEMENT:

Based on the advice of its auditors and discussion with the Securities and
Exchange Commission, the Company determined it was necessary to conduct a
thorough re-examination of its historical determination of inventory values and
cost of goods sold. As a result of additional procedures employed a number of
errors in the Company's historical inventory valuation relating to the
absorption of manufacturing costs were discovered. Each of the Company's
business units experienced various types of calculation and application errors.
These errors varied by quarter, type and cause. The errors and causes thereof
are included in the following general categories:

o Failure to analyze and account for standard cost variances
properly and on a timely basis;

o Failure to use readily available accounting and costing
records to determine manufacturing costs;

o Inclusion of inappropriate expenses in inventory cost pools;

o Apparent mathematical errors (including amounts used in
calculations that could not be reconciled to the Company's
underlying accounting records);

o Failure to adjust inventories to the lower of cost or market;
and

o Use of inconsistent parameters to determine cost pools that
relate to inventory at each reporting period.

Accordingly, the Company has restated its financial statements for the fiscal
year ended March 31, 2001, its results of operations for the six months ended
September 30, 2001 and its previously issued selected financial information for
each of the quarterly periods in the fiscal year ended March 31, 2001 and the
first three quarters in the fiscal year ended March 31, 2002. The effect of the
restatement was a reduction of our previously reported inventory values and
operating income and a corresponding increase to costs of goods sold aggregating
approximately $8,200 for the fiscal year ended March 31, 2001, $691 for the
three months ended September 30, 2001, and $4,672 for the six months ended
September 30, 2001.

In connection with the restatement and due in part to the cessation of
operations of Arthur Andersen LLP, the previous auditors of the Company's
financial statements for the fiscal year ended March 31, 2001, the Company
requested its current auditors to conduct a reaudit of its financial statements
for the fiscal year ended March 31, 2001. The reaudit resulted in the following
additional adjustments for the three and six months ended September 30, 2001:
reclassification of certain costs included in selling, general, and
administrative expenses to revenue for $256 and $469, amortization of patents in
the amount of $59 and $118; straight-lining of lease expense in accordance with
SFAS No. 13 in the amount of $32 and $99; and certain other adjustments. As a
result of all the above adjustments, the Company recalculated its tax

11

provision resulting in a reduction of a previously reported tax benefit of
$1,242 and $783. In addition, the results of operations for the three and six
months ended September 30, 2001 have been adjusted to reclassify the results of
discontinued operating units.

The following is a summary of the significant effects of the restatement of
results for the three and six months ended September 30, 2001:

(1) The consolidated statement of operations data and consolidated balance sheet
data have been adjusted to reclassify the results of discontinued operating
units and assets and liabilities held for sale.

4. RESTRUCTURING AND OTHER COSTS:

During the quarter ended March 31, 2002, management and the Board of Directors
approved a plan of reduction of workforce and a reduction of operating capacity
at certain locations. The reduction in workforce consisted of 106 employees in
the quarter ended March 31, 2002, and 49 additional employees in the quarter
ended June 30, 2002 in the consumer and sensor segments, in addition to the
corporate offices. Costs associated with this restructuring consist of severance
costs and the writedown of fixed assets which amounted to $1,413 in the quarter
ended March 31, 2002, an accrual of $443 in the quarter ended June 30, 2002 for
potential expense related to lease termination and an additional $150 for
severance, and an additional accrual of $530 in the quarter ended September 30,
2002 for potential expense related to lease termination and writedown of fixed
assets. As of September 30, 2002 $15 of the severance costs has not been paid.
As of September 30, 2002, $756 of other restructuring costs remain in the
accrual.

5. INVENTORIES:

Inventories are summarized as follows:

6. DISCONTINUED OPERATIONS, ASSETS AND LIABILITIES HELD FOR SALE, AND GAIN OR
LOSS ON SALE OF ASSETS:

As a result of the restructuring plan, the Company sold all of the outstanding
stock of Terraillon, previously a component of the Company's Consumer segment,
in September 2002 and sold the assets, principally property and equipment,
related to its IC Sensors silicon wafer fab manufacturing operations, previously
a component of the Company's Sensor segment, in July 2002. The assets held for
sale in the amount of $36,632 at March 31, 2002 and liabilities held for sale in
the amount of $12,800 at March 31, 2002 represent the assets and liabilities
from these operations.

13

Since these businesses were disposed of by September 30, 2002, the assets and
liabilities have been removed from the balance sheet. The amounts for Terraillon
on the consolidated statements of operations for the three and six months ended
September 30, 2002 and 2001 have been reclassified as discontinued operations to
reflect the disposal of this operating unit.

In July 2002, the Company sold the assets, principally property and equipment,
related to its silicon wafer fab manufacturing operation in Milpitas, CA to
Silicon Microstructures, Inc. (SMI), a wholly-owned subsidiary of Elmos
Semiconductor AG. The wafer fab operation was formerly part of the Company's IC
Sensors division. The price paid by SMI for the assets was approximately $5,250,
consisting of approximately $3,370 in cash and $1,880 in prepaid credit for
products and services, subject to reduction under certain circumstances.
Approximately $900 of the cash purchase price was used to satisfy an outstanding
equipment lease obligation. The prepaid credit for products and services, if
utilized, will be accounted as a component of wafer costs. The gain on this sale
was approximately $109, net of tax, and has been reflected in the Condensed
Consolidated Statements of Operations as "Gain on Sale of Wafer Fab" for the
three and six months ended September 30, 2002.

In September 2002, the Company sold all of the outstanding stock of Terraillon
Holdings Limited, a European manufacturer of branded consumer bathroom and
kitchen scales, to Fukuda (Luxembourg) S.a.r.l. ("Fukuda"), an investment
holding company incorporated in Luxembourg, for $22,300. Approximately $2,282 of
the purchase price will be held in escrow until January 24, 2003 to secure
payment of certain purchase price adjustments, if any, or any right of Fukuda to
set off as a result of breaches of the Company's representations and warranties
in the stock purchase agreement. Of the $2,282 held in escrow, the Company has
assumed that a portion of the escrow will be used to satisfy certain purchase
price adjustments. The gain on sale reflects these anticipated purchase price
adjustments. Fukuda also assumed approximately $4,800 in debt in connection with
the acquisition of Terraillon. The gain on this sale was approximately $340, net
of tax, subject to further adjustments, and has been reflected in the Condensed
Consolidated Statements of Operations as "Gain on Sale of Terraillon" for the
three and six months ended September 30, 2002.

The Company placed its United Kingdom subsidiary, Schaevitz UK (previously a
component of the Company's Sensor segment), into receivership on June 5, 2002
pursuant to the terms of a Mortgage Debenture dated February 28, 2001, as the
Company was no longer in a position to support its losses. The receiver's
function was to dispose of Schaevitz UK's business and assets for the best price
possible. The book debt recoveries and sale proceeds were applied in settlement
of the receiver's remuneration, costs and expenses, the preferential creditors'
claims, (i.e. the claims of the Inland Revenue, Customs & Excise and employee
claims up to certain statutory limits) and then to (i) claims by the Company's
lenders in accordance with UK insolvency legislation (the Insolvency Act 1986)
and (ii) priority arrangements. Schaevitz, UK's landlord has a potential
dilapidations claim of up to 350 Pounds Sterling (approximately $557 United
States dollars based on market exchange rates as of November 11, 2002) against
Schaevitz UK that arose on the expiration of the lease of 543/544 Ipswich Road
Trading Estate, Slough, Berkshire, England on June 23, 2002. The Company is
currently in negotiations with the landlord regarding this matter. The results
of operations of Schaevitz UK are reflected in discontinued operations from
April 1, 2002 through the June 5, 2002 date of liquidation. During the six
months ended September 30, 2002, the Company incurred approximately $3,577 of
costs and expenses in connection with the liquidation of Schaevitz UK, which
consisted of writedown of prepaid pension costs of $2,309 and receiver and other
costs of $1,268. The Company estimated the amount recoverable from the
liquidation was approximately $860. At September 30, 2002 the amount of "Due
from Receiver" was $90.

14

The following is a summary of the components of assets and liabilities held for
sale:

Assets held for sale:

15

A summary of the results of operations of the discontinued operating units
follows:

(1) Terraillon was acquired in August, 2001.

7. PER SHARE INFORMATION:

Basic per share information is computed based on the weighted average common
shares outstanding during each period. Diluted per share information
additionally considers the shares that may be issued upon exercise or conversion
of stock options, less the shares that may be repurchased with the funds
received from their exercise. Diluted earnings per share is not presented as the
results are antidilutive.

16

Excluded from earnings per share are 92,000 and 169,000 equivalent shares for
the three and six months ended September 30, 2002 and 470,000 and 597,000
equivalent shares for the three and six months ended September 30, 2001,
respectively, as their inclusion would be antidilutive.

8. SEGMENT INFORMATION:

The Company has two businesses ("segments"), a Sensor business and a Consumer
Products business.

The Company's Sensor business designs, manufactures, and markets sensors for
original equipment manufacturer applications. These products include pressure
sensors, custom microstructures, accelerometers, tilt/angle sensors, and
displacement sensors for electronic, automotive, military, and industrial
applications.

The Company's Consumer Products business manufactures and markets sensor-based
consumer products. These products include bathroom and kitchen scales, tire
pressure gauges, and distance estimators. These products are typically based on
application-specific integrated circuits, piezoresistive, and ultrasonic
technologies.

Segment data have been presented on a basis consistent with how business
activities are reported internally to management.

The accounting policies of the segments are substantially the same as those
described in Note 1.

The Company has no material intersegment sales.

The following is information related to industry segments:

9. COMMITMENTS AND CONTINGENCIES:

CLASS ACTION LAWSUIT

On March 20, 2002, a class action lawsuit was filed on behalf of purchasers of
the Company's common stock in the United States District Court for the District
of New Jersey against Measurement Specialties and certain of its present and
former officers and directors. The complaint was subsequently amended to include
the underwriters in the Company's August 2001 public offering and the Company's
former auditors. The lawsuit alleges violations of the federal securities laws
including, among other things, that the registration statement related to the
Company's August 2001 public offering and the Company's periodic SEC filings
misrepresented or omitted material facts and that certain of the Company's
officers made false or misleading statements of material fact. The lawsuit seeks
an unspecified award of money damages. After March 20, 2002, nine additional
similar class actions were filed in the same court. The ten lawsuits have been
consolidated into one case under the caption In re: Measurement Specialties,
Inc. Securities Litigation, 02 Civ. No. 1071 (D.N.J.). Plaintiffs filed a
Consolidated Amended Complaint on

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September 12, 2002. The Company must file a responsive pleading by December 9,
2002. The underwriters have made a claim for indemnification under the
underwriting agreement. The Company is currently in the process of responding to
the claims made in the class action lawsuit. The Company intends to defend the
foregoing lawsuit vigorously, but cannot predict the outcome and is not
currently able to evaluate the likelihood of success or the range of potential
loss, if any. However, if the Company were to lose this lawsuit, judgment would
likely have a material adverse effect on the Company's consolidated financial
position, results of operations and cash flows. The Company has Directors and
Officers insurance policies that provide an aggregate coverage of $10,000 for
the period during which the claims were filed, but cannot evaluate at this time
whether such coverage will be available or adequate to cover losses, if any,
arising out of this litigation.

SEC INVESTIGATION

In February 2002, the Company, at its own initiative, contacted the staff of the
SEC after discovering that the Company's former Chief Financial Officer had made
the misrepresentation to senior management, the Board and the Company's auditors
that a waiver of the covenant default under the Company's credit agreement had
been obtained when, in fact, the lenders refused to grant such a waiver. Since
February 2002, the Company and a Special Committee formed by the Company's Board
of Directors have been cooperating with the staff of the SEC. In June 2002, the
staff of the Division of Enforcement of the SEC informed the Company that it is
conducting a formal investigation relating to matters reported in the Company's
quarterly report on Form 10-Q for the quarter ended December 31, 2001. The
Company cannot predict how long the SEC investigation will continue or its
outcome.

UNITED STATES ATTORNEY INQUIRY

The Company has also learned that the Office of the United States Attorney for
the District of New Jersey is conducting an inquiry into the matters that are
being investigated by the SEC. The Company cannot predict how long the United
States Attorney's inquiry will continue or its outcome.

OTHER LITIGATION

In re Service Merchandise Company, Inc. (Service Merchandise Company, Inc. v.
Measurement Specialties, Inc.), United States Bankruptcy Court for the Middle
District of Tennessee, Nashville Division, Case No. 399-02649, Adv. Pro. No.
301-0462A.

The Company is currently the defendant in a lawsuit filed in March 2001 by
Service Merchandise Company, Inc. ("SMC") and its related debtors (collectively,
the "Debtors") in the context of the Debtors' Chapter 11 bankruptcy proceedings.
The Bankruptcy Court entered a stay of the action in May 2001, which was lifted
in February 2002. Citing 11 U.S.C. Section 547(b), the action alleges that the
Company received $645 from one or more of the Debtors during the ninety (90) day
period before the Debtors filed their bankruptcy petitions, that the transfers
were to the Company's benefit, were for or on account of an antecedent debt owed
by one or more of the Debtors, made when one or more of the Debtors were
insolvent, and that the transfers allowed the Company to receive more than it
would have received if the cases were cases under Chapter 7 of the United States
Bankruptcy Code. The action seeks to disgorge the sum of $645 from the Company.
It is not possible at this time to predict the outcome of the litigation or
estimate the extent of any damages that could be awarded in the event that the
Company is found liable to the estates of SMC or the other Debtors.

Robert L. DeWelt v. Measurement Specialties, Inc. et al., United States District
Court, District of New Jersey, Civil Action No. 02-CV-3431.

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On July 17, 2002, Robert DeWelt, the Company's former acting Chief Financial
Officer and general manager of the Company's Schaevitz Division, filed a lawsuit
against Measurement Specialties, Inc. and certain of the Company's officers and
directors. Mr. DeWelt resigned on March 26, 2002 in disagreement with
management's decision not to restate certain of the Company's financial
statements. The lawsuit alleges a claim for constructive wrongful discharge and
violations of the New Jersey Conscientious Employee Protection Act. Mr. DeWelt
seeks an unspecified amount of compensatory and punitive damages. The Company
has filed a Motion to Dismiss this case. The Company intends to defend the
foregoing lawsuit vigorously, but cannot predict the outcome and is not
currently able to evaluate the likelihood of success or the range of potential
loss, if any.

Hibernia Litigation

On or about July 23, 2002, Hibernia Capital Partners I, ilp and Hibernia Capital
Partners II, ilp filed a lawsuit against Measurement Specialties in the High
Court of Dublin. The Plenary Summons states that plaintiffs seek a declaration
that the plaintiffs entered into the share purchase agreement on June 7, 2001
for the sale of their shares in Terraillon Holdings Limited to Measurement
Specialties as a result of an operative misrepresentation and misstatement.
Plaintiffs further seek damages for misrepresentation and/or breach of contract
and/or breach of warranty and costs of the proceedings. On August 9, 2002, the
Company entered an Appearance, which is the equivalent of the acceptance of
service of process. On August 22, 2002, plaintiffs filed a Statement of Claim,
which is the equivalent of a complaint. The Company is still engaged in the
initial pleadings process wherein plaintiffs' claims and the Company's defenses
will be set forth in detail. The Company intends to defend the foregoing lawsuit
vigorously, but cannot predict the outcome and is not currently able to evaluate
the likelihood of success or the range of potential loss, if any.

Semex, Inc. vs. Measurement Specialties, Inc. and AMP Incorporated, Court of
Common Pleas, Montgomery County, Pennsylvania.

On October 24, 2002, Semex, Inc. ("Semex") filed a lawsuit against the Company
and AMP Incorporated alleging breaches of the lease for the Company's former
facility in the Valley Forge, Pennsylvania. The Company is the assignee of AMP
Incorporated under the lease. The plaintiff alleges that the Company owes at
least $770 for certain payment defaults under the lease. The plaintiff also
seeks an unspecified amount of damages related to plaintiff's allegations of,
among other things, damage to the property, failure to remove alterations and
failure to conduct environmental testing. At this point in the litigation, the
Company cannot predict its outcome.

The Company has other litigation occurring in the normal course of its business.
The Company does not believe that this litigation will have a material effect on
financial position or results of operations.

10. RELATED PARTY TRANSACTION

In May 2002, the Company retained Corporate Revitalization Partners (CRP) to
conduct its ongoing operational/financial restructuring efforts. In June 2002,
Frank Guidone, Managing Director of CRP, became the Company's chief executive
officer. As of November 9, 2002, the Company has incurred $1,606 in consulting
fees to CRP (excluding the success fees described in the following sentence). In
addition to consulting fees based on hours billed by CRP consultants, there is a
"success fee" consisting of $50 and a warrant exercisable to purchase 43,860
shares of the Company's common stock (at an exercise price of $2.28 per share)
that was payable upon the occurrence of each of the following three events:

20

o The successful negotiation and execution of an extended forbearance
agreement with the Company's former lenders (this agreement has been
executed);

o The Company's compliance as of September 30, 2002 with the terms of the
forbearance agreement with its former lenders (the Company was in
compliance with the forbearance agreement as of September 30, 2002);
and

o The repayment of all amounts due to the Company's existing senior
lenders and refinancing of the Company's debt on or before November 1,
2002 (this event was not met and accordingly, the fee will not be paid
and the warrant will not be issued).

During the three months ended September 30, 2002, the Company has expensed $153
relating to the warrants.

On October 31, 2002, the Company received a $9,300 bridge loan from Castletop
Capital, L.P., a limited partnership controlled by Mort Topfer, Vice Chairman of
our Board of Directors. The proceeds from this loan were used to repay all our
obligations under the term loan and revolving credit facility; accordingly, the
Company is no longer in default and these facilities have been eliminated. The
loan is evidenced by a Senior Secured Note due January 31, 2003 and does not
include a revolving credit facility. Interest on the note accrues at a rate of
7% per annum (subject to a 2% increase upon the occurrence of an event of
default under the note). The Company's obligations under the note are secured by
a lien on substantially all of our assets and substantially all of the assets of
IC Sensors. Castletop Capital also received a Warrant to purchase up to 297,228
shares of our common stock for an exercise price equal to the average closing
price of the Company's common stock on the American Stock Exchange for the first
five trading days after October 31, 2002 ($1.64 per share). The exercise price
and number of shares subject to the warrant are subject to adjustment under
certain circumstances. The terms of the warrant issued to Castletop Capital,
L.P. are substantially similar to the terms of the warrant that would have been
issued to the Company's lending group in the event that the Company had not
repaid all amounts outstanding under its term loan and revolving credit facility
on or before November 1, 2002.

21

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

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The following discussion of our results of operations and financial condition
should be read together with the other financial information and consolidated
financial statements and related notes included in this Quarterly Report on Form
10-Q. This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements as a result of a variety of factors.

OVERVIEW

We are a designer and manufacturer of sensors and sensor-based consumer
products. We produce a wide variety of sensors that use advanced technologies to
measure precise ranges of physical characteristics, including pressure, motion,
force, displacement, angle, flow, and distance. We have two businesses, a Sensor
business and a Consumer Products business.

Our Sensor business designs, manufactures, and markets sensors for original
equipment manufacturer applications. These products include pressure sensors,
custom microstructures, accelerometers, tilt/angle sensors, and displacement
sensors for electronic, automotive, military, and industrial applications. Our
Sensor business customers include leading manufacturers such as Alaris Medical,
Texas Instruments, Allison Transmission, Althen GmbH, and Graco.

Our Consumer Products business manufactures and markets sensor-based consumer
products. These products include bathroom and kitchen scales, tire pressure
gauges, and distance estimators. These products are typically based on
application-specific integrated circuits, piezoresistive, and ultrasonic
technologies. Our Consumer Products customers include leading retailers such as
Bed Bath & Beyond, Linens 'n Things, Sears, Costco and Target, and European
resellers such as Laica, Ole Bodtcher Hanson, and Babyliss.

RESTATEMENT

Background - Examination of Inventory Valuation; Capitalized Overhead
Calculations

In August 2001, we determined that the implementation of a more comprehensive
and standardized cost accounting system was necessary as a result of the
expansion of our company through recent acquisitions, and we hired an
experienced cost accountant, Robert DeWelt, to, among other things, implement
this system. This process included updating standard inventory costs at two of
our locations. After review and analysis, management, in November 2001,
completed the update of standard costs for these two locations and revised the
estimated capitalized overhead calculations used in valuing the inventory
located there, but concluded that a more complete analysis, including an
examination of inventory valuation at our other locations, was necessary. The
review process also raised questions regarding the appropriateness of our
inventory costing methodology.

After the termination of our Chief Financial Officer in February 2002, we
briefly retained PricewaterhouseCoopers (PwC) as a consultant with regard to the
appropriateness of our inventory costing methodology, including specifically the
methodology used in allocating fixed manufacturing expenses to inventory and
cost of sales. PwC was not engaged to, nor did they, reach a conclusion or

22

render any type of opinion regarding this matter. Additionally, because of PwC's
limited role, they were not involved in our final resolution of this issue.

In February 2002, our Board formed a Special Committee consisting of all of our
outside directors. The Special Committee performed a limited review of the
appropriateness of our inventory valuation methodology, including whether a
misapplication of accounting principles would require a restatement of
previously reported financial statements. The Special Committee retained
independent counsel to assist in its investigation and, through its independent
counsel, retained RosenfarbWinters, LLC as special accounting advisors to the
Special Committee.

Initial Decision Not to Restate Financial Statements for Periods Prior to
December 31, 2001

In March 2002, management initially determined that the calculation of
capitalized overhead was in compliance with applicable accounting principles and
concluded that the increase in cost of sales and attendant reduction in
inventory value during the quarter ended December 31, 2001 was largely
attributable to changes in accounting estimates relating to the general
absorption of direct labor and overhead costs and therefore no restatement of
previously reported financial results was necessary. This determination was
based on management's belief that the calculation was appropriately capturing
direct labor and overhead costs. Robert DeWelt (who had been temporarily given
the title of "Acting CFO" after the termination of our former Chief Financial
Officer, Kirk Dischino) and Edward McCausland, our Controller, resigned in
disagreement with management's conclusion not to restate prior period financial
statements.

We subsequently retained Amper, Politziner and Mattia, PC (APM) in April 2002 to
assist and work under the direction of management in our analysis and
quantification of inventory calculations and to consult as to whether or not any
errors in the application of accounting principles or in the preparation of our
financial statements required restatement of previously reported financial
statements.

In May 2002, management again determined that the calculation of capitalized
overhead was in compliance with applicable accounting principles and concluded
that the increase in cost of sales and attendant reduction in inventory value
during the quarter ended December 31, 2001 was largely attributable to changes
in accounting estimates and therefore no restatement of previously reported
financial results was necessary. Our Board of Directors concurred in the
decision not to restate prior periods. In its limited review, the Special
Committee concluded that no information had been brought to its attention that
would render management's decision inappropriate. APM, RosenfarbWinters, and our
independent auditors, Arthur Andersen, LLP, concurred in this conclusion. PwC's
engagement ended prior to the completion of our analysis and the Board's
determination.

Decision to Restate

On June 11, 2002, we retained Grant Thornton LLP to replace Arthur Andersen LLP
as our independent auditor. We appointed a new Chief Executive Officer in June
2002 and appointed a new Chief Financial Officer in July 2002. Based upon the
advice of our new auditor and after consultation with the United States
Securities and Exchange Commission, our new senior management team determined
that it was necessary to conduct a thorough re-examination of our historical
determination of inventory values and costs of goods sold. Beginning in July
2002, we concurred with our auditor's recommendation to expand the scope of
their audit work to include an extended analysis of our inventory valuation
calculations. As part of our auditor's procedures, they obtained detailed
operating and production data for our operating units, validated the underlying
data and applied the resulting data to assist new senior management in the
accurate determination of inventories valued at the lower of cost or estimated
market value. As a result of these procedures, our auditors discovered a number
of errors in our inventory valuation calculations.

23

Each of our business units experienced various types of calculation and
application errors. These errors varied by quarter, type and cause. The errors
and causes thereof are included in the following general categories:

o Failure to analyze and account for standard cost variances
properly and on a timely basis;

o Failure to use readily available accounting and costing
records to determine manufacturing costs;

o Inclusion of inappropriate expenses in inventory cost pools;

o Apparent mathematical errors (including amounts used in
calculations that could not be reconciled to our underlying
accounting records);

o Failure to adjust inventories to the lower of cost or market;
and

o Use of inconsistent parameters to determine cost pools that
relate to inventory at each reporting period.

We have determined that these errors in our valuation of inventory were of a
sufficient magnitude to require restatement. Accordingly, we have restated our
previously issued financial statements for the fiscal year ended March 31, 2001
and our previously issued selected financial information for each of the
quarterly periods in the fiscal year ended March 31, 2001 and the first three
quarters in the fiscal year ended March 31, 2002. The effect of the restatement
was an increase in cost of goods sold aggregating approximately $8,200 for the
fiscal year ended March 31, 2001, $691 for the three months ended September 30,
2001 and $4,672 for the six months ended September 30, 2001. During the course
of our review, we did not identify errors of a significant magnitude to require
restatement of periods ending prior to April 1, 2000.

In connection with the restatement of our inventory and cost of sales values,
and due in part to the cessation of operations of Arthur Andersen LLP, the
previous auditors of our financial statements for the fiscal year ended March
31, 2001, we instructed our current auditors to conduct a reaudit of our
financial statements for the fiscal year ended March 31, 2001. The reaudit and
the audit for the fiscal year ended March 31, 2002 resulted in the following
additional adjustments to the previously reported results for the three and six
months ended September 30, 2001, respectively:

o Reclassification of certain promotional costs from selling,
general and administrative to a reduction in revenue of $256
and $469;

o Amortization of patents in the amount of $59 and $118;

o Straight-lining of lease expense in accordance with SFAS 13 in
the amount of $32 and $99; and

o Certain other adjustments.

As a result of the restated items described above, including the inventory
valuation issue, we recomputed our tax provision for the three and six months
ended September 30, 2001, resulting in a reduction of our previously reported
tax benefit by $1,242 and $783, respectively.

The following is a summary of the significant effects of the restatement
discussed above on our results for the three and six months ended September 30,
2001:

24

(1) The consolidated statement of operations data and consolidated balance sheet
data have been adjusted to reclassify the results of discontinued operating
units.

See "Item 4. Controls and Procedures" for a discussion of the actions that we
have taken to strengthen our internal controls.

26

RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING OUR RESTRUCTURING PROGRAM

AS DESCRIBED BELOW UNDER "RECENT DEVELOPMENTS," WE ARE ENGAGED IN AN ONGOING
RESTRUCTURING PROGRAM PURSUANT TO WHICH WE HAVE DISCONTINUED CERTAIN OPERATIONS
AND SOLD ASSETS SINCE MARCH 31, 2002 AND MAY, IN THE FUTURE, ENGAGE IN
ADDITIONAL SALES OF ASSETS OR STOCK OR OBTAIN OTHER TYPES OF FINANCING.
ACCORDINGLY, THE HISTORICAL RESULTS OF OPERATIONS PRESENTED HEREIN ARE UNLIKELY
TO BE INDICATIVE OF FUTURE PERFORMANCE.

SPECIAL NOTE REGARDING RESTATEMENT OF OUR PREVIOUSLY ISSUED FINANCIAL STATEMENTS

WE HAVE RESTATED OUR PREVIOUSLY ISSUED FINANCIAL STATEMENTS FOR THE FISCAL YEAR
ENDED MARCH 31, 2001, AND OUR PREVIOUSLY ISSUED FINANCIAL RESULTS FOR EACH OF
THE QUARTERLY PERIODS IN THE FISCAL YEAR ENDED MARCH 31, 2001 AND THE FIRST
THREE QUARTERS IN THE FISCAL YEAR ENDED MARCH 31, 2002 (COLLECTIVELY, THE
"RESTATEMENT PERIOD"). SEE "RESTATEMENT" ABOVE. THE CONSOLIDATED FINANCIAL
RESULTS FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2001 INCLUDED IN THIS
REPORT AND THE DISCUSSION OF THE RESULTS OF OPERATIONS FOR THE THREE AND SIX
MONTHS ENDED SEPTEMBER 30, 2001 GIVE EFFECT TO THE RESTATEMENT.

WE INTEND TO FILE A CURRENT REPORT ON FORM 8-K TO PROVIDE RESTATED QUARTERLY
FINANCIAL INFORMATION FOR EACH OF THE QUARTERLY PERIODS IN THE RESTATEMENT
PERIOD.

YOU SHOULD NOT RELY ON DISCUSSIONS OF RESULTS OF OPERATIONS AND TRENDS AFFECTING
OUR BUSINESS FOR THE RESTATEMENT PERIOD THAT APPEAR IN OUR SEC FILINGS MADE
PRIOR TO THE FILING OF OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
MARCH 31, 2002.

AS A RESULT OF THE RESTATEMENT, OUR HISTORICAL RESULTS OF OPERATIONS DIFFER
SIGNIFICANTLY FROM THOSE CONTAINED IN OUR REPORTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION PRIOR TO THE FILING OF OUR ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED MARCH 31, 2002. ACCORDINGLY, YOU SHOULD NOT RELY ON THOSE
PREVIOUS DISCUSSIONS OF OUR RESULTS OF OPERATIONS AND TRENDS AFFECTING OUR
BUSINESS, SINCE SUCH DISCUSSIONS WERE BASED ON FINANCIAL RESULTS THAT HAVE NOW
BEEN RESTATED. WE DO NOT INTEND TO MAKE ADDITIONAL FILINGS TO CORRECT THE
HISTORICAL DISCUSSIONS OF RESULTS OF OPERATIONS AND TRENDS AFFECTING OUR
BUSINESS.

27

The following table sets forth, for the periods indicated, certain items in our
consolidated statements of income as a percentage of net sales:

(1) The consolidated financial statements for the three and six months ended
September 30, 2002 include the results of the ongoing operations of Measurement
Specialties, Inc. As a result of the restructuring plan, we sold all of the
outstanding stock of Terraillon Holdings Limited in September 2002 and placed
Measurement Specialties UK Limited (referred to herein as Schaevitz UK) into
receivership in June 2002. Accordingly, Terraillon is classified as a
discontinued operation in the consolidated financial results for the three and
six months ended September 30, 2002, and from its acquisition date in August
2001 through September 30, 2001. Schaevitz UK is classified as a discontinued
operation for the three months ended June 30, 2002 and for the three and six
months ended September 30, 2001. Schaevitz UK had no activity for the three
months ended September 30, 2002. The comparisons above exclude the results of
these discontinued operations, except for "Loss from discontinued units,"
"Cumulative effect of accounting change, net of tax" and "Net income (loss)."

(2) Reflects the restatement of our financial statements for the three and six
months ended September 30, 2001. See "Restatement" and Note 3 to our
consolidated financial results included in this Quarterly Report on Form 10-Q.

29

THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001

The consolidated financial statements for the three months ended September 30,
2002 include the results of the ongoing operations of Measurement Specialties,
Inc. As a result of our restructuring plan, we sold all of the outstanding stock
of Terraillon in September 2002 and placed Schaevitz UK into receivership in
June 2002. Accordingly, Terraillon is classified as a discontinued operation in
the consolidated financial results for the three months ended September 30,
2002, and from its acquisition date in August 2001 through September 30, 2001.
Schaevitz UK is classified as a discontinued operation for the three months
ended September 30, 2001. Schaevitz UK had no activity for the three months
ended September 30, 2002.

Net Sales. Net sales increased to $32,437 for the three months ended September
30, 2002 from $25,835 for the three months ended September 30, 2001.

Net sales of our Sensor business increased $1,630, or 13.2%, to $14,005 for the
three months ended September 30, 2002 from $12,375 for the three months ended
September 30, 2001. Sales of microfused pressure transducers increased
substantially, with growth in both our original equipment manufacturer business
and our Texas Instruments automotive sensor programs. PiezoSensors sales
improved as a result of increased sales of traffic sensors and other PiezoSensor
products. Sales of Schaevitz products fell due to weakness in the capital goods
market, primarily in the power generation segment. There was virtually no change
in IC Sensors sales for the three months ended September 30, 2002 as compared to
the three months ended September 30, 2001.

Net sales of our Consumer Products business increased $4,972, or 36.9%, to
$18,432 for the three months ended September 30, 2002 from $13,460 for the three
months ended September 30, 2001. During the three months ended September 30,
2002, $1,235 of slow moving and obsolete inventory was liquidated, which
accounted for 24.8% of the sales improvement. Without this liquidation event,
sales increased $3,737, or 27.8%, to $17,197 for the three months ended
September 30, 2002. The balance of the improved sales was principally the result
of a significant increase in sales of tire pressure gauges resulting from heavy
seasonal promotional activity and an increase in the sales of bath scales over
the prior period. Sales of our other consumer products also improved slightly.

Gross Profit. Gross profit increased $4,029, or 63.0%, to $10,423 for the three
months ended September 30, 2002 from $6,394 for the three months ended September
30, 2001. Gross margin increased to 32.1% for the three months ended September
30, 2002 from 24.7% for the three months ended September 30, 2001. Gross margin
for our Sensor business increased to 33.3% for the three months ended September
30, 2002 from 22.3% for the three months ended September 30, 2001. This margin
improvement was the result of manufacturing cost savings related to the transfer
of the production of certain products to our China facility and the favorable
impact of restructuring programs which included the sale of the IC Sensors wafer
fab and headcount reductions. Gross margin for our Consumer Products business
increased to 31.3% for the three months ended September 30, 2002 from 27.1% for
the three months ended September 30, 2001. Gross margins for the period ending
September 30, 2001 reflect $1,250 in write-downs of slow moving and obsolete
inventory to net realizable value. This write-down was largely comprised of Park
Zone inventory.

Selling, General, and Administrative. Selling, general, and administrative
expenses increased $553, or 5.9%, to $9,917 for the three months ended September
30, 2002 from $9,364 for the three months ended September 30, 2001. The increase
was largely attributable to $3,169 in consulting and professional fees incurred
as a result of defaults under our credit agreement, the restatement of financial
statements, the

30

class action lawsuits and SEC investigation. These increases were partially
offset by savings in payroll, facility, and other expenses resulting from our
cost reduction activities.

Research and Development. Research and development costs decreased $1,238, or
66.3%, to $630 for the three months ended September 30, 2002 from $1,868 for the
three months ended September 30, 2001. Customer-funded development decreased
$386 to $70 for the three months ended September 30, 2002 from $456 for the
three months ended September 30, 2001. On a net basis, research and development
costs decreased $852, or 60.3%, to $560 for the three months ended September 30,
2002 from $1,412 for the three months ended September 30, 2001. The primary
cause of the reduction in research and development spending and customer-funded
development was the sale of the IC Sensors wafer fab in July 2002. We do not
expect significant customer funded research and development for the remainder of
the fiscal year ending March 31, 2003.

Interest Expense, Net. Net interest expense decreased $337, or 35.0%, to $625
for the three months ended September 30, 2002 from $962 for the three months
ended September 30, 2001. This decrease is attributable to a $10,749 reduction
in average debt outstanding from $32,009 in the three months ended September 30,
2001 to $21,260 in the three months ended September 30, 2002. We expect interest
expense to decrease in the future as our average outstanding debt balances
decrease.

Income Taxes. We had a pretax loss for financial reporting purposes and have not
provided a tax benefit for the three months ended September 30, 2002.
Recognition of a deferred tax benefit will require generation of future taxable
income; accordingly, no benefit has been provided. We recorded a tax benefit of
$31 for the three months ended September 30, 2001 which relates to refundable
income taxes.

Discontinued Operations. As a result of the restructuring plan, we sold all of
the outstanding stock of Terraillon in September 2002 and placed Schaevitz UK
into receivership in June 2002. The net results for these discontinued units for
the three months ended September 30, 2002 was a loss of $34 compared to a loss
of $397 for the three months ended September 30, 2001.

SIX MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2001

The consolidated financial statements for the six months ended September 30,
2002 include the results of the ongoing operations of Measurement Specialties,
Inc. As a result of our restructuring plan, we sold all of the outstanding stock
of Terraillon in September 2002 and placed Schaevitz UK into receivership in
June 2002. Accordingly, Terraillon is classified as a discontinued operation in
the consolidated financial results for the six months ended September 30, 2002,
and from its acquisition date in August 2001 through September 30, 2001.
Schaevitz UK is classified as a discontinued operation for the three months
ended June 30, 2002 and for the six months ended September 30, 2001. Schaevitz
UK had no activity for the three months ended September 30, 2002.

Net Sales. Net sales increased to $56,083 for the six months ended September 30,
2002 from $49,536 for the six months ended September 30, 2001.

Net sales of our Sensor business increased $1,018, or 4.0%, to $26,444 for the
six months ended September 30, 2002 from $25,426 for the six months ended
September 30, 2001. Sales of microfused pressure transducers increased
substantially, with growth in both our original equipment manufacturer business
and our Texas Instruments automotive sensor programs. PiezoSensors sales
improved as a result of increased sales of traffic sensors and other PiezoSensor
products. However, this increase was largely offset by lower sales of Schaevitz
products due to weakness in the capital goods market, primarily in the power
generation segment, and lower sales of IC Sensors products.

31

Net sales of our Consumer Products business increased $5,529, or 22.9%, to
$29,639 for the six months ended September 30, 2002 from $24,110 for the six
months ended September 30, 2001. During the six months ended September 30, 2002,
$1,315 of slow moving and obsolete inventory was liquidated, which accounted for
slightly less than one quarter of the sales improvement. Without this
liquidation event, sales increased $4,214, or 17.5%, to $28,324 for the six
months ended September 30, 2002. The balance of the improved sales was
principally the result of an increase in sales of tire pressure gauges resulting
from heavy seasonal promotional activity and an increase in the sales of bath
scales over the prior period. Sales of food scales and distance measurement
products increased slightly while sales of fish scales were flat as compared to
the six months ended September 30, 2001.

Gross Profit. Gross profit increased $5,452, or 42.7%, to $18,207 for the six
months ended September 30, 2002 from $12,755 for the six months ended September
30, 2001. Gross margin increased to 32.5% for the six months ended September 30,
2002 from 25.7% for the six months ended September 30, 2001. Gross margin for
our Sensor business increased to 34.9% for the six months ended September 30,
2002 from 25.3% for the six months ended September 30, 2001. This margin
improvement was the result of manufacturing cost savings related to the transfer
of the production of certain products to our China facility and the favorable
impact of restructuring programs including the sale of the IC Sensors wafer fab
in July 2002 and headcount reductions. Gross margin for our Consumer Products
business increased to 30.3% for the six months ended September 30, 2002 from
26.2% for the six months ended September 30, 2001. Gross margins for the period
ended September 30, 2001 reflect $1,332 in write-downs of slow moving and
obsolete inventory to net realizable value. This write-down was largely
comprised of Park Zone inventory