##### 



Selected Financial Data
    
    Years Ended March 31,2007
    
    2006
    
    2005
    
    2004
    
    2003Net sales
    
    $
    18,981,000
    
    
    $
    22,354,000
    
    
    $
    24,287,000
    
    
    $
    21,541,000
    
    
    $
    19,541,000Interest
income, net
    
    
    57,000
    
    
    
    20,000
    
    
    
    39,000
    
    
    
    22,000
    
    
    
    20,000Net earnings (loss)
    
    
    (3,414,000
    )
    
    
    (673,000
    )
    
    
    1,811,000
    
    
    
    1,001,000
    
    
    
    (433,000
    )Basic earnings (loss) per share
    
    
    (.34
    )
    
    
    (.07
    )
    
    
    .18
    
    
    
    .10
    
    
    
    (.04
    )Diluted earnings (loss) per share
    
    
    (.34
    )
    
    
    (.07
    )
    
    
    .17
    
    
    
    .10
    
    
    
    (.04
    )Net working capital
    
    
    7,266,000
    
    
    
    9,806,000
    
    
    
    10,393,000
    
    
    
    9,175,000
    
    
    
    8,224,000Total assets
    
    
    11,748,000
    
    
    
    14,356,000
    
    
    
    15,790,000
    
    
    
    13,043,000
    
    
    
    12,105,000Shareholders equity
    
    
    9,094,000
    
    
    
    12,395,000
    
    
    
    13,024,000
    
    
    
    11,153,000
    
    
    
    10,100,000
 No cash dividends have been declared or paid during the periods presented.
 1




---



##### 



March 31,2007
    
    
    2006AssetsCurrent assets:Cash
    
    $
    375,000
    
    
    $
    935,000Accounts
receivable, less allowance for doubtful
accounts of $38,000 and $52,000 in 2007 and
2006, respectively
    
    
    2,376,000
    
    
    
    3,220,000Income taxes refundable
    
    
    291,000
    
    
    
    383,000Inventories (Note 2)
    
    
    6,557,000
    
    
    
    6,381,000Prepaid expenses and other assets
    
    
    321,000
    
    
    
    178,000Deferred income taxes (Note 3)
    
    
    
    
    
    
    666,000Total current assets
    
    
    9,920,000
    
    
    
    11,763,000Property and
equipment, at cost:Office equipment and furniture
    
    
    1,787,000
    
    
    
    1,761,000Machinery and equipment
    
    
    969,000
    
    
    
    954,000Tooling
    
    
    1,531,000
    
    
    
    1,489,000Leasehold improvements
    
    
    1,899,000
    
    
    
    1,897,0006,186,000
    
    
    
    6,101,000Less accumulated depreciation and amortization
    
    
    5,501,000
    
    
    
    5,151,000Net property and equipment
    
    
    685,000
    
    
    
    950,000Intangible assets, net (Note 4)
    
    
    1,107,000
    
    
    
    972,000Deferred income taxes (Note 3)
    
    
    
    
    
    
    600,000Other assets
    
    
    36,000
    
    
    
    71,000$
    11,748,000
    
    
    $
    14,356,000Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    1,282,000
    
    
    $
    522,000Accrued expenses (Note 7)
    
    
    1,372,000
    
    
    
    1,435,000Total current liabilities
    
    
    2,654,000
    
    
    
    1,957,000Other liabilities
    
    
    
    
    
    
    4,000Commitments (Note 8)Shareholders equity (Note 5):Common shares, $0.01 par value
Authorized 40,000,000 shares; 10,180,000
and 10,158,000 shares issued and outstanding
    
    
    13,526,000
    
    
    
    13,413,000Accumulated deficit
    
    
    (4,432,000
    )
    
    
    (1,018,000
    )Shareholders equity
    
    
    9,094,000
    
    
    
    12,395,000$
    11,748,000
    
    
    $
    14,356,000
 See accompanying notes to financial statements.
 2




---



##### 



Years Ended March 31,2007
    
    
    2006
    
    
    2005Net sales
    
    $
    18,981,000
    
    
    $
    22,354,000
    
    
    $
    24,287,000Cost of sales
    
    
    13,677,000
    
    
    
    15,113,000
    
    
    
    14,581,000Gross profit
    
    
    5,304,000
    
    
    
    7,241,000
    
    
    
    9,706,000Costs and expenses:Selling, general and administrative
    
    
    6,323,000
    
    
    
    6,788,000
    
    
    
    6,947,000Research and development
    
    
    1.466,000
    
    
    
    1,574,000
    
    
    
    1,473,000Total costs and expenses
    
    
    7,789,000
    
    
    
    8,362,000
    
    
    
    8,420,000Operating income (loss)
    
    
    (2,485,000
    )
    
    
    (1,121,000
    )
    
    
    1,286,000Interest
income, net
    
    
    57,000
    
    
    
    20,000
    
    
    
    39,000Other income (expense)
    
    
    6,000
    
    
    
    (3,000
    )
    
    
    2,000Earnings (loss) before income taxes
    
    
    (2,422,000
    )
    
    
    (1,104,000
    )
    
    
    1,327,000Income tax expense (benefit) (Note 3)
    
    
    992,000
    
    
    
    (431,000
    )
    
    
    (484,000
    )Net earnings (loss)
    
    $
    (3,414,000
    )
    
    $
    (673,000
    )
    
    $
    1,811,000Basic earnings (loss) per share
    
    $
    (.34
    )
    
    $
    (.07
    )
    
    $
    .18Diluted earnings (loss) per share
    
    $
    (.34
    )
    
    $
    (.07
    )
    
    $
    .17Weighted shares outstanding:Basic
    
    
    10,170,000
    
    
    
    10,146,000
    
    
    
    10,122,000Diluted
    
    
    10,170,000
    
    
    
    10,146,000
    
    
    
    10,625,000
 See accompanying notes to financial statements.
 3




---



##### 



For the years ended March 31, 2007,
2006, and 2005
 Common Shares
    
    
    AccumulatedShares
    
    
    Amount
    
    
    DeficitBalance at
March 31, 2004
    
    
    10,096,000
    
    
    $
    13,309,000
    
    
    $
    (2,156,000
    )Exercise of stock options
    
    
    38,000
    
    
    
    60,000
    
    
    
    Net earnings
    
    
    
    
    
    
    
    
    
    
    1,811,000Balance at
March 31, 2005
    
    
    10,134,000
    
    
    
    13,369,000
    
    
    
    (345,000
    )Exercise of stock options
    
    
    24,000
    
    
    
    29,000
    
    
    
    Tax benefit from exercise of
non-qualified stock options
    
    
    
    
    
    
    15,000
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    (673,000
    )Balance at
March 31, 2006
    
    
    10,158,000
    
    
    
    13,413,000
    
    
    
    (1,018,000
    )Stock based compensation  options
    
    
    
    
    
    
    33,000
    
    
    
    Stock based compensation  restricted stock
    
    
    22,000
    
    
    
    80,000
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    (3,414,000
    )Balance at 3/31/07
    
    
    10,180,000
    
    
    $
    13,526,000
    
    
    $
    (4,432,000
    )
 See accompanying notes to financial statements.
 4




---



##### 



Years Ended March 31,2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net earnings (loss)
    
    $
    (3,414,000
    )
    
    $
    (673,000
    )
    
    $
    1,811,000Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating activities:Depreciation and amortization of property and equipment
    
    
    350,000
    
    
    
    418,000
    
    
    
    378,000Amortization of intangibles
    
    
    42,000
    
    
    
    40,000
    
    
    
    39,000Provision for losses on receivables
    
    
    (14,000
    )
    
    
    13,000
    
    
    
    (31,000
    )Loss on asset disposition
    
    
    
    
    
    
    12,000
    
    
    
    Tax benefit attributable to stock options
    
    
    
    
    
    
    15,000
    
    
    
    Decrease (increase) in deferred income taxes
    
    
    1,266,000
    
    
    
    (237,000
    )
    
    
    (805,000
    )Stock based compensation
    
    
    113,000
    
    
    
    
    
    
    
    Changes in assets and liabilities:Decrease (increase) in accounts receivable
    
    
    858,000
    
    
    
    512,000
    
    
    
    (803,000
    )Decrease (increase) in inventories
    
    
    (176,000
    )
    
    
    2,131,000
    
    
    
    (3,523,000
    )Decrease (increase) in income taxes refundable
    
    
    92,000
    
    
    
    (383,000
    )
    
    
    Decrease (increase) in prepaid expenses and other assets
    
    
    (108,000
    )
    
    
    85,000
    
    
    
    (70,000
    )Increase (decrease) in accounts payable
    
    
    767,000
    
    
    
    (681,000
    )
    
    
    694,000Increase (decrease) in accrued expenses
    
    
    (63,000
    )
    
    
    65,000
    
    
    
    185,000Increase (decrease) in income taxes payable
    
    
    
    
    
    
    (200,000
    )
    
    
    (3,000
    )Net cash provided by (used in) operating activities
    
    
    (287,000
    )
    
    
    1,117,000
    
    
    
    (2,128,000
    )Cash flows from investing activities:Additions to intangible assets
    
    
    (177,000
    )
    
    
    (210,000
    )
    
    
    (112,000
    )Capital expenditures
    
    
    (85,000
    )
    
    
    (175,000
    )
    
    
    (351,000
    )Net cash used in investing activities
    
    
    (262,000
    )
    
    
    (385,000
    )
    
    
    (463,000
    )Cash flows from financing activities:Exercise of stock options
    
    


    
    
    
    
    29,000
    
    
    
    60,000Other liabilities
    
    
    (11,000
    )
    
    
    (3,000
    )
    
    
    Net cash provided by financing activities
    
    
    (11,000
    )
    
    
    26,000
    
    
    
    60,000Net increase (decrease) in cash
    
    
    (560,000
    )
    
    
    758,000
    
    
    
    (2,531,000
    )Cash beginning of year
    
    
    935,000
    
    
    
    177,000
    
    
    
    2,708,000Cash end of year
    
    $
    375,000
    
    
    $
    935,000
    
    
    
    177,000Supplemental disclosure of cash flow information:Cash paid during the year for:Income taxes
    
    $
    
    
    
    $
    348,000
    
    
    $
    325,000Acquisition of capital assets through capital lease
    
    $
    
    
    
    $
    14,000
    
    
    $
    
 See accompanying notes to financial statements.
 5




---



##### 



(1) Summary of Significant Accounting Policies
 The Company
  Fair Value of Financial Instruments
  Inventories
  Property and Equipment
  Office Equipment and Furniture
    
    5-10 YearsMachinery and Equipment
    
    3-10 YearsTooling
    
    4 Years
  Use of Estimates
   Valuation of Accounts Receivable
  Impairment of Long-Lived Assets
  Revenue Recognition
  Comprehensive Income (Loss)
  Royalty Expense
  Earnings (Loss) Per Common Share
  2007
    
    
    2006
    
    
    2005Basic earnings (loss) per share
Numerator  net earnings (loss)
    
    $
    (3,414,000
    )
    
    $
    (673,000
    )
    
    $
    1,811,000Denominator  weighted common
shares outstanding
    
    
    10,170,000
    
    
    
    10,146,000
    
    
    
    10,122,000Basic earnings (loss) per share
    
    $
    (.34
    )
    
    $
    (.07
    )
    
    $
    .18Diluted earnings (loss) per share
Numerator  net earnings (loss)
    
    $
    (3,414,000
    )
    
    $
    (673,000
    )
    
    $
    1,811,000Denominator  weighted common
shares outstanding
    
    
    10,170,000
    
    
    
    10,146,000
    
    
    
    10,122,000Diluted potential common shares
    
    
    
    
    
    
    
    
    
    
    503,00010,170,000
    
    
    
    10,146,000
    
    
    
    10,625,000Diluted earnings (loss) per share
    
    $
    (.34
    )
    
    $
    (.07
    )
    
    $
    .17
  Income Taxes
  6




---



##### 



Major Customer
 2007
    
    2006
    
    2005Customer A**
    
    
    41.3
    %
    
    
    36.0
    %
    
    
    35.8
    %Customer B**
    
    
    *
    
    
    
    *
    
    
    
    10.8
    %Customer C
    
    
    *
    
    
    
    11.0
    %
    
    
    *
 
 *
    
    Indicates sales less than 10% of the Companys net sales.**
    
    Indicates national chain customer.   Concentration of Credit Risk
   2007
    
    2006Customer A**
    
    
    41.0
    %
    
    
    25.4
    %Customer B
    
    
    *
    
    
    
    21.6
    %Customer C**
    
    
    12.6
    %
    
    
    *
 
 *
    
    Indicates accounts receivable balance less than 10% of gross accounts receivable.**
    
    Indicates national chain customer. Stock Option Plan
    Expected life (in years)
    
    
    8.0Expected volatility factor
    
    
    79.0
    %Risk free interest rate
    
    
    4.3
    %Dividend yield
    
    
    0.0Forfeiture rate
    
    
    4.0
    %
  RemainingExercise
    
    ContractualPrice Per
    
    TermShares
    
    Share
    
    (in years)Outstanding at March 31, 2006
    
    
    945,000
    
    
    $
    2.22Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited or expired
    
    
    41,000
    
    
    
    4.99Outstanding at March 31, 2007
    
    
    904,000
    
    
    $
    2.09
    
    
    
    4.06As of March 31, 2007Exercisable
    
    
    892,000
    
    
    $
    2.13
    
    
    
    4.1Vested and expected to vest
    
    
    902,000
    
    
    $
    2.14
    
    
    
    4.1
   7




---



##### 



Year Ended March 31,2006
    
    
    2005Net earnings (loss), as reported
    
    $
    (673,000
    )
    
    $
    1,811,000Deduct: Total stock-based
employee compensation expense
determined under fair-value-based method for all awards,
net of related tax effects
    
    
    (128,000
    )
    
    
    (108,000
    )Pro forma net earnings (loss)
    
    $
    (801,000
    )
    
    $
    1,703,000Earnings (loss) per share:Basic  as reported
    
    $
    (.07
    )
    
    $
    .18Basic  pro forma
    
    
    (.08
    )
    
    
    .17Diluted  as reported
    
    
    (.07
    )
    
    
    .17Diluted  pro forma
    
    $
    (.08
    )
    
    $
    .16
 Segment Information
  Reclassifications
 
 (2) Inventories
  2007
    
    
    2006Finished goods
    
    $
    1,841,000
    
    
    $
    1,706,000Work in process
    
    
    2,240,000
    
    
    
    1,234,000Raw materials
and supplies
    
    
    2,476,000
    
    
    
    3,441,000$
    6,557,000
    
    
    $
    6,381,000
 (3) Income Taxes
 
 2007
    
    
    2006
    
    
    2005Current:Federal
    
    $
    (282,000
    )
    
    $
    (217,000
    )
    
    $
    307,000State
    
    
    8,000
    
    
    
    7,000
    
    
    
    15,000(274,000
    )
    
    
    (210,000
    )
    
    
    322,000Deferred:Federal
    
    
    837,000
    
    
    
    (149,000
    )
    
    
    (466,000
    )State
    
    
    429,000
    
    
    
    (72,000
    )
    
    
    (340,000
    )1,266,000
    
    
    
    (221,000
    )
    
    
    (806,000
    )Total
    
    $
    992,000
    
    
    $
    (431,000
    )
    
    $
    (484,000
    )
  2007
    
    
    2006
    
    
    2005Statutory tax
expense (benefit)
    
    $
    (825,000
    )
    
    $
    (375,000
    )
    
    $
    451,000State income tax, net
    
    
    (57,000
    )
    
    
    (51,000
    )
    
    
    72,000Valuation allowance
    
    
    1,858,000
    
    
    
    9,000
    
    
    
    (1,004,000
    )Warranty and other
    
    
    16,000
    
    
    
    (14,000
    )
    
    
    (3,000
    )$
    992,000
    
    
    $
    (431,000
    )
    
    $
    (484,000
    )
  2007
    
    
    2006Bad debt reserves
    
    $
    15,000
    
    
    $
    21,000Accrued expenses
    
    
    286,000
    
    
    
    263,000Inventories
    
    
    426,000
    
    
    
    344,000Depreciation and amortization
    
    
    245,000
    
    
    
    241,000Intangible assets
    
    
    191,000
    
    
    
    261,000Net operating loss
    
    
    860,000
    
    
    
    147,000Other
    
    
    23,000
    
    
    
    2,000Total deferred tax assets
    
    
    2,046,000
    
    
    
    1,279,000Deferred tax liabilities:Valuation allowance
    
    
    (2,046,000
    )
    
    
    (13,000
    )Net deferred tax assets
    
    $
    
    
    
    $
    1,266,000
   (4) Intangible Assets
   (5) Shareholders Equity
  8




---



##### 



WeightedAverageOption
    
    
    PriceShares
    
    
    Per ShareIncentive options:Outstanding  March 31, 2004
    
    
    779,000
    
    
    
    2.37Cancelled
    
    
    (13,000
    )
    
    
    2.51Exercised
    
    
    (17,000
    )
    
    
    1.02Expired
    
    
    (83,000
    )
    
    
    8.19Outstanding  March 31, 2005
    
    
    666,000
    
    
    
    1.98Cancelled
    
    
    (7,000
    )
    
    
    3.33Granted
    
    
    40,000
    
    
    
    3.41Exercised
    
    
    (24,000
    )
    
    
    1.16Outstanding  March 31, 2006
    
    
    675,000
    
    
    
    2.10Cancelled
    
    
    (28,000
    )
    
    
    3.42Outstanding  March 31, 2007
    
    
    647,000
    
    
    $
    2.02Exercisable  March 31, 2007
    
    
    635,000
    
    
    $
    2.01Non-qualified options:Outstanding  March 31, 2004
    
    
    322,000
    
    
    
    4.30Cancelled
    
    
    (41,000
    )
    
    
    8.33Granted
    
    
    55,000
    
    
    
    3.71Exercised
    
    
    (21,000
    )
    
    
    2.07Expired
    
    
    (6,000
    )
    
    
    5.18Outstanding  March 31, 2005
    
    
    309,000
    
    
    
    3.83Expired
    
    
    (39,000
    )
    
    
    11.88Outstanding  March 31, 2006
    
    
    270,000
    
    
    
    9.56Cancelled
    
    
    (5,000
    )
    
    
    3.90Expired
    
    
    (8,000
    )
    
    
    11.50Outstanding  March 31, 2007
    
    
    257,000
    
    
    
    2.26Exercisable  March 31, 2007
    
    
    249,000
    
    
    $
    2.26
  Range of Exercise Prices$.50-6.69
    
    $7.62-12.54Number outstanding
    
    
    896,000
    
    
    
    8,000Weighted average
remaining life (yrs.)
    
    
    4.1
    
    
    
    1.0Weighted average
exercise price
    
    $
    2.01
    
    
    $
    7.62Number exercisable
    
    
    884,000
    
    
    
    8,000Weighted average
exercise price
    
    $
    2.08
    
    
    $
    7.62
   (6) Employee Benefit Plan
  (7) Accrued Expenses
  2007
    
    
    2006Accrued royalties
    
    $
    301,000
    
    
    $
    267,000Accrued vacation
    
    
    216,000
    
    
    
    205,000Warranty reserve
    
    
    163,000
    
    
    
    139,000Payroll and incentive compensation
    
    
    102,000
    
    
    
    86,000Accrued inventory in transit
    
    
    200,000
    
    
    
    175,000Customer deposits
    
    
    103,000
    
    
    
    152,000Accrued extended warranty
    
    
    91,000
    
    
    
    95,000Other
    
    
    196,000
    
    
    
    316,000$
    1,372,000
    
    
    $
    1,435,000
 (8) Commitments
       9




---



##### 



Operating Lease
    
    Minimum Royalty
    
    
    
    
    
    Capital LeaseObligation
    
    Obligation
    
    Employee Obligations
    
    Obligations
    
    Factoring Agreement2008
    
    $
    459,000
    
    
    $
    530,000
    
    
    $
    160,000
    
    
    $
    4,000
    
    
    $
    72,0002009
    
    
    118,000
    
    
    
    530,000
    
    
    
    200,000
    
    
    
    
    
    
    
    2010
    
    
    2,000
    
    
    
    530,000
    
    
    
    
    
    
    
    
    
    
    
    2011
    
    
    
    
    
    
    447,000
    
    
    
    
    
    
    
    
    
    
    
    2012
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    Thereafter
    
    $
    
    
    
    $
    105,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
  (9) Geographic Information
  2007
    
    
    2006
    
    
    2005United States
    
    $
    15,795,000
    
    
    $
    17,996,000
    
    
    $
    22,912,000Canada
    
    
    174,000
    
    
    
    193,000
    
    
    
    306,000Japan
    
    
    346,000
    
    
    
    506,000
    
    
    
    405,000Europe
    
    
    2,054,000
    
    
    
    3,337,000
    
    
    
    418,000Indonesia
    
    
    271,000
    
    
    
    42,000
    
    
    
    20,000All other countries
    
    
    341,000
    
    
    
    280,000
    
    
    
    226,000$
    18,981,000
    
    
    $
    22,354,000
    
    
    $
    24,287,000
  ®
 (10) Valuation and Qualifying Accounts and Reserves
  Balance at
    
    Charged to Costs
    
    
    
    
    
    Balance at End ofBeginning of Year
    
    and Expenses
    
    Deductions
    
    YearAllowance for
doubtful accounts:2005
    
    $
    68,000
    
    
    
    
    
    
    
    29,000
    
    
    $
    39,0002006
    
    
    39,000
    
    
    
    28,000
    
    
    
    15,000
    
    
    
    52,0002007
    
    $
    52,000
    
    
    
    27,000
    
    
    
    41,000
    
    
    $
    38,000Warranty reserve:2005
    
    $
    103,000
    
    
    
    57,000
    
    
    
    51,000
    
    
    $
    109,0002006
    
    
    109,000
    
    
    
    64,000
    
    
    
    34,000
    
    
    
    139,0002007
    
    $
    139,000
    
    
    
    46,000
    
    
    
    22,000
    
    
    $
    163,000
 (11) Quarterly Financial Data (Unaudited)
  DilutedEarningsGross
    
    
    Net
    
    
    LossRevenue
    
    
    Profit
    
    
    Loss
    
    
    Per Share2007First quarter
    
    $
    5,476,000
    
    
    $
    1,814,000
    
    
    $
    (116,000
    )
    
    $
    (.01
    )Second quarter
    
    
    4,983,000
    
    
    
    1,617,000
    
    
    
    (307,000
    )
    
    
    (.03
    )Third quarter
    
    
    4,307,000
    
    
    
    1,059,000
    
    
    
    (435,000
    )
    
    
    (.04
    )Fourth quarter
    
    
    4,215,000
    
    
    
    814,000
    
    
    
    (2,556,000
    )
    
    
    (.26
    )Year
    
    $
    18,981,000
    
    
    $
    5,304,000
    
    
    $
    (3.414.000
    )
    
    $
    (.34
    )2006First quarter
    
    $
    5,895,000
    
    
    $
    2,101,000
    
    
    $
    (42,000
    )
    
    $
    .00Second quarter
    
    
    5,375,000
    
    
    
    1,781,000
    
    
    
    (210,000
    )
    
    
    (.02
    )Third quarter
    
    
    5,907,000
    
    
    
    2,101,000
    
    
    
    39,000
    
    
    
    .00Fourth quarter
    
    
    5,177,000
    
    
    
    1,258,000
    
    
    
    (460,000
    )
    
    
    (.05
    )Year
    
    $
    22,354,000
    
    
    $
    7,241,000
    
    
    $
    (673,000
    )
    
    $
    (.07
    )
 (12) Accounting Standards
      10




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Audit Report
 
        11




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##### 



12




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##### 



Overview
   2 ®
   
    
    Development of additional oxygen conservers with a view
to diversifying our product line in order to offer customers a
range of oxygen conservation choices.




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
    
    An effort to expand the Companys product offerings in
order to reduce its dependence upon the oxygen conserver
sector.
  
    
    A continued promotional and educational campaign with
respect to the benefits of the TOTAL O2 system.
 2 2 2
 
    
    Continuing efforts to reduce manufacturing costs.
   Results of Operations
 2




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##### 



Financial Condition
    Payments Due By Period
 Contractual
    
    
    
    
    
    Less than 1
    
    1-3
    
    3-5
    
    After 5Cash Obligations
    
    Total
    
    Year
    
    Years
    
    Years
    
    YearsOperating
lease obligations
    
    $
    579,000
    
    
    $
    459,000
    
    
    $
    120,000
    
    
    
    
    
    
    
    Minimum royalty
obligations
    
    $
    2,172,000
    
    
    $
    530,000
    
    
    $
    1,507,000
    
    
    $
    90,000
    
    
    $
    45,000Employee obligations
    
    $
    360,000
    
    
    $
    160,000
    
    
    $
    200,000
    
    
    
    
    
    
    
    Capital lease
obligations
    
    $
    4,000
    
    
    $
    4,000
    
    
    
    
    
    
    
    
    
    
    
    Factoring agreement
    
    $
    72,000
    
    
    $
    72,000
    
    
    
    
    
    
    
    
    
    
    
    
  16




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Significant Accounting Policies
      17




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##### 



Outlook: Issues & Risks
   
    
    Our future results depend upon our ability to successfully introduce new products.
    
    Our operating results, profitability and operating margins have been adversely affected by price
pressure on our principal products.
    
    We are highly dependent upon a limited number of large customers, which may increase the
volatility of our future operating results.
    
    We are dependent upon a single product line, which increases our vulnerability to adverse
developments affecting the market for supplementary oxygen.
    
    Changes and prospective changes in the administration of health care may disrupt the market for
our products, resulting in decreased profitability.
    
    We operate in a highly competitive environment which has contributed to our reduced operating
margins.
    
    If we are unable to stay abreast of continuing technological change, our products may become
obsolete, resulting in a decline in sales and profitability.
    
    Failure to protect our intellectual property rights could result in a loss of market share.
    
    Our profitability would be adversely affected if we incur uninsured losses due to product
liability claims.
    
    Our dependence upon third party suppliers exposes us to the risk that our ability to deliver
products may be adversely affected if the suppliers fail to deliver quality components on a timely basis.
  Accounting Standards
    18




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19




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Officers
 THOMAS E. JONES
 EARL L. YAGER
 ALFONSO DEL TORO
 TRACY A. KERN
 ERIKA LASKEY
 KEVIN McCULLOH
 PAULA OCONNOR
 SAMUEL PATTON
 OSCAR J. SANCHEZ
 Directors
 THOMAS E. JONES
 EARL L. YAGER
 JOHN C. BOYD
 JAMES M. BROPHY
 KATHLEEN M. GRIGGS
 PHILIP T. WOLFSTEIN
 Corporate Data
 CORPORATE HEADQUARTERS
 LEGAL COUNSEL
 AUDITORS
 TRANSFER AGENT AND REGISTRAR
 Common Stock Price Range
  Quarter Ended
    
    High
    
    LowJune 30, 2005
    
    
    3.87
    
    
    
    3.62September 30, 2005
    
    
    3.81
    
    
    
    3.71December 31, 2005
    
    
    3.60
    
    
    
    3.36March 31, 2006
    
    
    2.90
    
    
    
    2.50June 30, 2006
    
    
    3.05
    
    
    
    2.41September 30, 2006
    
    
    2.85
    
    
    
    1.46December 31, 2006
    
    
    3.06
    
    
    
    1.86March 31, 2007
    
    
    2.42
    
    
    
    1.42
  SEC Form 10-K