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

                                   FORM 10-KSB

    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
            ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2006

                         COMMISSION FILE NUMBER: 0-12227

                               SUTRON CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter.)

           VIRGINIA                                              54-1006352
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(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

                 21300 RIDGETOP CIRCLE, STERLING VIRGINIA 20166
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                    (Address of principal executive offices)

                                 (703) 406-2800
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               (Registrants telephone number, including area code)

              SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
                          COMMON STOCK, $.01 PAR VALUE
                                (Title of class)

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) for the Exchange Act. |_|

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. |_|

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

Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|

Issuers' revenues for its most recent fiscal year were $19,406,638.

The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of March 27, 2007 was approximately $18,890,000 based on the
last sale price of such stock.

The number of shares outstanding of the issuers Common Stock, $.01 par value, as
of March 27, 2007 was 4,512,884. Transitional Small Business Disclosure format
(check one): Yes |_| No |X|
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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants' definitive proxy statement for the 2007 Annual
Meeting of Shareholders, which will be filed within 120 days after the end of
the year covered by this Form 10-KSB, are incorporated in Part III as set forth
herein.































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                               SUTRON CORPORATION
                            FORM 10-KSB ANNUAL REPORT
                      FOR THE YEAR ENDED DECEMBER 31, 2006

                                TABLE OF CONTENTS

PART I
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Item 1.    Description of Business                                            4
Item 2.    Description of Property                                           10
Item 3.    Legal Proceedings                                                 11
Item 4.    Submission of Matters to a Vote of Security Holders               11

PART II
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Item 5.    Market for Common Equity and Related Stockholder Matters
             and Small Business Issuer Purchases of Equity Securities        11

Item 6.    Management's Discussion and Analysis of Financial
             Condition and Results of Operations                             13
Item 7.    Financial Statements                                              21
Item 8.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure                                          38
Item 8A.   Controls and Procedures                                           38
Item 8B.   Other Information                                                 38

PART III
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Item 9.    Directors, Executive Officers, Promoters and Control Persons;
             Compliance with Section 16(a) of the Exchange Act               38
Item 10.   Executive Compensation                                            38
Item 11.   Security Ownership of Certain Beneficial Owners and
             Management and Related Stockholder Matters                      38
Item 12.   Certain Relationships and Related Transactions                    39
Item 13.   Exhibits                                                          39
Item 14.   Principal Accountant Fees and Services                            39





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                                     PART I

THIS FORM 10-KSB INCLUDES FORWARD-LOOKING STATEMENTS REGARDING OUR EXPECTED
FUTURE FINANCIAL POSITION, RESULTS OF OPERATIONS, CASH FLOWS, FINANCING PLANS,
BUSINESS STRATEGY, PRODUCTS AND SERVICES, COMPETITIVE POSITIONS, GROWTH
OPPORTUNITIES, PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS.
STATEMENTS THAT INCLUDE WORDS SUCH AS "ANTICIPATE," "IF," "BELIEVE," "PLAN,"
"ESTIMATE," "EXPECT," "INTEND," MAY," "SHOULD" AND OTHER SIMILAR EXPRESSIONS ARE
FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS,
UNCERTAINTIES AND CONTINGENCIES WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE, OR
ACHIEVEMENTS TO DIFFER MATERIALLY FROM ANTICIPATED RESULTS, PERFORMANCE, OR
ACHIEVEMENTS. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE IN THE FORWARD-LOOKING STATEMENTS INCLUDE THOSE DISCUSSED UNDER
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND ELSEWHERE IN THIS REPORT. ALL FORWARD-LOOKING STATEMENTS SPEAK
ONLY TO EVENTS AS OF THE DATE ON WHICH THE STATEMENTS ARE MADE. ALL SUBSEQUENT
WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US OR ANY PERSON
ACTING ON OUR BEHALF ARE QUALIFIED BY THE CAUTIONARY STATEMENTS IN THIS SECTION.
WE UNDERTAKE NO OBLIGATION TO UPDATE OR PUBLICLY RELEASE ANY REVISIONS TO
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS, CIRCUMSTANCES OR CHANGES IN
EXPECTATIONS AFTER THE DATE ON WHICH THE STATEMENT IS MADE.

ITEM 1 - DESCRIPTION OF BUSINESS
--------------------------------

Sutron Corporation was incorporated on December 30, 1975 under the General Laws
of the Commonwealth of Virginia. Our headquarters is located at 21300 Ridgetop
Circle, Sterling, Virginia 20166, and the telephone number at that location is
(703) 406-2800. We maintain a worldwide web address at www.sutron.com . The
information contained on our website is not incorporated by reference into this
Form 10-KSB and shall not be considered a part of this Form 10-KSB.

We design, manufacture and market products and solutions that enable government
and commercial entities to monitor and collect hydrological, meteorological and
oceanic data for the management of critical water resources, for early warning
of potentially disastrous floods, storms or tsunamis and for the optimization of
hydropower plants. We provide real-time solutions and services to our customers
in three areas of the hydrological, meteorological and oceanic markets. First,
we provide real-time data collection and control products consisting primarily
of dataloggers, satellite transmitters/loggers, water level and meteorological
sensors and tides monitoring systems. Second, we provide turnkey integrated
systems for hydrological and meteorological networks including airport weather
systems. Third, we provide services consisting of installation, training and
maintenance of hydrological and meteorological networks and other related
engineering services7. Our customers include a diversified base of federal,
state, local and foreign governments, engineering companies, universities, and
hydropower companies.

Our ongoing, principal strategic business units consist of the Hydromet Products
Division, the Integrated Systems Division, the Hydrological Services Division
and our India operations that consist of a branch office and a wholly owned
subsidiary, Sutron Hydromet Systems Private Limited. The Integrated Services
Division includes the results of providing airport weather systems and special
projects due to similarity of services and due to these units not being
significant in terms of size and volume. Each unit includes a range of products
and services designed to meet the specific needs of a particular customer
segment. Our India branch office was established in 2004 to comply with India
tax laws and the India wholly owned subsidiary was established in 2005 in order
to gain access to the local market.

PRINCIPAL PRODUCTS AND SERVICES
-------------------------------

HYDROMET PRODUCTS DIVISION

The Hydromet Products Division manufactures dataloggers, satellite
transmitters/loggers, water level and meteorological sensors and tides
monitoring systems. Dataloggers collect sensor data and transmit the data to
central facilities primarily by satellite radio but also by telephone, fiber
optics or microwave. Our sensors collect hydrological and meteorological data
and include a tipping bucket rain gauge, a barometric pressure sensor, a
temperature sensor and differing types of water level sensors including shaft
encoders, bubbler systems, submersible sensors and radar sensors. Our
dataloggers can interface to sensors from other companies. We have long-standing
relationships with suppliers for wind speed and wind direction, water quality,
humidity and solar radiation sensors. The principal products that are
manufactured by the Hydromet Products Division are described below.

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8210 DATA LOGGER

The 8210 Data Logger/Transmitter is a simple-to-operate, low-cost data
collection platform which supports a wide variety of telemetry applications. The
8210 is environmentally hardened, capable of operating from -40 C to 60 C,
making it ideal for remote locations. As a data recorder, the 8210 will store
over 65,000 readings in battery-backed memory. The 8210 supports a wide variety
of communications, including radio, satellite, and telephone. The
Telephone/Voice Synthesis option allows communications over standard telephone
circuits using either a synthesized voice message or a modem connected to a
computer terminal.

XPERT AND XLITE DATALOGGERS

The Xpert Datalogger/controller is our fourth generation datalogger. The Xpert
is environmentally hardened and capable of operating from -40 C to 60 C. It runs
on a Microsoft CE operating system, has a 486 microprocessor, C++ programming
and standard 2 MB memory that is expandable to over 1 gigabyte. The XLite, a
derived product based on the Xpert, does not have a display but is similarly
capable. The XLite was released at the end of 2001.

The Xpert and XLite dataloggers are the core of a wide-range of remote
monitoring and control systems, The rugged Xpert is highly modular and can be
leveraged to handle multiple applications, from the simplest to the most
complex. Its Sensor Library programs are for widely used brand name sensors and
all Sutron sensors. Generic measurement objects make adding support for new
sensors very easy. It is designed specifically to support a variety of portable
and permanent monitoring and control applications and systems including
automatic weather stations, agrimet stations, synoptic weather stations, AWOS
stations, tide stations, hydromet stations, water level and water quality
stations, rainfall stations, gate control stations, irrigation and water
distribution control stations, stream gaging stations, dam safety stations and
flood forecasting, monitoring, control and warning systems

SATLINK2

In January 2004, the SatLink2 was certified by the National Environmental
Satellite, Data and Information Services (NESDIS). The SatLink2 is a redesign of
the original SatLink transmitter in order to provide the latest features, to
improve functionality and to lower manufacturing costs. The SatLink2 is a high
data rate satellite transmitter/logger that transmits at 100, 300 and 1200 baud,
incorporates GPS and functions as a logger. The SatLink transmitter was
certified by the NESDIS in July 2001 for operation on the Geostationary
Operational Environment Satellite (GOES) system. NESDIS operates two U.S.
Government environmental satellites on this system. All GOES customers are
mandated by NESDIS to purchase high data rate satellite transmitters and to
replace all old 100 baud transmitters within a ten-year period beginning in July
2001. NESDIS made this a requirement in order to increase the amount of data
that the two GOES satellites can handle.

SatLink2 is certified on all major satellite systems around the world and works
with virtually all dataloggers. SatLink2 is programmable from any PC or PDA
using software provided with the unit. SatLink2's innovative design includes
everything needed to collect high quality data, without costly options. Our
standard unit includes a built-in logger, SDI-12 interface, dedicated tipping
bucket input, 4 analog inputs and a powerful mathematical equation editor.

STAGE DISCHARGE RECORDER

The Stage Discharge Recorder is an ultra-reliable SDI-12 optical encoder fused
with logger technology from our Satlink2 Transmitter/Logger to create an encoder
that never forgets. Using proven float-tape-counterweight technology, the Stage
Discharge Recorder is a "plug compatible" replacement for strip chart recorders
or punched-tape recorder. The Stage Discharge Recorder saves data in
ultra-reliable flash memory. This means that there are no backup batteries for
the memory. The Stage Discharge Recorder incorporates standard flume and weir
equations and can compute and log discharge totals and display discharge as well
as flume/weir stage. A built-in event log keeps track of when anyone views or
downloads data or makes changes to the setup. The Stage Discharge Recorder will
run up to one year on an industrial alkaline battery.

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ACCUBAR GAUGE PRESSURE SENSOR

The Accubar Gauge Pressure sensor is used in water level monitoring systems and
is a highly accurate solid state pressure transducer capable of measuring
air/dry gas pressures from 0 to 22 psi with a maximum pressure of 35 psi. It is
housed in an aluminum case and with its low power consumption and low
maintenance requirements, it is ideal for remote monitoring applications.

ACCUBUBBLE SELF-CONTAINED BUBBLER SYSTEM

The AccuBubble Self-Contained Bubbler is a mercury-free and nitrogen-free
bubbler apparatus designed for low maintenance water level measuring. Using the
Sutron Accubar Pressure Sensor as the control and sensing element makes the
AccuBubble a very stable and highly accurate water level measuring device. The
AccuBubble uses power conservation techniques to minimize current consumption.
The bubbler purges the orifice line prior to each measurement. This eliminates
the need for a constant bubble rate, which has been known to consume excessive
power. In addition, the purging sequence prevents debris build up in the orifice
line. The AccuBubble uses an oil-less, non-lubricated piston and cylinder
compressor. This type of compressor is designed to give consistent air delivery
without the use of a diaphragm which can rupture over time. The AccuBubble uses
the SDI-12 communications protocol as the control interface. This allows the
unit to be configured by any data logger supporting the SDI-12 standard.

TIDES AND PORTS SYSTEMS

The National Ocean Survey (NOS), part of the National Oceanic and Atmospheric
Administration (NOAA), has the responsibility to accurately measure tide levels
around the perimeter of the United States. NOS ensures that measurements are the
most accurate possible by using the best water level instruments available. Tide
stations are based on the Xpert data logger and the SatLink2. Xperts run the
powerful Windows CE multi-tasking operating system. Sutron has taken advantage
of Windows CE to equip each tide station with software that meets and exceeds
all of the NOS requirements. In 2004, we enhanced the capabilities of tides
systems by adding Storm Surge/Tsunami software. This software provides added
capability to tides stations to detect and provide tsunami warnings.

The Main Tide Station is designed to detect a vast array of events. Sutron's
Xpert Logger is a Windows device programmable to monitor multiple parameters
including traditional NOS methods such as sudden water level drops and seismic
sensors, or both at one time. It supports a wide variety of water level
monitoring and weather instruments. The Main Tide Station provides
pre-programmed support for all NOS-required tidal data processing, including:

- 6- Minute GOES self-timed transmissions
- 1- Hour GOES self-timed data transmissions
- DQAP (Outlier elimination) water level averaging
- Redundant data transmissions
- Tsunami and storm surge data processing and transmission

The Main Tide Station also supports GOES satellite and a wide variety of other
telemetry methods including cell and marine phones. The tides station provides
built-in surge protection for all inputs. Although designed for the tidal
market, the Main Tide Station is an ideal starting point for a wide variety of
highly reliable and accurate weather stations.

INTEGRATED SYSTEMS DIVISION

The Integrated Systems Division provides system integration services consisting
of the design, integration, installation and commissioning of customer-specific
configurations and software applications for hydrological and meteorological
monitoring and control systems. The division is also responsible for the sale of
our XConnect database systems software and long-term software support for
XConnect users. This software capability allows us to provide turnkey
hydrological and meteorological systems to a variety of users. Projects may
range in size from one station to hundreds of stations. Projects usually require
design, equipment integration, software application

                                        6
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development, installation, training and commissioning. Projects can range in
duration from several days to twelve months depending on the scope and
complexity of the system.

Airport weather systems are integrated and installed by the Integrated Services
Division. We have contracted with a seasoned manager with over 20 years
experience in the Automatic Weather Observation System (AWOS) market to lead our
airport weather efforts. Typically, an AWOS includes a sensor suite to measure
wind direction and speed, temperature, relative humidity, precipitation, and
barometric pressure as well as cloud height and horizontal visibility/runway
visibility. Sensors are connected to an Xpert datalogger, which processes the
data, stores it in a relational database and transmits real-time weather
parameters to all designated users, regardless of location. The system produces
weather reports for aviation and meteorological use, virtually automatically and
without need of human intervention.

Special projects are customer funded projects for the development of specific
products or systems. This work is typically performed by our product development
engineers who charge direct to a contract rather than to a product development
project. Special projects vary in size, complexity and duration. We received two
Small Business Innovation Research (SBIR) contracts in 2006. The first SBIR,
totaling $94,479, called for us to develop a prototype (preliminary design and
specifications) for a "DCPI Low Power and Low Cost Command Receiver". The new
DCPI (Data Collection Platform with Interrogate Capability) employing DS-CDMA RF
transmission techniques will allow two-way communication through the GOES
Satellite System and other geostationary satellite systems. The second SBIR,
totaling $94,380, was to innovate an "Improved Water Level Measurement System"
and required that we produce an improved design of the dual-orifice bubble gauge
for water level observations in cold regions. The enhancements consisted of
adding capabilities to use optimized true-differential sensors and specialized
processing to increase accuracy, particularly in the presence of water waves.

HYDROLOGICAL SERVICES DIVISION

The Hydrological Services Division provides hydrologic services including data
interpretation and analysis, flow modeling (low flow, rainfall runoff, unsteady
flow routing, water surface profiles), field studies (time of travel, diffusion,
dispersion, calibration of flow control structures, site location), hydrologic
studies (water budget, regression analysis, basin inventory studies),
environmental permitting, legal or expert witness and equipment integration,
installation, commissioning and maintenance.

SUTRON INDIA OPERATIONS

The Sutron India Operations consist of a Branch Office that was established
early in 2004 in order to comply with India tax law and to perform work on an
annual maintenance contract that was received from the Central Water Commission
of India (CWC) in July 2004. In February 2005, we established Sutron HydroMet
Systems Private Limited, a wholly owned subsidiary, in order to bid on National
tenders. The Sutron India Operations procures local goods for projects and
performs systems integration, civil works construction, installation,
commissioning and maintenance. The Sutron India Operations maintains over 130
remote automatic real-time hydromet monitoring stations in India under annual
maintenance contracts with the CWC and with the Government of Andhra Pradesh.

SALES AND MARKETING
-------------------

We market our products and services both domestically and internationally.
Domestic sales are conducted by our internal sales staff that consists of five
salaried sales personnel who are directly engaged in direct sales activities.
The sales staff is assisted by two other employees in marketing and sales
support functions. Internationally, we have two employees who cover the world
and who work closely with our international sales network that consists of 35
resellers and agents in Canada, Latin and South America, Europe, Africa, Asia
and Australia.

COMPETITION
-----------

We compete in the hydrological, meteorological and oceanic monitoring markets
and are aware of both domestic and foreign competitors who offer products,
systems, and services of their own as well as companies that are systems
integrators who primarily offer real-time networks from components manufactured
by others. We are aware

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of numerous firms, ranging in size, that offer competitive dataloggers, high
data rate satellite transmitters, sensors and other instruments and software.

Several of these companies have financial, research and development, marketing,
management and technical resources substantially greater than ours. We may also
be at a competitive disadvantage because we purchase certain sensors and other
equipment components, as well as computer hardware and peripheral equipment,
from manufacturers who are or may become competitors with respect to one or more
of our products.

With respect to our professional engineering and technical services, we are in
competition with numerous diverse engineering and consulting firms, many of
which have larger staffs and facilities, and are better known, have greater
financial resources, and have more experience. As to hydrological services, we
are aware that many firms offer maintenance services; some of these companies
have larger staffs, are better equipped, and have greater financial, marketing
and management resources. Price, features, product quality, promptness of
delivery, customer service and performance are believed to be the primary
competitive factors with respect to all of our products and services.

CUSTOMERS
---------

During 2006, approximately 42% of our products and services were sold to the
Federal Government. Net sales and revenues in 2006 among the various agencies
were as follows: Department of the Interior, 17%; Department of Commerce, 7%,
Department of Defense, 16% and other agencies of the federal government, 2%. The
revenues from the Department of the Interior were among the U.S. Geological
Survey and the Bureau of Reclamation. The revenue from the Department of Defense
was primarily from the U.S. Army Corps of Engineers. Approximately all revenues
with the Department of Commerce were from sales of tides systems to NOS.

We also performed on various contracts of foreign origin. Revenues from foreign
customers amounted to approximately 36% of revenues in 2006, 25% of revenues in
2005 and 32% of revenues in 2004.

RESEARCH AND DEVELOPMENT
------------------------

During the three years ended December 31, 2006, 2005, and 2004, we incurred
expenses of $1,358,624, $1,321,591 and $1,018,874 respectively, on activities
relating to the development of new products and enhancements and improvements of
existing products.

In 2006, we focused on the development of enhancements to the Xpert and XLite
Dataloggers that will provide significant additional communication capabilities
as well as improved functionality. We also focused on the development of a radar
water level sensor; a precision water level measuring instrument using radar
pulses that allow measurements to be made without direct contact with the water
surface. A radar water level sensor can be located on a bridge, pier or any
structure over the water's surface. We anticipate that there will be significant
growth in sales of radar water level sensors due to the sensor's non-contact
with the water surface. Another significant product development focus was on the
addition of new functionality to our stage discharge recorder that is used to
measure water discharge in irrigation ditches. The stage discharge recorder is
an ultra-reliable SDI-12 optical encoder fused with logger technology from our
SatLink2 transmitter/logger to create an encoder that never forgets due to data
being saved in flash memory.

We also performed work on two Small Business Innovation Research (SBIR)
contracts that were received in 2006. The first SBIR was to develop a prototype
(preliminary design and specifications) for a "DCPI Low Power and Low Cost
Command Receiver". The new DCPI (Data Collection Platform with Interrogate
Capability) employing DS-CDMA RF transmission techniques will allow two-way
communication through the GOES Satellite System and other geostationary
satellite systems. The second SBIR was to innovate an "Improved Water Level
Measurement System" and required that we produce an improved design of the
dual-orifice bubble gauge for water level observations in cold regions. The
enhancements will consist of adding capabilities to use optimized
true-differential sensors and specialized processing to increase accuracy,
particularly in the presence of water waves.

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<PAGE>

PATENTS, TRADEMARKS, COPYRIGHTS AND AGREEMENTS
----------------------------------------------

Although we do not deem patent protection to be of significant importance to our
industry, we have and may in the future seek patents for certain products,
real-time networks, and technology as well as software products, real-time
networks, and technology. Our software products and innovations may not be
patentable but may be subject to automatic but limited copyright protection. We
treat our products, real-time networks, technology and software as proprietary
and rely on trade secret laws and internal non-disclosure safeguards rather than
making our designs and processes generally available to the public by applying
for patents.

Further, we believe that, because of the rapid pace of technological change in
the computer, electronics and telecommunications industries, patent and
copyright protection is of less significance than factors such as the knowledge
and experience of our personnel and their ability to design and develop enhanced
and new products, real-time networks and their components.

MANUFACTURING
-------------

Our manufacturing operations consist of materials planning and procurement,
final assembly, product assurance testing, quality control, and packaging and
shipping. We currently use several independent manufacturers to provide certain
printed circuit boards, chassis and subassemblies. We believe that the
efficiency of our manufacturing process to date is largely due to our product
architecture and our commitment to manufacturing process design. We have spent
significant engineering resources producing customized software to assure
consistent high product quality. Products are tested after the assembly process
using internally developed automated product assurance testing procedures.

Our products use certain components, such as microprocessors, memory chips and
pre-formed enclosures that are acquired or available from one or a limited
number of sources. We have generally been able to procure adequate supplies of
these components in a timely manner from existing sources. While most components
are standard items, certain application-specific integrated circuit chips used
in many of our products are customized to our specifications. None of the
suppliers of components operate under contract. Additionally, availability of
some standard components may be affected by market shortages and allocations.
Our inability to obtain a sufficient quantity of components when required or to
develop alternative sources at acceptable prices and within a reasonable time
could result in delays or reductions in product shipments which could materially
affect our operating results in any given period. In addition, as referenced
above, we rely heavily on outsourcing subcontractors for production. The
inability of such subcontractors to deliver products in a timely fashion or in
accordance with our quality standards could materially affect our operating
results and business.

We received an ISO 9001 certification on March 12, 1999 and an ISO 9001:2000
certification on August 13, 2003. We continued to be certified during fiscal
year 2006.

GOVERNMENT REGULATION
---------------------

We manufacture some of our products and provide some of our services under
contracts with the United States government. We manufacture other products under
contracts with private third parties who utilize our products to satisfy United
States government contracts to which they are a party. Federal acquisition
regulations and other federal regulations govern these relationships. Some of
these regulations relate specifically to the seller-purchaser relationship with
the government (which may exist on our own account, or that of one or more of
our clients), such as the bidding and pricing rules. Under regulations of this
type, we must observe pricing restrictions, produce and maintain detailed
accounting data, and meet various other requirements.

Other regulations relate to the conduct of our business generally, such as
regulations and standards established by the Occupational Safety and Health Act
or similar state laws and relating to employee health and safety. In particular,
regulations governing these contracts require that we comply with federal laws
and regulations, in general, or face civil liability, cancellation or suspension
of existing contracts, or ineligibility for future contracts or subcontracts
funded in whole or in part with federal funds. In addition, loss of governmental
certification (affirming that we are eligible to participate on government
contracted work) could cause some of our customers to reduce or cease making
purchases from us, which would adversely impact our business.

                                        9
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EVALUATIONS OF CONTROLS REQUIRED BY SECTION 404 OF THE SARBANES-OXLEY ACT
-------------------------------------------------------------------------

Changing laws, regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act and related regulations
implemented by the SEC, are creating uncertainty for public companies,
increasing legal and financial compliance costs and making some activities more
time consuming. We will be evaluating our internal controls systems to allow
management to report on, and our independent auditors to attest to, our internal
controls. We will be performing the system and process evaluation and testing
(and any necessary remediation) required to comply with the management
certification and auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act. While we anticipate being able to fully implement the
requirements relating to internal controls and all other aspects of Section 404
by our December 31, 2007 deadline, we cannot be certain as to the timing of
completion of our evaluation, testing and remediation actions or the impact of
the same on our operations. If we are not able to implement the requirements of
Section 404 in a timely manner or with adequate compliance, we may be subject to
sanctions or investigation by regulatory authorities, including the SEC. This
type of action could adversely affect our financial results or investors'
confidence in our company and our ability to access capital markets and could
cause our stock price to decline. In addition, the controls and procedures that
we will implement may not comply with all of the relevant rules and regulations
of the SEC. If we fail to develop and maintain effective controls and
procedures, we may be unable to provide the required financial information in a
timely and reliable manner. Further, if we acquire any company in the future, we
may incur substantial additional costs to bring the acquired company's systems
into compliance with Section 404.

FOREIGN OPERATIONS
------------------

We opened a branch office in New Delhi, India in December 2004. The branch
office was established in order to comply with India tax law after the Advance
Tax Court of India determined that we had a Permanent Establishment in India as
a result of the employment of a full-time Country Manager. The branch office can
perform sales and marketing and installation and maintenance activities but is
restricted from bidding on domestic Indian tenders. We began the process of
forming a wholly owned subsidiary in India in 2004 in order to bid on domestic
India tenders. Formal approval of the wholly owned subsidiary was given in
February 2005. Our India Operations procures local goods for projects and
performs systems integration, civil works construction, installation,
commissioning and maintenance services including maintaining over 130 remote
automatic real-time hydromet monitoring stations under annual maintenance
contracts with the CWC and with the Government of Andhra Pradesh.

EMPLOYEES
---------

As of December 31, 2006, we and our wholly owned subsidiary had a total of 90
employees, of which 89 were full time. We also from time to time employ
part-time employees and hires independent contractors. Our employees are not
represented by any collective bargaining agreement and we have never experienced
a work stoppage. We believe that our employee relations are good.

BACKLOG
-------

At December 31, 2006, our backlog was $7,269,144 as compared with $10,839,778 at
December 31, 2005. We anticipate that 58% of our 2006 year-end backlog will be
shipped in 2007.

ITEM 2 - PROPERTIES
-------------------

Our corporate headquarters are located at 21300 Ridgetop Circle, Sterling,
Virginia. We lease this 17,000 square foot facility and it contains our
administrative offices, sales and marketing offices and manufacturing
facilities. The lease expires in March 2009. We lease an additional 7,000 square
feet of space in Sterling, Virginia for our Research and Development group and
Integrated Services Division. The lease for this facility expires in March 2009
as well.

We lease 5300 square feet of office and warehouse space in West Palm Beach,
Florida. The four-year lease expires in August 2008. The Hydrological Services
division uses this space which consists of both office and warehouse space. The
Hydrological Services Division also occupies 1500 square feet of leased office
space in Brandon, Florida. The lease expires in December 2008. This space is
used for sales and marketing and engineering offices.

                                       10
<PAGE>

The Corporation entered into lease agreements for office space and furniture in
New Delhi, India in September 2006. The three-year leases expire in August 2009.
The India branch office and wholly owned subsidiary use this space for offices.
We believe that our facilities are adequate for our present needs and that our
properties are in good condition, well maintained and adequately insured.

ITEM 3 - LEGAL PROCEEDINGS
--------------------------

Various legal claims can arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect on
our financial statements. We have been named in a compensation claim under the
Indian Anti-Trust Law that is pending before The Monopolies and Restrictive
Trade Practices Commission in New Delhi, India. Management believes that the
case is unsubstantiated and intends to vigorously defend itself.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

No matter was submitted to a vote of security holders in the fourth quarter of
2006.


                                     PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
-------------------------------------------------------------------------------
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
----------------------------------------------------

MARKET INFORMATION

Our common stock, $.01 par value, was traded on the OTC Bulletin Board under the
symbol "STRN.OB" until October 2005. Our common stock began trading on the
Nasdaq Capital Market (formerly the Nasdaq SmallCap Market) under the symbol
"STRN" on October 25, 2005. The table below sets forth the high and low sales
for the periods shown.



           FISCAL YEAR ENDED DECEMBER 31, 2005            HIGH      LOW
           ------------------------------------------- --------- ---------
           First Quarter                                $ 10.00   $  5.40
           Second Quarter                               $  6.65   $  5.25
           Third Quarter                                $  8.14   $  5.50
           Fourth Quarter                               $  9.00   $  5.45

           FISCAL YEAR ENDED DECEMBER 31, 2006
           ------------------------------------------- --------- ---------
           First Quarter                                $  9.70   $  7.00
           Second Quarter                               $  8.79   $  7.34
           Third Quarter                                $  8.66   $  7.22
           Fourth Quarter                               $  8.60   $  6.67

The closing price of the Common Stock on March 27, 2007 was $6.35, and on that
date, there were approximately 875 stockholders of record.

DIVIDENDS

We have never declared or paid a dividend on our common stock. We intend to
retain future earnings to fund development and growth of our business.

RECENT SALES OF UNREGISTERED SECURITIES

There were no issuances of unregistered securities in fiscal 2006 that have not
been reported previously in a quarterly report on Form 10-QSB or a current
report on Form 8-K.

                                       11
<PAGE>

ISSUER PURCHASES OF EQUITY SECURITIES

No purchases of Sutron equity securities were made by or on behalf of Sutron in
the fourth quarter of our fiscal year ended December 31, 2006.

EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes the securities authorized for issuance under
equity compensation plans as of December 31, 2006:


                                  NUMBER OF         WEIGHTED
                               SECURITIES TO BE      AVERAGE
                                 ISSUED UPON     EXERCISE PRICE     NUMBER OF
                                 EXERCISE OF     OF OUTSTANDING     SECURITIES
                                 OUTSTANDING        OPTIONS,        REMAINING
                              OPTIONS, WARRANTS   WARRANTS AND    AVAILABLE FOR
                                  AND RIGHTS         RIGHTS      FUTURE ISSUANCE
                              ------------------ --------------- ---------------
Equity compensation plans
  approved by stockholders             --              --              --

Equity compensation plans not
  approved by stockholders          554,333           $1.13          215,667
                                  ---------         -------        ---------
Total                               554,333           $1.13          215,667
                                  =========         =======        =========















                                       12
<PAGE>

ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------

THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH REFLECT THE
CURRENT VIEWS OF THE COMPANY WITH RESPECT TO FUTURE EVENTS THAT COULD HAVE AN
EFFECT ON ITS FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS MAY INCLUDE SUCH
WORDS AS "EXPECTS," "BELIEVES," "ESTIMATES," AND SIMILAR EXPRESSIONS. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE
CURRENTLY ANTICIPATED. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
THESE FORWARD-LOOKING STATEMENTS.

BACKGROUND AND OVERVIEW

Our primary focus is to provide real-time systems solutions, including equipment
and software, and services to our customers in the areas of hydrological
monitoring and control, meteorological monitoring including airport weather
systems, oceanic monitoring and hydrological services. We design, manufacture
and market these products and services to a diversified customer base consisting
of federal, state, local and foreign governments, engineering companies,
universities, and hydropower companies. Our products and services enable these
entities to monitor and collect hydrological, meteorological and oceanic data
for the management of critical water resources, for early warning of potentially
disastrous floods, storms or tsunamis, for the optimization of hydropower plants
and for providing real-time weather conditions at airports.

Our key products are the SatLink2 Transmitter/Logger, the Xpert/XLite
dataloggers, the Accububble Self-Contained Bubbler, the Accubar Pressure Sensor
and XConnect Systems Software. These are the essential components of most
systems and are provided to customers as off-the-shelf equipment or as part of a
custom system. The SatLink2 is a key product because it functions both as a
transmitter and logger. It is an excellent solution for small systems that do
not require a significant number of sensors or communications options. The Xpert
and XLite are more powerful dataloggers that have significant more logging
capability and communications options than the SatLink2.

We expanded our services capabilities when we started our Hydrological Services
Division in 2001. The principal customer of this division has been the South
Florida Water Management District (SFWMD) which is a regional agency of the
state of Florida that is charged with managing and protecting water resources in
a 16 county area. We provide a variety of services to SFWMD as well as other
entities including hydrologic modeling, flood and stormwater management, river
and stream analysis, and equipment integration, installation, commissioning and
maintenance.

In 2007, we are committed in our ongoing sales, marketing and research and
development activities to sustain and grow our sales and revenues from our
products and services. We are also committed to expanding our airport weather
systems and our hydrological services. We are beginning fiscal year 2007 with a
backlog of $7,269,144 as compared to beginning fiscal year 2006 with a backlog
of $10,839,778. We anticipate moderate growth in net sales and revenues in 2007
due to increased governmental awareness and concern over the management of vital
water resources and increased governmental efforts to provide earlier warnings
of flooding, storms and tsunamis.

In 2007, we anticipate that we will continue to experience significant quarterly
fluctuations in our sales and revenues. Operating results will depend upon the
product mix and upon the timing of project awards. International sales, which
totaled 36% of revenues for 2006, constitute a significant portion of our
revenues but are difficult to project. We are aware of many significant
international opportunities and we expect international revenues to grow as a
percentage of our total business. We expect our sales and marketing, research
and development and general and administrative expenses to increase moderately
in 2007 as compared to 2006.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of financial condition and results of operations is
based upon the consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
evaluate, on an on-going basis, our estimates and judgments, including those
related to bad debts,

                                       13
<PAGE>

excess and obsolete inventories, warranty obligations, income taxes,
contingencies and litigation. Our estimates are based on historical experience
and assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.

We believe the following critical accounting policies, among others, affect our
more significant judgments and estimates used in the preparation of the
consolidated financial statements.

     o    Revenue recognition;
     o    Allowance for doubtful accounts;
     o    Allowances for excess and obsolete inventories;
     o    Accounting for warranty obligations;
     o    Accounting for income taxes;
     o    Accounting and valuation of stock option compensation.

REVENUE RECOGNITION - Our revenue recognition policy is consistent with the
requirements of Staff Accounting Bulletin No. 101 (SAB 101), "Revenue
Recognition in Financial Statements," Statement of Position No. 97-2 (SOP 97-2),
"Software Revenue Recognition," and other applicable revenue recognition
guidance and interpretations. In general, we record revenue when it is realized,
or realizable, and earned. We consider these requirements met when persuasive
evidence of an arrangement exists, the products or services have been provided
to the customer, the sales price is fixed or determinable and collectibility is
reasonably assured. Our revenue reflects reductions attributable to discounts
and customer returns.

For our products, consisting of both equipment and software, revenue is
recognized upon shipment, delivery, installation or customer acceptance of the
product, as agreed in the customer order or contract. We do sell our software
products without the related equipment although software products are integral
to systems. Our typical system requires no significant production, modification
or customization of the software or hardware. For complex systems, revenue is
deferred until customer acceptance. We do provide customer discounts and do
allow for product returns. We do not do consignment sales or bill and hold.
Revenue reflects reductions due to discounts and product returns. Product
returns have historically been insignificant in amount.

Our sales arrangements for systems often include services in addition to
equipment and software. These services could include equipment integration,
software customization, installation, maintenance, training, and customer
support. For sales arrangements that include bundled hardware, software and
services, we account for any undelivered service offering as a separate element
of a multiple-element arrangement. Amounts allocated to each element are based
on its objectively determined fair value, such as the sales price for the
product or service when it is sold separately. Revenue for these services is
typically recognized ratably over the period benefited or when the services are
complete.

We use the percentage of completion method for recognizing revenue and profits
when we perform on fixed price contracts that extend over a number of years.
Under the percentage of completion method, revenue and profits are recorded as
costs are incurred based on estimates of total sales value and costs at
completion where total profit can be estimated with reasonable accuracy and
ultimate realization is reasonably assured. Profit estimates are revised
periodically based upon changes and facts, and any losses on contracts are
recognized immediately. Contracts may contain provisions to earn incentive and
award fees if targets are achieved. Incentive and award fees that can be
reasonably estimated are recorded over the performance period of the contract.
Incentive and award fees that cannot be reasonably estimated are recorded when
awarded. We recognize revenue from time-and-materials contracts to the extent of
billable rates, times hours delivered, plus direct materials costs incurred.
Some of the contracts include provisions to withhold a portion of the contract
value as retainage. Our policy is to take into revenue the full value of the
contract, including any retainage, as we perform against the contract.

                                       14
<PAGE>

ALLOWANCE FOR DOUBTFUL ACCOUNTS - Accounts receivable arise from the normal
course of selling products on credit to customers. An allowance for doubtful
accounts has been provided for estimated uncollectable accounts. Accounts
receivable balances, historical bad debts, customer concentrations, customer
creditworthiness, current economic trends and changes in customer payment terms
and practices are analyzed when evaluating the adequacy of the allowance for
doubtful accounts. Individual accounts are charged against the allowance when
collection efforts have been exhausted.

INVENTORY VALUATION - Our inventories are stated at the lower of cost or market.
We provide allowances on inventories for any material that has become obsolete
or may become unsaleable based on estimates of future demand and sale price in
the market. Judgments with respect to saleability and usage of inventories,
estimated market value, and recoverability upon sale are complex and subjective.
Such assumptions are reviewed periodically and adjustments are made, as
necessary, to reflect changed conditions.

WARRANTY OBLIGATIONS - We warranty our products for up to two years and
estimated warranty costs are based upon management's best estimate of the
amounts necessary to settle future and existing claims on equipment sold as of
the balance sheet date. Factors considered include actual past experience of
product returns and the related estimated cost of labor and material to make the
necessary repairs as well as technological advances and enhanced design and
manufacturing processes. If actual future product return rates or the actual
costs of material and labor differ from the estimates, adjustments to the
accrued warranty liability are made.

INCOME TAXES - We are taxed as a domestic U.S. corporation under the Internal
Revenue Code. Deferred income tax assets and liabilities are recognized for the
expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Deferred income tax assets and
liabilities are determined based on the differences between the financial
statement and tax basis of assets and liabilities using currently enacted tax
rates in effect for the years in which the differences are expected to reverse.
Deferred tax assets are evaluated and a valuation allowance is established if it
is more likely than not that all or a portion of the tax asset will not be
utilized.
STOCK OPTION COMPENSATION - We adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), SHARED-BASED PAYMENT, (SFAS
123(R)), on January 1, 2006, which requires the measurement and recognition of
compensation expense for all share-based payment awards to employees and
directors based on estimated fair values. Additionally, the Corporation follows
the Securities and Exchange Commission's Staff Accounting Bulletin No. 107,
SHARE-BASED PAYMENT (SAB 107), issued in March 2005, which provides supplemental
SFAS 123(R) application guidance based on the views of the SEC.

The Corporation adopted SFAS 123(R) using the modified prospective transition
method. Under this transition method, share-based compensation expense
recognized during the year ended December 31, 2006 included: (a) compensation
expense for all share-based awards granted prior to, but not yet vested, as of
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of SFAS 123, and (b) compensation expense for all
share-based awards granted beginning January 1, 2006, based on the grant date
fair value estimated in accordance with the provisions of SFAS 123(R). In
accordance with the modified prospective transition method, the Corporation's
consolidated financial statements for prior periods have not been restated to
reflect the impact of SFAS 123(R).


RESULTS OF OPERATIONS

The following table sets forth, for the periods presented, certain income
statement data of the Company expressed as a percentage of revenues:

                                                       Year Ended December 31,
                                                      2006      2005      2004
                                                     ------    ------    ------

     Net sales and revenues                           100.0%    100.0%    100.0%
     Cost of sales and revenues                        62.1      58.3      61.5
                                                     ------    ------    ------
     Gross profit                                      37.9      41.7      38.5

                                       15
<PAGE>

     Selling, general and administrative expenses      15.1      18.9      14.4
     Research and Development expenses                  7.1       8.5       6.1
                                                     ------    ------    ------
     Operating income                                  15.7      14.3      18.0
                                                     ------    ------    ------
     Interest income (expense)                           .4        .1       (.1)
                                                     ------    ------    ------
     Income before  income taxes                       16.1      14.4      17.9
     Income taxes (benefit)                             3.5       4.9       6.5
                                                     ------    ------    ------
     Net income                                        12.6%      9.5%     11.4%
                                                     ======    ======    ======

FISCAL 2006 COMPARED TO FISCAL 2005

NET SALES AND REVENUES

Net sales and revenues for 2006 increased 26% to $19.4 million from $15.4
million in 2005. The increase was primarily due to two contracts in India and
contracts with the U.S. Army Corps of Engineers in New Orleans to replace
equipment that was destroyed by Hurricane Katrina. Revenues are reported
internally by principal operating division or profit center consisting of the
Hydromet Products Division, the Integrated Services Division, which includes
special projects that are funded R&D activities and airport weather systems, the
Hydrological Services Division and Sutron's India Operations. The Hydromet
Products Division, which is responsible for sales of standard products,
experienced a revenue decline of 1% to $9.2 million from $9.3 million in 2005.
Integrated Systems revenue increased 88% to $6.2 million from $3.3 million in
2005, due primarily to the aforementioned contracts in India and with the U.S.
Army Corps of Engineers in New Orleans. Revenues from the Hydrological Services
Division decreased to $2.2 million from $2.6 million in 2005. The Vice President
of this division resigned during 2006. The division now operates under two
managers, one located in our West Palm Beach office and the other in our Tampa
Bay office. Sutron's India Operations had increased revenues of $1.8 million as
compared to $.2 million in 2005 due primarily to work completed on a contract
with the Central Water Commission to deliver, install, provide training and
commission 168 rainfall monitoring stations.

Domestic net sales and revenues for 2006 increased 8% to $12.5 million from
$11.6 million in 2005. Net sales and revenues from standard products decreased
to $7 million in 2006 from $7.5 million in 2005. A decrease in sales of NOS
tides systems to approximately $1.2 million in 2006 from approximately $2.4
million in 2005 was the result of one-time funding increases in tides monitoring
systems by NOS after the tsunami in Indonesia. This decrease was partially
offset by increased sales of SatLink2 transmitters/loggers. Net sales and
revenues from Integrated Systems increased to $3.3 million compared to $1.5
million in 2005, primarily due to increased project activity relating to
contracts with the Army Corps of Engineers. Net sales and revenues from
hydrological services decreased to $2.2 million from $2.6 million in 2005 due to
the reorganization of our operations in Florida.

International net sales and revenues increased 79% to $6.9 million in 2006 from
$3.8 million in 2005. Net sales and revenues from standard products increased to
$2.2 million from $1.8 million in 2005 due to increased contract revenue from
the supply of standard products on the Central Water Commission of India
contract. Net sales and revenues from Integrated Systems increased to $2.9
million from $1.8 million due primarily to increased revenues from a contract
with the India Meteorological Department to provide 100 automatic weather
stations. Sutron India Operations had net sales and revenues of $1.8 million as
compared to $.2 million in 2005. Approximately $1.6 million of the increase was
related to revenues from the Central Water Commission of India contract. We
anticipate that this contract will be completed by mid-2007.

The Department of the Interior, the principal agencies being the US Geological
Survey and the Bureau of Reclamation, was our largest customer accounting for
17% and 22% of total revenues in years 2006 and 2005, respectively. Non-federal
government, commercial and international revenues represented 58% of revenues in
2006 and 56% in 2005.

COST OF SALES AND REVENUES

Cost of sales as a percentage of revenues was 62.1% for 2006 compared to 58.3%
for 2005. The increase reflects changes in product mix. In 2005, we had
significant sales of NOS tide systems that contributed to reduced cost of

                                       16
<PAGE>

sales as we purchased materials in greater quantities and experienced labor
efficiencies with larger production runs. In 2006, our standard product sales
decreased slightly and we had increased project costs. Projects have higher
costs than standard products due to higher labor content and the use of
non-Sutron parts. The projects in New Orleans were more labor intensive than
expected and resulted in higher costs. Our Hydrological Services Division
experienced a revenue decrease that resulted in higher cost absorption and had
difficulties on several projects that resulted in cost overruns. Since the
resignation of the Vice President of the Hydrological Services Division, we have
made adjustments to reduce personnel and associated costs.

Cost of sales for both 2006 and 2005 include provisions for inventory
obsolescence, physical inventory adjustments and inventory valuation
adjustments. We continually pursue product cost reductions through continual
review of procurement sourcing based on quality and cost goals, product value
engineering and improvements in manufacturing processes.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were $2.9 million in 2006 and 2005.
Selling, general and administrative expenses as a percentage of revenues
decreased to 15.1% in 2006 from 18.9% in 2005.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased slightly to $1.36 million in 2006
from $1.32 million in 2005. Research and development expenses as a percentage of
revenues decreased to 7.1% in 2006 from 8.5% in 2005. In 2006, product
development focused on enhancements to the Xpert and XLite Dataloggers that will
provide significant additional communication capabilities as well as improved
functionality. We also focused on the development of a radar water level sensor
which is a precision water level measuring instrument that uses radar pulses
without direct contact with the water surface. Another significant product
development was on the addition of enhanced functionality to our stage discharge
recorder that is used to measure water discharge in irrigation ditches.

INTEREST INCOME AND EXPENSE, NET

We earned net interest income of $68,394 in 2006 as compared with net interest
income of $22,708 in 2005. Higher cash and cash equivalent balances and higher
interest rates were responsible for the increase in net interest income.

INCOME TAXES

Income tax expense for 2006 was $674,000 compared to $755,000 for 2005. The
provision for income taxes for 2006 represents an effective tax rate of
approximately 22% compared with 34% for 2005. This significant decrease is
primarily due to tax deductible compensation expense from the exercise of
non-qualified stock options that reduced income taxes by approximately $440,000.

FISCAL 2005 COMPARED TO FISCAL 2004

NET SALES AND REVENUES

Our net sales and revenues for 2005 decreased 7.5% to $15.4 million from $16.7
million in 2004, primarily as a result of a decrease in export sales of standard
products in our Hydromet Products Division. Our revenues are broken down between
our principal operating divisions or profit centers which include the Hydromet
Products Division, the Integrated Services Division, which includes special
projects, airport weather systems and our India operations, and the Hydrological
Services Division. The Hydromet Products Division, which is responsible for
sales of standard products, had a revenue decrease of 12.9% to $9.3 million from
$10.7 million in 2004. In 2004, we shipped approximately $2.4 million of
dataloggers and sensors to a Canadian consortium for a flood warning project in
Poland. We also shipped approximately $1.3 million FMQ-13(v)2 Wind Sensor
systems to Hanscom Air Force Base. The decrease in project shipments was
partially offset by increased shipments of NOS tides systems. Integrated Systems
revenues decreased 3.9% to $3.5 million from $3.6 million in 2004 due to a
decrease in project

                                       17
<PAGE>

deliveries. Revenues from the Hydrological Services Division increased to $2.6
million from $2.4 million in 2004 due to increased activity in Florida.

Domestic net sales and revenues increased in 2005 to $11.6 million from $11.3
million in 2004, an increase of 2.6%. Net sales and revenues from standard
products increased to $7.5 million in 2005 from $6.96 million in 2004. This
increase was primarily due to increased sales of NOS tides systems which
increased to approximately $2.4 million from approximately $900,000 in 2004 and
increased sales of SatLink2 transmitters/loggers. These increases offset
decreased revenues from deliveries of FMQ-13(v)2 Wind Sensor systems to Hanscom
Air Force Base in 2004 that totaled approximately $1.3 million. Net sales and
revenues from Integrated Systems decreased to $1.45 million compared to $1.95
million in 2004 primarily due to decreased project activity. Net sales and
revenues from hydrological services increased to $2.6 million from $2.4 million
in 2004 due to the expansion of operations in Florida.

International net sales and revenues decreased 29% to $3.8 million in 2005 from
$5.4 million in 2004. Net sales and revenues from standard products decreased to
$1.8 million from $3.7 million in 2004 due to decreased project shipments. In
2004, we shipped approximately $2.4 million of dataloggers and sensors to a
Canadian consortium for a flood warning project in Poland. This was a
significant project but was partially offset in 2005 by revenues from new
international project shipments. Net sales and revenues from Integrated Systems
increased to $2.0 million from $1.7 million due primarily to increased revenues
from projects and operations in India. We were awarded two contracts from
customers in India in the fourth quarter of 2005 that totaled approximately
$6,067,600. We had projected receiving both awards earlier in 2005 which, if
that had occurred, would have improved the 2005 twelve month operating results.
The timing of both contract awards, however, was in late 2005 and we expect 2006
results to benefit from the increased backlog.

Our largest customer in each of years 2005 and 2004 was the Department of the
Interior, the principal agencies being the US Geological Survey and the Bureau
of Reclamation, which accounted for 22% and 20% of revenues, respectively.
Non-federal government, commercial and international revenues represented 56% of
revenues in 2005 and in 2004.

COST OF SALES AND REVENUES

Cost of sales as a percentage of revenues was 59.1% for 2005 as compared to
61.5% for 2004. The decrease in cost of sales reflects improvements in
manufacturing efficiencies as well as changes in the product mix. In 2005, we
had a full year of sales of the SatLink2 transmitter/logger as compared to
approximately seven months of sales in 2004. SatLink was redesigned to add
features and reduce costs and the SatLink2, its replacement, was certified by
NESDIS in January 2004. The SatLink2 has significantly reduced material costs,
subcontract assembly costs and final assembly and testing labor costs. The
increase in sales of NOS tides systems also contributed to reduce cost of sales
as we was able to purchase materials in greater quantities and improve labor
efficiency via larger production runs. Cost of sales for both 2005 and 2004
include provisions for inventory obsolescence, physical inventory adjustments
and inventory valuation adjustments. We continually pursues product cost
reductions through continual review of procurement sourcing based on quality and
cost goals, product value engineering and improvements in manufacturing
processes.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were $2.9 million in 2005 as
compared with $2.4 million in 2004. Selling, general and administrative expenses
as a percentage of revenues increased to 18.9% in 2005 from 14.4% in 2004. The
increase was due primarily to increased costs associated with sales and
marketing efforts of our India operations, increased legal costs associated with
compliance requirements, increased insurance costs for directors and officers'
coverage and increased stock exchange fees associated with our listing on the
Nasdaq Capital Market.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased 30% to $1.3 million in 2005 from $1
million in 2004. Research and development expenses as a percentage of revenues
decreased to 8.6% in 2005 from 6.1% in 2004. In 2004, engineers worked directly
on certain contracts including the Hanscom Air Force Base AN-FMQ-13(V)2 Wind
Sensor System resulting in significant engineering costs being included in cost
of sales.

                                       18
<PAGE>

In 2005, our product development focus was on the development of a stage
discharge recorder, improvement of the SatLink2 user interface software and
continual improvement of our water level sensors. The stage discharge recorder
is an ultra-reliable SDI-12 optical encoder fused with logger technology from
our state-of-the art SatLink2 transmitter/logger to create an encoder that never
forgets due to data being saved in flash memory and uses proven
float-tape-counterweight technology. All setup is done from the front panel of
the encoder, and download utilities are available for Pocket PC compatible PDAs
and Windows laptops.

INTEREST INCOME AND EXPENSE, NET

We earned net interest income of $22,708 in 2005 as compared with net interest
expenses of $30,411 in 2004. Lower levels of debt combined with higher cash and
cash equivalent balances were responsible for the net interest income.

INCOME TAXES

Income tax expense for 2005 was $755,000 compared to $1,078,000 for 2004. The
provision for income taxes for 2005 represents an effective tax rate of
approximately 34% compared with 36% for 2004. The decrease is primarily due to
an increase in research and development and manufacturer tax credits that offset
income taxes.

OFF-BALANCE SHEET ARRANGEMENTS

The Company is not a party to any off-balance sheet transactions, arrangements
or obligations that have, or are reasonably likely to have, a material effect on
the Company's financial condition, changes in the financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital
resources.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents was $1,539,032 at December 31, 2006 compared to
$1,861,627 at December 31, 2005. Working capital increased to $9.5 million at
December 31, 2006 compared with $6.84 million at December 31, 2005. The increase
resulted from the earnings in 2006.

Net cash used by operating activities was $430,148 for the year ended December
31, 2006, compared to net cash provided by operating activities of $840,634 for
the year ended December 31, 2005 and cash provided by operating activities of
$2,133,859 for the year ended December 31, 2004. The decrease was due to a
significant increase in accounts receivable.

Net cash used by investing activities was $45,885 for the year ended December
31, 2006, compared to cash provided by investing activities of $47,034 for the
year ended December 31, 2005 and compared to cash used by investing activities
of $322,277 for the year ended December 31, 2004. The decrease in 2006 resulted
primarily from the purchases of property and equipment that was partially offset
by a reduction in restricted cash which are funds that are used to secure bid
and performance bonds. A decrease in restricted cash in 2005 exceeded the
purchases of property and equipment. The decrease in 2004 was due primarily due
to purchases of property and equipment.

Net cash provided by financing activities was $164,934 for the year ended
December 31, 2006 due to the proceeds from the exercise of employee stock
options. Net cash used by financing activities was $53,370 for the year ended
December 31, 2005 due primarily to payments on term notes. Net cash used by
financing activities was $893,740 for the year ended December 31, 2004 due to
payments on the line of credit and on shareholder and term notes.

We have a revolving credit facility of $2,500,000 with Branch Banking & Trust
(BB&T). We are permitted to borrow based on accounts receivable and inventory
according to pre-established criteria. The credit facility expires on August 5,
2007 and is secured by substantially all assets of the Company. Borrowings bear
interest at the bank's prime rate. During 2006, there were no borrowings on the
line of credit. We frequently bid on and enter into international contracts that
require bid and performance bonds. At December 31, 2006 and 2005, BB&T had
issued standby letters of credit in the amount of $532,300 and $751,725 that
served as either bid or performance bonds. The amount available to borrow under
the line of credit was reduced by these amounts.

                                       19
<PAGE>

Management believes that its existing cash resources, cash flow from operations
and short-term borrowings on the existing credit line will provide adequate
resources for supporting operations during fiscal 2007. Although there can be no
assurance that our revolving credit facility will be renewed, management
believes that, if needed, it would be able to find alternative sources of funds
on commercially acceptable terms.

RECENT ACCOUNTING PRONOUNCEMENTS

SFAS 159 In February 2007, the Financial Account Standards Board (FASB) issued
SFAS No. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
LIABILITIES. SFAS 159 permits entities to choose to measure many financial
instruments, and certain other items, at fair value. SFAS 159 applies to
reporting periods beginning after November 15, 2007. The adoption of SFAS 159 is
not expected to have a material impact on the Corporation's financial condition
or results of operations.

SFAS 157 In September 2006 the FASB issued its SFAS No. 157, FAIR VALUE
MEASUREMENTS (SFAS 157). This Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements. However,
for some entities, the application of this Statement will change current
practice. SFAS 157 is effective for fiscal years beginning after November 15,
2007. The Corporation does not expect that adoption of this standard will have a
material impact on its financial position, operations or cash flows.

FIN 48 In June 2006, the FASB issued FASB Interpretation No. 48, ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES, (FIN 48) which clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS 109. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The Corporation does not expect the adoption of FIN 48 to have a
material impact on its consolidated financial position, results of operations or
cash flows.




                                       20
<PAGE>

ITEM 7 - FINANCIAL STATEMENTS
-----------------------------



                                SUTRON CORPORTION
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Report of Independent Registered Public Accounting Firm                      22

Consolidated Balance Sheets at December 31, 2006 and 2005                    23

Consolidated Statements of Operations for the Years ended
  December 31, 2006, 2005 and 2004                                           24

Consolidated Statements of Stockholders' Equity for the
  Years ended December 31, 2006, 2005 and 2004                               25

Consolidated Statements of Cash Flows for the Years ended
   December 31, 2006, 2005 and 2004                                          26

Notes to Consolidated Financial Statements                                   27










                                       21
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Sutron Corporation and Subsidiary
Sterling, Virginia

We have audited the accompanying consolidated balance sheets of Sutron
Corporation and Subsidiary as of December 31, 2006 and 2005, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2006. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sutron Corporation and
Subsidiary as of December 31, 2006 and 2005, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2006, in conformity with U.S. generally accepted accounting principles.


                                        /s/ Thompson, Greenspon & Co., P.C.


Fairfax, Virginia
March 22, 2007






                                       22
<PAGE>

                        SUTRON CORPORATION AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE><CAPTION>
                                                      DECEMBER 31,    DECEMBER 31,
                                                          2006            2005
                                                      ------------    ------------
<S>                                                   <C>             <C>
ASSETS

CURRENT ASSETS:
     Cash and cash equivalents                        $  1,539,032    $  1,861,627
     Restricted cash and cash equivalents                  138,233         233,375
     Accounts receivable, net                            6,835,751       3,711,426
     Inventory                                           3,402,017       2,532,524
     Prepaid items and other assets                        530,720         493,947
     Deferred income taxes                                 333,000         278,000
                                                      ------------    ------------
          TOTAL CURRENT ASSETS                          12,778,753       9,110,899

PROPERTY AND EQUIPMENT, AT COST                          3,361,159       3,222,086
Less: Accumulated depreciation and amortization         (2,740,941)     (2,534,854)
                                                      ------------    ------------
     Property and equipment, net                           620,218         687,232
OTHER ASSETS                                                50,576          48,623
                                                      ------------    ------------
         TOTAL ASSETS                                 $ 13,449,547    $  9,846,754
                                                      ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Accounts payable                                 $  1,398,285    $    844,511
     Accrued payroll                                       317,974         195,153
     Other accrued expenses                              1,506,950       1,179,925
     Notes payable - current                                50,722          47,663
                                                      ------------    ------------
          TOTAL CURRENT LIABILITIES                      3,273,931       2,267,252

LONG-TERM LIABILITIES
     Notes payable, net of current maturities               37,678          88,773
     Deferred income taxes                                 129,000         169,000
                                                      ------------    ------------
          TOTAL LONG-TERM LIABILITIES                      166,678         257,773
                                                      ------------    ------------
          TOTAL LIABILITIES                              3,440,609       2,525,025
                                                      ------------    ------------

STOCKHOLDERS' EQUITY
     Common stock                                           44,946          42,946
     Additional paid-in capital                          2,559,281       2,312,230
     Retained earnings                                   7,417,878       4,968,224
     Accumulated other comprehensive (loss) income
                                                           (13,167)         (1,671)
                                                      ------------    ------------
         TOTAL STOCKHOLDERS' EQUITY                     10,008,938       7,321,729

                                                      ------------    ------------
         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 13,449,547    $  9,846,754
                                                      ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       23
<PAGE>

                        SUTRON CORPORATION AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE><CAPTION>

                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                    --------------------------------------------
                                                        2006            2005            2004
                                                    ------------    ------------    ------------
<S>                                                 <C>             <C>             <C>
NET SALES AND REVENUES                              $ 19,406,638    $ 15,434,255    $ 16,678,889

COST OF SALES AND REVENUES                            12,055,829       8,998,869      10,252,952
                                                    ------------    ------------    ------------
               Gross profit                            7,350,809       6,435,386       6,425,937
                                                    ------------    ------------    ------------

OPERATING EXPENSES:
     Selling, general and administrative expenses      2,936,925       2,911,209       2,396,690
     Research and development expenses                 1,358,624       1,321,591       1,018,874
                                                    ------------    ------------    ------------
               Total operating expenses                4,295,549       4,232,800       3,415,564
                                                    ------------    ------------    ------------

               Operating income                        3,055,260       2,202,586       3,010,373

INTEREST INCOME (EXPENSE), NET                            68,394          22,708         (30,411)
                                                    ------------    ------------    ------------

                Income before income taxes             3,123,654       2,225,294       2,979,962

INCOME TAX EXPENSE                                      (674,000)       (755,000)     (1,078,000)
                                                    ------------    ------------    ------------
NET INCOME                                          $  2,449,654    $  1,470,294    $  1,901,962
                                                    ============    ============    ============

NET INCOME PER SHARE:

               Basic income per share               $        .56    $        .34    $        .44
                                                    ============    ============    ============

               Diluted income per share             $        .51    $        .30    $        .38
                                                    ============    ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       24
<PAGE>

                        SUTRON CORPORATION AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
<TABLE><CAPTION>
                                                                                       Accumulated
                                                         Additional                       Other
                             Common         Stock         Paid-In        Retained     Comprehensive
                             Shares       Par Value       Capital        Earnings     Income (Loss)      Total
                          ------------   ------------   ------------   ------------   ------------    ------------
<S>                         <C>         <C>            <C>            <C>            <C>             <C>
BALANCES, DECEMBER 31,
2003                         4,289,551   $     42,896   $  2,306,655   $  1,595,968   $       --      $  3,945,519
                                                                                                      ------------
Comprehensive income:
Net income                        --             --             --        1,901,962           --         1,901,962
Cumulative translation
adjustment                        --             --             --             --            4,149           4,149
                                                                                                      ------------
Total comprehensive
income                                                                                                   1,906,111
                          ------------   ------------   ------------   ------------   ------------    ------------
BALANCES, DECEMBER 31,
2004                         4,289,551         42,896      2,306,655      3,497,930          4,149       5,851,630
                                                                                                      ------------
Comprehensive income:
Net income                        --             --             --        1,470,294           --         1,470,294

Cumulative translation
adjustment                        --             --             --             --           (5,820)         (5,820)
                                                                                                      ------------

Total comprehensive
income                                                                                                   1,464,474
                                                                                                      ------------
Stock options exercised          5,000             50          5,575           --             --             5,625
                          ------------   ------------   ------------   ------------   ------------    ------------

BALANCES, DECEMBER 31,
2005                         4,294,551         42,946      2,312,230      4,968,224         (1,671)      7,321,729
                                                                                                      ------------

Comprehensive income:
Net income                        --             --             --        2,449,654           --         2,449,654
Cumulative translation
adjustment                        --             --             --             --          (11,496)        (11,496)
                                                                                                      ------------

Total comprehensive
income                                                                                                   2,438,158
                                                                                                      ------------
Stock based
compensation                      --             --           36,081           --             --            36,081
Stock options exercised        200,000          2,000        210,970           --             --           212,970
                          ------------   ------------   ------------   ------------   ------------    ------------
BALANCES, DECEMBER 31,
2006                         4,494,551   $     44,946   $  2,559,281   $  7,417,878   $    (13,167)   $ 10,008,938
                          ============   ============   ============   ============   ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       25
<PAGE>

                        SUTRON CORPORTION AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE><CAPTION>

                                                               FOR THE YEARS ENDED DECEMBER 31,
                                                        --------------------------------------------
                                                            2006            2005            2004
                                                        ------------    ------------    ------------
<S>                                                     <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                                         $  2,449,654    $  1,470,294    $  1,901,962
     Noncash items included in net income:
        Depreciation and amortization                        206,088         209,646         202,873
        Deferred income taxes                                (95,000)       (102,000)        135,000
        Stock based compensation                              36,081            --              --
        Loss on disposal of property                            --             2,931            --
        Changes in current assets and liabilities:
            Accounts receivable                           (3,124,325)         44,013        (693,234)
            Inventory                                       (869,493)       (161,048)         66,799
            Prepaid items and other assets                   (36,773)       (225,795)       (147,864)
            Accounts payable                                 553,774         (99,105)       (104,189)
            Accrued expenses                                 449,846        (298,302)        772,512
                                                        ------------    ------------    ------------
Net Cash Provided (Used) by Operating Activities            (430,148)        840,634       2,133,859
                                                        ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Restricted cash and cash equivalents                     95,142         152,647        (108,568)
     Purchase of property and equipment                     (139,074)       (111,985)       (185,562)
     Other assets                                             (1,953)          4,372         (28,147)
     Proceeds from the sale of property and equipment           --             2,000            --
                                                        ------------    ------------    ------------
Net Cash Provided (Used) by Investing Activities             (45,885)         47,034        (322,277)
                                                        ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Payments on notes payable                               (48,036)        (58,995)       (164,286)

     Proceeds from stock options exercised                   212,970           5,625            --

     Payments on line of credit, net                            --              --          (399,454)

     Payments on stockholder notes payable                      --              --          (330,000)
                                                        ------------    ------------    ------------
Net Cash Provided (Used) by Financing Activities             164,934         (53,370)       (893,740)
                                                        ------------    ------------    ------------

Effect of exchange rate changes on cash
     and cash equivalents                                    (11,496)         (5,820)          4,149
                                                        ------------    ------------    ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS        (322,595)        828,478         921,991
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR               1,861,627       1,033,149         111,158
                                                        ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, END OF YEAR                  $  1,539,032    $  1,861,627    $  1,033,149
                                                        ============    ============    ============

NONCASH INVESTING/FINANCING ACTIVITIES
     Purchase of property and equipment via
       Issuance of note payable                         $       --      $     80,152    $    129,500
                                                        ============    ============    ============

    Stock based compensation                            $     36,081    $       --      $       --
                                                        ============    ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       26
<PAGE>

                       SUTRON CORPORATION AND SUBISIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Sutron Corporation (the "Company") was incorporated on December 30, 1975, under
the General Laws of the Commonwealth of Virginia. The Company operates from its
headquarters located in Sterling, Virginia. The Company has several branch
offices located throughout the United States, a branch office in India and a
wholly owned subsidiary in India. The Company is a leading provider of real-time
data collection and control products, systems software and professional services
in the hydrological, meteorological and oceanic monitoring markets. The
Company's products include data loggers, satellite transmitters/loggers, water
level and meteorological sensors, tides systems and systems and applications
software. Customers consist of a diversified base of Federal, state, local and
foreign government agencies, universities and hydropower companies.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Sutron Hydromet Systems Private Limited. All
intercompany balances and transactions have been eliminated in consolidation.

REVENUE RECOGNITION

The Company's revenue recognition policy is consistent with the requirements of
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements," Statement of Position No. 97-2 (SOP 97-2), "Software Revenue
Recognition," and other applicable revenue recognition guidance and
interpretations. In general, the Company records revenue when it is realized, or
realizable, and earned. The Company considers these requirements met when
persuasive evidence of an arrangement exists, the products or services have been
provided to the customer, the sales price is fixed or determinable and
collectibility is reasonably assured. The Company's revenue reflects reductions
attributable to discounts and customer returns.

For the Company's products, consisting of both equipment and software, revenue
is recognized upon shipment, delivery, installation or customer acceptance of
the product, as agreed in the customer order or contract. Sutron does sell its
software products without the related equipment although software products are
integral to systems. The Company's typical system requires no significant
production, modification or customization of the software or hardware. For
complex systems, revenue is deferred until customer acceptance. The Company does
provide customer discounts and does allow for product returns. The Company does
not do consignment sales or bill and hold. Revenue reflects reductions due to
discounts and product returns. Product returns have historically been
insignificant in amount.

The Company's sales arrangements for systems often include services in addition
to equipment and software. These services could include equipment integration,
software customization, installation, maintenance, training, and customer
support. For sales arrangements that include bundled hardware, software and
services, Sutron accounts for any undelivered service offering as a separate
element of a multiple-element arrangement. Amounts allocated to each element are
based on its objectively determined fair value, such as the sales price for the
product or service when it is sold separately. Revenue for these services is
typically recognized ratably over the period benefited or when the services are
complete.

The Company uses the percentage of completion method for recognizing revenue and
profits when it performs on fixed price contracts that extend over a number of
years. Under the percentage of completion method, revenue and profits are
recorded as costs are incurred based on estimates of total sales value and costs
at completion where total profit can be estimated with reasonable accuracy and
ultimate realization is reasonably assured. Profit estimates are revised
periodically based upon changes and facts, and any losses on contracts are
recognized immediately. Contracts may contain provisions to earn incentive and
award fees if targets are achieved. Incentive and award fees that can be
reasonably estimated are recorded over the performance period of the contract.
Incentive and award fees that cannot be reasonably estimated are recorded when
awarded. The Company recognizes revenue from time-and-materials contracts to the
extent of billable rates, times hours delivered, plus direct materials costs
incurred. Some

                                       27
<PAGE>

of the contracts include provisions to withhold a portion of the contract value
as retainage. The Company's policy is to take into revenue the full value of the
contract, including any retainage, as it performs against the contract. Contract
costs include allocated indirect costs. Anticipated losses on all contracts are
recognized as soon as they become known. Costs rendered on contracts in excess
of related billings are reflected as costs in excess of billings.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, cash equivalents include time
deposits and all highly liquid debt instruments with original maturities of
three months or less. Interest paid approximated $100 for the years ended
December 31, 2006 and 2005, and $32,500 for the year ended December 31, 2004.
Income taxes paid approximated $663,000, $1,292,000, and $600,000 for the years
ended December 31, 2006, 2005 and 2004, respectively. Foreign income tax paid
approximated $74,000, $24,000 and $5,000 for the years ended December 31, 2006,
2005 and 2004, respectively.

RESTRICTED CASH

For the years ended December 31, 2006 and 2005, the Corporation submitted
contract proposals that require bid bonds or bank guarantees. At December 31,
2006 and 2005, $48,753 and $233,375, respectively, of the cash and cash
equivalents balance is restricted for these bid bonds. At December 31, 2006,
$89,480 is restricted for protest bonds.

INVENTORY

Inventory is stated at the lower of cost or market. Electronic components costs,
work in process and finished goods costs consist of materials, labor and
overhead and are recorded at a standard cost that approximates the average cost
method. The Company provides allowances on inventories for any material that has
become obsolete or may become unsaleable based on estimates of future demand and
sale price in the market. The allowance for obsolete or unsaleable inventory as
of December 31, 2006 and 2005 approximate $504,000 and $290,000, respectively.

ACCOUNTS RECEIVABLE

Based on management's evaluation of uncollected accounts receivable at the end
of each year, bad debts are provided for utilizing the allowance method. The
allowance for doubtful accounts as of December 31, 2006 and 2005 approximate
$107,000 and $40,000, respectively. At December 31, 2006 and 2005, the
Corporation's investment in accounts 90 days or more past due is $1,030,402 and
$701,218, respectively, net of contract retainages.

PROPERTY AND EQUIPMENT

Equipment is recorded at cost and depreciated over their estimated useful lives,
ranging from 3 to 7 years, using the straight-line method for financial
statement purposes, and the straight-line and accelerated methods for income tax
purposes. Expenditures for maintenance, repairs, and improvements that do not
materially extend the useful lives of the assets are charged to earnings as
incurred. When items of property and equipment are disposed of, the cost of the
asset and the related accumulated depreciation are removed from the accounts.
Any gain or loss resulting from the removal from service is taken into the
current period earnings.

INCOME TAXES

The Company utilizes an asset and liability approach to accounting for income
taxes. The objective is to recognize the amount of income taxes payable or
refundable in the current year based on the Company's income tax return and the
deferred tax liabilities and assets for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The asset and liability method accounts for deferred income taxes by
applying enacted statutory rates to temporary differences, the difference
between financial statement amounts and tax basis of assets and liabilities. The
resulting deferred tax liabilities or assets are classified as current or
noncurrent based on the classification of the related asset or liability.
Deferred income tax liabilities or assets are adjusted to reflect changes in tax
laws or rates in the year of enactment.

                                       28
<PAGE>

FOREIGN CURRENCY TRANSLATION

Results of operations for the Company's foreign branch office and foreign
wholly-owned subsidiary are translated from the designated functional currency
to the U.S. dollar using average exchange rates during the period, while assets
and liabilities of the foreign branch office and foreign wholly-owned subsidiary
are translated at the exchange rate in effect at the reporting date. Resulting
gains or losses from translating foreign currency financial statements are
included in other comprehensive income, net of any related tax effect.

FINANCIAL INSTRUMENTS

The estimated fair value of cash and cash equivalents, accounts receivable,
accounts payable, other accrued expenses, and short term notes payable
approximate their carrying amounts in the financial statements. Based on the
borrowing rates currently available to the Company for debt with similar
maturity dates and collateral, the estimated fair value of long-term debt is
$38,000 and $89,000 at December 31, 2006 and 2005, respectively.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could vary from the estimates that were
used.

CAPITAL

The Company has 12,000,000, $.01 par value, shares authorized. There were
4,494,551 shares issued and outstanding at December 31, 2006, 4,294,551 shares
issued and outstanding at December 31, 2005 and 4,289,551 shares issued and
outstanding at December 31, 2004.

EARNINGS PER SHARE

The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128 that establishes standards for computing and presenting earnings per share
(EPS) for entities with publicly held common stock. The standard requires
presentation of two categories of earnings per share, basic EPS and diluted EPS.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the year. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company.

STOCK COMPENSATION PLANS

Effective January 1, 2006, the Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 123 (revised 2004), SHARED-BASED PAYMENT,
(SFAS 123(R)), which requires the measurement and recognition of compensation
expense for all share-based payment awards to employees and directors based on
estimated fair values. Additionally, the Corporation follows the Securities and
Exchange Commission's Staff Accounting Bulletin No. 107, SHARE-BASED PAYMENT
(SAB 107), issued in March 2005, which provides supplemental SFAS 123(R)
application guidance based on the views of the SEC. The Corporation adopted SFAS
123(R) using the modified prospective transition method. Under this transition
method, share-based compensation expense recognized during the year ended
December 31, 2006 included: (a) compensation expense for all share-based awards
granted prior to, but not yet vested, as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of SFAS
123, and (b) compensation expense for all share-based awards granted beginning
January 1, 2006, based on the grant date fair value estimated in accordance with
the provisions of SFAS 123(R). In accordance with the modified prospective
transition method, the Corporation's consolidated financial statements for prior
periods have not been restated to reflect the impact of SFAS 123(R).

Prior to January 1, 2006, the Corporation accounted for stock option awards
granted under the Corporation's stock compensation plans in accordance with the
recognition and measurement provisions of Accounting Principles Board

                                       29
<PAGE>

Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, (APB 25) and related
Interpretations, as permitted by Statement of Financial Accounting Standards No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, (SFAS 123). Share-based employee
compensation expense was not recognized in the Corporation's consolidated
statements of operations prior to January 1, 2006, as all stock option awards
granted had an exercise price equal to or greater than the market value of the
common stock on the date of the grant (other than for certain option
modifications resulting in exercise prices below the fair market value at the
date of modification). As permitted by SFAS 123, the Corporation reported
pro-forma disclosures presenting results and earnings per share as if the
Corporation had used the fair value recognition provisions of SFAS 123 in the
Notes to Consolidated Financial Statements.

RECENT ACCOUNTING PRONOUNCEMENTS

SFAS 159 In February 2007, the Financial Account Standards Board (FASB) issued
SFAS No. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
LIABILITIES. SFAS 159 permits entities to choose to measure many financial
instruments, and certain other items, at fair value. SFAS 159 applies to
reporting periods beginning after November 15, 2007. The adoption of SFAS 159 is
not expected to have a material impact on the Corporation's financial condition
or results of operations.

SFAS 157 In September 2006 the FASB issued its SFAS No. 157, FAIR VALUE
MEASUREMENTS (SFAS 157). This Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements. However,
for some entities, the application of this Statement will change current
practice. SFAS 157 is effective for fiscal years beginning after November 15,
2007. The Corporation does not expect that adoption of this standard will have a
material impact on its financial position, operations or cash flows.

FIN 48 In June 2006, the FASB issued FASB Interpretation No. 48, ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES, (FIN 48) which clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS 109. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The Corporation does not expect the adoption of FIN 48 to have a
material impact on its consolidated financial position, results of operations or
cash flows.

RECLASSIFICATIONS

Certain reclassifications have been made to conform the prior period data to the
current presentation. These reclassifications had no effect on reported
earnings.

2. ACCOUNTS RECEIVABLE

Accounts receivable at December 31, consists of the following:

                                                     2006            2005
                                                 ------------    ------------
Current                                          $  5,185,171    $  2,390,421
Costs in excess of billings and
   estimated earnings                               1,294,443       1,321,005
Contract retainage                                    356,137            --
                                                 ------------    ------------
       Totals                                    $  6,835,751    $  3,711,426
                                                 ============    ============


                                       30
<PAGE>

3. INVENTORY

Inventory consists of the following at December 31:

                                                     2006            2005
                                                 ------------    ------------
Electronic components                            $  1,593,899    $  1,064,385
Work in process                                     1,407,541         933,008
Finished goods                                        400,577         535,131
                                                 ------------    ------------
       Totals                                    $  3,402,017    $  2,532,524
                                                 ============    ============

4. PROPERTY AND EQUIPMENT

A summary of property and equipment at December 31 is as follows:

                                                     2006            2005
                                                 ------------    ------------
Furniture, fixtures and equipment                $  2,867,053    $  2,740,177
Vehicles                                              400,271         391,974
Leasehold improvements                                 93,835          89,935
                                                 ------------    ------------
       Totals                                    $  3,361,159    $  3,222,086
                                                 ============    ============

Accumulated depreciation and amortization at December 31, is as follows:

                                                     2006            2005
                                                 ------------    ------------
Furniture, fixtures and equipment                $  2,469,562    $  2,331,972
Vehicles                                              228,964         163,477
Leasehold improvements                                 42,415          39,405
                                                 ------------    ------------
       Totals                                    $  2,740,941    $  2,534,854
                                                 ============    ============

Depreciation and amortization expense totaled $206,088, $209,646 and $202,873
for the years ended December 31, 2006, 2005 and 2004, respectively.

5. LINE OF CREDIT

The Company has a $2,500,000 line of credit with a commercial bank. The line of
credit is collateralized by substantially all of the assets of the Company and
expires August 2007. Under the terms of the line of credit, the Company is
required to maintain certain financial covenants. Interest is charged at the
bank's prime rate and is payable monthly. There was no balance outstanding at
December 31, 2006 or 2005.

The Company frequently bids on and enters into international contracts that
require bid and performance bonds. At December 31, 2006 and 2005, a commercial
bank had issued standby letters of credit in the amount of $532,300 and $751,725
that served as either bid or performance bonds. The amount available under the
line of credit is reduced by this amount.

6. OTHER ACCRUED EXPENSES

Components of other accrued expenses consist of the following at December 31:

                                                     2006            2005
                                                 ------------    ------------
Accrued vacation pay                             $    182,980    $    207,905
Accrued profit sharing                                100,000         188,000
Accrued warranty costs                                288,000         288,000
Subcontractor costs                                      --           384,821
Customer advance payments                             907,133          97,167
Other accruals                                         28,837          14,032
                                                 -------------   ------------
       Totals                                    $  1,506,950    $  1,179,925
                                                 =============   ============

                                       31
<PAGE>

7. ACCRUED WARRANTY COSTS

The Company warranties its products for up to two years and estimated warranty
costs are based upon management's best estimate of the amounts necessary to
settle future and existing claims on equipment sold as of the balance sheet
date. Factors considered include actual past experience of product returns and
the related estimated cost of labor and material to make the necessary repairs
as well as technological advances and enhanced design and manufacturing
processes. If actual future product return rates or the actual costs of material
and labor differ from the estimates, adjustments to the accrued warranty
liability are made. Changes to the product warranty reserve are identified below
and represent adjustments to the reserve based on management estimates and other
factors as noted above:

Balance as of December 31, 2004                                  $    272,000
   Reserve adjustment for current sales                                16,000
                                                                 ------------
Balance as of December 31, 2005                                       288,000
   Reserve adjustment for current sales                                   --
                                                                 ------------
Balance as of December 31, 2006                                  $    288,000
                                                                 ============

8. NOTES PAYABLE

Notes payable consist of the unpaid balances of notes from various finance
companies for vehicle acquisitions and are secured by the underlying vehicles.
Monthly installments range from $259 to $800 and include interest from 0 percent
to 5.61 percent. The balances outstanding at December 31 are as follows:

                                                     2006            2005
                                                 ------------    ------------
Long-term maturities                             $     37,678    $     88,773
Current maturities                                     50,722          47,663
                                                 ------------    ------------
          Totals                                  $    88,400    $    136,436
                                                 ============    ============

Principal payments required over the remaining payment periods as of December 31
are as follows:

Years ending December 31:
     2007                                                        $     50,722
     2008                                                              37,678
                                                                 ------------
           Total                                                 $     88,400
                                                                 ============

Notes payable of $330,000 to stockholders were paid off during the year ended
December 31, 2004. The notes accrued interest at 7.25 percent per annum.
Interest paid on the notes was $18,210 for the year ended December 31, 2004.

9. LEASE OBLIGATIONS

The Company leases space for its headquarters and production facilities, which
were renewed in 2005 and expire March 2009. The operating lease calls for
monthly rent of $12,616 and increases three percent per annum, thereafter. The
lease agreement includes additional rent payments based on a pro rata portion of
maintenance fees and operating expenses on the land and building. The Company
leases additional office and warehouse space in Sterling, Virginia. The lease
was renewed in 2005 and expires March 2009 and requires monthly rent payments of
$5,500.

The Company leases office and warehouse space in West Palm Beach, Florida. The
four-year lease, expiring in August 2008, requires monthly payments of $5,827.
The Company entered into a lease agreement for office space in Brandon, Florida.
The five-year lease, expiring on December 31, 2008, requires monthly payments of
$1,984 and increases of four percent per annum, thereafter.

The Corporation entered into lease agreements for office space and furniture in
New Delhi, India in September 2006. The three-year leases, expiring in August
2009, require monthly payments of approximately $1,518. Both

                                       32
<PAGE>

leases include an option to renew for another period of three years with a
twenty percent increase in rent. The following is a schedule of future minimum
lease payments by year:

Years ending December 31:
     2007                                                        $    332,757
     2008                                                             314,093
     2009                                                              68,802
                                                                 ------------
           Total                                                 $    715,652
                                                                 ============

Rent expense amounted to $315,903, $307,695 and $282,706 for the years ended
December 31, 2006, 2005 and 2004, respectively.

10. INCOME TAXES

The income tax (expense) benefit charged to operations for the years ended
December 31, were as follows:
<TABLE><CAPTION>
                                                     2006            2005            2004
                                                 ------------    ------------    ------------
<S>                                              <C>             <C>             <C>
Current income tax expense                       $   (769,000)   $   (857,000)   $   (943,000)

Deferred tax benefit (expense)                         95,000         102,000        (135,000)
                                                 ------------    ------------    ------------
Total income tax (expense) benefit               $   (674,000)   $   (755,000)   $ (1,078,000)
                                                 ============    ============    ============

Deferred tax assets, are comprised of the following at December 31:

                                                     2006            2005            2004
                                                 ------------    ------------    ------------
Accrued vacation and warranty                    $    184,000    $    193,000    $    179,000
Accounts receivable and inventory allowances          149,000          85,000             --
                                                 ------------    ------------    ------------
    Gross deferred tax assets                         333,000         278,000         179,000

Gross deferred tax liability - depreciation          (129,000)       (169,000)       (172,000)
                                                 ------------    ------------    ------------
     Net deferred tax assets                     $    204,000    $    109,000    $      7,000
                                                 ============    ============    ============
</TABLE>

The realization of the deferred tax assets is dependent on future taxable
earnings. The Company has not provided for a deferred tax asset valuation
allowance due to their current and anticipated future earnings.

A reconciliation between the amount of reported income tax expense and the
amount computed by multiplying the applicable statutory Federal income tax rate
is as follows:

                                         2006           2005           2004
                                     ------------   ------------   ------------

Income before income taxes           $  3,123,654   $  2,225,294   $  2,979,962
Applicable statutory tax rate                 34%            34%            34%
                                     ------------   ------------   ------------
Computed "expected" Federal income
     tax Expense                       (1,062,000)      (757,000)    (1,013,000)

Adjustments to Federal income tax
  resulting from:
     State income tax expense            (120,000)      (111,000)      (115,000)

     Tax credits                           68,000        113,000         50,000
     Stock compensation                   440,000            --             --
                                     ------------   ------------   ------------
Income tax (expense) benefit         $   (674,000)  $   (755,000)  $ (1,078,000)
                                     ============   ============   ============


11. MAJOR CUSTOMERS

Set forth below are customers, including agencies of the U.S. Government, from
which the Company received more than ten percent of total revenue, for the years
ended December 31:

                                       33
<PAGE>

                                                2006      2005       2004
                                               ------    ------     ------
Department of Interior                           17%       22%        20%
International                                    36%       25%        32%
Commercial                                       23%       31%        24%
Department of Commerce                           --        16%         -
Department of Defense                            16%       --         16%


Set forth below are customers, including agencies of the U.S. Government, from
which the Company had more than ten percent of total accounts receivable
outstanding for the years ended December 31, 2006 and 2005:

                                                         2006           2005
                                                      ----------     ----------
South Florida Water Management                        $  410,759     $  855,896

US Army Corps of Engineers                            $  676,757     $      --

National Oceanic and Atmospheric Administration       $  592,607     $      --


Unbilled accounts receivable at December 31, 2006 of approximately $1,190,000 is
from the Government of India Central Water Commission.

12. CONCENTRATIONS OF CREDIT RISK

At times throughout the year, cash and cash equivalents exceeded FDIC insurance
limits. As of December 31, 2006 and 2005, the Corporation's cash deposits
exceeded the FDIC insured amount by approximately $867,000 and $1,854,000,
respectively. The Corporation's products use certain standard and application
specific components that are acquired from one or a limited number of sources.
The Corporation has generally been able to procure adequate supplies of these
components in a timely manner from existing sources. The Corporation's inability
to obtain a sufficient quantity of components when required or to develop
alternative sources at acceptable prices and within a reasonable time, could
result in delays or reductions in product shipments which could materially
affect the Corporation's operating results in any given period.

13. STOCK OPTION PLANS

The Corporation has granted stock options under the 2002, 1997 and the 1996
Stock Option Plans to key employees and directors for valuable services provided
to the Corporation. The authorized and granted options under each of these plans
are as follows:

                                                   Authorized    Granted
                                                   ----------    -------
1996 Plan                                            260,000     259,000
1997 Plan                                             60,000      60,000
2002 Plan                                            650,000     435,333

During 2005, the 2002 Stock Option Plan was amended to authorize an additional
250,000 shares from the original 400,000 shares. In addition, all three plans
were amended in 2005 to allow Directors to participate in the plan, and that
vesting schedules will be determined by the Board at the time each individual
option is granted. Shares under all of the plans may be granted at not less than
100 percent of the fair market value at the grant date. All options have a
ten-year term from the date of grant. Prior to the 2005 amendments, options
vested ratably over five years on each anniversary date the option was granted.
The Corporation elected to accelerate vesting of all outstanding options as of
December 31, 2005, as permitted under the plans. Cancelled or expired options
are able to be reissued.

As discussed in Note 1, STOCK COMPENSATION PLANS, effective January 1, 2006, the
Corporation adopted the fair value recognition provision of SFAS 123(R), using
the modified prospective transition method. The adoption of SFAS 123(R) resulted
in share-based compensation expense associated with options for the year ended
December 31, 2006 of $36,081 which was recorded to general and administrative
expenses. This expense decreased basic and diluted earnings per share by $0.01
for the year ended December 31, 2006.

The vesting period of the remaining options is as follows:

Vested and exercisable                        539,333
2007                                           15,000
                                           ----------
   Total                                      554,333
                                           ==========

                                       34
<PAGE>

The fair value of Sutron Corporation stock options used to recognize
compensation expense in 2006 and to compute pro forma net income and earnings
per share disclosures for 2005 and 2004 is the estimated present value at grant
date using the Black-Scholes pricing model, with the following assumptions:

                                        2006             2005           2004
                                   (Compensation)    (Pro forma)    (Pro forma)
                                   --------------    -----------    -----------
Risk free rate                           5.16%            4.1%           3.4%
Expected volatility                        30%             32%            30%
Dividend yield                              0%              0%             0%
Holding period                        10 years         5 years        5 years


If the Company had elected to recognize compensation cost for the plan based on
the fair value at the grant dates for awards under those plans, consistent with
the method prescribed by SFAS No. 123, net income and earnings per share would
have been changed to the pro forma amounts indicated below:

                                                         2005          2004
                                                      ----------    ----------
Net income                As reported                 $1,470,294    $1,901,962
                          Pro forma                    1,418,960     1,857,958
Earnings per share
  - Basic                 As reported                       $.34          $.44
  - Basic                 Pro forma                         $.33          $.43
  - Diluted               As reported                       $.30          $.38
  - Diluted               Pro forma                         $.29          $.38

The following summarizes the option activity under these plans for the last
three years:

                                                                      Weighted
                                         Option                       Average
                                         Price        Number of       Exercise
                                       Per Share        Shares         Price
                                      ------------    ----------    -----------
Outstanding, December 31, 2003        $.40 - 1.125      709,000      $     .73
     Grants                               2.8            10,000      $    2.80
     Exercised                             --               --             --
     Cancelled or expired                  --               --             --
                                      ------------    ----------    -----------

Outstanding, December 31, 2004         .40 - 2.80       719,000      $     .76
     Grants                           5.50 - 7.45        28,333      $    6.53
     Exercised                           1.125            5,000      $    1.13
     Cancelled or expired                1.125            3,000      $    1.13
                                      ------------    ----------    -----------

Outstanding, December 31, 2005         .40 - 7.45       739,333      $     .98
     Grants                               7.80           15,000      $    7.80
     Exercised                         .40 - 1.125      200,000      $    1.06
     Cancelled or expired                  -                --             --
                                      ------------    ----------    -----------
Outstanding, December 31, 2006        $.55 - 7.80       554,333      $    1.13
                                      ============    ==========    ===========

The weighted average fair value of options granted during the three years is as
follows:

December 31, 2004                                                    $    7.20
December 31, 2005                                                    $    2.97
December 31, 2006                                                    $    4.12

The weighted average remaining contractual life of options outstanding at
December 31, 2006 is 6.0 years.

                                       35
<PAGE>

14. EARNINGS PER SHARE

The following table shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number of shares
of potential dilutive common stock.

                                                Years Ended December 31,
                                        --------------------------------------
                                           2006          2005          2004
                                        ----------    ----------    ----------

Net income                              $2,449,654    $1,470,294    $1,901,962
Shares used in calculation of
  income per share:
     Basic                               4,341,534     4,292,051     4,289,551
        Effect of dilutive options         469,109       641,761       661,558
                                        ----------    ----------    ----------
     Diluted                             4,810,643     4,933,812     4,951,109
Net income per share:
     Basic                                    $.56          $.34          $.44
     Diluted                                  $.51          $.30          $.38


Contracts to issue common stock that are anti-dilutive in nature are not
included in the earnings per share calculations.

15. PROFIT SHARING PLAN

The Corporation has a profit-sharing retirement plan that covers substantially
all employees of the Corporation. The Plan includes a 401(k) provision under
which employees may elect to defer a portion of their compensation. The Plan was
amended in May 2006 to allow for employer matching of up to 4 percent as
determined in the Plan. The profit-sharing contribution is determined each year
by the Board of Directors based on profits. The Corporation made a profit
sharing contribution for the years ended December 31, 2006, 2005 and 2004 of
$100,000, $188,000 and $175,000, respectively. The employer matching
contribution was approximately $73,000 for the year ended December 31, 2006.

16. SEGMENT INFORMATION

Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information establishes standards for the
manner in which public companies report information about operating segments in
annual and interim financial statements. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The method for determining what information to report is based on the
way management organizes the operating segments within the Company for making
operating decisions and assessing financial performance.

The Company's chief operating decision-maker is considered to be the Company's
chief executive officer (CEO). The CEO reviews financial information presented
based on divisions, comprised of products and/or services. Nearly all of the
Company's operations and assets are located at its headquarters location.
Therefore, indirect costs are not allocated among segments.

The Company currently reports its results in four divisions: Hydromet Products,
Integrated Systems, Hydrological Services and Sutron India Operations. Hydromet
Products division is responsible for the manufacture and sale of the Company's
products including dataloggers, satellite transmitters, sensors and tides
systems. The Integrated Systems division is responsible for systems design,
integration, installation, training and commissioning of turnkey
hydrometeorological systems. The Company's Hydrological Services division
provides data interpretation and analysis services including modeling, flood
forecasting and hydrologic studies. Sutron India Operations consists of the
branch office and wholly owned subsidiary and is responsible for the sale of
products, systems and services to customers in India.

                                       36
<PAGE>

The results of these segments are shown below (in thousands):

                                           2006          2005         2004
                                        ----------    ----------   ----------
Revenue
   Hydromet Products                    $    9,234    $    9,305   $   10,689
   Integrated Systems                        6,153         3,277        3,631
   Hydrological Services                     2,214         2,639        2,359
   Sutron India Operations                   1,806           213
                                        ----------    ----------   ----------
       Totals                           $   19,407    $   15,434   $   16,679
                                        ==========    ==========   ==========

Cost of Goods Sold
   Hydromet Products                    $    4,508    $    4,519   $    6,030
   Integrated Systems                        3,818         1,977        2,063
   Hydrological Services                     2,304         2,444        2,160
   Sutron India Operations                   1,426            59
                                        ----------    ----------   ----------
       Totals                           $   12,056    $    8,999   $   10,253
                                        ==========    ==========   ==========

Gross Margin
   Hydromet Products                    $    4,726    $    4,786   $    4,659
   Integrated Systems                        2,335         1,300        1,568
   Hydrological Services                       (90)          195          199
   Sutron India Operations                     380           154
                                        ----------    ----------   ----------
       Totals                           $    7,351    $    6,435   $    6,426
                                        ==========    ==========   ==========

17. EXPORT SALES

Export sales from the Company's operations at December 31, were as follow (in
thousands):

                                           2006          2005         2004
                                        ----------    ----------   ----------
Central and South America               $    1,269    $    1,238   $      695
Canada                                         645           750          246
Asia                                         4,527         1,363        1,266
Australia/New Zealand                          --             47           63
Europe and other                               441           438        3,141
                                        ----------    ----------   ----------
                                        $    6,882    $    3,836   $    5,411
                                        ==========    ==========   ==========

18. LEGAL CONTINGENCIES

Various legal claims can arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect on
the Company's financial statements. The Company has been named in a compensation
claim under the Indian Anti-Trust Law that is pending before The Monopolies and
Restrictive Trade Practices Commission in New Delhi, India. Management believes
that the case is unsubstantiated and does not anticipate that any losses will
occur.

                                       37
<PAGE>

ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------

Not applicable.

ITEM 8A - CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our management (with the participation of our Chief Executive Officer and Chief
Financial Officer) evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), as of December 31, 2006,
the end of the fiscal period covered by this report on Form 10-KSB. The Company
maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act of 1934
reports are recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our chief executive officer and
chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure. Based on this evaluation, the chief executive officer and
chief financial officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting that
occurred during the quarter ended December 31, 2006 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

ITEM 8B - OTHER INFORMATION
---------------------------

None

PART III

ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------

The Board has adopted a Code of Conduct and Ethics that applies to Sutron's
principal executive officer, principal financial officer and all other employees
of the Company. This Code of Conduct and Ethics is posted on the Company's
website at http://www.sutron.com on the investors' page. Any amendments to the
Code of Ethics and waivers of the Code of Ethics for our principal executive,
accounting or financial officers will be published on our website.

The remainder of information required for this Item is incorporated by reference
to the Proxy Statement to be filed in connection with our 2007 Annual Meeting of
Shareholders.

ITEM 10 - EXECUTIVE COMPENSATION
--------------------------------

The information required for this Item is incorporated by reference to the Proxy
Statement to be filed in connection with our 2007 Annual Meeting of
Shareholders.

ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required for this Item is incorporated by reference to the Proxy
Statement to be filed in connection with our 2007 Annual Meeting of
Shareholders.

                                       38
<PAGE>

ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

The information required for this Item is incorporated by reference to the Proxy
Statement to be filed in connection with our 2007 Annual Meeting of
Shareholders.

ITEM 13 - EXHIBITS
------------------

3(a)   Copy of Articles of Incorporation of Sutron Corporation, received and
       approved December 30, 1975

3(b)   Copy of Articles of Amendment to the Articles of Incorporation and
       Articles of Reduction of Stated Capital of Sutron Corporation received
       and approved September 7, 1983

3(c)   By-Laws of the Registrant

3(d)   Copy of Articles of Amendment to the Articles of Incorporation received
       and approved June 8, 1995

10.11  Stock Option Agreement between The Company and Andrew D. Lipman dated May
       17, 2006 (filed herewith)

10.12  Stock Option Agreement between The Company and Thomas R. Porter dated May
       17, 2006 (filed herewith)

10.13  Stock Option Agreement between The Company and Robert F. Roberts, Jr.
       dated May 17, 2006 (filed herewith)


ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required for this Item is incorporated by reference to the Proxy
Statement to be filed in connection with our 2007 Annual Meeting of
Shareholders.


                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


SUTRON CORPORATION

(Registrant)


/s/  Raul S. McQuivey                                      Date: March 29, 2007
----------------------------
By:  Raul S. McQuivey,
     Chairman of the Board of Directors and
     President and Chief Executive Officer

In accordance with the Securities Exchange Act, this report has been signed by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.


/s/  Raul S. McQuivey                                      Date: March 29, 2007
----------------------------
By:  Raul S. McQuivey,
     Chairman of the Board of Directors and
     President and Chief Executive Officer


                                       39
<PAGE>

/s/  Daniel W. Farrell                                     Date: March 29, 2007
----------------------------
By:  Daniel W. Farrell, Director and Vice President


/s/  Andrew D. Lipman                                      Date: March 29, 2007
----------------------------
By:  Andrew D. Lipman, Director


/s/  Thomas R. Porter                                      Date: March 29, 2007
----------------------------
By:  Thomas R. Porter, Director


/s/  Robert F. Roberts, Jr.                                Date: March 29, 2007
----------------------------
By:  Robert F. Roberts, Jr., Director


/s/  Sidney C. Hooper                                      Date: March 29, 2007
----------------------------
By:  Sidney C. Hooper, Chief Financial Officer
     (Chief Financial and Accounting Officer)



















                                       40