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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-KSB

|(Mark One)
|----------
|x         
|          
|          
|o         
|          

Commission file number: 0-30721

IPEC HOLDINGS INC.
  (Name of small business issuer in its charter)

|Nevada                                           | 87-0621339                          
|------------------------------------------------ | ------------------------------------
|(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.)
|organization)                                    |                                     
|                                                 |                                     

|Northgate Industrial Park, 185 Northgate Circle
    New Castle, Pennsylvania 16105
|----------------------------------------------------------------------------------
|(Address of principal executive offices)                                          

Issuers telephone number: (800) 377-4732

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:Common Stock, $0.001 par value 
(Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange
Act during the past 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:
o

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

State issuers revenues for its most recent fiscal year: $22,381,158

State the aggregate market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was sold, or the average bid and asked
price of such common equity, as of a specified date within the past 60 days: $4,476,171 as of March 11, 2005

State the number of shares outstanding of each of the issuers classes of common equity, as of
the latest practicable date: 9,972,912 shares of Common Stock as of March 11, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the issuers Information Statement to be filed for its 2005 Annual Meeting of Shareholders
are incorporated by reference into Part III of this Annual Report on Form 10-KSB.

Transitional Small Business Disclosure Format (Check one): Yes o No x

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|         |      |     | TABLE OF CONTENTS                                                               |    | 
|-------- | ---- | --- | ------------------------------------------------------------------------------- | -- | 
|         |      |     |                                                                                 |    | 
|Part I   |      |     |                                                                                 |    | 
|         |      |     |                                                                                 |    | 
|         | Item | 1.  | Description of Business                                                         | 1  | 
|         |      | 2.  | Description of Properties                                                       | 13 | 
|         |      | 3.  | Legal Proceedings                                                               | 13 | 
|         |      | 4.  | Submission of Matters to a Vote of Security Holders                             | 13 | 
|         |      |     |                                                                                 |    | 
|Part II  |      |     |                                                                                 |    | 
|         |      |     |                                                                                 |    | 
|         | Item | 5.  | Market for Common Equity, Related Stockholder Matters and Small Business Issuer |    | 
|         |      |     | Purchases of Equity Securities                                                  | 13 | 
|         |      | 6.  | Managements Discussion and Analysis or Plan of Operation                       | 14 | 
|         |      | 7.  | Financial Statements                                                            | 21 | 
|         |      | 8.  | Changes in and Disagreements with Accountants on Accounting and Financial       |    | 
|         |      |     | Disclosure                                                                      | 21 | 
|         |      | 8A. | Controls and Procedures                                                         | 21 | 
|         |      | 8B. | Other Information                                                               | 21 | 
|         |      |     |                                                                                 |    | 
|Part III |      |     |                                                                                 |    | 
|         |      |     |                                                                                 |    | 
|         | Item | 9.  | Directors and Executive Officers                                                | 22 | 
|         |      | 10. | Executive Compensation                                                          | 24 | 
|         |      | 11. | Security Ownership of Certain Beneficial Owners and Management and Related      |    | 
|         |      |     | Stockholder Matters                                                             | 24 | 
|         |      | 12. | Certain Relationships and Related Transactions                                  | 24 | 
|         |      | 13. | Exhibits                                                                        | 24 | 
|         |      | 14. | Principal Accountant Fees and Services                                          | 24 | 

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Forward-looking Statements

Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995
(the PSLRA), we caution readers regarding forward looking statements found in this report
and in any other statement made by, or on our behalf, whether or not in future filings with the Securities
and Exchange Commission. Forward-looking statements are statements not based on historical information
and which relate to future operations, strategies, financial results or other developments and are
typically identified by words such as believes, anticipates and expects.
In addition, any statements that refer to expectations or other characterizations of future events
or circumstances are forward-looking statements. Forward-looking statements are necessarily based
upon estimates and assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond our control and many of which,
with respect to future business decisions, are subject to change. These uncertainties and contingencies
can affect actual results and could cause actual results to differ materially from those expressed
in any forward looking statements made by or on our behalf. We undertake no obligation to update
forward-looking statements. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors discussed throughout this report,
including but not limited to those discussed under the caption Risk Factors as well as:

| | current and potential governmental regulatory actions in the United States and regulatory actions and political unrest in other countries,
|- | ------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                           
| | terrorist acts,                                                                                                                           
|  |                                                                                                                                           
| | termination of customer and supplier contracts,                                                                                           
|  |                                                                                                                                           
| | contamination or defect in our products that damage our industry reputation,                                                              
|  |                                                                                                                                           
| | risks of doing business outside the United States, including foreign currency fluctuations,                                               
|  |                                                                                                                                           
| | technological developments, and                                                                                                           
|  |                                                                                                                                           
| | our ability to implement our business strategies.                                                                                         

Any of these factors, or a combination of these factors, could materially affect our future results
of operations and the ultimate accuracy of the forward-looking statements. These forward-looking
statements are not guarantees of our future performance, and our actual results and future developments
may differ materially from those projected in the forward-looking statements. Management cautions
against putting undue reliance on forward-looking statements or projecting any future results based
on such statements or present or prior earnings levels.

ITEM 1. DESCRIPTION OF BUSINESS.

Background

IPEC Holdings Inc. was incorporated in the State of Nevada on December 11, 1985, under the name Nostromo
Construction Corporation. From inception to June 1988, we investigated a mining project. After determining
not to pursue the mining project, we were inactive until April 1998. On December 1, 1998, we changed
our name to Golden Hole, Inc. We filed a registration statement for our common stock under the Securities
Exchange Act of 1934, which became effective July 29, 2000, and then began looking for a business
opportunity.

On January 28, 2003, we acquired all of the issued and outstanding capital stock of International Plastics
and Equipment Corp. (IPEC), a Pennsylvania corporation, in exchange solely for approximately
95% of our common stock in a reverse acquisition transaction. Since all of our operations are now
conducted through our wholly-owned subsidiary, IPEC, we changed our name to IPEC Holdings Inc. on
April 9, 2003.

1

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IPEC

Our wholly-owned subsidiary, IPEC, was founded as a Pennsylvania corporation in December 1994. During
the first year of its operations, IPEC was engaged principally in the design, manufacture and sale
of capping equipment for use by bottlers. In 1996, IPEC transitioned to a manufacturer of tamper-evident
caps. IPEC currently manufactures 26.7mm, 28mm and 38mm tamper evident plastic closures. These closures
are used in the bottling of non-carbonated beverages, including bottled water, milk, fruit, and sport
drinks. IPEC also still designs and fabricates capping equipment for use by bottlers.

Principal Products

We sell our closures to two primary markets: the bottled water and juice market and the dairy market.
We believe that we will benefit from three major trends: i) shifting markets from metal and glass
closures to plastic closures, which has resulted primarily from the fact that plastics are cheaper,
offer greatly improved tamper protection and have been the subject of substantial technological advancements
over recent years, ii) continued transition of the dairy and water markets towards smaller packaging
units and iii) conversion of a significant portion of the United States school lunch program to plastic
bottles from paperboard cartons.

The following table sets forth sales by major product line for our fiscal year ended December 31, 2004:

|Product          |    | Use                                                                                                                                                                                      |  | Percentage of 
      Sales Volume
      for Fiscal 2004 |  
|---------------- | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------- | -
|                 |    |                                                                                                                                                                                          |  |                                                         |  
|28mm sport       |    | Primarily for water bottling on polyethylene terephthalate (PET)bottles ranging in sizes from 8-ounce bottles to 1 and 2-liter bottles.                                                  |  | 7                                                       | %
|                 |    |                                                                                                                                                                                          |  |                                                         |  
|26.7mm sport     |    | Primarily for water bottling on PET bottles ranging in sizes from8-ounce bottles to 1 and 2-liter bottles.                                                                               |  |                                                         |  
|                 | 2  | %                                                                                                                                                                                       
|                 |    |                                                                                                                                                                                          |  |                                                         |  
|28mm flat        |    | Primarily for water bottling on PET bottles ranging in sizes from8-ounce bottles to 1 and 2-liter bottles.                                                                               |  |                                                         |  
|                 | 10 | %                                                                                                                                                                                       
|                 |    |                                                                                                                                                                                          |  |                                                         |  
|26.7mm flat      |    | Primarily for water bottling on PET bottles ranging in sizes from8-ounce bottles to 1 and 2-liter bottles.                                                                               |  |                                                         |  
|                 | 9  | %                                                                                                                                                                                       
|                 |    |                                                                                                                                                                                          |  |                                                         |  
|38 mm snap       |    | High density polyethylene (HDPE) and PET bottles ranging from 8-ounce single-serve to gallon and half-gallon containers used in the water, juice, and dairy sectors.                     |  |                                                         |  
|                 |    |                                                                                                                                                                                         
|                 | 8  | %                                                                                                                                                                                       
|                 |    |                                                                                                                                                                                          |  |                                                         |  
|38mm twist &pull |    | HDPE and PET bottles ranging from 8-ounce single-serve to gallonand half-gallon containers used in the water, juice, and dairy sectors.This is the sport version of the 38mm snap cap. |  |                                                         |  
|                 |    |                                                                                                                                                                                         
|                 | 13 | %                                                                                                                                                                                       
|                 |    |                                                                                                                                                                                          |  |                                                         |  
|38mm pushpull    |    | Made by special request for a major customer who uses this cap on aproduct which is an 8-ounce decanter style bottle. This is a modifiedversion of the 38mm twist & pull.                |  |                                                         |  
|                 |    |                                                                                                                                                                                         
|                 | 4  | %                                                                                                                                                                                       
|                 |    |                                                                                                                                                                                          |  |                                                         |  
|38mm snapscrew   |    | Used on HDPE bottles for gallon and half-gallon containers in thedairy sector. May also be used on a single-serve dairy container.                                                       |  |                                                         |  
|                 | 22 | %                                                                                                                                                                                       
|                 |    |                                                                                                                                                                                          |  |                                                         |  
|38mm tail cap    |    | Used on HDPE bottles for gallon and half-gallon containers in thedairy sector. May also be used on a single-serve dairy container.                                                       |  |                                                         |  
|                 | 25 | %                                                                                                                                                                                       

2

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Manufacturing and Raw Materials

Our existing facilities are capable of manufacturing approximately 3.8 billion closures across all
product lines. For the years ended December 31, 2004 and 2003, we produced approximately 2.0 and
1.4 billion closures, respectively. We also outsourced production on our 38mm push pull closure whereby
a third-party approved by us produced approximately 50 million closures in 2004.

The manufacturing process consists principally of the high-speed injection molding of a given cap using
a mold specifically engineered for that design. Resin, which is in the form of small pebble-sized
pellets, is drawn to a particular injection-molding machine through the use of a vacuum delivery
system. The resin is melted and introduced along with any coloring agent to the machine for forming.

To assure a consistent quality of product, the manufacturing floor is maintained to clean room standards
where heating, ventilation and air conditioning equipment is designed to preserve a relatively dust-free,
thermostatically-controlled environment as well as provide maintenance of required manufacturing
temperatures on each machine.

Our quality assurance procedures involve the use of optical sensing to detect dimensional conformity
with specifications and a physical sampling of the production taken every two hours of operation
to test for aesthetics and functionality. If a sample should fail the test, the run would be quarantined
back to the last occurrence of acceptability with a follow-up corrective action taken to modify any
batch deficiency noted. We perform the optical sensing using an optical scanning device designed
to measure product conformity to preset dimensional standards. Acceptable product is then packaged
and scanned for subsequent distribution. For up to 180 days from the delivery date of our product,
we offer our customers either a full refund or replacement product for goods determined to have quality-related
deficiencies. All other product is eligible for return at our sole discretion.

The cap production process may involve any one of four different types of resins that are readily available
on the open market from multiple suppliers. In addition, various coloring agents may be mixed with
the resins to meet customer coloring specifications. We procure inventories of resin, as well as
packaging materials, on a just in time basis, with resin inventory levels being maintained
on a 2-7 day usage basis and packaging materials levels on an approximate 7-day level. We primarily
use one supplier, Equistar Chemicals, LP, for our resin purchase requirements. Resins are subject
to quarterly price fluctuations, resulting from shortages in supply, changes in prices in petrochemical
products, strength or weakness of the U.S. dollar and its effect on export demand and other factors.
Our agreements with our customers generally include cost escalation clauses to pass price increases
on to customers that could otherwise have a material adverse impact on our company.

SRI Quality Registrars independently assessed and certified us as operating a quality management system
conforming to ISO 9002. As of December 5, 2003, we received upgraded certification to the revised
ISO 9001-2000 quality standard. The International Organization for Standardization (ISO) is a non-governmental
organization established in 1947, which has published international standards to facilitate the exchange
of goods and services. The ISO 9000 family of standards represents an international consensus on
good management practices with the aim of ensuring that the organization can consistently deliver
products that meet the clients quality requirements. The standards give organizations guidelines
on what constitutes an effective quality management system and models against which quality systems
can be audited.

Distribution Methods

We distribute closures through both direct and indirect sales channels. Most of our products are typically
purchased directly by manufacturers on a standing order or contract basis. To a lesser extent, we
do use brokers and manufacturers representatives. Another distribution channel is the contract
packager. Many consumer goods manufacturers employ outside firms to assemble and fill finished product
containers. The closures utilized in these arrangements are commonly purchased by the contract vendor.

Once a serious lead is identified, a sales representative or member of senior management meets with
the potential customer to discuss terms of any engagement.

3

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Equipment Design and Fabrication

We maintain a capping equipment design and fabrication division in our Pennsylvania production facility,
comprised of engineers and technicians. This division focuses on upstream integration by constructing
custom designed application equipment for our customers and other bottlers. The division also constructs
certain post-injection line equipment for our Company.

Competition

We compete on the basis of price, product design, product quality, customer service, and response time.

In the water and juice market, management believes that large scale manufacturers, such as Alcoa, Crown
Cork & Seal, and Owens Illinois, are our primary competition, with additional competition from
bottling companies and other food and beverage providers that elect to produce their own closures.
As compared to large-scale manufacturers, management believes that we distinguish ourselves by providing
better customer service and response time, while maintaining parity on price and quality.

In the dairy market, our major competitor is Portola Packaging, Inc., a multi-national cap producer,
with annual sales in excess of $240 million as reported in their Form 10-K/A filed on December 14,
2004 with the Securities and Exchange Commission. Management believes that we compete favorably due
to our proprietary rights to variations of the 38mm closure being used in milk packaging for the
gallon, half-gallon, and single-serve containers, as well as our customer service, product quality,
and competitive pricing.

Major Customers

Our customers are located primarily in the United States. Our sales to customers in the United States
comprised 90% and 84% of net sales in 2004 and 2003, respectively. Other customers are located principally
in Canada (7% of 2004 net sales), England (2% of 2004 net sales), Mexico, Israel, and the Caribbean
islands.

During 2004, sales to one customer amounted to 22% of our net sales and sales to another customer amounted
to 15% of net sales. In 2003, two customers accounted for approximately 16% and 11% of net sales,
respectively. In determining the customer concentration information presented above, we used the
aggregated sales of the customers parent company. Typically, purchasing decisions are made
at the subsidiary or plant level of our customer base; mitigating a portion of the risk associated
with the concentration levels.

Research and Development

We have a program of ongoing research and development that has led to significant product innovations.
By designing our own products, we can insure exclusivity while avoiding excessive licensing costs.
We charge research and development expenses to operations as incurred. We spent approximately $26,000
and $44,000 on research and development activities in fiscal 2004 and 2003, respectively, none of
which was borne directly by customers.

Patents, Licenses & Trademarks

IPEC owns the following patents:

4

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|Description                                                           |  | Issue Date |  | Expiration
      Date |  | Patent Number     |  | Country | 
|--------------------------------------------------------------------- |  | ---------- |  | --------------------- |  | ----------------- |  | ------- | 
|                                                                      |  |            |  |                       |  |                   |  |         | 
|Tamper evident push-pull closure with pour spout                      |  | 1/26/1999  |  | 4/16/2016             |  | 5,862,953         |  | U.S.    | 
|                                                                      |  |            |  |                       |  |                   |  |         | 
|Tamper evident closure with push-pull pour spout                      |  | 2/15/2000  |  | 2/15/2016             |  | 6,024,255         |  | U.S.    | 
|                                                                      |  |            |  |                       |  |                   |  |         | 
|Snap-on screw off closure for use in combination with a container     |  | 5/9/2000   |  | 10/31/2017            |  | 6,059,134         |  | U.S.    | 
|                                                                      |  |            |  |                       |  |                   |  |         | 
|Tamper evident closure                                                |  | 6/6/2000   |  | 2/15/2016             |  | 6,070,766         |  | U.S.    | 
|                                                                      |  |            |  |                       |  |                   |  |         | 
|Snap-on tamper evident closure with push-pull pour spout              |  | 6/13/2000  |  | 2/15/2016             |  | 6,073,809         |  | U.S.    | 
|                                                                      |  |            |  |                       |  |                   |  |         | 
|Tamper evident closure                                                |  | 6/13/2000  |  | 2/15/2016             |  | 6,073,810         |  | U.S.    | 
|                                                                      |  |            |  |                       |  |                   |  |         | 
|Snap-on screw-off closure                                             |  | 10/23/2001 |  | 4/16/2016             |  | 6,305,579         |  | U.S.    | 
|                                                                      |  |            |  |                       |  |                   |  |         | 
|Tamper evident plastic closure                                        |  | 3/19/2002  |  | 4/16/2016             |  | 6,357,628         |  | U.S.    | 
|                                                                      |  |            |  |                       |  |                   |  |         | 
|Tamper evident closure                                                |  | 8/13/2002  |  | 4/16/2016             |  | 6,431,404         |  | U.S.    | 
|                                                                      |  |            |  |                       |  |                   |  |         | 
|Tamper evident closure                                                |  | 8/3/2004   |  | 4/16/2016             |  | 6,769,575         |  | U.S.    | 
|                                                                      |  |            |  |                       |  |                   |  |         | 
|Snap-on screw-off closure for use in combination
    with a container |  | 9/21/2004  |  | 4/16/2016             |  | 6,793,082         |  | U.S.    | 
|                                                                      |  |            |  |                       |  |                   |  |         | 
|Snap-on screw-off closure                                             |  | 3/17/2004  |  | 10/29/2018            |  | 1 027 261         |  | Europe  | 
|                                                                      |  |            |  |                       |  |                   |  |         | 
|Snap-on screw-off closure                                             |  | 3/17/2004  |  | 10/29/2018            |  | 1 027 261         |  | Germany | 
|                                                                      |  |            |  |                       |  | (698 22 492.0-08) |  |         | 
|                                                                      |  |            |  |                       |  |                   |  |         | 
|Snap-on screw-off closure                                             |  | 3/17/2004  |  | 10/29/2018            |  | 1 027 261         |  | France  | 
|                                                                      |  |            |  |                       |  |                   |  |         | 
|Snap-on screw-off closure                                             |  | 3/17/2004  |  | 10/29/2018            |  | 1 027 261         |  | United  | 
|                                                                      |  |            |  |                       |  |                   |  | Kingdom | 

IPEC has additional patent submissions pending in the United States, Canada and Mexico.

We have also from time to time secured licensing arrangements to produce other tamper evident caps
not of our own design. There are no currently existing licensing arrangements. We did not pay any
licensing fees in either 2004 or 2003.

In addition, we announced in our press release dated October 26, 2004 that we are in the final product
development stages for two additional product offerings to complete our standard 38mm closure portfolio.
We believe our 38mm foil-lined closures and our 38mm screw closure will be available for market consumption
in second quarter of 2005. We do not intend to file any patent submissions with respect to these
product lines.

Government Regulation

Our products are subject to regulation by the Food and Drug Administration and other agencies with
jurisdiction over the effectiveness of tamper-resistant devices and other closures for dairy and
other beverage products. A change in government regulation could affect us. We cannot assure you
that federal, state, or local authorities will not develop protocols in the future that could materially
increase our cost of manufacturing certain products.

5

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Environmental Matters

Federal, state, local and foreign governments could enact laws or regulations concerning environmental
matters that increase the cost of producing, or otherwise adversely affect the demand for, plastic
products. Management is aware that certain local governments have adopted ordinances prohibiting
or restricting the use or disposal of certain plastic products that are among the types of products
produced by us. If such prohibitions or restrictions were widely adopted, such regulatory and environmental
measures or a decline in consumer preference for plastic products due to environmental considerations
could have a material adverse effect on our business. In addition, certain of our operations are
subject to federal, state and local environmental laws and regulations that impose limitations on
the discharge of pollutants into the air and water and establish standards for the treatment, storage
and disposal of solid and hazardous wastes.

While we have not been required historically, and do not currently expect, to make significant capital
expenditures in order to comply with applicable environmental laws and regulations, we cannot predict
with any certainty our future capital expenditure requirements because of continually changing compliance
standards and environmental technology. We do not have insurance coverage for environmental liabilities
and do not anticipate obtaining such coverage in the future.

Employees

As of December 31, 2004, we had 110 employees, all of which were full-time. None of the employees are
represented by any labor unions.

Risk Factors

Set forth below and elsewhere in this report are descriptions of certain risks and uncertainties that
could affect our companys future overall performance as well as cause our actual results to
differ materially from the results contemplated by the forward-looking statements contained in this
report.

VOLATILE PRICING OR SHORTAGE IN RESIN MAY SIGNIFICANTLY AFFECT OUR OPERATING MARGINS

We purchase large volumes of resin in order to conduct our business operations. The cost of resin,
in the aggregate, represents approximately 55% of our total production costs. Resin pricing generally
follows price trends of, and varies with the market conditions for, crude oil and natural gas, which
may be highly volatile and cyclical. Instability in the world markets for petroleum and natural gas
could materially adversely affect the price and timely availability of raw materials. Our results
of operations could be in the future significantly affected by increases and volatility in these
costs. Increases in the unit price of resin will generally increase our working capital needs, and
can therefore also adversely affect our liquidity and cash flow.

We may not be able to arrange for sources of resin from our regular vendors or alternative sources
in the event of an industry-wide general shortage of resins used by us, or a shortage or discontinuation
of certain types or grades of resin purchased from one or more of our suppliers.

To mitigate against the risk of resin price volatility, we generally have cost pass-through arrangements
for resin pricing with our customers. Loss or significant ineffectiveness in this arrangement could
remove stability in our margins and have a material adverse effect on our business, results of operations
and financial condition.

6

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WE MAY EXPERIENCE CONTINUED PRICING PRESSURES AND CREDIT RISKS DUE TO CONSOLIDATION IN OUR CUSTOMER
ACCOUNTS.

We have experienced customer consolidations through mergers and acquisitions in recent years primarily
in our dairy customer base and this trend may continue. We could experience additional customer concentration,
and our results of operations would be increasingly sensitive to changes in the businesses of customers
that represent an increasingly large portion of our sales or any deterioration of their financial
condition. Furthermore, this consolidation has resulted in pricing pressures, as larger customers
often have been able to make greater pricing and other demands on us.

Most of our contracts currently have ninety-day termination clauses which permit, with proper notification,
our customers to exit their contractual relationship with us without significant penalty. The loss
or significant decrease in business or a change in the procurement practices of any of our major
customers may produce pricing pressures or other circumstances that could have a material adverse
effect on our business, results of operations and financial condition.

WE MAY COMPETE AGAINST EXISTING OR NEW COMPETITORS THAT HAVE FINANCIAL AND OTHER RESOURCES SUBSTANTIALLY
GREATER THAN OURS

We face direct competition in each of our product lines from a number of companies, many of which have
financial and other resources that are substantially greater than ours. We can expect to meet significant
competition from existing competitors with entrenched positions and new competitors with respect
to our existing product lines as well as with respect to new products we might introduce. The market
has decreased historical pricing levels of our products, and this trend has accelerated during recent
years.

In addition, the dairy closure market in the United States is significantly controlled by one primary
competitor. This competitor is substantially larger than us and could have better access to capital
markets and other financial resources than us.

POTENTIAL FUTURE ACQUISITIONS AND/OR JOINT VENTURES MAY NOT RESULT IN EXPECTED SYNERGIES OR OTHER LONG-TERM
BENEFITS.

We continuously seek opportunities to generate value through business combinations, purchases and sales
of assets and contractual arrangements or joint ventures. Any identified transactions would be intended
to result in the realization of synergies, the creation of efficiencies or the generation of cash
to reduce debt. To the extent permitted under our credit facilities and other debt agreements, some
of these transactions may be financed with additional borrowings by us or by the issuance of equity
securities or other securities convertible into equity securities. Although these transactions would
be expected to yield longer-term benefits if the expected efficiencies and synergies of the transactions
are realized, they could adversely affect our results of operations in the short term because of
the costs and possible business disruptions associated with such transactions, and there can be no
assurance that the expected efficiencies and synergies will be realized in the longer term.

7

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Acquisitions may also cause us to:

| | Issue common stock that would dilute our current shareholders percentage ownership;                                                                          
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                               
| | Assume liabilities;                                                                                                                                           
|  |                                                                                                                                                               
| | Record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges;
|  |                                                                                                                                                               
| | Incur amortization expenses related to certain intangible assets;                                                                                             
|  |                                                                                                                                                               
| | Incur large and immediate write-offs and restructuring and other related expenses; or                                                                         
|  |                                                                                                                                                               
| | Become subject to litigation.                                                                                                                                 

WE MAY BE SUBJECT TO UNINSURED OPERATING CONDITIONS THAT MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION.

Although we take precautions to enhance the safety of our operations and minimize the risk of disruptions,
we are subject to certain production hazards. These hazards include: explosions; fires; severe weather
and natural disasters; mechanical failures; unscheduled downtimes; labor difficulties; transportation
interruptions; environmental risks; and potential terrorist acts. Some of these hazards can cause
personal injury and loss of life, severe damage to or destruction of property and equipment and environmental
damage, and may result in suspension of operations and the imposition of civil or criminal penalties.

Furthermore, we are also subject to present and future claims with respect to workplace exposure, workers
compensation and other matters. We maintain property, business interruption and casualty insurance,
which we believe are in accordance with customary industry practices, but we are not fully insured
against all potential hazards incident to our business, including losses resulting from war risks
or terrorist acts. As a result of market conditions, premiums and deductibles for certain insurance
policies can increase substantially and, in some instances, certain insurance may become unavailable
or available only for reduced amounts of coverage. If we were to incur a significant liability for
which we were not fully insured, it could have a material adverse effect on our financial condition.

ADVERSE WEATHER CONDITIONS COULD ADVERSELY IMPACT OUR FINANCIAL RESULTS.

Weather conditions in the United States can have a significant impact on our water closure sales. Unusually
cool temperatures during a hot weather season in one or more of our markets have adversely affected,
and could again adversely affect, sales of our products in those markets.

OUR OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS, WHICH MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION

We expect to experience fluctuations in our future operating results that may be caused by many factors,
including;

8

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| | Our ability to maintain appropriate inventory levels and purchase commitments;                                                                                                                                                                                                                    
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                   
| | Fluctuations in demand for our product and services, such as has occurred in the last two years;                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                   
| | Price and product competition in the dairy closure industry, which can change rapidly due to the competitive landscape;                                                                                                                                                                           
|  |                                                                                                                                                                                                                                                                                                   
| | The overall trend toward industry consolidation among our customers;                                                                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                   
| | Variations in sales channels, product costs, or mix of products sold;                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                   
| | The timing and size of orders from customers;                                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                   
| | Manufacturing lead times;                                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                   
| | Fluctuations in our gross margins and the factors that contribute to this as discussed herein;                                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                   
| | Our ability to achieve targeted cost reductions;                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                   
| | Actual events, circumstances, outcomes, and amounts differing from judgments, assumptions, and estimates used in determining the values of certain assets (including the amounts of related valuation allowances), liabilities and other items reflected in our consolidated financial statements;
|  |                                                                                                                                                                                                                                                                                                   
| | How well we execute on our strategy and operating plans; and                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                   
| | Changes in accounting rules, such as recording expenses for employee stock option grants.                                                                                                                                                                                                         

As a consequence, operating results for a particular future period are difficult to predict, and therefore,
prior results are not necessarily indicative of results to be expected in future periods. Any of
the foregoing factors, or any other factors discussed elsewhere in this report, could have a material
adverse effect on our business, results of operations, and financial condition.

OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE WITH LOW TRADING VOLUME.

Our common stock has experienced substantial price volatility, primarily due to a combination of low
trading volumes and volatile earnings in recent years. Our common stock is currently traded through
the Over-the-Counter Bulletin Board with minimal, if any, volume exchanging hands on a daily basis.
While we expect that trading volume in our stock will improve over time as, among other items, i)
we have commenced work with an investor relations firm to create retail and institutional investor
awareness of and exposure in our common stock and ii) We intend to seek to list our common stock
on the American Stock Exchange, there can be no assurance these events will occur or that if they
do occur that they will result in increased liquidity in our stock. Additionally, volatility or a
lack of positive performance in our stock price may adversely affect our ability to retain key employees
that are frequently compensated in part based on the performance of our stock price. Furthermore,
the lack of liquidity in our stock may put us at a disadvantage in constructing future acquisition
financing packages.

OUR BUSINESS MODEL SUBSTANTIALLY DEPENDS UPON THE CONTINUED GROWTH AND ACCEPTANCE IN THE GENERAL MARKETPLACE
OF BOTTLED WATER AND MILK PACKAGED IN PLASTIC UNITS.

A substantial portion of our business and revenue depends on growth and acceptance of bottled water
and milk products packaged in plastic and on the related demand for our products by customers that
depend on the continued growth of these markets. To the extent that an event or condition would cause
a market shift away from either i) the core bottled water or milk beverage markets or ii)
plastic packaging units, this would adversely affect spending on our product lines and likely cause
us to experience material adverse effects on our business, operating results, and financial condition.

In response to paradigm shifts in industry and market conditions, we may be required to strategically
realign our resources and consider restructuring, disposing of, or otherwise exiting businesses.
Any decision to limit investment in or dispose of or otherwise exit businesses may result in the
recording of special charges, such as inventory and other write-offs, workforce reduction costs or
charges relating to consolidation of excess facilities.

9

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WE DEPEND UPON KEY PERSONNEL.

We have two principal shareholders that own approximately 81% of our common stock and serve in the
capacities of president, secretary, treasurer and directors of our company. We believe that our future
success depends upon their knowledge, ability and experience coupled with that of other senior executive
management. The loss of key personnel responsible for managing our company could adversely affect
our business and financial condition.

WE MAY NOT BE ABLE TO SERVICE OUR DEBT OR STAY IN COMPLIANCE WITH OUR FINANCIAL COVENANTS.

Our ability to satisfy our obligations will depend on our future operating performance and financial
results, which will be subject, in part, to factors beyond our control, such as interest rates and
general economic, financial and business conditions. If we are unable to generate sufficient cash
flow to service our debt, we may be required to:

| |  | refinance all or a portion of our debt;  
| | - | -----------------------------------------
| |   |                                          
| |  | obtain additional financing;             
| |   |                                          
| |  | sell certain of our assets or operations;
| |   |                                          
| |  | reduce or delay capital expenditures; or 
| |   |                                          
| |  | revise or delay our strategic plans.     

If we are required to take any of these actions, it could have a material adverse effect on our business,
financial condition and results of operations. In addition, we cannot assure you that we would be
able to take any of these actions, that these actions would enable us to continue to satisfy our
capital requirements or that these actions would be permitted under the terms of our various debt
instruments.

Our primary lender, among other items, requires us to comply with certain financial covenants and other
restrictions. Adverse changes in our operating results or other adverse factors could result in our
being unable to comply with these financial covenants. If we violate these covenants and are unable
to obtain waivers from our lender, we would be in default under these agreements and our lender could
accelerate our obligations thereunder. If our indebtedness is accelerated, we may not be able to
repay our debt or borrow sufficient funds to refinance it. Even if we are able to obtain new financing,
it may not be on commercially reasonable terms, or terms that are acceptable to us. If our expectations
of future operating results are not achieved, or our debt is in default for any reason, our business,
financial condition and results of operations would be materially and adversely affected. In addition,
complying with these covenants may make it more difficult for us to successfully execute our business
strategy and compete against companies who are not subject to such restrictions.

In addition, we have a $1,800,000 secured letter of credit related to our Alabama plant financing.
The letter of credit is renewable annually at the election of the lender. If the financial markets
did not permit us to renew this letter of credit on an annual basis, our lessor could draw upon the
letter of credit prior to its expiration and its issuer could require us to make an immediate payment
of $1,800,000. If such payment is required, it is possible that we may not have either adequate funds
to make such payment or the option to make payment without triggering a default under other outstanding
debt agreements.

10

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OUR PROPRIETARY RIGHTS MAY PROVE DIFFICULT TO ENFORCE

We generally rely on patents, unregistered copyrights, unregistered trademarks, and trade secret laws
to establish and maintain proprietary rights in our technology and products. While we have been issued
a number of patents and other patent applications are currently pending, there can be no assurance
that any of these patents will not be challenged, invalidated, or circumvented, or that any rights
granted under these patents will in fact provide competitive advantages to us. In addition, there
can be no assurance that patents will be issued from pending or any future applications, or that
claims allowed on any patents will be sufficiently broad to protect our technology. In addition,
the laws of some foreign countries may not protect our proprietary rights to the same extent as do
the laws of the United States. The outcome of any actions taken in these foreign countries may be
different than if such actions were determined under the laws of the United States.

WE MAY BE FOUND TO INFRINGE ON INTELLECTUAL PROPERTY RIGHTS OF OTHERS

Third parties, including customers, have in the past and may in the future assert claims or initiate
litigation related to exclusive patent, copyright, trademark and other intellectual property rights
to technologies and related standards that are relevant to us. Regardless of the merit of these claims,
they can be time-consuming, result in costly litigation and diversion of technical and management
personnel, or require us to develop a non-infringing technology or enter into license agreements.
Where claims are made by customers, resistance even to unmeritorious claims could damage customer
relationships. There can be no assurance that licenses would be available on acceptable terms and
conditions, if at all, in all such circumstances. Furthermore, because of the potential for high
court awards which are not necessarily predictable, it is not unusual to find even arguably unmeritorious
claims settled for significant funds. If any infringement or other intellectual property claim made
against us by any third party is successful, or if we fail to develop non-infringing technology or
license the proprietary rights on commercially reasonable terms and conditions, our business, operating
results and financial condition could be materially and adversely affected.

Our exposure to risks associated with the use of intellectual property may be increased as a result
of any acquisitions we may complete, as we would likely have less knowledge of the development process
with respect to acquired technology or the care taken to safeguard against infringement risks.

IF WE DO NOT SUCCESSFULLY MANAGE OUR STRATEGIC ALLIANCES, WE MAY EXPERIENCE INCREASED COMPETITION OR
DELAYS IN PRODUCT DEVELOPMENT

We have several strategic alliances with other companies with whom we work to offer complementary products
and services. These arrangements are generally limited to specific projects, the goal of which is
generally to either supplement our product line portfolio or facilitate product compatibility and
adoption of industry standards. If successful, these relationships may be mutually beneficial and
result in revenue growth. However, these alliances carry an element of risk because, in most cases,
we must compete in some business areas with a company with which we have a strategic alliance and,
at the same time, cooperate or compete with that company in another business area.

With respect to strategic alliances with whom we compete in another business area, it is possible that
through our relationship they will develop a substantial amount of knowledge about that particular
area or other areas of our business and in the future utilize such knowledge to detrimentally affect
us through new product offerings or competing products. Also, if these companies fail to perform
or if these relationships fail to materialize as expected, we could suffer delays in product development
or other operational difficulties.

OUR BUSINESS AND OPERATIONS ARE ESPECIALLY SUBJECT TO THE RISKS OF FLOODS, HURRICANES AND OTHER NATURAL
CATASTROPHIC EVENTS

Our Brewton, Alabama manufacturing facility is located near an area that has experienced recent flooding
and intense hurricane activity. A significant natural disaster, such as a flood or hurricane could
have a material adverse impact on our business, operating results, and financial condition.

11

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CHANGES IN EFFECTIVE TAX RATES OR ADVERSE OUTCOMES RESULTING FROM EXAMINATION OF OUR INCOME TAX RETURNS
COULD ADVERSELY AFFECT OUR RESULTS

Our future effective tax rates could be adversely affected and drive our earnings lower than anticipated.
Such changes could be driven by a variety of circumstances including i) a revision in our state apportionment
factors which could adversely affect our existing deferred tax assets and liabilities as well as
future provisional expense, ii) any requirement to file tax returns in states where we currently
do not believe such requirement exists or iii) changes in tax laws or interpretations thereof. In
addition, we are subject to normal examination of our income tax returns by the Internal Revenue
Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting
from these examinations to determine the adequacy of our provision for income taxes. There can be
no assurance that the outcomes from these examinations will not have an adverse effect on our operating
results and financial condition.

WE ARE EXPOSED TO THE CREDIT RISK OF SOME OF OUR CUSTOMERS AND TO CREDIT EXPOSURES IN WEAKENED MARKETS,
WHICH COULD RESULT IN MATERIAL LOSSES

Most of our sales are on an open credit basis, with typical payment terms of 30 days in the United
States, and, because of local customs or conditions, longer in some markets outside the United States.
We monitor individual customer payment capability in granting such open credit arrangements, seek
to limit such open credit to amounts we believe the customers can pay, and maintain reserves we believe
are adequate to cover exposure for doubtful accounts.

Although we have programs in place that are designed to monitor and mitigate the associated risk, including
monitoring of particular risks in certain geographic areas, there can be no assurance that such programs
will be effective in reducing our credit risks. There exists a significant number of bankruptcies
among our customer base, particularly among start-up bottled water companies due to the low capital
and informational barriers to entry coupled with attractive market growth trends for the industry.
There can be no assurance that additional losses will not be incurred. Although these losses have
not been material to date, future losses, if incurred, could harm our business and have a material
adverse effect on our operating results and financial condition.

PRODUCT QUALITY PROBLEMS COULD LEAD TO REDUCED REVENUE, GROSS MARGINS AND NET INCOME

We produce injection-molded parts that must hold liquid. Defects in our product can cause the customer
significant downtime and have detrimental margin effects on their entire operations. There can be
no assurance that our pre-shipment testing programs will be adequate to detect all defectswhich
might interfere with customer satisfaction, reduce sales opportunities, or affect gross margins.
While the cost of recalls and remediation has not been material in the past, there can be no assurance
that a recall or remediation, depending on the product involved, would not have a material impact.
An inability to cure a product defect could result in the failure of a product line, temporary or
permanent withdrawal from a product or market segment, damage to our reputation, inventory costs,
or product reengineering expenses, any of which could have a material negative impact on our business,
operating results and financial condition.

OUR REVENUE FOR A PARTICULAR PERIOD IS DIFFICULT TO PREDICT, AND A SHORTFALL IN REVENUE MAY HARM OUR
OPERATING RESULTS

As a result of a variety of factors discussed in this report including the unpredictable nature of
inventory build months for our seasonal customer base, our revenue for a particular quarter is difficult
to predict. Our net sales may grow at a slower rate than in past periods and, in particular periods,
may decline. Our ability to meet financial expectations could also be adversely affected if the nonlinear
sales pattern seen in some of our past quarters recurs in future periods. We have experienced periods
of time during which shipments exceeded net bookings, leading to nonlinearity in shipping patterns.
This can increase costs, as irregular shipment patterns result in periods of underutilized capacity
and periods when overtime expenses may be incurred, as well as leading to additional costs arising
out of inventory management.

12

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In addition, to improve customer satisfaction, we continue to attempt to reduce our manufacturing lead
times, which may result in corresponding reductions in order backlog. A decline in backlog levels
could result in more variability and less predictability in our quarter-to-quarter net sales and
operating results.

ITEM 2. DESCRIPTION OF PROPERTIES.

Our headquarters and one of our manufacturing facilities are located at 185 Northgate Industrial Park,
New Castle, Pennsylvania. In December 1997, we added a second manufacturing facility located at 572
Industrial Parkway, Brewton, Alabama. The total square footage of these facilities is approximately
140,000 square feet. We lease both facilities.

We believe that our leased properties are in good condition and suitable for the conduct of our business.
For additional information regarding the leases, see Note 11 to our Consolidated Financial Statements
included in this report.

ITEM 3. LEGAL PROCEEDINGS.

We are not a party to any pending legal proceedings, other than routine litigation deemed incidental
to our business.

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

None.

PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF
EQUITY SECURITIES

Market Information

Our common stock has been quoted on the OTC Bulletin Board under the symbol IPEC since
July 5, 2002. The following table sets forth the range of high and low bid quotations for each fiscal
quarter during 2004 and 2003. These quotations as reported by the OTC Bulletin Board reflect inter-dealer
prices without retail mark-up, mark-down, or commissions and may not necessarily represent actual
transactions.

|FISCAL QUARTER ENDING | HIGH BID |      | LOW BID |  
|--------------------- | -------- | ---- | ------- | -
|                      |          |      |         |  
|2003                  |          |      |         |  
|                      |          |      |         |  
|March 31, 2003        | $        | 5.00 |         | $
|June 30, 2003         | $        | 2.20 |         | $
|September 30, 2003    | $        | 2.80 |         | $
|December 31, 2003     | $        | 2.75 |         | $
|                      |          |      |        
|2004                  |          |      |        
|                      |          |      |         |  
|March 31, 2004        | $        | 1.99 |         | $
|June 30, 2004         | $        | 1.75 |         | $
|September 30, 2004    | $        | 1.75 |         | $
|December 31, 2004     | $        | 2.95 |         | $

Holders

As of March 25, 2005, there were 68 registered holders of record of our common stock. However, we believe
the number of beneficial owners is significantly greater.

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Dividends

Since our inception, no cash dividends have been declared on our common stock. Our Revolving Credit
and Loan Agreement (Loan Agreement) with Citizens Bank prohibits our subsidiary,
IPEC, from making dividend distributions or repurchasing its capital stock if we are in an Event
of Default, as defined in the Loan Agreement, or after giving effect to such distribution we would
be in an Event of Default.

ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

Company History

Effective January 28, 2003, an arrangement was completed between Golden Hole, Inc. and IPEC, whereby
the shareholders of IPEC exchanged all of their common shares for 9,489,796 shares of Golden Hole
common stock.

Following the acquisition, the former shareholders of IPEC held a majority of Golden Holes total
issued and outstanding common shares, and IPEC was therefore deemed to be the acquirer. Accordingly,
the transaction was accounted for as a reverse takeover using the purchase method whereby the assets
and liabilities of Golden Hole have been recorded at their fair market values and operating results
have been included in the financial statements from the effective date of purchase. The fair value
of the net assets acquired is equal to their book values. Golden Hole was renamed IPEC Holdings Inc.
in April 2003.

Overview

We sell standardized tamper evident plastic closures that address a wide range of closure requirements
for such industries as water, milk, juice and food. We believe our two primary competitive advantages
are i) our continuous focus on delivering industry leading after-sale support through a combination
of our domestically dispersed field technicians and centralized customer service center and ii) our
low cost manufacturing process.

The closure industry in the United States is dependent primarily on container demand trends and container
mix. According to a 2004 market study published by the Freedonia Group, the demand for caps and closures
in the United States market is expected to reach $6.8 billion and 210 billion units in 2008 with
beverages remaining the largest and fastest-growing closure market. We believe unit gains will be
driven by the following major market trends:

| |  | Increasing demand for smaller, single-serve containers and multi-packs;                  
| | - | -----------------------------------------------------------------------------------------
| |   |                                                                                          
| |  | Further market share conversion from metal and glass closures; and                       
| |   |                                                                                          
| |  | Reduction in the amount of closureless containers like metal cans and paperboard cartons.

Our primary strategy is to increase our plastic closure sales by aggressively increasing our market
share in the non-carbonated beverage sector of the caps and closures industry. We have identified
the following areas of focus to support this strategy:

| |  | Emphasizing customer support and total product solutions;     
| | - | --------------------------------------------------------------
| |   |                                                               
| |  | Continuing to enhance low cost manufacturing capabilities; and
| |   |                                                               
| |  | Expanding sales initiatives.                                  

In 2004, we articulated our financial goals of growing annual revenue, increasing gross profit margins
and reducing our leverage position. Our results for 2004 indicate that we have made substantial progress
towards these goals. Net sales were up 36.5% to $22,381,158 from $16,395,664 in 2003. Net Income
was $1,678,780 compared to $87,071 in 2003. Diluted earnings per share were at $0.16 compared to
$0.01 in 2003. Cash flow from operations was $3,354,684 compared to $2,181,092 in 2003.

Our sales increase was driven through a combination of the broadening of our closure portfolio to attract
a previously inaccessible customer base, penetration of larger customer accounts and the trickle-down
effect of our developing reputation for quality and service in the industry. While various product
lines attributed to the growth, we saw our highest increase in the 38mm tail cap product line (unthreaded
cap) in only its second year of production. The product line now accounts for 25% of our revenue
base in 2004 compared to 11% in 2003.

14

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We also undertook a comprehensive review of our production process and made significant changes to
increase our gross profit margin. Changes implemented in 2004 included:

| |  | The development and implementation of a strategic initiative to mitigate future effects of the volatile
resin markets on our margins;                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                 
| |  | Automation of previously labor-intensive production tasks;                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                 
| |  | Conversion from a manual intensive periodic inventory management system to a substantially automated
perpetual bar-coded system generating measurable improvement in several key areas including the reduction
of shipping and production scheduling errors; and
| |   |                                                                                                                                                                                                                                                                 
| |  | Construction of our 30,000 square foot warehouse in Brewton, Alabama to minimize third-party processing
errors and charges, increase customer satisfaction and decrease lead times.                                                                             

In addition, we are currently in the process of increasing our packaging counts on certain product
lines in order to reduce raw material requirements, increase warehouse space, decrease labor costs
and minimize freight charges. This improvement is expected to commence with production on May 1,
2005.

We have also been active on the financial end of our business. On May 21, 2004, we completed the sale
of our two production facilities under a sale and leaseback arrangement. The sale resulted in $3,300,000
of available cash flow for our company which was used to fund the Alabama warehouse expansion and
initially pay down our demand line of credit to the extent of approximately $900,000 and $2,400,000,
respectively.

In February 2005, we consummated a debt refinancing package with Citizens Bank. The consummation of
this transaction reduced the average fixed interest rate (considering the effect of our swap derivative)
by approximately 200 basis points from that of the refinanced debt; decreased required term principal
debt payments by approximately $600,000 over the subsequent twelve-month period, and removed our
obligation to fund $400,000 to a reserve fund over a sixty-month period as security against our $1,800,000
letter of credit.

We believe that the consummation of these transactions coupled with higher levels of operating cash
flow has provided adequate liquidity to withstand unexpected short-term volatility in our markets
while providing us flexibility with our financial resources to entertain potential new product market
entry opportunities.

During 2005, we plan on focusing on growing annual revenue, maintaining gross profit margins and expanding
our product offerings. Among the key external factors we expect to influence our fiscal 2005 performance
are the success of our additional product offerings in the marketplace, the trend of market pricing
on certain product lines, the advancement of the major market expectations discussed above and our
ability to increase market share primarily on the west coast of the United States.

Critical Accounting Estimates

General

The preparation of consolidated financial statements and related disclosures in conformity with accounting
principles generally accepted in the United States requires management to make judgments, estimates
and assumptions that affect the amounts reported in the consolidated financial statements and the
accompanying notes. Actual results could differ from those estimates. Note 3 to our Consolidated
Financial Statements included in this report describes the significant accounting policies and methods
used in the preparation of our Consolidated Financial Statements. We consider the accounting policies
described below to be affected by critical accounting estimates. Such accounting policies are impacted
significantly by judgments, assumptions, and estimates used in the preparation of the consolidated
financial statements, and actual results may differ from our estimates under different assumptions
or conditions.

15

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Allowance for Doubtful Accounts and Returns

Our accounts receivable balance was $2,041,383 as of December 31, 2004, compared with $2,093,245 as
of December 31, 2003. The allowance for doubtful accounts as of December 31, 2004 was $378,000, compared
with $220,000 as of December 31, 2003. The allowance is based on our assessment of the collectibility
of customer accounts. We regularly review the allowance by considering factors such as historical
experience, credit quality, age of the accounts receivable balances, and current economic conditions
that may affect a customers ability to pay.For up to 180 days from the delivery date of our product, we offer our customers either a full refund
or replacement product for goods determined to have quality-related deficiencies. All other product
is eligible for return at our sole discretion. A reserve for sales returns is established based on
historical trends in product return rates. The reserve for sales returns as of December 31, 2004
included $40,000 for estimated future returns that were recorded as a reduction of our accounts receivable.
If the actual future returns were to deviate from the historical data on which the reserve had been
established, our revenue could be adversely affected.

Our provision for doubtful accounts and returns was $318,320 and $82,615 for fiscal 2004 and 2003,
respectively. In fiscal 2004, we recorded approximately $252,000 for the balance due from a Canadian
bottled water customer and its affiliated joint venture. In December 2004, the customer filed for
bankruptcy protection. If a major customers creditworthiness deteriorates, or if actual defaults
are higher than our historical experience, or if other circumstances arise, our estimates of the
recoverability of amounts due to us could be overstated, and additional allowances could be required,
which could have an adverse impact on our revenue.

Allowance for Inventory

Our inventory balance was $2,774,613 as of December 31, 2004, compared with $2,143,572 as of December
31, 2003. Our inventory allowances as of December 31, 2004 were $59,047, compared with $81,875 as
of December 31, 2003. We provide inventory allowances based on excess and obsolete inventories determined
primarily by future demand forecasts and historical product turns. The allowance is measured as the
difference between the cost of the inventory and market based upon assumptions about future demand
and is charged to the provision for inventory, which is a component of our cost of sales. At the
point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent
changes in facts and circumstances do not result in the restoration or increase in that newly established
cost basis.Our provision for inventory write-downs was $106,172 and $150,655 for 2004 and 2003, respectively.
This resulted in the recording of a provision as a percentage of costs of sales of 0.6% and 1.0%,
respectively. If there were to be a sudden and significant decrease in demand for our products, or
if there were a higher incidence of inventory obsolescence because of rapidly changing markets and
customer requirements, we could be required to increase our inventory allowances, and our gross margin
could be adversely affected. Inventory management remains an area of focus as we balance the need
to maintain strategic inventory levels to ensure competitive lead times compared with the risk of
inventory obsolescence.

Non-Employee Stock Based Compensation

We account for stock-based awards to non-employees (excluding non-employee directors) using the fair
value method of accounting in accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123).

The value of each non-employee option and warrant grant is estimated on the date of grant using the
Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use
in estimating the value of traded options that have no vesting restrictions and are fully transferable.
In addition, option pricing models require the input of highly subjective assumptions including the
expected stock price volatility. We use historical data to compute expected volatility based on the
sixty-five week period prior to the awards grant date. Expected life of our stock options are
based upon historical and other economic data trended into future years.

Under this method, we have recorded $90,000 and $1,100 of compensation expense for fiscal years 2004
and 2003, respectively.

16

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Impairments of Long-Lived Assets

Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment

whenever events or changes in circumstances indicate that the carrying amount of such assets may

not be recoverable. Determination of recoverability is based on an estimate of undiscounted cash

flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment

loss for long-lived assets and certain identifiable intangible assets that management expects to

hold and use is based on the fair value of the asset. Long-lived assets and certain identifiable

intangible assets to be disposed of are reported at the lower of carrying amount or the fair value

less costs to sell.

Income Taxes

We are subject to income taxes in both the United States and various state jurisdictions. During the
ordinary course of business, there are certain transactions and calculations for which the ultimate
tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates
of whether, and the extent to which, additional taxes and interest will be due. These reserves are
established when, despite our belief that our tax return positions are fully supportable, we believe
that certain positions are likely to be challenged and may not be sustained on review by tax authorities.
Reserves are also established for changes or challenges by taxing authorities in state apportionment
factors and the negative effect such changes may have on our reported taxable income and on our deferred
taxes and liabilities. We adjust these reserves in light of changing facts and circumstances. The
provision for income taxes includes the impact of reserve provisions and changes to reserves that
are considered appropriate. Our effective tax rates differ from the statutory rate primarily due to state taxes, export incentives
and the tax impact of permanent differences relating to life insurance premiums and non-deductible
meals and entertainment. Our effective tax rate was 40.0% and 41.7% for fiscal 2004 and 2003, respectively.
Our future effective tax rates could be adversely affected by earnings or apportionment factors being
lower than anticipated in states where we have lower statutory rates and higher than anticipated
in states where we have higher statutory rates, by changes in the valuation of our deferred tax assets
or liabilities, or by changes in tax laws or interpretations thereof. In addition, we are subject
to the examination of our income tax returns by the Internal Revenue Service and other tax authorities.
We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine
the adequacy of our provision for income taxes.Loss Contingencies

We are subject to the possibility of various loss contingencies arising in the ordinary course of business.
We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as
well as our ability to reasonably estimate the amount of loss, in determining loss contingencies.
An estimated loss contingency is accrued when it is probable that an asset has been impaired or a
liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate
current information available to us to determine whether such accruals should be adjusted and whether
new accruals are required.

Discussion of Fiscal Years Ended December 31, 2004 and 2003

Operating income for the year ended December 31, 2004 increased $2,512,584 from the comparable 2003
period. The increase in operating income was primarily a function of our increased customer base,
fixed overhead volume efficiencies, implementation of certain cost saving initiatives and the attainment
of a fixed selling and service infrastructure permitting the margin from our new customer base to
increase overall profitability. Accordingly, sales for the 2004 period increased by $5,985,494 (36.5%)
while operating expenses increased by $3,472,910 (22.1%). Non-operating expenses decreased by $136,074
(24.2%) primarily due to lower borrowing rates and a lower overall outstanding balance of borrowings.
This resulted in income before taxes for the 2004 period being $2,648,658 higher than that of the
previous year.

Cost of sales of $15,749,399 for the 2004 period was lower as a percentage of sales (70.4%) that that
for the 2003 period (77.1%) due to lower resin pricing we procured, fixed overhead volume efficiencies
and the implementation of certain cost saving initiatives, offset by lower selling prices in certain
product lines as a result of intensified market competition and customer consolidation.

17

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Selling and service expenses for the 2004 period decreased $205,146 (14.8%) as compared to the 2003
period, reflecting a lower headcount and lower costs associated with start-up tooling for customer
conversions.

General and administrative expenses for the 2004 period increased $574,441 (34.8%) as compared to the
2003 period, reflecting the additional seven months of salary for a new executive, the increased
number of employees in various departments, routine salary increases, higher information technology
related expenditures associated with the maintenance of our new financial reporting system, higher
professional service fees and the payment of higher executive bonuses.

We accrued $1,119,144 for federal and state income taxes for the fiscal year ended December 31, 2004
resulting in an effective rate of approximately 40% compared to 41.7% in 2003. As a result, net income
for the fiscal year ended December 31, 2004 was $1,678,780 or $0.16 per diluted share, as compared
to net income of $87,071 or $0.01 per diluted share for the fiscal year ended December 31, 2003.

Liquidity and Financial Condition

Cash and Cash Equivalents. At December 31, 2004, we had cash and cash equivalents of $279,278. In addition, we had a working
capital surplus of $1,421,862, as compared to a deficiency of $2,925,764 at December 31, 2003. This
favorable variation was primarily due to a combination of the consummation of our sale leaseback
transactions, increased customer base and new credit arrangements with our primary resin suppliers.
Management believes that existing cash and cash equivalents and available borrowing capacity together
with anticipated cash flow from operations will be adequate to fund our operations, debt service
requirements and capital expenditures throughout fiscal 2005.

Operating Activities. Our operations provided cash of $3,354,684 for the fiscal year ended December 31, 2004, as compared
to the previous year when our operations provided cash of $2,181,092. The increase in cash provided
by operations during the 2004 period was due primarily to an increase in net income, the results
of improved accounts receivable management processes and favorable credit terms awarded by our primary
resin suppliers.

Investing Activities. During the year ended December 31, 2004, we generated $3,463,113 through the sale of our Pennsylvania
manufacturing facility offset by capital expenditures of $1,787,447 primarily for our Alabama warehouse
expansion and certain machinery, as compared to using $1,802,248 during the same period in the previous
year primarily for new product line molds. In addition, we paid $900,000 into an escrow deposit to
fund construction of our Alabama warehouse addition, all of which (except for $32,000 returned to
us) was subsequently released for the project.

We anticipate that future capital expenditures will be incurred primarily for the purchase of additional
molds, presses and customer conversion equipment in order to meet increasing demand for our product.
We project such growth spending to approximate $1,000,000 in 2005. Furthermore, we believe capital
spending to maintain existing machinery and equipment and enhance administrative operations and processes
will approximate $800,000 in 2005. In addition, if our growth trend continues at its current pace,
we believe that a third production facility will be required during fiscal 2006. We expect that this
facility would be constructed primarily to service our growing customer base in the western portion
of the United States. We estimate that this project would require total capital expenditures of approximately
$7,000,000.

We anticipate the majority of the capital required for these items to be funded through a combination
of operating cash flows and traditional debt financing collateralized by a combination of existing
assets and the new assets being acquired.

18

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Financing Activities. In 2004, we paid down capital lease obligations of $83,164, notes payable of $1,526,394, our Pennsylvania
manufacturing facility debt of $1,864,117, $3,580,000 on our line of credit and retired a promissory
note totaling $39,236 related to our Alabama facility. As part of the Alabama plant financing transaction,
we borrowed $1,753,923 and funded $40,000 as collateral for our secured letter of credit. All of
these activities resulted in net cash of $5,378,988 used by financing activities during fiscal 2004.
During 2003, $164,411 was provided by financing activities comprised of $1,830,000 borrowed on our
line of credit offset by repayments of $1,513,236 on our long-term debt and reduction in our capital
lease obligations of $152,353. A significant portion of funds borrowed on our line of credit in fiscal
2003 were used to fund the creation of molds for new product lines.

In February 2005, we completed a debt refinancing that resulted in a maximum $3,500,000 formula-based
secured credit facility with available remaining borrowing capacity of approximately $1,600,000 and
an unused $1,000,000 Multi-Term Loan that may be drawn for future equipment expenditures. Among other
benefits, the refinancing provided us with more favorable interest rates and additional financial
flexibility to assist us in meeting our companys growth plans.

We compete in a very competitive marketplace that has observed significant price decreases in certain
product lines over the past three years. We believe that such price level erosion experienced in
recent years will eventually reverse. However, there is no guarantee that such trend will reverse
and further price erosion could significantly affect our financial position and our results of operations
in future periods.

In the future, we may require additional funds to support operations and may seek to raise additional
funds through debt financing or other sources. There can be no assurance that additional funding
will be available at all, or that if available, such financing will be obtainable on terms favorable
to our company.

Related Party Transactions

Related party transactions are primarily with the following entities, related to our company by common
ownership (i) Giordano Construction Co., Inc. (Giordano Construction), for which we fabricate
certain products and from which we obtain building and construction services and (ii) L&G
Properties, from which we lease equipment. Giordano Construction is owned 50% by one our principal
owners who is also a director and executive officer with the remainder owed by another company director.
L&G Properties is owned 50% by each of the two principal owners of our company who are also directors
and executive officers.

These related party transactions consist of the following:

|                                                           | 2004 |         | 2003 |  
|---------------------------------------------------------- | ---- | ------- | ---- | -
|                                                           |      |         |      |  
|Transactions with Giordano Construction                    |      |         |      |  
|Sales                                                      | $    | 7,695   |      | $
|                                                           |      |         |      |  
|Purchases                                                  | $    | 970,240 |      | $
|                                                           |      |         |      |  
|Receivable From Giordano Construction at December 31       | $    | 1,250   |      | $
|                                                           |      |         |      |  
|Payable to Giordano Construction at December 31            | $    |        |      | $
|                                                           |      |         |      |  
|                                                           |      |         |      |  
|Transactions with L&G Properties
     Leasing of Equipment | $    |        |      | $
|                                                           |      |         |      |  

Giordano Construction entered into an $868,000 construction agreement with our company to provide overall
management and construction related services for a 30,000 square foot expansion of our Brewton, Alabama
production facility. In December 2004, Giordano Construction was paid $29,000 for cost overruns related
to this project. The remaining purchases are for paving and other construction related services.

In March 2003, we received a $650,000 advance from one of our two principal shareholders. We paid the
entire outstanding balance on April 3, 2003.

Our principal shareholders had personally guaranteed all of our debt. These guaranties were released
in connection with our February 2005 refinancing.

19

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Contractual Obligations

Our cash flows from operations are dependent on a number of factors, including fluctuations in our
operating results, shipment linearity, accounts receivable collections, inventory management, and
the timing of tax and other payments. As a result, the impact of contractual obligations on our liquidity
and capital resources in future periods should be analyzed in conjunction with such factors. The following table summarizes our contractual obligations at December 31, 2004:

|                                              |  | Payment Due By Period |           
|--------------------------------------------- |  | --------------------- | ----------
|
|
|                                              |  |                       |           
|Operating lease commitments (1)               |  | $                     | 63,228    
|Real estate operating lease commitments(2)(3) |  |                       | 7,139,195 
|Long-term debt (4)                            |  |                       | 4,182,462 
|Capital lease obligations                     |  |                       | 36,694    
|Purchase obligations (5)                      |  |                       |          
|                                              |  |                       |           
|Total                                         |  | $                     | 11,421,579
|                                              |  |                       |           

|(1) | We lease certain manufacturing equipment and vehicles under operating leases expiring at various dates
through 2007. Management expects that in the normal course of business, leases will be renewed or
replaced by other leases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(2) | On May 21, 2004, we sold our Pennsylvania production facility for gross proceeds of $3,897,000. Concurrent
with the sale, we leased the property back under a non-cancelable lease for a period of 29.5 years
and thereafter renewable at market rates at our option.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(3) | A portion of the future minimum lease payments are contingent upon fluctuations in the three month
LIBOR rate. Rent was computed based on the 2.09% rate existing in the lease as of December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(4) | In connection with our debt refinancing in February 2005, the information on long-term debt set forth
above has been altered. Please refer to Note 19 of our Consolidated Financial Statements included
in this report for additional information.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(5) | Contractual obligations for purchases of goods or services are defined as agreements that are enforceable
and legally binding on us and that specify all significant terms, including fixed or minimum quantities
to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.
Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors
within a short time. We do not have significant agreements for the purchase of raw materials or other
goods specifying minimum quantities and set prices that exceed our expected requirements for three
months. Therefore, agreements for the purchase of raw materials and other goods and services are
not included in the table above. Agreements for outsourced services generally contain clauses allowing
for cancellation without significant penalty, and are therefore not included in the table above.

The table does not include contractual obligations recorded on the balance sheet as current liabilities
except for the current portion of long-term debt, bank line of credit and the current portion of
capital lease obligations.

20

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Other Commitments

We are required to have a secured letter of credit for $1,800,000 related to our rental obligation
on our Alabama Plant Financing (see Note 15 to our Consolidated Financial Statements included in
this report). Subsequent to our debt refinancing transaction in February 2005 (see Note 19 to our
Consolidated Financial Statements included in this report), this letter of credit was renewable on
an annual basis with our financial institution. As of February 22, 2005, the letter of credit had
an unused balance of $1,800,000 and an expiration date in February 2006.

We are also required to have a financial guarantee surety bond to cover our goods and services tax
to conduct exporting services into Canada (GST Tax). The surety bond issuer requires protection under
a letter of credit. The letter of credit had an unused balance of $35,000 U.S. dollars and an expiration
date of January 30, 2006.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangement.

ITEM 7. FINANCIAL STATEMENTS.

See pages beginning with page F-1.

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

Effective July 25, 2003, Baier & Williams, LLP. (Baier & Williams) resigned as
our independent accountant. Baier & Williams informed us that it could no longer provide audit
(or audit related) services to SEC registrants in as much as the firm had chosen not to register
with the Public Company Accounting Oversight Board. Baier & Williams audited our financial statements
for the years ended December 31, 2002, 2001 and 2000. On September 8, 2003, we engaged Beard Miller
Company LLP (Beard Miller) as our new independent accountants. The decision to engage
Beard Miller was approved by the Audit Committee of our Board of Directors.

We reported these events in our Form 10-QSB for the fiscal quarter ended June 30, 2003 filed on July
25, 2003 and in a Form 8-K filed on September 15, 2003.

ITEM 8A. CONTROLS AND PROCEDURES

Based on our managements evaluation (with the participation of our principal executive officer
and principal financial officer), as of the end of the period covered by this report, our principal
executive officer and principal financial officer have concluded that 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)) are effective to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission rules
and forms. During the quarter ended December 31, 2004, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.

ITEM 8B. OTHER ITEMS

We are not aware of any information that should have been reported on Form 8-K during the fourth quarter
of the year covered by this Form 10-KSB, but not reported, whether or not otherwise required by this
Form 10-KSB.

21

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ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS

Information relating to our directors and executive officers is set forth below. Information regarding
compliance with Section 16(a) of the Securities Act of 1934 is included under the caption Ownership
of SecuritiesSection 16(a) Beneficial Ownership Reporting Compliance in our Information
Statement related to our 2005 Annual Meeting of Shareholders (the 2005 Information Statement),
which section is incorporated herein by reference. We expect to file the 2005 Information Statement
or an amendment to this report on Form 10-KSB on or before April 29, 2005.

Non-Employee Directors:

THOMAS J. GIORDANO, age 35, became a director March 29, 2004. He has served as Vice-President of Giordano
Construction since 1998. Mr. Giordano oversees daily operations of Giordano Construction, which provides
general contracting, commercial, industrial and telecommunications construction services in numerous
states. Since 2002, Mr. Giordano has been Vice-President and partner of Portage Chrysler, Jeep, Dodge
of Garratsville, Ohio. Thomas J. Giordano is the son of Joseph Giordano, Jr., the President and a
director of our company.

MEL GRATA, age 52, became a director in March 2003. He has been the owner of Mel Grata Chevrolet in
Hermitage, Pennsylvania since July 1985. Mr. Grata has been active in his local community, serving
as a director of the Shenango Valley Foundation since July 1994, a director of Shenango Valley Industrial
Development Corp. since 1984, and a founding member of Subscribers Encouraging Economic Development.
In addition, he has previously served as a director of McDowell National Bank/Integra Bank North
in Hermitage, Pennsylvania, and as an advisory board member for the First National Bank of Pennsylvania
from 1987 to 1991. In November 2004, Mr. Grata was named the Shenango Valley Chamber of Commerce
Man of the Year.

DONALD L. FRANTY, age 41, became
a director in March 2003. Since August 2002, he has been an officer and shareholder in Franty &
Company located in McMurray, Pennsylvania. This is a full-service firm of certified public accountants
and management consultants offering services in the areas of auditing, accounting, tax, and management
consulting. From 1996 to August 2002, Mr. Franty operated a tax and accounting practice, Franty-Good
& Co. He was an auditor with the Pittsburgh office of Parente Randolph, a Wilkes-Barre-based
regional accounting firm from 1989 to 1996. He began his career in public accounting in 1985 with
the local firm of Ryan Damratoski & Company, after having received a bachelors degree in
accounting from West Virginia University. Mr. Franty is a member of the American Institute of Certified
Public Accountants (AICPA) and the Pennsylvania Institute of Certified Public Accountants
(PICPA). He is also involved in various civic activities in McMurray, Pennsylvania.

TERRY L. MASSARO, age 51, became
a director in March 2003. He is currently a partner with the accounting firm of Carbis Walker LLP,
New Castle, Pennsylvania, and has been with the firm for over 25 years. He has focused on building
expertise in the areas of manufacturing and nonprofit entities. Mr. Massaro is the quality control
partner of the firm and captain of Carbis Walkers peer review team, which is utilized by other
firms as a mandatory quality control tool to meet standards set by the AICPA. Additionally, he is
in charge of the firms report center where he is responsible for reviewing reports for accuracy
and adherence to guidelines set by the AICPA. He is currently the alternate coordinator of manufacturing
services and has served as the firms partner-in-charge of the New Castle office. Mr. Massaro
received a bachelor of arts degree in business with a concentration in accounting from Westminster
College. He is a member of the AICPA, the PICPA, and the Ohio Society of Certified Public Accountants.

22

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JOSEPH J. PRISCHAK, age 74, became
a director in March 2003. He is the chairman of the board of the Plastek Group of Erie, Pennsylvania,
a company which he founded in 1971. Mr. Prischak began his career at Erie Resistor in the molding
department and then moved to the tool room where he took up his apprenticeship. He then worked for
Penn Erie Manufacturing. With two partners, he founded Triangle Tool Company in 1956 in Erie, Pennsylvania.
He then moved into the plastics field in 1971 with the founding of the Plastek Group, an international
tool making and plastic molding company in the field of plastic packaging for consumer products.
The Plastek Group now has over 2,000 employees. In 1991, Mr. Prischak was honored with the Master
Entrepreneur of the Year Award, which is sponsored by Inc. Magazine, Merrill Lynch Financial
Services, and Ernst and Young LLP. He has served on the Hamot Corporation Board, and currently serves
on Penn State Behrend Council of Fellows. Since December 1999, he has been a director of Echocath,
Inc., a public company located in Princeton, New Jersey, which develops, manufactures and markets
medical devices, which enhance and expand the use of ultrasound technology for medical applications and procedures.

Executive Officers and Employee Directors:

|Name                |  | Age |  | Position with our Company                      
|------------------- |  | --- |  | -----------------------------------------------
|                    |  |     |  |                                                
|                    |  |     |  |                                                
|Joseph Giordano, Jr |  | 54  |  | President and Director                         
|                    |  |     |  |                                                
|Charles J. Long, Jr |  | 43  |  | Secretary, Treasurer and Director              
|                    |  |     |  |                                                
|Jay A. Martin       |  | 31  |  | Vice-President of Operations                   
|                    |  |     |  |                                                
|Shawn C. Fabry      |  | 27  |  | Chief Financial Officer and Assistant Secretary

JOSEPH GIORDANO, JR. has been the President of IPEC since December 1994 and became the President and
a director of our company in January 2002. Mr. Giordano has also been the Chief Executive Officer
of Giordano Construction Company, Inc. (Giordano Construction) since 1998 until the present
time and was the President of Giordano Construction from 1973 through 1998. Giordano Construction
provides general, commercial, industrial and telecommunications construction services. From January
2000 through April 2003, Mr. Giordano was a principal shareholder and director of Everclear Communications,
LLC (Walton, Kentucky), a telecommunication construction services company.

CHARLES J. LONG, JR. has been the corporate Secretary and Treasurer of IPEC since 1994 and became the
Secretary, Treasurer and a Director of our company in January 2002. Mr. Long served as the President
of E. Long Holdings (New Castle, Pennsylvania) from 1984 through January 2002. E. Long Holdings is
a private company that provides paving construction services. Since 1990, Mr. Long has been the President
of Hackers Inc. (Volant, Pennsylvania), a private company that owns and manages several golf course
facilities.

JAY A. MARTIN has been our Vice President of Operations since 2001. Mr. Martin earned a Bachelor of
Science in Mechanical Engineering along with additional education in Quality Management with a concentration
in Metrology. He began his professional career in the engineering department of IPEC in 1996. He
has held the following positions within our company in the order listed: CAD/Drafting Engineer, Engineering
Manager, Corporate Purchasing Manager, Divisional Quality Assurance Manager, Corporate Quality Assurance
Director, Plant Manager, and Assistant Vice-President of Operations. Mr. Martin is now responsible
for all phases of our operations including the Brewton, Alabama and the New Castle, Pennsylvania
facilities. As such, he oversaw the entire ISO 9001-2000 certification process for IPEC. Mr. Martin
has been active in his local community, serving as the Head of Public Relations for the Lawrence
County Big Brothers Big Sisters, as well as sitting on the Board of Directors since 2001. Mr.
Martin is also an active member of the Lawrence County School to Work program as well as the Lawrence
County Student Mentoring Program.

23

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SHAWN C. FABRY became our Chief Financial Officer in July 2003 and Assistant Secretary in February
2005. Mr. Fabry holds a Bachelor of Science degree in accounting with a minor in business administration.
Mr. Fabry began his career with Arthur Andersen LLP in 1999, where he spent three years as a senior
auditor. From 2002 to 2003, he worked as an audit manager for Ernst & Young LLP, Pittsburgh,
Pennsylvania serving a client base comprised primarily of SEC registrants. Mr. Fabry is a member
of the American Institute of Certified Public Accountants (AICPA) and the Pennsylvania
Institute of Certified Public Accountants (PICPA). He is also involved in various civic
activities in Cranberry, Pennsylvania and is a Certified Public Accountant.

Code of Ethics

We have adopted a code of ethics that applies to our principal executive officer and all members of
our finance department, including the principal financial officer and principal accounting officer.
A copy of this code of ethics is filed as an exhibit to this report.

ITEM 10. EXECUTIVE COMPENSATION.

The information required by this item is included under the captions Proposal No. 1:Election
of DirectorsDirector Compensation and Executive Compensation and Related Information
in the 2005 Information Statement, which sections are incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by this item relating to security ownership of certain beneficial owners and
management, and securities authorized for issuance under equity compensation plans is included under
the caption Ownership of Securities in the 2005 Information Statement, which section
is incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item is included under the caption Certain Relationships and
Related Transactions in the 2005 Information Statement, which section is incorporated herein
by reference.

ITEM 13. EXHIBITS

The exhibits listed in the Index to Exhibits are incorporated herein by reference as the list of exhibits
required as part of this report.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is included under the captions Proposal No. 3:Ratification
of the Selection of Beard Miller Company LLP as Independent AuditorsIndependent Auditor Fee
Information and Audit Committee Approval Process in 2005 Information Statement,
which sections are incorporated herein by reference.

24

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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.

|                     | IPEC HOLDINGS INC.
|-------------------- | ------------------
|                     |                   
|Date: March 30, 2005 | By:               
|                     |                   
|                     |                   

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

|Signature                |  | Title                                                                       |  | Date          
|------------------------ |  | --------------------------------------------------------------------------- |  | --------------
|                         |  |                                                                             |  |               
|                         |  |                                                                             |  |               
|/s/ Joseph Giordano, Jr. |  | President and Director 
      (Principal Executive Officer)                 |  | March 30, 2005
|            |  |                                                                             |  |               
|Joseph Giordano, Jr.     |  |                                                                             |  |               
|                         |  |                                                                             |  |               
|/s/ Charles J. Long, Jr. |  | Secretary, Treasurer and Director                                           |  | March 30, 2005
|            |  |                                                                             |  |               
|Charles J. Long, Jr.     |  |                                                                             |  |               
|                         |  |                                                                             |  |               
|/s/ Shawn C. Fabry       |  | Chief Financial Officer (Principal 
      Financial and Accounting Officer) |  | March 30, 2005
|            |  |                                                                             |  |               
|Shawn C. Fabry           |  |                                                                             |  |               
|                         |  |                                                                             |  |               
|/s/ Thomas J. Giordano   |  | Director                                                                    |  | March 30, 2005
|            |  |                                                                             |  |               
|Thomas J. Giordano       |  |                                                                             |  |               
|                         |  |                                                                             |  |               
|/s/ Mel Grata            |  | Director                                                                    |  | March 30, 2005
|            |  |                                                                             |  |               
|Mel Grata                |  |                                                                             |  |               
|                         |  |                                                                             |  |               
|/s/ Donald L. Franty     |  | Director                                                                    |  | March 30, 2005
|            |  |                                                                             |  |               
|Donald L. Franty         |  |                                                                             |  |               
|                         |  |                                                                             |  |               
|/s/ Terry L. Massaro     |  | Director                                                                    |  | March 30, 2005
|            |  |                                                                             |  |               
|Terry L. Massaro         |  |                                                                             |  |               
|                         |  |                                                                             |  |               
|/s/ Joseph J. Prishak    |  | Director                                                                    |  | March 30, 2005
|            |  |                                                                             |  |               
|Joseph J. Prishak        |  |                                                                             |  |               

25

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Index to Exhibits

|Exhibit 
      Number |  | Description of Exhibit (1)                                                                                                                                                                                                                                                         
|--------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                      |  |                                                                                                                                                                                                                                                                                    
|2.1                   |  | Share Exchange Agreement between Golden Hole, Inc. and International Plastics and Equipment Corp. dated January 14, 2002 (incorporated by reference to Exhibit 2.1 to the registrants Current Report on Form 8-K/A dated March 18, 2002).                                         
|                      |  |                                                                                                                                                                                                                                                                                    
|3.1                   |  | Restated Articles of Incorporation of IPEC Holdings Inc. (incorporated by reference to Exhibit 3.1 to the registrants Current Report on Form 8-K dated April 15, 2002).                                                                                                           
|                      |  |                                                                                                                                                                                                                                                                                    
|3.2                   |  | Bylaws of IPEC Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the registrants Current Report on Form 8-K dated April 15, 2002).                                                                                                                                      
|                      |  |                                                                                                                                                                                                                                                                                    
|10.1*                 |  | Amended and Restated IPEC Holdings Inc. 2002 Stock Option Plan (incorporated by reference to Exhibit 10.16 to the registrants quarterly report on Form 10-QSB for the quarter ended June 30, 2004).                                                                               
|                      |  |                                                                                                                                                                                                                                                                                    
|10.2                  |  | Lease Agreement dated as of May 21, 2004 between CRICIPECPA LP, as Lessor, and International Plastics and Equipment Corp., as Lessee (incorporated by reference to Exhibit 10.10 to the registrants quarterly report on Form 10-QSB for the quarter ended June 30, 2004).         
|                      |  |                                                                                                                                                                                                                                                                                    
|10.3                  |  | Lease Agreement dated as of May 21, 2004 between CRICIPECAL LLC, as Lessor, and International Plastics and Equipment Corp., as Lessee (incorporated by reference to Exhibit 10.11 to the registrants quarterly report on Form 10-QSB for the quarter ended June 30, 2004).        
|                      |  |                                                                                                                                                                                                                                                                                    
|10.4                  |  | Guaranty of Lease dated May 21, 2004 between IPEC Holdings Inc., as Guarantor, to and for the benefit of CRICIPECPA LP, as Lessor (incorporated by reference to Exhibit 10.12 to the registrants quarterly report on Form 10-QSB for the quarter ended June 30, 2004).            
|                      |  |                                                                                                                                                                                                                                                                                    
|10.5                  |  | Guaranty of Lease dated May 21, 2004 between IPEC Holdings Inc., as Guarantor, to and for the benefit of CRICIPECAL LLC, as Lessor (incorporated by reference to Exhibit 10.13 to the registrants quarterly report on Form 10-QSB for the quarter ended June 30, 2004).           
|                      |  |                                                                                                                                                                                                                                                                                    
|10.6*                 |  | Form of Agreement for Incentive Stock Option Awards under the Amended and Restated IPEC Holdings Inc. 2002 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the registrants quarterly report on Form 10-QSB for the quarter ended September 30, 2004).             
|                      |  |                                                                                                                                                                                                                                                                                    
|10.7*                 |  | Form of Agreement for Non-qualified Stock Option Awards under the Amended and Restated IPEC Holdings Inc 2002 Stock Option Plan (incorporated by reference to Exhibit 10.2 to the registrants quarterly report on Form 10-QSB for the quarter ended September 30, 2004).          
|                      |  |                                                                                                                                                                                                                                                                                    
|10.8                  |  | Agreement for Financial Investor Relations for IPEC Holdings Inc. dated October 25, 2004 by and between IPEC Holdings Inc. and Murdock Capital Partners Corp. (incorporated by reference to Exhibit 10.1 to the registrants Current Report on Form 8-K filed on October 28, 2004).

26

---



|10.9  |  | Revolving Credit and Term Loan Agreement dated February 18, 2005 by and between International Plastics and Equipment Corp. and Citizens Bank of Pennsylvania (incorporated by reference to Exhibit 10.1 to the registrants Current Report on Form 8-K filed on February 25, 2005).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                                                    
|10.10 |  | Revolving Credit Note dated February 18, 2005 made by International Plastics and Equipment Corp. in favor of Citizens Bank of Pennsylvania (incorporated by reference to Exhibit 10.2 to the registrants Current Report on Form 8-K filed on February 25, 2005).                  
|      |  |                                                                                                                                                                                                                                                                                    
|10.11 |  | Term Note dated February 18, 2005 made by International Plastics and Equipment Corp. in favor of Citizens Bank of Pennsylvania (incorporated by reference to Exhibit 10.3 to the registrants Current Report on Form 8-K filed on February 25, 2005).                              
|      |  |                                                                                                                                                                                                                                                                                    
|10.12 |  | Multi-Draw Term Note dated February 18, 2005 made by International Plastics and Equipment Corp. in favor of Citizens Bank of Pennsylvania (incorporated by reference to Exhibit 10.4 to the registrants Current Report on Form 8-K filed on February 25, 2005).                   
|      |  |                                                                                                                                                                                                                                                                                    
|10.13 |  | Security Agreement dated February 18, 2005 by and between International Plastics and Equipment Corp. and Citizens Bank of Pennsylvania (incorporated by reference to Exhibit 10.5 to the registrants Current Report on Form 8-K filed on February 25, 2005).                      
|      |  |                                                                                                                                                                                                                                                                                    
|10.14 |  | Guaranty and Suretyship Agreement dated February 18, 2005 made by IPEC Holdings Inc. in favor of Citizens Bank of Pennsylvania (incorporated by reference to Exhibit 10.6 to the registrants Current Report on Form 8-K filed on February 25, 2005).                              
|      |  |                                                                                                                                                                                                                                                                                    
|10.15 |  | Summary of Non-Employee Director Compensation effective January 1, 2005                                                                                                                                                                                                            
|      |  |                                                                                                                                                                                                                                                                                    
|14.1  |  | Code of Ethics for Senior Financial Officers.                                                                                                                                                                                                                                      
|      |  |                                                                                                                                                                                                                                                                                    
|21.1  |  | Subsidiaries of the registrant.                                                                                                                                                                                                                                                    
|      |  |                                                                                                                                                                                                                                                                                    
|31.1  |  | Rule 13a-14(a) Certification of Chief Executive Officer.                                                                                                                                                                                                                           
|      |  |                                                                                                                                                                                                                                                                                    
|31.2  |  | Rule 13a-14(a) Certification of Chief Financial Officer.                                                                                                                                                                                                                           
|      |  |                                                                                                                                                                                                                                                                                    
|32.1  |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, of the Chief Executive Officer.                                                                                                                            
|      |  |                                                                                                                                                                                                                                                                                    
|32.2  |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, of the Chief Financial Officer.                                                                                                                            


* Indicates management contract or compensatory plan or arrangement.

(1)  In the case of incorporation by reference to documents filed by the registrant under
the Securities Exchange Act of 1934, as amended, the registrants file number under the Exchange
Act is 0-30721.

Copies of the exhibits filed or furnished as part of this Form 10-KSB are available at the cost of
$0.25 per page to any shareholder of record upon written request to the Secretary, IPEC Holdings
Inc., Northgate Industrial Park, 185 Northgate Circle New Castle, Pennsylvania 16105.

27

---



Item 7. FINANCIAL STATEMENTS

IPEC Holdings Inc. Consolidated Financial StatementsDecember 31, 2004 and 2003

|Table of Contents                                                             
|------------------------------------------------------------------------------
|
|                                                                              
|Report of Independent Registered Public Accounting Firm                       
|                                                                              
|Consolidated Balance Sheets  December 31, 2004 and 2003                      
|                                                                              
|Statements Of Consolidated Operations - Years Ended December 31, 2004 and 2003
|                                                                              
|Statements Of Consolidated Cash Flows - Years Ended December 31, 2004 and 2003
|                                                                              
|Statement of Consolidated Shareholders Equity  December 31, 2004 and 2003   
|                                                                              
|Notes To Consolidated Financial Statements  December 31, 2004 and 2003       

F-1

---





Report of Independent Registered Public Accounting Firm

To the Board of DirectorsIPEC Holdings Inc. New Castle, Pennsylvania

We have audited the accompanying consolidated balance sheets of IPEC Holdings Inc. and subsidiary as
of December 31, 2004 and 2003, and the related statements of consolidated operations, shareholders
equity, and cash flows for the years then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of IPEC Holdings Inc. and subsidiary as of December 31,
2004 and 2003, and the consolidated results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the United States of America.

|                         | /s/ Beard Miller Company LLP
|------------------------ | ----------------------------
|                         |                             
|Pittsburgh, Pennsylvania |                             
|February 24, 2005        |                             

F-2

---



IPEC Holdings Inc. 
Consolidated Balance Sheets

|                                                                                 |  | December 31,
2004 |            | December 31,
      2003 |  
|-------------------------------------------------------------------------------- |  | ----------------- | ---------- | ----------------------- | -
|                                                                                 |  |                   |            |                         |  
|Assets                                                                           |  |                   |            |                         |  
|                                                                                 |  |                   |            |                         |  
|Cash                                                                             |  | $                 | 279,278    |                         | $
|Accounts receivable, less allowance for doubtful accounts and returns of        
|$418,000 and $220,000, respectively in 2004 and 2003                             |  |                   | 1,623,383  |                         |  
|Other trade related receivables                                                  |  |                   | 268,305    |                         |  
|Inventories                                                                      |  |                   | 2,774,613  |                         |  
|Income tax refund receivable                                                     |  |                   | 37,492     |                         |  
|Deferred tax asset                                                               |  |                   | 210,551    |                         |  
|Prepaid expenses                                                                 |  |                   | 152,394    |                         |  
|                                                                                 |  |                   |            |                         |  
|Current Assets                                                                   |  |                   | 5,346,016  |                         |  
|                                                                                 |  |                   |            |                         |  
|                                                                                 |  |                   |            |                         |  
|Land                                                                             |  |                   | 41,040     |                         |  
|Buildings and equipment                                                          |  |                   | 17,732,115 |                         |  
|Construction in progress                                                         |  |                   | 223,234    |                         |  
|Accumulated depreciation                                                         |  |                   | (8,738,980 | )                       |  
|                                                                                 |  |                   |            |                         |  
|Property, plant & equipment, net                                                 |  |                   | 9,257,409  |                         |  
|                                                                                 |  |                   |            |                         |  
|                                                                                 |  |                   |            |                         |  
|Patents, less accumulated amortization of $129,709 and $104,115 in 2004 and 2003 |  |                   | 262,178    |                         |  
|Other assets                                                                     |  |                   | 372,593    |                         |  
|                                                                                 |  |                   |            |                         |  
|Other Assets                                                                     |  |                   | 634,771    |                         |  
|                                                                                 |  |                   |            |                         |  
|Total Assets                                                                     |  | $                 | 15,238,196 |                         | $
|                                                                                 |  |                   |            |                         |  

The accompanying notes are an integral part of these consolidated financial statements.

F-3

---



IPEC Holdings Inc. 
Consolidated Balance Sheets

|                                                                                                                         | December 31,
      2004 |            | December 31,
      2003 |  
|------------------------------------------------------------------------------------------------------------------------ | ----------------------- | ---------- | ----------------------- | -
|                                                                                                                         |                         |            |                         |  
|Liabilities                                                                                                              |                         |            |                         |  
|                                                                                                                         |                         |            |                         |  
|Accounts payable                                                                                                         | $                       | 905,115    |                         | $
|Accrued liabilities                                                                                                      |                         | 1,200,850  |                         |  
|Current portion of long-term debt                                                                                        |                         | 961,381    |                         |  
|Bank line of credit                                                                                                      |                         | 800,000    |                         |  
|Current portion of capital lease obligation                                                                              |                         | 9,642      |                         |  
|Current portion of deferred gain on plant sale                                                                           |                         | 47,166     |                         |  
|                                                                                                                         |                         |            |                         |  
|Current Liabilities                                                                                                      |                         | 3,924,154  |                         |  
|                                                                                                                         |                         |            |                         |  
|                                                                                                                         |                         |            |                         |  
|Capital lease obligation                                                                                                 |                         | 27,053     |                         |  
|Long-term debt                                                                                                           |                         | 3,221,081  |                         |  
|Long-term deferred gain on plant sale                                                                                    |                         | 1,046,141  |                         |  
|                                                                                                                         |                         |            |                         |  
|Long-term Liabilities                                                                                                    |                         | 4,294,275  |                         |  
|                                                                                                                         |                         |            |                         |  
|                                                                                                                         |                         |            |                         |  
|Deferred income taxes                                                                                                    |                         | 860,881    |                         |  
|                                                                                                                         |                         |            |                         |  
|Total Liabilities                                                                                                        |                         | 9,079,310  |                         |  
|                                                                                                                         |                         |            |                         |  
|                                                                                                                         |                         |            |                         |  
|Shareholders Equity                                                                                                     |                         |            |                         |  
|                                                                                                                        
|Preferred stock, $0.001 par value, 25,000,000 shares authorized, no shares                                              
|issued and outstanding                                                                                                   |                         |           |                         |  
|                                                                                                                        
|Common stock, par value $0.001 per share, 100,000,000 shares authorized,
        9,972,912 shares issued and outstanding |                         | 9,973      |                         |  
|Additional paid in capital                                                                                               |                         | 4,467,994  |                         |  
|Retained earnings                                                                                                        |                         | 1,680,919  |                         |  
|                                                                                                                         |                         |            |                         |  
|Shareholders Equity                                                                                                     |                         | 6,158,886  |                         |  
|                                                                                                                         |                         |            |                         |  
|Total Liabilities and Shareholders Equity                                                                               | $                       | 15,238,196 |                         | $
|                                                                                                                         |                         |            |                         |  

The accompanying notes are an integral part of these consolidated financial statements.

F-4

---



IPEC Holdings Inc. 
Statements of Consolidated Operations

|                                         | Year Ended December 31, |           
|---------------------------------------- | ----------------------- | ----------
|
|
|                                         |                         |           
|                                         |                         |           
|Sales                                    | $                       | 22,381,158
|                                         |                         |           
|Operating Expenses                      
|Cost of Goods Sold                       |                         | 15,749,399
|Selling and Service                      |                         | 1,180,884 
|General and Administrative               |                         | 2,225,971 
|                                         |                         |           
|Operating Expenses                       |                         | 19,156,254
|                                         |                         |           
|Operating Income                         |                         | 3,224,904 
|                                         |                         |           
|Non-operating Expense (Income)          
|Interest Expense                         |                         | 414,167   
|Other Expense (Income)                   |                         | 12,813    
|                                         |                         |           
|Non-operating Expenses, net              |                         | 426,980   
|                                         |                         |           
|                                         |                         |           
|Income Before Taxes                      |                         | 2,797,924 
|Income Taxes                             |                         | 1,119,144 
|                                         |                         |           
|                                         |                         |           
|Net Income                               | $                       | 1,678,780 
|                                         |                         |           
|                                         |                         |           
|                                         |                         |           
|                                         |                         |           
|Average Shares of Common Stock - Basic   |                         | 9,972,912 
|                                         |                         |           
|                                         |                         |           
|                                         |                         |           
|                                         |                         |           
|Average Shares of Common Stock - Diluted |                         | 10,230,486
|                                         |                         |           
|                                         |                         |           
|                                         |                         |           
|                                         |                         |           
|Basic Net Income Per Share               | $                       | 0.17      
|                                         |                         |           
|                                         |                         |           
|                                         |                         |           
|                                         |                         |           
|Diluted Net Income Per Share             | $                       | 0.16      
|                                         |                         |           
|                                         |                         |           

The accompanying notes are an integral part of these consolidated financial statements.

F-5

---



IPEC Holdings Inc. 
Statements of Consolidated Cash Flows

|                                                                                       |  
|-------------------------------------------------------------------------------------- | -
|
|2003                                                                                  
|                                                                                       |  
|Cash Flows from Operating Activities:                                                  |  
|Net Income                                                                             | $
|Adjustments to reconcile net income to net cash provided by
     operating activities: |  
|Depreciation and amortization                                                          |  
|Deferred taxes                                                                         |  
|Deferred financing cost amortization                                                   |  
|Gain amortization on plant sale                                                        |  
|Provision for doubtful accounts and returns                                            |  
|Provision for inventory write-downs                                                    |  
|Common stock issued for services                                                       |  
|Warrants issued for services                                                           |  
|Changes in operating assets and liabilities:                                          
|Accounts receivable                                                                    |  
|Other trade related receivables                                                        |  
|Inventory                                                                              |  
|Prepaid expenses                                                                       |  
|Other assets                                                                           |  
|Accounts payable                                                                       |  
|Accrued liabilities                                                                    |  
|Income taxes                                                                           |  
|                                                                                       |  
|Net cash provided by operating activities                                              |  
|                                                                                       |  
|                                                                                      
|Cash Flows from Investing Activities:                                                  |  
|Purchases of property, plant & equipment                                               |  
|Payment to escrow deposit                                                              |  
|Release of funds from escrow deposit                                                   |  
|Proceeds from sale of plant, net of $434,000 in transaction related costs              |  
|Development of patents                                                                 |  
|                                                                                       |  
|Net cash provided (used) in investing activities                                       |  
|                                                                                       |  
|                                                                                      
|Cash Flows from Financing Activities:                                                 
|Borrowing on bank line of credit                                                       |  
|Repayment of bank line of credit                                                       |  
|Repayments of capital lease obligations                                                |  
|Repayment of long-term debt                                                            |  
|Payment of letter of credit collateral deposit                                         |  
|Proceeds from financing of plant, net of $233,000 in transaction related costs         |  
|Repayment of existing plant debt                                                       |  
|Repayment of debt from plant sale                                                      |  
|                                                                                       |  
|Net cash (used) provided by financing activities                                       |  
|                                                                                       |  
|Net (decrease) / increase in cash                                                      |  
|Cash - beginning of period                                                             |  
|                                                                                       |  
|Cash  end of period                                                                   | $
|                                                                                       |  

The accompanying notes are an integral part of these consolidated financial statements.

F-6

---



IPEC Holdings Inc. 
Statements of Consolidated Shareholders Equity
For the Years Ended December 31, 2004 and December 31, 2003

|                                                                   | Preferred
      Shares
      Outstanding |  | Common
      Shares
      Outstanding |  | Common
      Stock
      Warrants |  | Preferred
      Stock |   | Common
      Stock |   | Additional
      Paid
      In Capital |  | Retained
      Earnings
      (Deficit) |           | Total |  
|------------------------------------------------------------------ | ---------------------------------------- |  | ------------------------------------- |  | --------------------------------- |  | --------------------- | - | ------------------ | - | -------------------------------------- |  | --------------------------------------- | --------- | ----- | -
|                                                                   |                                          |  |                                       |  |                                   |  |                       |   |                    |   |                                        |  |                                         |           |       |  
|Balance at                                                         |                                          |  |                                       |  |                                   |  |                       |   |                    |   |                                        |  |                                         |           |       |  
|December 31, 2002                                                  |                                         |  | 9,972,912                             |  | 200,000                           |  | $                     |  |                    | $ | 9,973                                  |  | $                                       | 4,376,894 |       | $
|                                                                   |                                          |  |                                       |  |                                   |  |                       |  
|                                                                  
|Issuance of common                                                
|stock options                                                     
|for services                                                       |                                         |  |                                      |  |                                  |  |                       |  |                    |   |                                       |  |                                         | 1,100     |       |  
|                                                                  
|Issuance of common
           stock warrants
         for services |                                         |  |                                      |  |                                  |  |                       |  |                    |   |                                       |  |                                         |          |       |  
|Net Income                                                         |                                         |  |                                      |  |                                  |  |                       |  |                    |   |                                       |  |                                         |          |       |  
|                                                                   |                                          |  |                                       |  |                                   |  |                       |   |                    |   |                                        |  |                                         |           |       |  
|                                                                   |                                          |  |                                       |  |                                   |  |                       |  
|                                                                   |                                          |  |                                       |  |                                   |  |                       |  
|Balance at
         December 31,  2003                             |                                         |  | 9,972,912                             |  | 200,000                           |  | $                     |  |                    | $ | 9,973                                  |  | $                                       | 4,377,994 |       | $
|                                                                   |                                          |  |                                       |  |                                   |  |                       |  
|                                                                  
|Issuance of                                                       
|warrants for                                                      
|services                                                           |                                         |  |                                      |  | 100,000                           |  |                       |  |                    |   |                                       |  |                                         | 90,000    |       |  
|Net Income                                                         |                                         |  |                                      |  |                                  |  |                       |  |                    |   |                                       |  |                                         |          |       |  
|                                                                   |                                          |  |                                       |  |                                   |  |                       |   |                    |   |                                        |  |                                         |           |       |  
|                                                                   |                                          |  |                                       |  |                                   |  |                       |  
|                                                                   |                                          |  |                                       |  |                                   |  |                       |  
|Balance at                                                        
|December 31, 2004                                                  |                                         |  | 9,972,912                             |  | 300,000                           |  | $                     |  |                    | $ | 9,973                                  |  | $                                       | 4,467,994 |       | $
|                                                                   |                                          |  |                                       |  |                                   |  |                       |   |                    |   |                                        |  |                                         |           |       |  
|                                                                   |                                          |  |                                       |  |                                   |  |                       |  
|                                                                   |                                          |  |                                       |  |                                   |  |                       |  

The accompanying notes are an integral part of these consolidated financial statements.

F-7

---



1. Description of Business

IPEC Holdings Inc. (the Company) manufactures and sells tamper evident plastic closures
through its wholly-owned operating subsidiary, International Plastics and Equipment Corp (IPEC).
These closures are predominantly used in the bottling of non-carbonated beverages including bottled
water, milk and fruit and sports drinks. The Company also designs and manufactures equipment for
the bottling industry. IPECs customer base primarily consists of dairy and bottled water manufacturers
both domestically and internationally. The Companys two manufacturing facilities are located
in Pennsylvania and Alabama.

2. Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued Statement No. 123(R), Share-Based
Payment. Statement 123(R) revised Statement 123, Accounting for Stock-Based Compensation,
and supersedes APB Opinion No. 25, Accounting for Stock Issued for Employees, and its
related implementation guidance. Statement 123(R) will require compensation costs related to share-based
payment transactions to be recognized in the financial statements (with limited exceptions). The
amount of compensation cost will be measured based on the grant-date fair value of the equity or
liability instruments issued. Compensation cost will be recognized over the period that an employee
provides service in exchange for the award. Statement 123(R) is effective as of the beginning of
the first interim or annual reporting period that begins after December 15, 2005. The Company is
currently evaluating the impact from Statement 123(R) on its results of operations and financial position.

In November 2004, the Financial Accounting Standards Board issued Statement No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4, which clarifies the types of costs that should
be expensed rather than capitalized as inventory. Statement No. 151 also clarifies the circumstances
under which fixed overhead costs associated with operating facilities involved in inventory processing
should be capitalized. The provisions of Statement No. 151 are effective for fiscal years beginning
after June 25, 2005. The Company has not determined the impact, if any, that Statement No. 151 will
have on its results of operations and financial position.

3. Summary of Significant Accounting Policies

Principals of Consolidation

The Consolidated Financial Statements include the accounts of IPEC Holdings Inc. and its wholly-owned
subsidiary, International Plastics and Equipment Corporation. All significant intercompany accounts
and transactions have been eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original or remaining maturity
of less than three months at the date of purchase to be cash equivalents. Cash and cash equivalents
are maintained with primarily one financial institution.

Use of Estimates

The preparation of the consolidated financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial statements and the
accompanying notes. Estimates are used for allowance for doubtful accounts and sales returns, inventory
allowances, impairment of long-lived assets, stock compensation, income taxes, loss contingencies
and intangible assets. Actual results could differ materially from these estimates.

Stock-Based Compensation

Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based CompensationTransition
and Disclosure and Amendment of FASB Statement No. 123, amends the disclosure requirements
of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123), to require more prominent disclosures in both annual and interim financial
statements regarding the method of accounting for stock-based employee compensation and the effect
of the method used on reported results.

F-8

---



The Company accounts for stock-based awards to employees and non-employee directors using the intrinsic
value method of accounting in accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25). Under the intrinsic value method, because
the exercise price of the Companys employee and non-employee director stock options equals
the market price of the underlying stock on the date of grant, no compensation expense is recognized
in the Companys Consolidated Statements of Operations.

The Company is required under SFAS 123, to disclose pro forma information regarding option grants made
to its employees and non-employee directors based on specified valuation techniques that produce
estimated compensation charges. The pro forma information is as follows:

|                                                         | Year Ended
      December 31, 
      2004 |           | Year Ended
      December 31, 
      2003 |  
|-------------------------------------------------------- | ----------------------------------------- | --------- | ----------------------------------------- | -
|                                                         |                                           |           |                                           |  
|Net Income - as reported                                 | $                                         | 1,678,780 |                                           | $
|Compensation expense options - net of tax                |                                           | 148,634   |                                           |  
|Compensation expense warrants - net of tax               |                                           | 54,000    |                                           |  
|Compensation recorded in financial statement -net of tax |                                           | (54,000   | )                                         |  
|                                                         |                                           |           |                                           |  
|Net Income (Loss) - pro forma                            | $                                         | 1,530,146 |                                           | $
|                                                         |                                           |           |                                           |  
|                                                         |                                           |           |                                           |  
|Basic Net Income Per Share - as reported                 | $                                         | 0.17      |                                           | $
|                                                         |                                           |           |                                           |  
|Diluted Net Income Per Share - as reported               | $                                         | 0.16      |                                           | $
|                                                         |                                           |           |                                           |  
|Basic Net Income (Loss) Per Share - pro forma            | $                                         | 0.15      |                                           | $
|                                                         |                                           |           |                                           |  
|Diluted Net Income (Loss) Per Share - pro forma          | $                                         | 0.15      |                                           | $
|                                                         |                                           |           |                                           |  

The value of each option grant is estimated on the date of grant using the Black-Scholes option pricing
model. The Black-Scholes option pricing model was developed for use in estimating the value of traded
options that have no vesting restrictions and are fully transferable. In addition, option pricing
models require the input of highly subjective assumptions including the expected stock price volatility.
The Company uses projected data for expected volatility and expected life of its stock options based
upon historical and other economic data trended into future years. Because the Companys employee
and non-employee directors stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions can materially affect
the estimate, in managements opinion, the existing valuation models do not provide a reliable
measure of the fair value of the Companys employee and non-employee directors stock options.

Computation of Net Income per Share

Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding
during the period. Diluted net income per share is computed using the weighted-average number of
common shares and dilutive potential common shares outstanding during the period. Diluted net loss
per share is computed using the weighted-average number of common shares and excludes dilutive potential
common shares outstanding, as their effect is antidilutive. Dilutive potential common shares primarily
consist of employee and non-employee director stock options and warrants.

For purposes of determining the number of diluted shares outstanding, weighted average shares outstanding
for basic earnings per share calculations were increased due solely to the dilutive effect of unexercised
stock options and warrants by 257,574 and 269,547 for the years ended December 31, 2004 and 2003,
respectively.

Revenue Recognition

The Company recognizes product revenue when persuasive evidence of an arrangement exists, delivery
has occurred, the fee is fixed or determinable, and collection is reasonably assured. Cash payments
received in advance of product revenue are recorded as deferred revenue.

F-9

---



Contingent Vendor Rebates

The Company has entered into multiple contracts with its suppliers that provide for retroactive rebates
if negotiated quantitative breakpoints of purchase volumes are obtained. The Company follows the
guidance in EITF 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor and recognizes such vendor rebates as a reduction of the cost of sales
on a systematic and rational allocation correlated to progress by the Company towards earning the
rebate or refund provided the amounts are probable and reasonably estimable. If the rebate or refund
is not probable and reasonably estimable, the Company recognizes such rebates when the quantitative
breakpoint is actually obtained.

Inventory Valuation

Inventories are stated at the lower of cost or market. The Company uses the first-in first-out (FIFO)
method for determining the cost of its inventory. The Company will record an obsolescence reserve
based upon its assessment of customer demand and alternative disposals methods.

Shipping

Amounts billed to customers for shipping-related fees are recorded as revenue. Shipping costs incurred
by the Company are recorded as cost of sales in the accompanying statements of operations. For the
years ended December 31, 2004 and 2003, the Company recorded shipping revenue of approximately $918,000
and $411,000, respectively.

Concentrations

Cash and cash equivalents are maintained with primarily one financial institution. Deposits held with
banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may
be redeemed upon demand and therefore bear minimal risk.

The Company performs ongoing credit evaluations of its customers and with the exception of certain
financing related transactions, does not require collateral from its customers. The Companys
customer base consists primarily of dairy and bottled water manufacturers in the United States, Canada
and the United Kingdom.

The Company receives certain raw materials from primary suppliers. The inability of any contract manufacturer
or supplier to fulfill supply requirements could materially impact future operating results.

The majority of the Companys products are produced from plastic resin. Resin pricing is subject
to periodic price fluctuations primarily resulting from shortages in supply and fluctuations in feedstock
petrochemical products. The Companys agreements with its customers generally include adjustment
clauses to pass price changes on to the Companys customers.

During calendar year 2004, sales to one customer amounted to 22% of net sales and sales to another
customer amounted to 15% of net sales. In 2003, two customers accounted for approximately 16% and
11% of net sales, respectively. In determining the customer concentration information presented above,
the Company used the aggregated sales of the customers parent company. Typically, purchasing
decisions are made at the subsidiary or plant level of our customer base, mitigating a portion of
the risk associated with the concentration levels.

Depreciation

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets as follows:

|Asset                          |  | Depreciable Life
    Years | 
|------------------------------ |  | -------------------------- | 
|                               |  |                            | 
|Buildings                      |  | 40                         | 
|Machinery and equipment        |  | 5  10                     | 
|Office furniture and equipment |  | 7                          | 
|Software                       |  | 3-5                        | 

F-10

---



Depreciation charged to operations was approximately $1,742,000 and $1,713,000 for the years ended
December 31, 2004 and 2003, respectively. Of those amounts, approximately $1,711,000 and $1,645,000,
respectively, were included in cost of goods sold.

Expenditures for improvements are capitalized while costs for maintenance and repairs are expensed
as incurred. The Company capitalized $22,600 and $21,500 of interest in connection with buildings
and equipment under construction in 2004 and 2003, respectively.

Impairment of Long-Lived Assets

Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment

whenever events or changes in circumstances indicate that the carrying amount of such assets may

not be recoverable. Determination of recoverability is based on an estimate of undiscounted cash

flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment

loss for long-lived assets and certain identifiable intangible assets that management expects to

hold and use is based on the fair value of the asset. Long-lived assets and certain identifiable

intangible assets to be disposed of are reported at the lower of carrying amount or the fair value

less costs to sell.

Advertising

The Company expenses all advertising costs as incurred. Such costs were insignificant in 2004 and 2003.

Intangible Assets

The Companys intangible assets include finite-life patents that are amortized over the shorter
of their legal or estimated useful lives. Amortization expense for these intangible assets was $25,600
and $25,400 for 2004 and 2003, respectively. The following represents the estimated future amortization
expense for these intangible assets as of December 31, 2004:

|Fiscal Year |   | Amount  | 
|----------- | - | ------- | 
|            |   |        
|2005        | $ | 25,600  | 
|2006        |   | 25,600  | 
|2007        |   | 25,600  | 
|2008        |   | 25,600  | 
|2009        |   | 25,600  | 
|Thereafter  |   | 134,178 | 
|            |   |        
|Total       | $ | 262,178 | 
|            |   |        

Fair Value of Financial Instruments

The carrying amount of cash, receivables, and accounts payable approximate fair value based upon the
liquidity and short-term nature of the items. The carrying amount of notes payable approximates the
fair value based upon borrowings at approximate market interest rates.

Income Taxes

The Company accounts for income taxes under the liability method which requires that deferred taxes

be computed annually on an asset and liability basis and adjusted when new tax laws are enacted
or
new tax rates become effective.

Foreign Currency Translation

The Company has no foreign subsidiaries and uses the United States Dollar as its functional currency.
Translation gains and losses result from changes in exchange rates between the functional currency
and the currency in which the Companys customers denominate transactions. Translation gains
and losses are not considered significant.

F-11

---



Seasonality

The Companys sales and earnings are subject to a seasonal pattern as a result of greater bottled
water sales volumes during the summer months. Approximately 39% and 27% of sales occurred between
May and August in 2004 and 2003, respectively.

Segment Information

The Companys primary operations are in one segment - the manufacture of injection molded thermoplastic
components used primarily as closures for containers in the non-carbonated beverage industry. All
of the Companys production operations are in the United States of America.

Reclassifications

Certain reclassifications have been made to prior period balances in order to conform to the current
period presentation.

4. Business Combination

On January 28, 2002, the Company closed on a share exchange agreement that resulted in the acquisition
of International Plastics & Equipment Corp (IPEC). In connection with this share
exchange agreement, IPEC became a wholly owned subsidiary of the Company and the Company issued 9,489,796
shares of its common stock to the shareholders of IPEC.

At the time of the share exchange, the Company had no net assets or operations. Accordingly, the transaction
has been accounted for as a reverse takeover using the purchase method whereby the assets and liabilities
of the Company have been recorded at their fair market values and operating results have been included
in the financial statements from the effective date of purchase. As the net assets acquired consisted
solely of working capital items, the application of Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets did not have any significant effect on the
consolidated financial position or results of operations to the Company.

5. Balance Sheet Details

|               | December 31,
      2004 |           | December 31,
      2003 |  
|-------------- | ----------------------- | --------- | ----------------------- | -
|               |                         |           |                         |  
|Inventories:   |                         |           |                         |  
|Raw materials  | $                       | 963,506   |                         | $
|Finished goods |                         | 1,811,107 |                         |  
|               |                         |           |                         |  
|Total          | $                       | 2,774,613 |                         | $
|               |                         |           |                         |  

The Company is permitted to borrow under its secured line of credit up to 50% of the value of all components
of its inventory after adjusting for certain items as set forth in its borrowing agreement.

|Other Assets:                  |   |         |  |   |         | 
|------------------------------ | - | ------- |  | - | ------- | 
|                               |   |        
|Deferred financing costs       | $ | 210,612 |  | $ | 110,989 | 
|                               |   |        
|Deferred contract incentives   |   | 73,163  |  |   |        | 
|                               |   |        
|Letter of credit collateral    |   | 40,000  |  |   |        | 
|                               |   |        
|Long-term equipment receivable |   | 35,000  |  |   | 56,000  | 
|                               |   |        
|Miscellaneous items            |   | 13,818  |  |   |        | 
|                               |   |         |  |  
|Total                          | $ | 372,593 |  | $ | 166,989 | 
|                               |   |         |  |  
|                               |   |        

Unamortized deferred financing costs represent transaction costs arising from the Alabama Plant Financing
discussed in Note 16. The costs are being amortized using the effective interest rate method over
the life of the related obligations. In 2004, the Company amortized $4,400 as interest expense in
the accompanying consolidated statement of operations associated with these deferred financing costs.

F-12

---



6. Debt

Secured Line of Credit

On January 13, 2000, the Company entered into a demand line of credit with a financing institution.
The line bears interest at prime with interest only on the unpaid principal balance paid monthly.
The borrowing base is secured by inventory, receivables and all intangible assets. During 2004, the
maximum borrowing base for this line was increased from $3,500,000 to $5,500,000 to partially fund
an additional $1,900,000 for the purchase of certain closure molds. As a result of the increase,
the molds were added as collateral securing amounts borrowed under the line of credit. Actual availability
under the line is based primarily on a combination of the health of the Companys receivable
portfolio and 50% of the inventory balance. As of December 31, 2004, the Company had available borrowing
capacity of $2,900,000 related to this secured line of credit.

The interest rate as of December 31, 2004 and 2003 was 5.25% and 4.0%, respectively. There was $800,000
and $4,380,000 outstanding under this line at December 31, 2004 and 2003, respectively. The average
dollar amount of the borrowings and the average interest rate on the line of credit was $2,600,000
and $4,207,000 at 4.4% and 4.1% for the years ending December 31, 2004 and 2003, respectively.

Long-term Debt

Long-term debt at December 31, 2004 and 2003 was comprised of the following:

|                                                                                                                                                                                                                                                                            | 2004 |           | 2003 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | --------- | ---- | -
|                                                                                                                                                                                                                                                                            |      |           |      |  
|7.90% note due January 1, 2006, payable in monthly installments,                                                                                                                                                                                                            |      |           |      |  
|secured by equipment                                                                                                                                                                                                                                                        | $    | 245,493   |      | $
|                                                                                                                                                                                                                                                                            |      |          
|                                                                                                                                                                                                                                                                           
|7.90% note due January 1, 2006, payable in monthly installments,                                                                                                                                                                                                           
|secured by equipment                                                                                                                                                                                                                                                        |      | 157,155   |      |  
|                                                                                                                                                                                                                                                                            |      |          
|                                                                                                                                                                                                                                                                           
|7.90% note due May 1, 2006, payable in monthly installments,
    secured by equipment                                                                                                                                                                                       |      | 215,323   |      |  
|                                                                                                                                                                                                                                                                            |      |          
|                                                                                                                                                                                                                                                                           
|7.50% fixed interest rate note through January 1, 2004, with reset                                                                                                                                                                                                         
|rates on January 1, 2004 and every 60 months thereafter to US                                                                                                                                                                                                               |      |           |     
|5-year treasury plus 275 basis points until maturity on January 1,                                                                                                                                                                                                         
|2012, payable in monthly installments, secured by real property                                                                                                                                                                                                             |      |          |      |  
|                                                                                                                                                                                                                                                                            |      |          
|                                                                                                                                                                                                                                                                           
|Variable interest rate note at prime, due July 1, 2005, payable in
    monthly installments, secured by molds                                                                                                                                                               |      | 119,351   |      |  
|                                                                                                                                                                                                                                                                            |      |          
|                                                                                                                                                                                                                                                                           
|7.75% note due January 15, 2005, payable in monthly installments,                                                                                                                                                                                                          
|secured by a general assignment of all assets                                                                                                                                                                                                                               |      | 62,253    |      |  
|                                                                                                                                                                                                                                                                            |      |          
|                                                                                                                                                                                                                                                                           
|Variable interest rate note at prime due January 15, 2006, payable
      in monthly installments of $19,792 with a final payment of
      approximately $1,190,000 at termination, secured by general
    business assets and cross collateralized with other notes payable |      | 1,424,992 |      |  
|                                                                                                                                                                                                                                                                            |      |          
|                                                                                                                                                                                                                                                                           
|6.97% fixed interest rate obligation through June 1, 2009, with                                                                                                                                                                                                            
|rate reset thereafter every 60 months based on market conditions                                                                                                                                                                                                           
|secured by letter of credit and lease commitment on Alabama plant                                                                                                                                                                                                           |      | 1,380,972 |      |  
|                                                                                                                                                                                                                                                                            |      |          

|                                                                                                                                                                                                                                         |   |          
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------
|                                                                                                                                                                                                                                         |   |          
|Interest-only variable rate obligation at 3-month LIBOR plus 165 
basis points through June 1, 2024, thereafter monthly principal
payments of $5,061 for 9.5 years secured by letter of credit and
    lease commitment on Alabama plant |   | 576,923  
|                                                                                                                                                                                                                                         |   |          
|                                                                                                                                                                                                                                        
|7.0% fixed interest rate note through March 15, 2007, thereafter                                                                                                                                                                        
|reset to FHLB 5-year plus 275 basis points until maturity on                                                                                                                                                                            
|August 15, 2017, payable in monthly installments, secured by the                                                                                                                                                                        
|Companys warehouse expansion                                                                                                                                                                                                            |   |         
|                                                                                                                                                                                                                                         |   |          
|                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                        
|6.40- 7.10% notes, due October, 2005 - June, 2007, payable in
    monthly installments, secured by Company vehicles                                                                                                                      |   |         
|                                                                                                                                                                                                                                         |   |          
|                                                                                                                                                                                                                                         |   |          
|                                                                                                                                                                                                                                         |   |          
|                                                                                                                                                                                                                                         |   |          
|Subtotal                                                                                                                                                                                                                                 |   | 4,182,462
|Less - current portion of long-term debt                                                                                                                                                                                                 |   | (961,381 
|                                                                                                                                                                                                                                         |   |          
|                                                                                                                                                                                                                                         |   |          
|                                                                                                                                                                                                                                         |   |          
|                                                                                                                                                                                                                                         |   |          
|                                                                                                                                                                                                                                         | $ | 3,221,081
|                                                                                                                                                                                                                                         |   |          
|                                                                                                                                                                                                                                         |   |          

F-13

---



With the exception of the notes secured by Company vehicles and the Alabama plant financing debt, these
notes are all payable to the same bank. Various loans and the secured line of credit contain certain
financial covenants and other restrictions. The covenants include (i) maintenance of a defined tangible
net worth of not less than $3,000,000, (ii) a defined leverage ratio not greater than 2.5 to 1 computed
as a relationship of total liabilities to tangible net worth with debt subordinated in favor of the
bank deemed as equity and (iii) a debt service coverage ratio greater than 1.2 to 1. As of December
31, 2004, the Company was in compliance with all three financial covenants.

Payments on permanent long-term debt in future years are as follows:

|Calendar Year        | Debt
      Reduction |          
|-------------------- | -------------------- | ---------
|                     |                      |          
|2005                 | $                    | 961,381  
|2006                 |                      | 1,332,494
|2007                 |                      | 39,995   
|                     |                     
|2008                 |                      | 42,874   
|2009                 |                      | 45,959   
|Thereafter           |                      | 1,759,759
|                     |                      |          
|Total Debt Reduction | $                    | 4,182,462
|                     |                      |          

Interest Rates

The Companys has its debt portfolio concentrated at approximately 58% in variable rate interest
loans as of December 31, 2004. The following table provides information on the Companys interest
rate structure as of December 31 2004 and 2003.

F-14

---



|                                                       | 2004 | 2003      |  
|------------------------------------------------------ | ---- | --------- | -
|                                                       |      |           |  
|Fixed Rate Debt and Capital Lease Obligations (1)      |      |           |  
|                                                       |      |          
|Principal                                              | $    | 2,097,891 |  
|Weighted Average Rate                                  |      | 7.33      | %
|                                                       |      |          
|Variable Rate Debt                                    
|Principal                                              | $    | 2,921,266 |  
|                                                       |      |          
|Weighted Average Rate                                  |      | 5.04      | %
|                                                       |      |          
|                                                      
|(1)  See Note 10 relating to capital lease obligations

For purposes of the above table, hybrid debt instruments where the reset rate on a portion of the unamortized
principal is not known as of December 31, 2004 or 2003, the Company has included the variable portion
of the unamortized debt at reset as a variable rate instrument.

The Company is required to have a financial guarantee surety bond to cover its goods and services tax
to conduct exporting services into Canada (GST Tax). The surety bond issuer requires protection under
a letter of credit. As of December 31, 2004 the letter of credit had an unused balance of $35,000
USD and expiration date of January 30, 2006.

7. Preferred Stock

The Company is authorized to issue up to 25,000,000 shares of preferred stock with a par value of $.001
per share. No shares of preferred stock have been designated or issued.

The Companys wholly owned operating subsidiary, International Plastics and Equipment Corp., has
authorized 1,000,000 shares of Series A Convertible Preferred Stock (Series A Preferred),
no-par value. All Series A Preferred shares were sold for $1,000,000 in January 2000 without registration
in reliance on an exemption under federal securities laws that permit issuance of stock without registration
of the securities. On March 28, 2001, the subsidiary entered into an agreement with the holder of
the preferred stock to repurchase the shares of stock at the initial purchase price of $1,000,000,
which was paid in installments ranging from $100,000 to $250,000 beginning in March of 2001 through
September 30, 2001.

The Series A Preferred repurchase agreement includes a provision for a one-time additional payment
to be made by the subsidiary to the holder of the preferred stock if, before March 28, 2004, the
subsidiarys capital structure changed as a result of an infusion of additional equity. The
amount of the payment would have been $50,000 if the capital infusion reached $2,000,000 and a pro-rata
payment up to $150,000 for up to $4,000,000 of capital infusion. The subsidiary did not reach this
funding level by March 28, 2004 to trigger the payment amount.

8. Shareholders Equity

Common Stock

The Company has a single class of common stock, par value $.001, with 100,000,000 shares authorized
and 9,972,912 shares issued and outstanding as of December 31, 2004.

On February 10, 2003, one of the two principal shareholders transferred 4,124,998 shares of the Companys
common stock to a limited partnership in exchange for an interest in that limited partnership. On
April 24, 2003, the partnership transferred 4,024,998 shares of the Companys stock back to
the same individual.

Two individuals who are officers and directors of the Company own approximately 81% of the shares of
the Companys common stock, in substantially equal amounts.

F-15

---



Employee Stock Option Plan

In April 2003, the Board of Directors approved the adoption of a non-qualified and incentive stock
option plan (the 2003 Stock Option Plan or Plan). Under this Plan, the Company
may grant options to employees, officers, consultants, or directors of the Company or its subsidiaries.
The Plan will remain in effect until terminated, however, no options will be granted after the tenth
anniversary of the plans adoption by the Board. As amended by the Board of Directors on July
25, 2003 and approved by the shareholders, the aggregate number of shares that may be issued under
the Plan may not exceed a number equal to the greater of (i) 20% of the number of shares of common
stock outstanding at the end of the Companys last completed fiscal year or (ii) 1,750,000.
Unless sooner terminated, all options granted under the Plan expire ten years from the grant date.

Stock Option Grants

The Company has adopted only the disclosure provisions of SFAS No. 123. It applies Accounting Principles
Board (APB) Opinion No. 25 and related interpretations in accounting for its plans and
does not recognize compensation expense for its stock-based compensation plans other than for restricted
stock and options issued to outside third parties.

On July 25, 2003, the Company granted 549,000 stock options with an exercise price of $1.15 to certain
employees and one consultant. The consultant grant of 1,000 shares was valued under the provisions
of SFAS No. 123 at $1,100 using a Black Scholes valuation model. The consultant grant was expensed
in the accompanying consolidated statement of operations for the year ended December 31, 2003. The
options vesting schedule is set forth in the following table:

|Vesting Date         | Shares |        
|-------------------- | ------ | -------
|                     |        |        
|July 25, 2003        |        | 24,000 
|December 31, 2003    |        | 150,000
|December 31, 2004    |        | 125,000
|December 31, 2005    |        | 125,000
|December 31, 2006    |        | 125,000
|                     |        |        
|Total granted shares |        | 549,000
|                     |        |        

On June 2, 2004, the Company granted a total of 5,000 options with an exercise price of $1.68 per share
and which vested immediately to members of its Board of Directors.

Dilutive Effect of Options

|                                     | 2004 |           | 2003 | 
|------------------------------------ | ---- | --------- | ---- | 
|
|Basic Average Shares of Common Stock |      | 9,972,912 |      | 
|                                     |      |          
|Granted and Assumed                  |      | 5,000     |      | 
|                                     |      |          
|Canceled                             |      | (2,500    | )    | 
|
|Net Options Granted                  |      | 2,500     |      | 
|                                     |      |          
|Grant Dilution                       |      | 0.0       | %    | 
|
|Exercised                            |      |          |      | 
|                                     |      |          
|Exercise dilution                    |      | 0.0       | %    | 
|                                     |      |          

The percentage for grant dilution is computed based on options granted and assumed less options canceled
as a percentage of the weighted average common stock outstanding during the year. The percentage
for exercise dilution is computed based on options exercised as a percentage of the weighted average
common stock outstanding during the year.

F-16

---



General Option Information

A summary of option activity follows. A total of 1,750,000 shares of the Companys common stock
have been reserved for issuance under the Plan. The following is a schedule of option activity from
December 31, 2002 to December 31, 2004:

|                  | Options
      Outstanding |          
|----------------- | ------------------------- | ---------
|
|December 31, 2002 |                           | 666,000  
|Granted           |                           | 549,000  
|Forfeitures       |                           |         
|Exercised         |                           |         
|                  |                           |          
|December 31, 2003 |                           | 1,215,000
|                  |                           |          
|Granted           |                           | 5,000    
|Forfeitures       |                           | (2,500   
|Exercised         |                           |         
|                  |                           |          
|December 31, 2004 |                           | 1,217,500
|                  |                           |          

The following table summarizes outstanding and exercisable options as of December 31, 2004:

|  | OPTIONS OUTSTANDING |  | OPTIONS EXERCISABLE |          
|- | ------------------- |  | ------------------- | ---------
|
|
|  |                     |  |                     |          
|$ | 1.15                |  |                     | 547,500  
|$ | 1.38                |  |                     | 660,000  
|$ | 1.68                |  |                     | 5,000    
|$ | 5.00                |  |                     | 5,000    
|  |                     |  |                     |          
|  |                     |  |                     | 1,217,500
|  |                     |  |                     |          

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value based
on the Companys closing stock price of $2.50 as of December 31, 2004. The total number of in-the-money
options exercisable as of December 31, 2004 was 797,500 shares and their weighted-average exercise
price was $1.30 per share.

Pro Forma  Information

For purposes of computing the pro forma disclosures required by SFAS No. 123, the fair value of each
option granted is estimated using the Black-Scholes option-pricing model with the following weighted-average
assumptions:

|                        | 2004 |      | 2003 | 
|----------------------- | ---- | ---- | ---- | 
|
|Expected Dividend       |      |     |      | 
|Risk-free interest rate |      | 4.74 | %    | 
|Expected Volatility     |      | 106  | %    | 
|Expected Life (Years)   |      | 10   |      | 

The fair value of each option computed under this method is $1.55 and $1.10 for the grants at June
2, 2004 and July 25, 2003, respectively.

F-17

---



Dilutive shares outstanding include the dilutive impact of in-the-money options, which is calculated
based on the average share price for each fiscal period using the treasury stock method. Under the
treasury stock method, the tax-effected proceeds that would be hypothetically received from the exercise
of all in-the-money options are assumed to be used to repurchase shares. In fiscal 2004, the dilutive
impact of in-the-money employee stock options was approximately 258,000 shares or 3% of the basic
shares outstanding based on the Companys average stock price of $1.78 per share. In fiscal
2003, the dilutive impact of in-the-money employee stock options was approximately 270,000 shares
or 3% of the basic shares outstanding based on the Companys average stock price of $2.22 per share.

Warrants

On November 14, 2002, the Company, as approved by its Board of Directors, issued 200,000 common stock
warrants to its investment advisor for services received. Each warrant allows the purchase of one
share of common stock for $5.00 and all of the warrants were vested immediately upon issuance. The
aggregate fair value of these warrants was calculated to be $227,200 using the Black-Scholes option-pricing
model with the following assumptions: market value of the common stock of $5.00; dividend yield of
0%; expected volatility of 20%; risk-free interest rate of 3.75%; and expected life of 4 years.

On October 25, 2004, the Company, as approved by its Board of Directors, issued 100,000 common stock
warrants to an investment advisor for services received. Each warrant allows the purchase of one
share of common stock for $2.75 and all of the warrants were vested immediately upon issuance. The
aggregate fair value of these warrants was calculated to be $90,000 using the Black-Scholes option-pricing
model with the following assumptions: market value of the common stock of $1.30; dividend yield of
0%; expected volatility of 106%; risk-free interest rate of 3.25%; and expected life of 5 years.
As part of the agreement, the Company has an option to repurchase any or all of the unexercised warrants
at $0.01 per underlying share if it gives the investment advisor fifteen days notice of its intention
to do so, and, during the ensuing fifteen day period, the investment advisor does not exercise the warrants.

The deemed exercise of common stock warrants has not been included in the calculation of diluted earnings
per share, since the effects are anti-dilutive

9. Income Taxes

The Company accounts for income taxes under the liability method which requires that deferred taxes

be computed annually on an asset and liability basis and adjusted when new tax laws are enacted
or
new tax rates become effective.

The components of the provision for income taxes were as follows:

|                      | Year ended
      December 31,
      2004 |           | Year ended
      December 31,
      2003 |  
|--------------------- | ---------------------------------------- | --------- | ---------------------------------------- | -
|
|Federal income taxes: |                                          |           |                                          |  
|Current provision     | $                                        | 791,819   |                                          | $
|Deferred provision    |                                          | 100,106   |                                          |  
|State income taxes:  
|Current provision     |                                          | 87,858    |                                          |  
|Deferred provision    |                                          | 139,361   |                                          |  
|                      |                                          |           |                                          |  
|Total                 | $                                        | 1,119,144 |                                          | $
|                      |                                          |           |                                          |  

F-18

---



The components of the deferred tax assets (liabilities) are as follows:

|                                            | Year ended
      December 31,
      2004 |            | Year ended
      December 31,
      2003 |  
|------------------------------------------- | ---------------------------------------- | ---------- | ---------------------------------------- | -
|                                            |                                          |            |                                          |  
|Assets:                                     |                                          |            |                                          |  
|Allowance for doubtful accounts and returns | $                                        | 157,269    |                                          | $
|Net operating losses                        |                                          |           |                                          |  
|Inventory allowances and capitalization     |                                          | 53,282     |                                          |  
|Unrecognized sale leaseback gain            |                                          | 490,355    |                                          |  
|Equity compensation                         |                                          | 119,758    |                                          |  
|                                            |                                          |            |                                          |  
|Total deferred tax assets                   | $                                        | 820,664    |                                          | $
|                                           
|Liabilities:                               
|Change in accounting method                 | $                                        | (303,242   | )                                        | $
|Property basis difference                   |                                          | (1,167,752 | )                                        |  
|                                            |                                          |            |                                          |  
|Total deferred tax liabilities              | $                                        | (1,470,992 | )                                        | $
|Net deferred tax liability                  | $                                        | (650,330   | )                                        | $
|Current portion                             |                                          | 210,551    |                                          |  
|                                            |                                          |            |                                          |  
|Long-term deferred tax liability            | $                                        | (860,881   | )                                        | $
|                                            |                                          |            |                                          |  

The differences between the provision for income taxes and income taxes computed using the U.S. federal
income tax rate were as follows:

|                                                         | Year ended
      December 31,
      2004 |           | Year ended
      December 31,
      2003 |  
|-------------------------------------------------------- | ---------------------------------------- | --------- | ---------------------------------------- | -
|                                                         |                                          |           |                                          |  
|Federal statutory rate                                   |                                          | 34.00     | %                                        |  
|                                                         |                                          |           |                                          |  
|Income tax at statutory rate                             | $                                        | 951,294   |                                          | $
|                                                         |                                          |           |                                          |  
|Effect of:                                               |                                          |           |                                          |  
|State and other income taxes, net of federal tax benefit |                                          | 149,956   |                                          |  
|Non-deductible meals and entertainment                   |                                          | 8,422     |                                          |  
|Non-deductible life insurance                            |                                          | 9,472     |                                          |  
|                                                         |                                          |           |                                          |  
|                                                         |                                          |           |                                          |  
|Provision for income taxes                               | $                                        | 1,119,144 |                                          | $
|                                                         |                                          |           |                                          |  

As of December 31, 2004 and 2003, the Companys federal and state net operating loss carryforwards
for income tax purposes were approximately $0 and $1,812,000, respectively.

10. Leases

Operating Leases

The Company leases certain manufacturing equipment and vehicles under operating leases expiring at
various dates through 2007. Management expects that in the normal course of business, leases will
be renewed or replaced by other leases. Total equipment and vehicle lease expense amounted to $30,758
and $32,404 in 2004 and 2003, respectively.

F-19

---



From May 21, 2004 to December 31, 2004, the Company recorded $180,000 for rent expense related to its
Pennsylvania production and corporate office building. Of this amount, $162,000 was recorded as cost
of sales and $18,000 as general and administrative expense in the accompanying statement of operations.

Future Minimum Lease Payments

As of December 31, 2004, future minimum lease payments for non-real estate operating leases are as
follows:

|Calendar Year        | Equipment
      and Vehicle
      Operating
    Leases |       
|-------------------- | ------------------------------------------------------ | ------
|                     |                                                        |       
|2005                 |                                                        | 28,685
|2006                 |                                                        | 21,662
|2007                 |                                                        | 12,881
|                     |                                                        |       
|Total Lease Payments | $                                                      | 63,228
|                     |                                                        |       

As of December 31, 2004, future minimum lease payments required for the Companys real estate
operating lease (see Note 15) through December 1, 2033, are as follows:

|Calendar Year        | Real Estate
    Operating Lease |          
|-------------------- | ------------------------------- | ---------
|                     |                                 |          
|2005                 | $                               | 298,720  
|2006                 |                                 | 298,720  
|2007                 |                                 | 298,720  
|2008                 |                                 | 298,720  
|2009                 |                                 | 298,720  
|Thereafter           |                                 | 5,645,595
|                     |                                 |          
|Total Lease Payments | $                               | 7,139,195
|                     |                                 |          

Future minimum lease payments depend on an existing index or rate, such as LIBOR, and were included
in minimum lease payments based on the index or rate existing in the lease as of December 31, 2004.

Capital Leases

The Company leased a building through May 2004 and leases certain manufacturing and office equipment
under capital leases expiring at various dates through 2009.

The net book value and related liability for capital leases reflected in the accompanying Consolidated
Balance Sheets is as follows:

|                                | 2004 |         | 2003 |  
|------------------------------- | ---- | ------- | ---- | -
|                                |      |         |      |  
|Asset Cost                      | $    | 48,736  |      | $
|Less - Accumulated Depreciation |      | (10,518 | )    |  
|                                |      |         |      |  
|Net Book Value                  | $    | 38,218  |      | $
|                                |      |         |      |  
|                                |      |         |      |  
|Capital Lease Obligation        | $    | 36,695  |      | $
|                                |      |         |      |  

Approximately $17,900 and $64,508 were charged against operations for depreciation and interest associated
with capital leases in 2004 and 2003, respectively.

F-20

---



As of December 31, 2004, future minimum lease payments for capital leases are as follows:

|Calendar Year                                  | Capital Leases |       
|---------------------------------------------- | -------------- | ------
|
|2005                                           | $              | 14,178
|2006                                           |                | 14,178
|2007                                           |                | 9,865 
|2008                                           |                | 5,550 
|2009                                           |                | 1,630 
|                                               |                |       
|Total minimum lease payments                   | $              | 45,401
|Less amount representing interest              |                | (8,706
|                                               |                |       
|Present value of future minimum lease payments |                | 36,695
|Less current portion                           |                | (9,642
|                                               |                |       
|Long-term portion                              | $              | 27,053
|                                               |                |       

11. Earnings Per Share

Earnings per share have been computed in accordance with the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share. The following table sets forth the computation
of basic and diluted earnings per share for the years ended December 31, 2004 and 2003:

|                                                                                         | 2004 |           | 2003 |  
|---------------------------------------------------------------------------------------- | ---- | --------- | ---- | -
|
|Net income                                                                               | $    | 1,678,780 |      | $
|                                                                                         |      |           |      |  
|                                                                                         |      |           |      |  
|Weighted average shares outstanding for basic earnings per share                         |      | 9,972,912 |      |  
|                                                                                         |      |           |      |  
|                                                                                         |      |           |      |  
|Basic earnings per share                                                                 | $    | 0.17      |      | $
|                                                                                         |      |           |      |  
|                                                                                        
|Adjustment to weighted average shares outstanding for - exercise of stock
       options |      | 257,574   |      |  
|                                                                                         |      |           |      |  
|Increase in weighted average shares outstanding                                          |      | 257,574   |      |  
|                                                                                         |      |           |      |  
|                                                                                         |      |           |      |  
|Diluted earnings per share                                                               | $    | 0.16      |      | $
|                                                                                         |      |           |      |  

Stock options to purchase approximately 5,000 and 6,000 shares in fiscal 2004 and 2003, respectively,
and warrants to purchase 300,000 and 200,000 shares in 2004 and 2003, respectively, were outstanding,
but were not included in the computation of dilutive earnings per share because the exercise price
of the stock options was greater than the average share price of the common shares and therefore,
the effect would have been antidilutive. The Company also had 532,500 and 535,000 additional shares
of common stock reserved for grants under the 2003 Stock Option Plan as of December 31, 2004 and
2003, respectively.

12. Related Parties

Related party transactions are primarily with the following entities, related to the Company by common
ownership (i) Giordano Construction Co. Inc. (Giordano Construction), for which the Company
fabricates certain products and from which the Company obtains building and construction services
and (ii) L&G Properties, from which the Company leases equipment. Giordano Construction is owned
50% by one of the Companys principal owners with the remainder owed by a Company director.
L&G Properties is owned 50% by each of the two principal owners of the Company.

F-21

---



These related party transactions consist of the following:

|                                        | 2004 |         | 2003 |  
|--------------------------------------- | ---- | ------- | ---- | -
|
|Transactions with Giordano Construction |      |         |      |  
|Sales                                   | $    | 7,695   |      | $
|                                        |      |         |      |  
|Purchases                               | $    | 970,240 |      | $
|                                        |      |         |      |  
|Receivable From Giordano Construction   | $    | 1,250   |      | $
|                                        |      |         |      |  
|Payable to Giordano Construction        | $    |        |      | $
|                                        |      |         |      |  
|Transactions with L&G Leasing          
|Leasing of Equipment                    | $    |        |      | $
|                                        |      |         |      |  

Giordano Construction entered into an $868,000 construction agreement with the Company to provide overall
management and construction-related services for a 30,000 square foot expansion of the Companys
Brewton, Alabama production facility. In connection with the Alabama Plant Financing discussed in
Note 16, the Company funded $900,000 into an escrow account. On May 25, 2004, funds totaling $673,000
were paid to Giordano Construction. In August 2004, the remaining obligation of the escrow deposit
was disbursed to the contractor with the residual escrow account proceeds of $32,000 returned to
the Company for use in general operations. In December 2004, Giordano Construction was paid $29,000
for cost overruns related to this project. The remaining purchases are for paving and other construction
related services.

In March 2003, the Company had received a $650,000 advance from one of its two principal stockholders.
The Company paid the entire outstanding balance on April 3, 2003.

The Companys principal shareholders have personally guaranteed all Company debt. In addition,
all advances made by the principal shareholders are subordinated to the banks interest under
the Companys secured line of credit.

13. Supplemental Cash Flow Information

|                                                          | December 31,
      2004 |         | December 31,
      2003 |  
|--------------------------------------------------------- | ----------------------- | ------- | ----------------------- | -
|
|Cash paid for interest, including $22,600 and $21,500 for |                         |         |                         |  
|capitalized interest                                      | $                       | 437,000 |                         | $
|                                                          |                         |         |                         |  
|Cash paid for income taxes                                | $                       | 916,000 |                         | $
|                                                          |                         |         |                         |  
|Equipment acquired under capital leases                   | $                       | 27,750  |                         | $
|                                                          |                         |         |                         |  

14. Asset Sale  Pennsylvania Plant

On May 21, 2004, the Company sold its Pennsylvania production facility for gross proceeds of $3,897,000.
Concurrent with the sale, the Company leased the property back under a non-cancelable lease for a
period of 29.5 years, renewable thereafter at market rates at the Companys option. As part
of the transaction, the Company incurred transaction costs of $434,000 and a gain on the sale of
$1,120,000 that was initially deferred to be prospectively amortized through other income over the
term of the lease in proportion to the related gross rental charges. During 2004, $27,000 of this
gain was recorded as other income in the accompanying statement of operations.

Annual rental payments are based on a combination of a fixed market component subject to agreed upon
reset provisions, typically every five years, and a variable component indexed to the 3-month LIBOR
plus 165 basis points.

F-22

---



15. Alabama Plant Financing

On May 21, 2004, the Company sold its existing Alabama production facility and title rights to an in-progress
warehouse addition on that facility to an independent third-party resulting in gross sale proceeds
of $1,977,000. As a required condition under the sale agreement, the Company funded $900,000 in an
escrow account to be released to the construction contractor upon satisfaction of certain milestones
towards completion of the warehouse addition. All funds were released to the contractor by August
18, 2004. Concurrent with the sale, the Company entered into a lease agreement with the buyer for
a period of 29.5 years for the property, renewable thereafter at market rates at the Companys
option.

As part of the transaction, the Company was required to obtain a secured letter of credit in the amount
of $1,800,000 to provide collateral for its rental obligation. As security for the letter of credit,
the issuer of the letter of credit has required the Company to fund $400,000 into a reserve fund
ratably over the first sixty months of the lease agreement. Upon a satisfactory review of the Companys
financial condition by the issuer, the $400,000 is to be returned to the Company after expiration
of the funding term. As a result of the secured nature of the letter of credit, the transaction has
been recorded as a financing transaction rather than as a sale, and the building, transaction debt
and related accounts will continue to be recognized in the accompanying financial statements. Accordingly,
any rental payments made that are not attributable to transaction debt are recorded as interest expense.

In fiscal 2014, the lease agreement rescinds the requirement to maintain the letter of credit and the
Company expects to record the transaction as a sale at that time. The Company has initially recorded
deferred financing costs of $223,000 in other assets in the accompanying balance sheet to be amortized
prospectively as interest expense under the effective interest rate method.

Annual rental payments under the lease agreement are based on a combination of a fixed market component
subject to agreed upon reset provisions, typically every five years, and a variable component indexed
to the 3-month LIBOR plus 165 basis points.

As of December 31, 2004, future minimum lease payments required through December 1, 2033 are as follows:

|Calendar Year        |  | Payment |          
|-------------------- |  | ------- | ---------
|
|2005                 |  | $       | 151,525  
|2006                 |  |         | 151,525  
|2007                 |  |         | 151,525  
|2008                 |  |         | 151,525  
|2009                 |  |         | 151,525  
|Thereafter           |  |         | 2,863,708
|                     |  |         |          
|Total Lease Payments |  | $       | 3,621,333
|                     |  |         |          

Future minimum lease payments depend on an existing index or rate, such as LIBOR, were included in
minimum lease payments based on the index or rate existing in the lease as of December 31, 2004.

16. Employee Benefit Plans

The Company maintains a defined contribution plan (401(k) Plan) covering substantially all employees.
Employees can contribute from 1% to 15% of their annual compensation to the 401(k) Plan. Employee
contributions are limited to a maximum annual amount as set periodically by the Internal Revenue
Service. Employees are eligible to participate in the 401(k) Plan following one year of continuous
service and may enter the 401(k) Plan on January 1 or July 1. The Company currently matches 20% of
the first 5% of eligible earnings contributed by employees. Matching contributions vested on a tiered
structure are based on the employees years of service. Matching contributions under the 401(k)
Plan for 2004 and 2003 were approximately $11,000 and $7,200, respectively.

F-23

---



17. Segment Information

The Companys primary operations are in a single business segment and substantially all assets
and operations are located in the United States of America. The Company conducts business globally
by exporting or through its relationship with selected subcontractors. The Company is managed out
of its corporate headquarters in New Castle, Pennsylvania.

The Companys sales to customers in the United States comprised 90% and 84% of sales in 2004 and
2003, respectively. Other customers are located principally in Canada (7% of 2004 net sales), England
(2% of 2004 net sales), Mexico, Israel, and the Caribbean islands. For purposes of the computation
above, revenue was determined based on the country where the sale originates; accordingly, all sales
are deemed to be in the United States except for $453,000 of subcontracted sales in the United Kingdom.

Property and equipment information is based on the physical location of the assets. The following table
presents property and equipment information for geographic area:

|                            | 2004 |           | 2003 |  
|--------------------------- | ---- | --------- | ---- | -
|
|Property and Equipment, net |      |           |      |  
|United States               | $    | 9,084,838 |      | $
|England                     |      | 172,571   |      |  
|
|Total                       | $    | 9,257,409 |      | $
|

18. Commitments and Contingencies

Purchase Commitments with Suppliers

The Company purchases components from a variety of suppliers for its products. During the normal course
of business, in order to reduce manufacturing lead times and to help assure adequate component supply,
the Company enters into agreements with suppliers that either allow them to procure inventory based
upon criteria as defined by the Company or that establish the parameters defining the Companys
requirements. All significant supply agreements allow the Company the option to cancel, reschedule
and adjust the Companys requirements based on its business needs prior to firm orders being
placed. Consequently, the Company does not report purchase commitments arising from firm, non-cancelable
and unconditional commitments.

Legal Proceedings

The Company is subject to various legal proceedings and claims arising out of the normal course of
business. Based on the facts currently available, management believes that the ultimate amount of
liability beyond reserves provided, if any, for any pending actions will not have a material adverse
effect on the Companys financial position or results of operations. However, the ultimate outcome
of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material
impact on the results of operations or liquidity of the Company in a particular period.

F-24

---



19. Subsequent Events

Debt Refinancing

On February 18, 2005, the Company entered into a Revolving Credit and Term Loan Agreement (the Loan
Agreement) with Citizens Bank of Pennsylvania (Citizens), which provides for the
making by Citizens to the Company of revolving credit loans in the maximum principal amount of $3,500,000
outstanding at any given time (the Revolving Credit Facility), a term loan in the principal
amount of $1,500,000 (the Term Loan), a multi-draw term loan in the maximum principal
amount of $1,000,000 (the Multi-Draw Term Loan) and a letter of credit facility in the
maximum principal amount of $1,800,000 that secures the Companys obligations under the lease
of its manufacturing and warehouse facility in Alabama (the Letter of Credit). The maximum
availability under the Revolving Credit Facility is the lesser of $3,500,000 or the sum of 85% of
the aggregate gross amount of the Companys Qualified Accounts plus 50% of the aggregate gross
amount of its Qualified Inventory, each as defined in the Loan Agreement. On February 22, 2005, the
Company borrowed approximately $1,412,000 under the Revolving Credit Facility and used such funds
in combination with the $1,500,000 proceeds of the Term Loan to repay all of its existing revolving
credit facility and equipment notes indebtedness to its existing financial institution. No prepayment
fees were associated with the termination of these agreements.

All financial instruments under the Loan Agreement bear interest at the one month LIBOR plus 150 basis
points. The covenants in the Loan Agreement also include covenants regarding the maintenance of certain
financial conditions of the Company including (i) a minimum Consolidated Tangible Net Worth equal
to the sum of (x) $5,049,000 plus (y) 50% of the Consolidated Net Income (excluding net losses) for
each completed fiscal quarter and (ii) a Consolidated Fixed Charge Coverage Ratio of not less than
1.10 to 1.00 at the end of any fiscal quarter, each as described in the Loan Agreement.

The personal guarantees of the Companys principal owners and the Companys obligation to
fund $400,000 over a sixty-month period into a reserve account to serve as collateral for the Letter
of Credit Note were released by the predecessor financial institution as a result of the termination
of their agreements.

On February 22, 2005, the Company had $1,412,000 outstanding on its Revolving Credit Facility. Remaining
borrowing capacity amounted to $2,600,000 consisting of $1,600,000 on its Revolving Credit Facility
and $1,000,000 under its Multi-Draw Term Loan.

The following table sets forth the Companys outstanding debt excluding it Revolving Credit Facility
and capital lease obligations immediately after the funding of the transaction on February 22, 2005:

|                                                                                                                                                                                                                                    |  | Outstanding
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------
|                                                                                                                                                                                                                                    |  |            
|Variable rate note payable in monthly installments of $25,000 through January 31, 2010, secured by substantially all of the Companys assets                                                                                        |  | $          
|                                                                                                                                                                                                                                    |  |            
|6.97% fixed interest rate obligation through June 1, 2009, with rate reset thereafter every 60 months based on market conditions secured by letter of credit and lease commitment on Alabama plant                                  |  |            
|                                                                                                                                                                                                                                    |  |            
|Interest-only variable rate obligation at 3-month LIBOR plus 165 basis points through June 1, 2024, thereafter monthly principal payments of $5,061 for 9.5 years secured by letter of credit and lease commitment on Alabama plant |  |            
|                                                                                                                                                                                                                                    |  |            
|                                                                                                                                                                                                                                    |  | $          
|                                                                                                                                                                                                                                    |  |            

F-25

---



Payments on permanent long-term debt in future years are as follows:

|Calendar Year        | Debt
      Reduction |          
|-------------------- | -------------------- | ---------
|                     |                      |          
|2005 (ten months)    | $                    | 279,179  
|2006                 |                      | 337,310  
|2007                 |                      | 339,995  
|2008                 |                      | 342,874  
|2009                 |                      | 345,959  
|Thereafter           |                      | 1,812,578
|                     |                      |          
|Total Debt Reduction | $                    | 3,457,895
|                     |                      |          

Swap Derivative

On March 3, 2005, the Company entered into a swap agreement on a notional amount of $1,500,000 of the
Companys floating rate debt. The effective one month LIBOR swap rate was 4.30% and the notional
amount of the swap amortizes in accordance with the amortization schedule of the Term Loan. The Company
has designated this transaction as a cash flow hedge of a floating-rate liability and has applied
the guidance set forth in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
to this transaction. The fair value of the swap will be recorded in the balance sheet with the offset
to Accumulated Other Comprehensive Income (Loss), net of a provision for income taxes.

F-26

---