UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 FORM
10-KSB (Mark
  One)|X|
  ANNUAL REPORT UNDER SECTION 13 OR
  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December
  31, 2003|_|
  TRANSITION REPORT UNDER SECTION 13
  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from
  __________to __________ 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 organization)
  
  (I.R.S. Employer Identification No.)Northgate Industrial Park, 185
  Northgate Circle, P.O. Box 5311
  New Castle, Pennsylvania 16105(Address of principal executive offices)
  
  (Zip Code)Issuers telephone number:
  (800)
  377-4732Securities registered
  under Section 12(b) of the Exchange Act:NoneSecurities 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:    |_| 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. State issuers revenues
for its most recent fiscal year:  $16,395,664 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:  $3,548,311
as of March 16, 2004 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 16, 2004. Portions of the issuers
Information Statement to be filed for its 2004 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  |_|;  No  |X|    TABLE OF CONTENTS
Part IItem
  1.
  Description of Business
  32.
  Description of Properties
  63.
  Legal Proceedings
  74.
  Submission of Matters to a Vote of
  Security Holders
  7Part IIItem
  5.
  Market for Common Equity and Related
  Stockholder Matters
  76.
  Managements Discussion and Analysis or
  Plan of Operation
  87.
  Financial Statements
  128.
  Changes in and Disagreements with
  Accountants on Accounting and Financial Disclosure
  128A.
  Controls and Procedures
  13Part IIIItem
  9.
  Directors, Executive Officers, Promoters
  and Control Persons; Compliance with Section 16(a) of the Exchange Act
  1310.
  Executive Compensation
  1411.
  Security Ownership of Certain
  Beneficial Owners and Management  and
  Related Stockholder Matters
  1412.
  Certain Relationships and Related
  Transactions
  1413.
  Exhibits and Reports on Form 8-K
  1414.
  Principal Accountant Fees and Services
  152


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.  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 disclaim any
obligation to update forward-looking statements.

ITEM 1.  DESCRIPTION OF BUSINESS.
Background
We were 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 under the Securities Exchange Act of 1934,  which 
became  effective  July 29, 
2000,  and then began looking for
a business opportunity.
On January  28, 
2002,  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, 2002.
IPEC

IPEC was founded as a
Pennsylvania corporation in December 1994. During the first year of its
operations, IPEC was engaged principally in the design and manufacturing and
sale of capping  equipment for use by
bottlers.  In 1996, IPEC transitioned to
a manufacturer of  tamper-evident  caps. IPEC currently manufactures 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 designs and fabricates capping
equipment.

Principal Products
IPEC sells to two primary
markets:  (1) bottled water and juice
market and (2) dairy market.  IPEC
believes that it will benefit from a shift being made from  metal 
closures  and glass  bottling 
to plastic bottles and closures, which has resulted from the fact that
plastics are cheaper and offer greatly improved tamper protection.
Product
  
  Use
  
  Percentage
  of
  Sales Volume
  for Fiscal 200328mm sport
  
  Primarily for water bottling on polyethylene
  terephthalate (PET) bottles ranging in sizes from 8-ounce bottles to 1 and
  2-liter bottles
  
  8%26.7mm sport tri-lead
  
  Primarily for water bottling on PET bottles ranging
  in sizes from 8-ounce bottles to 1 and 2-liter bottles.
  
  2%28mm flat
  
  Primarily for water bottling on PET bottles ranging
  in sizes from 8-ounce bottles to 1 and 2-liter bottles
  
  14%26.7mm flat
  
  Primarily for water bottling on PET bottles ranging
  in sizes from 8-ounce bottles to 1 and 2-liter bottles
  
  4%3

Product
  
  Use
  
  Percentage
  of
  Sales Volume
  for Fiscal 200338 mm snap
  
  High density polyethylene (HDPE) and PET bottles
  ranging from 8-ounce single serve as well as gallon and half-gallon
  containers, used in the water, juice, and dairy sectors
  
  17%38mm twist & pull
  
  HDPE and PET bottles ranging from 8-ounce single
  serve as well as gallon and half-gallon containers, used in the water, juice,
  and dairy sectors.  This is the
  sport version of the 38mm snap cap.
  
  11%38mm push pull
  
  Made by special request for a major customer who
  uses this cap on a product which is an 8-ounce decanter style bottle, this is
  a modified version of the 38mm twist & pull
  
  12%38mm snap screw
  
  Used on HDPE bottles for gallon and half-gallon
  containers in the dairy sector.  May
  also be used on a single-serve dairy container.
  
  21%38mm tail cap
  
  Used on HDPE bottles for gallon and half-gallon
  containers in the dairy sector.  May
  also be used on a single-serve dairy container.
  
  11%Manufacturing
and Raw Materials
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 
whereby  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.
IPECs  quality 
assurance  procedures  involve an optical  sensing for dimensional  
conformity  to  specification  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 with a follow-up  corrective 
action taken to modify any deficiency 
noted. IPEC performs  the  optical 
sensing  using an optical  scanning 
device  designed to measure
product conformity to preset dimensional standards.
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. IPEC procures 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. 
Resins are subject to periodic 
price  fluctuations, resulting
from shortages in supply, changes in prices in petrochemical products, and
other factors.  IPECs agreements with
its customers include cost escalation clauses to pass price  increases on to  customers  that could  otherwise 
have a material adverse impact on IPEC.
SRI Quality  Registrars 
independently  assessed and
certified  IPEC as operating a quality  management system conforming to ISO 9002. As
of December 5, 2002, IPEC 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
the 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.
4


Distribution Methods
IPEC has identified
potential customers through leads generated 
internally,  and by reference
from other customers,  suppliers, and
individuals  involved in the bottling
and/or the caps and closures industry. Once a serious lead is identified,  a member of senior management meets with the
potential customer. IPEC  has  also 
used  brokers  and  
manufacturers   representatives.
Equipment Design and Fabrication
IPEC maintains a
capping  equipment design  and 
fabrication  division  in its New 
Castle  facility,  comprising 
2 engineers and 5 
technicians.  This  division 
provides  technical  support when converting customer equipment
to accept IPEC products.
Competition
IPEC  competes 
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, 
to be IPECs prime 
competition,  with
additional  competition from bottling
companies and other food and beverage 
providers that elect to produce their own closures. As   against  
large-scale   manufacturers,   management   believes   that  IPEC distinguishes  itself by providing 
better  customer  service and response time, while maintaining
parity on price and quality.
In the dairy  market, IPECs major  competitor 
is Portola  Packaging, Inc.,  a  multi-national  cap 
producer,  with  annual 
sales in  excess of $200
million.  Management believes that IPEC
competes favorably due to its proprietary rights to variations of the 38mm
closure  being used in milk  packaging for the gallon, half-gallon,  and single-serve containers, its customer
service, product quality, and competitive pricing.
Major Customers
IPECs customers are
located  primarily in the United
States.  Sales to customers in the
United States  comprised 84% and 82%, in
fiscal  2003 and 2002,  respectively.   Other  customers  are 
located principally  in
Canada,  England,  Ireland, 
the  Bahamas,  and the West Indies.
During  fiscal 2003,  sales to one customer 
accounted  for 16% of net sales
and sales to one other customer amounted to 11% of net sales.  One customer accounted for 20% of net sales
in 2002 and two other customers each amounted to 10% of net sales.

Research and Development
IPEC has a program of
ongoing research and development that has led to significant  product 
innovations.  By designing its
own products, IPEC can insure exclusivity while avoiding  excessive 
licensing costs.  Research and
development expenses are charged to operations as incurred. IPEC estimates  that it spent  approximately  $44,000,
and $8,850 on research  and   development   activities  in  fiscal 
2003 and 2002, respectively, none of which was borne directly by
customers.
Patents, Licenses & Trademarks
IPEC owns the following
patents:
Description
  
  Issue Date
  
  Expiration
  Date
  
  Patent
  NumberTamper Evident Plastic Closure
  
  01/31/1996
  
  01/31/2013
  
  5,487,481Tamper Evident Resealable Plastic Closure
  
  12/31/1996
  
  12/31/2013
  
  5,588,5625

Description
  
  Issue Date
  
  Expiration
  Date
  
  Patent
  NumberTamper Evident Push-Pull Closure with Pour Spout
  
  01/26/1999
  
  07/24/2016
  
  5,862,953Tamper Evident Closure with Push-Pull Pour Spout
  (Continuation in part)
  
  02/15/2000
  
  09/11/2017
  
  6,024,255Snap-On Screw Off Closure
  
  05/09/2000
  
  10/31/2017
  
  6,059,134Tamper Evident Closure (Continuation in part)
  
  06/06/2000
  
  10/09/2017
  
  6,070,766Snap-On Tamper Evident Closure With Push-Pull Pour
  
  06/13/2000
  
  11/15/2016
  
  6,073,809Tamper Evident Closure (Continuation in part)
  
  06/13/2000
  
  04/28/2018
  
  6,073,810IPEC has additional patent submissions  pending for various new designs, as well as
improvements to existing closure designs. All patents listed above are for
rights protection in the United States. However, IPEC is also in the process of
applying for international  patent  protection on several of its patents.
IPEC has also
secured  licensing  arrangements  to produce other tamper evident 
caps not of its own design.  IPEC
has not paid any licensing fees in both 2003 and 2002.

Government Regulation
IPECs products are
subject to regulation by the Food 
and  Drug   Administration  and  other  agencies 
with  jurisdiction  over effectiveness of tamper-resistant
devices and other closures for dairy and other beverage  products. 
A change in  government  regulation 
could affect IPEC.  We cannot
assure you that federal,  state,  or local 
authorities  will not develop
protocols  in  the  future  that 
could  materially  increase 
IPECs  costs  of manufacturing certain of its products.
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  of IPEC 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 IPEC. 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 upon IPEC and us. In addition,  certain of IPECs  operations are subject to Federal, state,  local 
and  foreign  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 IPEC has not been
required historically, and does not currently expect, to make  significant 
capital  expenditures  in order 
to  comply  with 
applicable environmental  laws
and regulations,  IPEC cannot predict
with any certainty its future 
capital  expenditure   requirements   because  of  continually 
changing compliance standards and environmental technology.  IPEC does not have insurance coverage
for  environmental  liabilities and does not anticipate  obtaining such coverage in the future.
Employees

As of December 31, 2003,
IPEC had 94 employees, all of which were full-time. None of the employees are
represented by any labor unions.

ITEM 2.  DESCRIPTION OF PROPERTIES.
Headquarters  for the 
Company  and  IPEC, 
as well as  IPECs  primary manufacturing  facility are located at Northgate  Industrial 
Park,  New Castle, Pennsylvania.
In December 1997, it added a second manufacturing facility located at 572
Industrial Parkway,  Brewton,  Alabama. The total square footage of these
facilities is approximately 110,000 square feet. The facilities are mortgaged
to a bank.
6

IPECs existing  facilities are capable of manufacturing  approximately 3.3 billion closures across
the entire product line. For the year ended December 31, 2003 and 2002, approximately
1.4 and 1.1 billion closures were produced, repectively.  IPEC also outsources production on its 38mm
push pull closure whereby a third-party approved by IPEC produced approximately
50 million closures for 2003.
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 AND RELATED STOCKHOLDER MATTERS.
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 since trading began.  These quotations 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 BID2002September 30, 2002
  
  
  $
  5.00
  
  
  
  $
  1.30December 31, 2002
  
  
  $
  6.20
  
  
  
  $
  4.702003March 31, 2003
  
  
  $
  5.00
  
  
  
  $
  2.00June 30, 2003
  
  
  $
  2.20
  
  
  
  $
  1.20September 30, 2003
  
  
  $
  2.80
  
  
  
  $
  1.10December 31, 2003
  
  
  $
  2.75
  
  
  
  $
  1.95On March 16, 2004, the closing bid price for the
common stock on the OTC Bulletin Board was $1.90.
At December 31, 2003,
there were 1,215,000 shares of common stock issuable upon exercise of
outstanding options.  The following
table shows the number of options outstanding and their exercise price.




OPTIONS
  OUTSTANDINGOptions
  
  Exercise
  Price
  per Share549,000
  
  $
  1.15660,000
  
  $
  1.386,000
  
  $
  5.001,215,000
  
  $
  1.297

Holders

As of January 20, 2004,
there were 82 record holders of our common stock.

Dividends
Since our inception, no
cash dividends have been declared on our common stock.
ITEM 6.  MANAGEMENTS DISCUSSION
AND ANALYSIS OR PLAN OF OPERATION.
Overview
Effective January 28,
2002, an arrangement was completed between Golden Hole 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; IPEC was thereby deemed to be the
acquiror.  Accordingly, the transaction
has been 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.
Critical Accounting Policies
General
The  preparation 
of  consolidated   financial 
statements  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 financial statements and
the accompanying notes. Actual results could differ from those estimates.  We believe the policies and estimates  related to stock based compensation, revenue
recognition, impairment  of  long-lived 
assets, goodwill  and  intangible 
assets,   and  inventory valuation  represent 
our  critical accounting policies
and estimates.  Future results may
differ from our estimates under different assumptions or conditions.
In September 2003, the
Company engaged Beard Miller Company LLP to perform audits on its financial
statements for fiscal years ended December 31, 2003 and 2002.   In connection with the audit, the
accompanying consolidated financial statements as of December 31, 2002 and for
the year then ended have been restated from those previously issued to account
for the issuance of 200,000 common stock warrants in November 2002, net of tax
effects and to correct an error related to the Companys tax provision in the
amount of $199,871.  The restatement
decreased net income for the fourth quarter and year ended December 31, 2002 by
$348,071 and both basic and diluted income per share by $0.03.

Stock Based Compensation
Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure on 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.

The Company accounts for
stock-based awards to employees and 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 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.
Revenue Recognition
The
Company recognized product revenues 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.
8

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.
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.

Results of Operations
Overview
In 2003, we saw a
substantial top-line improvement (25%) in the volume of business compared to
2002, and as we look ahead to 2004, we are planning for growth in annual
revenue and progress in increasing overall gross profit margins. Our growth
continues to be largely dependent on our developing reputation for service and
quality in the industry combined with our decision to enter different closure
style markets during fiscal 2003. 
Throughout fiscal 2003, our margins were detrimentally affected
primarily due to untimely movements in our resin commodity mover in comparison
to corresponding customer price increases and the occurrence of non-recurring
conversion costs for the new customer base obtained.  IPEC strives to meet and exceed all customer requirements and realizes
that we do business in a very competitive marketplace.  Accordingly, we place continuous focus on
delivering superior products and services as a staple to retain our existing
customers and attract additional business.
During 2004, we plan to
continue to streamline operations and refocus on core strategic areas within
our closure business. In line with this effort, we have been exploring
opportunities to further automate our already technologically advanced
production process and mitigate Company risks associated with price fluctuations
in its raw materials.  In addition, we
are in the process of completing a 30,000 square foot warehouse expansion
project on our Brewton, Alabama plant to minimize third party processing
errors, warehousing costs and unnecessary freight charges.  This warehouse addition is scheduled for
completion in May 2004 and is expected to increase efficiencies in overall
production operations for that location.
Fiscal Years Ended December 31, 2003 and 2002.   Sales increased by $3,348,996 (25.7%) from
the previous year and cost of goods sold also increased to $12,645,784 or 77.1%
of sales, as compared to $9,441,839 or 72.3% of sales for 2002.  Revenues increased primarily due to the
Companys entry into new closure markets in 2003 primarily including the 38mm
tail closure. The cost of resin, the raw material used to manufacture our
products, increased significantly in both March and September of 2003 primarily
triggered by increases in our suppliers petroleum based feedstock.  We were not able to pass this increased cost
to our customers through price adjustments until the second quarter of 2003 and
the first quarter of 2004.  Management
has taken steps to significantly mitigate this risk by restructuring the
Companys 2004 supply contracts whereby the commodity mover is more inline with
that of the Companys customer base. 
This situation coupled with the continued consolidation of our customer
portfolio and intensified market pricing competition resulted in lower profit
margin percentages in comparison to the previous year.

9


Selling expenses for the
year ended December 31, 2003 increased by $612,499 (79.0%) from the previous
year due to the addition of new service and sales personnel. We also incurred
initial conversion costs associated with our customers blow mold neck tooling
to accommodate our closures.  In
addition, with an increased customer base, our salespeople and service
technicians incurred more visits to customer locations, thereby increasing
travel, overtime labor and related expenses.
General and administrative
expenses for the year ended December 31, 2003 increased by $191,126 (13.1%)
from the previous year.  This increase
reflects, among other items, the addition of two new Company executives,
routine salary increases, investment banking fees, directors fees and the cost
of complying with new regulations promulgated by the Securities and Exchange
Commission offset by a $227,200 pre-tax charge for a one-time consultant
warrant grant. The Company believes that it has in place a general and administrative
infrastructure that will be able to sustain future sales growth and does not
anticipate any significant personnel expansion in this area of operations.
Non-operating expenses
decreased slightly by $36,161 (6.0%) for year ended December 31, 2003 as compared
to the previous year primarily due to lower borrowing rates offset by a
decrease in the amount of capitalized interest.

We accrued $62,195 of
income taxes for the year ended December 31, 2003 using an effective rate of
approximately 42%.  For fiscal 2002,
income taxes of $274,871 were recorded using an effective rate of approximately
36%.  The difference in effective rates
between periods is primarily due to permanent differences having a greater
effect on the rate for 2003 due to the lower income before taxes.  As a result, we had net income for 2003 of
$87,071, as compared to net income of $496,808 for 2002.
Liquidity
and Financial Condition
Cash and Cash Equivalents.  At December 31, 2003, the Company had cash
and cash equivalents of $627,916.   In
addition, we had a working capital deficiency of $2,978,454, as compared to a
deficiency of $1,383,276 at December 31, 2002, primarily due to increased
accounts payable, bank line of credit and the current portion of long-term
debt.  The Company had unused
availability under its secured line of credit of $242,000 as of December 31,
2003.  As disclosed in footnote 17 to
the consolidated financial statements, the Company has signed commitment
letters and obtained board approval for two separate sale leaseback
transactions.  These transactions are
anticipated to generate between $1.6 and $2.0 million in cash flows upon their
consummation.  Management believes that
existing cash and cash equivalents together with anticipated cash flow from
operations will be adequate to fund the Companys operations, debt service
requirements and capital expenditures throughout fiscal 2004.  The Company 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 the
Company.
Operating Activities.  Our operations provided cash of $2,182,092
for the year ended December 31, 2003, as compared to the previous year when our
operations provided cash of $1,763,390. 
The increase in cash provided by operations during 2003 was due
primarily to an increase in accounts payable and a decrease in our inventory
levels offset by an increase in our accounts receivable balance.  The increases to accounts receivable are
primarily due to an increase in our customer base and additional business
commencing in the fourth quarter of 2003.
Investing Activities.  During the year ended December 31, 2003, we
used $1,802,248 primarily for property, plant, and equipment, as compared to
$2,266,958 during the previous year.

Financing Activities.  In 2003, we paid down capital lease
obligations ($152,353) and notes payable ($1,513,326), while net borrowing an
additional $1,830,000 on our bank line of credit, for net cash of $164,411
provided by financing activities.   A
significant portion of funds borrowed on our line of credit were used to fund the
creation of molds for new product lines with all molds active in production
during 2003.  During the 2002 fiscal
year, ($474,332) was used in financing activities comprised of net borrowings
of $289,000 on our line of credit and a reduction in amounts due to related
parties by ($700,000).

10


The Company competes in a
very competitive marketplace that has observed significant price decreases in
the past years.  The Company believes
that such price level erosion experienced in recents years will eventually
reverse.  However, there is no guarantee
that such trend will occur and further price erosion could significantly affect
the Companys financial position and its results of operations in future
periods.
Contractual Obligations
As of December 31, 2003,
the Companys concentration in variable rate debt instruments is approximately
76% of its total outstanding debt portfolio comprised of an average borrowing
rate of 4.08%.   The Companys fixed
rate debt instruments bear an average rate of 7.54% as of December 31,
2003.  The following additional information
regarding the Companys contractual obligations is provided as of December 31,
2003:
Payment
        Due By PeriodTotal
    
    Less
        than 
        1 year
    
    1-3
        years
    
    3-5
        years
    
    More
      than
      5 yearsLong-term
        debt, including current portion (1)
    
    5,635,286
    
    1,545,938
    
    2,592,995
    
    375,538
    
    1,120,815Bank
        line of credit (2)
    
    4,380,000
    
    4,380,000
    
    
    
    
    
    Capital
        lease obligations (3)
    
    92,109
    
    75,795
    
    12,298
    
    4,016
    
    Operating
        lease commitments (4)
    
    37,575
    
    26,650
    
    10,925(1)
  The Companys long-term debt bears fixed rates from
  7.5% to 8.0%. Variable debt components bear interest at prime (4.0% as of
  December 31, 2003) or the five year treasury plus 275 basis points (6.0% as
  of December 31, 2003). The debt is securitized by various assets of the
  Company including its principal production facilities and certain equipment.(2)
  The Companys bank line of credit is payable upon
  demand. Generally, it is securitized by an 80% loan to value ratio on the
  Companys receivable, 50% on inventory cost and equipment balance not
  securitized under (1) above, subject to certain adjustments as defined in the
  debt indenture.(3)
  The Company has acquired certain machinery, office
  equipment and vehicles under non-cancelable capital lease obligations.(4)
  The Company leases certain office equipment and vehicles
  under operating leases.Plan of
Operations
IPECs primary strategy
is to increase its plastic closure sales by aggressively increasing its market
share in the non-carbonated beverage sector of the caps and closures
industry.  Management has identified 4
areas of focus to support this strategy:

(i)
  Continuing its commitment to research and
  development leading to new product innovations;(ii)
  Emphasizing customer support and total product
  solutions;(iii)
  Continuing to enhance low cost manufacturing
  capabilities; and(iv)
  Expanding sales initiatives.11

Management of the Company
believes that it has in place a significant portion of the capital and
administrative infrastructure required to support growth up to three times its
2003 production levels. The Company intends to sustain its current capacity and
increase its overall closure sales to approximately 4.0 billion closures within
the next three years.  With the goal of
this operating capacity, Company management projects the following capital
expenditures through 2006:



Year
  
  Description
  
  Amount
  
  Totals2004
  
  Machinery and equipment
  
  $
  400,000Molds
  
  
  200,000Alabama warehouse expansion
  
  
  870,000Total 2004
  
  
  
  
  $
  1,470,0002005
  
  Machinery and equipment
  
  $
  400,000Molds
  
  
  200,000Total 2005
  
  
  
  
  $
  600,0002006
  
  Machinery and equipment
  
  $
  400,000Molds
  
  
  200,000Total 2006
  
  
  
  
  $
  600,000TOTAL
  
  
  
  
  $
  2,670,000To provide the cash necessary to support this business
plan through 2006, the Company anticipates that it will generate cash flow of
$1.2, $1.5 and 1.7 million from operations during the next three years.  As disclosed further in footnote 17 to the consolidated
financial statements, the Company anticipates consummating in May 2004 a
sale-leaseback transaction for its two primary production facilities expected
to generate between $1.6 and $2.0 million in free cash flow.  These proceeds accompanied with a conversion
of a portion of its bank line of credit to a term note will enable the Company
to execute its business plan and retire $3.3 million in debt obligations
through 2006.
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.
During the two most
recent fiscal years and the subsequent interim period, neither we nor anyone on
our behalf consulted any other accountant regarding any of the matters
identified in Item 304(a)(2) of Regulation S-B.
Baier & Williams
audited our financial statements for the years ended December 31, 2002, 2001
and 2000.  Baier & Williams report
for such periods did not contain an adverse opinion or a disclaimer of opinion,
nor was the report qualified or modified as to uncertainty, audit scope or
accounting principles.
During the two most
recent fiscal years and the subsequent interim period ending July 25, 2003,
there were no disagreements with Baier & Williams on any matter of
accounting principles or practices, financial statements disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Baier & Williams, would have caused such firm to make reference
to the subject matter of the disagreements in connection with its report on our
financial statements.  In addition,
there were no such events as described under Item 304 of Regulation S-B during
our two most recent fiscal years and the subsequent interim period ending July
25, 2003.
On September 8, 2003, the Company
engaged Beard Miller Company LLP (Beard) as its new independent accountants.
The decision to engage Beard was approved by the Company's Audit Committee.

12

ITEM 8A.  CONTROLS AND PROCEDURES
Evaluation
of disclosure 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.
Changes
in internal control over financial reporting. There was no
change in our internal control over financial reporting during our fourth
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

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

The information required
by this item relating to our directors and nominees, and compliance with
Section 16(a) of the Securities Act of 1934 is included under the captions
Proposal No. 1:Election of Directors and Management Information and
Ownership of SecuritiesSection 16(a) Beneficial Ownership Reporting Compliance
in our Information Statement related to the 2004 Annual Meeting of Shareholders
and is incorporated herein by reference.

Our executive officers
are:
Joseph Giordano,
      Jr
    53
    
    President
      and DirectorCharles J.
      Long, Jr
    42
    
    Secretary,
      Treasurer and DirectorJay A. Martin
    30
    
    Vice-President
      of OperationsShawn C.
      Fabry
    26
    
    Chief Financial
      OfficerJOSEPH
GIORDANO, JR. Mr. Giordano 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.  Since
January 2000, Mr. Giordano has been a principal shareholder and director   of  
Everclear    Communications,    LLC  
(Walton,    Kentucky),   a telecommunication  construction services company through April
2003.
CHARLES
J. LONG,  JR. Mr.  Long 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 has 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.  Mr. Martin has been the Vice
President of Operations of the Company 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 International Plastics & Equipment
Corp. in 1996.  He has held the
following positions within the company in the order listed: CAD/Drafting
Engineer, Engineering Manager, Corporate Purchasing Manager, Divisional Quality
Assurance Manager, Corporate Quality Assurance Director, Plant Manager,
Assistant Vice-President of Operations. 
Mr. Martin is now responsible for all phases of operations for the
Company including the Brewton, Alabama facility as well as the New Castle,
Pennsylvania facility.  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.
13

SHAWN
C. FABRY. Mr. Fabry became the Chief Financial Officer of the Company in July
2003.  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 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 prominent
SEC client base and focus on strategic finance for developmental stage
corporations.  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.
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 our Information Statement related to the 2004 Annual Meeting of
Shareholders and is incorporated herein by reference.

Given time constraints
and free personnel resources, we have not yet 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.  We are currently working on
the drafting and finalization of such document.
Once completed, we intend
to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an
amendment to, or waiver from, a provision of this code of ethics by disclosing
such amendments or waivers on our internet site www.ipec.biz.
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 captions Ownership of Securities and Equity
Compensation Plan Information in our Information Statement related to the 2004
Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12.  CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS.
The information required
by this item is included under the caption Executive Compensation and Related
InformationCertain Relationships and Related Transactions in our Information
Statement related to the 2004 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 13.  EXHIBITS AND REPORTS ON
FORM 8-K.
Regulation
  S-B Number
  
  Exhibit2.1
  
  Share Exchange Agreement between Golden Hole, Inc.
  and International Plastics and Equipment Corp. dated January 14, 2002 (1)3.1
  
  Articles of Incorporation, as amended (2)3.2
  
  Bylaws (2)4.1
  
  Description of Series A Convertible Preferred Stock
  (3)10.1
  
  December 23, 1998 Loan Documents with First Western
  Bank (3)10.2
  
  January 13, 2000 Loan Documents with First Western
  Bank (3)14

Regulation
  S-B Number
  
  Exhibit10.3
  
  January 11, 2001 Loan Documents with Sky Bank (3)10.4
  
  February 25, 2002 Loan Documents with Sky Bank (3)10.5
  
  Series A Convertible Preferred Stock Purchase
  Agreement dated January 1, 2000 (3)10.6
  
  Consulting Agreement dated January 1, 2000 with
  Sherwood LLC (3)10.7
  
  Payment and Severance Agreement and Guarantee dated
  January 2, 2001 (3)10.8
  
  Consulting Agreement dated January 1, 2001 with
  Sherwood LLC (3)16.1
  
  Letter from Andersen Andersen & Strong, L.L.C.
  (1)21.1
  
  Subsidiaries of the registrant (3)31.1
  
  Rule 13a-14(a) Certification of Chief Executive
  Officer31.2
  
  Rule 13a-14(a) Certification of Chief Financial
  Officer32.1
  
  Certification Pursuant to 18 U.S.C. Section 1350, as
  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief
  Executive Officer32.2
  
  Certification Pursuant to 18 U.S.C. Section 1350, as
  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Financial
  Officer(1)
  Incorporated by reference to the exhibits to the
  registrants current report on Form 8-K dated January 28, 2002, file number
  0-30721.(2)
  Incorporated by reference to the exhibits to the
  registrants registration statement on Form 10-SB, file number 0-30721.(3)
  Incorporated by reference to the exhibits to the
  registrants annual report on Form 10-KSB for the fiscal year ended December
  31, 2001, file number 0-30721.Reports on Form 8-K: 
On November 14, 2003, the Registrant filed a current report on Form 8-K disclosing under
Item 5 the filing of its restated financial statements. No financial
statements were required to be filed with that Form 8-K.
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 our Information
Statement related to the 2004 Annual Meeting of Shareholders and is
incorporated herein by reference.
15

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, 2004
  
  
  By:
  /s/ Shawn C. FabryShawn C. Fabry, Chief Financial OfficerIn 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
  
  DatePresident and Director
  (Principal Executive Officer)
  
  March 30, 2004Joseph Giordano, Jr. /s/Secretary, Treasurer and Director
  
  March 30, 2004Charles J. Long, Jr. /s/Chief Financial Officer (Principal
  Financial and Accounting Officer)
  
  March 30, 2004Shawn C. Fabry /s/Director
  
  March 30, 2004Thomas J. Giordano /s/Director
  
  March 30, 2004Mel Grata /s/Director
  
  March 30, 2004Donald L. Franty /s/Director
  
  March 30, 2004Terry L. Massaro /s/Director
  
  March 30, 2004Joseph J. Prishak /s/16

Item 7.  FINANCIAL STATEMENTS

IPEC Holdings, Inc.
Consolidated Financial Statements
December 31, 2003 and 2002

Table of Contents

Page(s)Independent Auditor's Report
  F-2Consolidated Balance Sheets  December
  31, 2003 and 2002
  F-3  F-4Statements Of Consolidated Operations -
  Years Ended December 31, 2003 and 2002
  F-5Statements Of Consolidated Cash Flows -
  Years Ended December 31, 2003 and 2002
  F-6Statement of Consolidated Shareholders
  Equity  December 31, 2003 and 2002
  F-7Notes To Consolidated Financial
  Statements  December 31, 2003 and 2002
  F-8  F-26F-1

logo

INDEPENDENT
AUDITORS REPORT
To the Board of Directors
IPEC Holdings, Inc. 
New Castle, Pennsylvania


We
have audited the accompanying consolidated balance sheets of IPEC Holdings, Inc. and
subsidiary as of December 31, 2003 and 2002, and the related statements of
consolidated operations, shareholders equity (deficit), 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 auditing standards generally accepted in the
United States of America. 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, 2003 and 2002, 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.


As
discussed in Note 2, the Company has restated its financial statements to reflect the
issuance of 200,000 common stock warrants in November 2002 and to correct an error related
to the Companys tax provision.

/s/    Beard
        Miller Company LLPPittsburgh, PennsylvaniaMarch 23, 2004F-2

IPEC Holdings, Inc.Consolidated Balance Sheets
December 31,
  2003
  
  As Restated
  December 31,
  2002AssetsCash
  
  $
  627,916
  
  $
  84,661Accounts Receivable, less reserves for doubtful
  accounts of $220,000 and $210,000, respectively in 2003 and 2002
  
  
  1,873,245
  
  
  937,168Other Trade Related Receivables
  
  
  284,009
  
  
  183,812Inventories
  
  
  2,143,572
  
  
  2,634,742Deferred Tax Asset
  
  
  102,108
  
  
  Prepaid Expenses
  
  
  51,040
  
  
  5,549Current Assets
  
  
  5,081,890
  
  
  3,845,932Land
  
  
  129,297
  
  
  119,374Buildings and Equipment
  
  
  18,482,266
  
  
  17,122,861Construction In Progress
  
  
  335,002
  
  
  406,307Accumulated Depreciation
  
  
  (7,418,823
  )
  
  (6,196,300
  )Property, Plant & Equipment, Net
  
  
  11,527,742
  
  
  11,452,242Patents, less accumulated amortization of $104,115
  and $78,702 in 2003 and 2002
  
  
  287,772
  
  
  299,395Other Assets
  
  
  166,989
  
  
  9,173Other Assets
  
  
  454,761
  
  
  308,568Total Assets
  
  $
  17,064,393
  
  $
  15,606,742See accompanying notes to these consolidated financial statements.
F-3

IPEC Holdings, Inc.
Consolidated Balance Sheets
December 31,
        2003
    
    As
        Restated
        December 31,
        2002Liabilities
        and Shareholders EquityAccounts
        Payable
    
    $
    1,788,983
    
    $
    800,753Accrued
        Liabilities
    
    
    201,639
    
    
    109,281Taxes
        Payable
    
    
    
    
    
    16,426Accrued
        Interest
    
    
    8,261
    
    
    31,657Notes
        Payable - Current Portion
    
    
    1,545,938
    
    
    1,416,436Bank
        Line Of Credit
    
    
    4,380,000
    
    
    2,550,000Capital
        Lease Obligation - Current Portion
    
    
    82,833
    
    
    169,820Current
        Liabilities
    
    
    8,007,654
    
    
    5,094,373Capital
        Lease Obligation
    
    
    9,276
    
    
    74,642Notes
        Payable - Long Term
    
    
    4,089,348
    
    
    5,732,086Long
        Term Liabilities
    
    
    4,098,624
    
    
    5,806,728Deferred
        Income Taxes
    
    
    568,009
    
    
    403,706Commitments
        and ContingenciesShareholders
        EquityPreferred
        Stock, no par value, 25,000,000 shares authorized, no shares issued
    
    
    
    
    
    Common
        Stock, par value $0.001 per share, 100,000,000 shares authorized, 9,972,912
        shares issued and outstanding at December 31, 2003 and December 31, 2002
    
    
    9,973
    
    
    9,973Additional
        Paid In Capital
    
    
    4,377,994
    
    
    4,376,894Retained
        Earnings (Deficit)
    
    
    2,139
    
    
    (84,932
    )Shareholders
        Equity
    
    
    4,390,106
    
    
    4,301,935Total
        Liabilities and Shareholders Equity
    
    $
    17,064,393
    
    $
    15,606,742See accompanying notes to these consolidated financial statements.
F-4

IPEC Holdings, Inc.
Statements of Consolidated Operations
Year Ended December 31,2003
  
  2002 As
  RestatedSales
  
  $
  16,395,664
  
  $
  13,046,668Operating ExpensesCost of Goods Sold
  
  
  12,645,784
  
  
  9,441,839Selling
  
  
  1,386,030
  
  
  773,531General and Administrative
  
  
  1,651,530
  
  
  1,460,404Operating Expenses
  
  
  15,683,344
  
  
  11,675,774Operating Income
  
  
  712,320
  
  
  1,370,894Non-operating Expense (Income)Interest Expense
  
  
  598,922
  
  
  616,366Other Income
  
  
  (35,868
  )
  
  (17,151
  )Non-operating Expenses, net
  
  
  563,054
  
  
  599,215Income Before Taxes
  
  
  149,266
  
  
  771,679Income Taxes
  
  
  62,195
  
  
  274,871Net Income
  
  $
  87,071
  
  $
  496,808Average Shares of Common Stock - Basic
  
  
  9,972,912
  
  
  9,934,356Average Shares of Common Stock - Diluted
  
  
  10,242,459
  
  
  10,142,946Basic Net Income Per Share
  
  $
  0.01
  
  $
  0.05Diluted Net Income Per Share
  
  $
  0.01
  
  $
  0.05See accompanying notes to these consolidated financial statements.
F-5

IPEC Holdings, Inc.Statements of Consolidated Cash Flows
Year Ended December 31,2003
  
  2002 - As
  RestatedCash Flows from Operating ActivitiesNet Income
  
  $
  87,071
  
  $
  496,808Adjustments to reconcile net income to net cash
  provided by operating activitiesDepreciation and amortization
  
  
  1,738,371
  
  
  1,487,506Deferred taxes
  
  
  62,195
  
  
  268,871Provision for doubtful accounts
  
  
  82,615
  
  
  50,605Issuance of common stock for services
  
  
  
  
  
  25,000Issuance of options for services
  
  
  1,100
  
  
  Issuance of common stock warrants for services
  
  
  
  
  
  227,200Changes in Assets and LiabilitiesAccounts receivable
  
  
  (1,018,692
  )
  
  (129,288
  )Other trade related receivables
  
  
  (100,197
  )
  
  15,947Inventory
  
  
  491,170
  
  
  (785,229
  )Prepaid Expenses
  
  
  (45,491
  )
  
  30,739Other Assets
  
  
  (157,816
  )
  
  Accounts payable
  
  
  988,230
  
  
  22,092Accrued liabilities
  
  
  92,358
  
  
  36,196Taxes payable
  
  
  (16,426
  )
  
  (8,629
  )Accrued interest
  
  
  (23,396
  )
  
  25,572Net cash provided by operating activities
  
  
  2,181,092
  
  
  1,763,390Cash Flows from Investing ActivitiesPurchases of property, plant & equipment
  
  
  (1,788,458
  )
  
  (2,211,937
  )Investment in and development of patents
  
  
  (13,790
  )
  
  (6,841
  )Net cash used in investing activities
  
  
  (1,802,248
  )
  
  (2,218,778
  )Cash Flows from Financing ActivitiesBorrowings on bank line of credit
  
  
  2,330,000
  
  
  2,815,362Repayments of bank line of credit
  
  
  (500,000
  )
  
  (2,526,362
  )Payments on capital lease obligations
  
  
  (152,353
  )
  
  (124,709
  )(Payments) borrowings on notes payable
  
  
  (1,513,236
  )
  
  61,377Decrease in amounts due to related parties
  
  
  
  
  
  (700,000
  )Net cash provided (used) by financing activities
  
  
  164,411
  
  
  (474,332
  )Net Increase / (Decrease)  in cash
  
  
  543,255
  
  
  (929,720
  )Cash - beginning of period
  
  
  84,661
  
  
  1,014,381Cash - end of period
  
  $
  627,916
  
  $
  84,661Cash paid for interest, net of capitalized interest
  of $21,500 and $37,000, respectively
  
  $
  600,818
  
  $
  553,794Cash paid for income taxes
  
  $
  
  
  $
  14,629See accompanying notes to these consolidated financial statements.
F-6

IPEC Holdings, Inc.Statement of Consolidated Shareholders EquityFor the
Years Ended December 31, 2003 and December 31, 2002 (as restated)
Preferred
  Shares
  Outstanding
  
  Common
  Shares
  Outstanding
  
  Common
  Stock
  Warrants
  
  Preferred
  Stock
  
  Common
  Stock
  
  Additional Paid
  In Capital
  
  Retained
  Earnings
  (Deficit)
  
  TotalBalance at December 31, 2001
  
  
  
  
  
  9,489,796
  
  
  
  
  $
  
  
  $
  9,490
  
  $
  4,125,177
  
  $
  (581,740
  )
  $
  3,552,927Stock issued in connection with reverse merger
  
  
  
  
  
  465,000
  
  
  
  
  
  
  
  
  465
  
  
  (465
  )
  
  
  
  
  Issuance of Common Stock for services
  
  
  
  
  
  18,116
  
  
  
  
  
  
  
  
  18
  
  
  24,982
  
  
  
  
  
  25,000Issuance of Common Stock Warrants for services
  
  
  
  
  
  
  
  
  200,000
  
  
  
  
  
  
  
  
  227,200
  
  
  
  
  
  227,200Net Income
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  496,808
  
  
  496,808Balance at December 31, 2002 - As Restated
  
  
  
  
  
  9,972,912
  
  
  200,000
  
  $
  
  
  $
  9,973
  
  $
  4,376,894
  
  $
  (84,932
  )
  $
  4,301,935Issuance of Options for services
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  1,100
  
  
  
  
  
  1,100Net Income
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  87,071
  
  
  87,071Balance at December 31, 2003
  
  
  
  
  
  9,972,912
  
  
  200,000
  
  $
  
  
  $
  9,973
  
  $
  4,377,994
  
  $
  2,139
  
  $
  4,390,106See accompanying notes to these consolidated financial statements.
F-7

IPEC HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
1.  Description of
Business
IPEC Holdings, Inc. (the
Company or IPEC) manufactures and sells tamper evident plastic
closures.  These closures are
predominantly used in the bottling of non-carbonated beverages including
bottled water, milk, fruit and sports drinks. 
The Company also designs and manufactures capping equipment.  IPECs customer base primarily consists of
dairy and bottled water manufacturers both domestically and internationally. The
Companys two principal manufacturing facilities are located in the United
States of America in Pennsylvania and Alabama.
2.  Restatement of 2002 Consolidated Financial
Statements
In September 2003, the
Company engaged Beard Miller Company LLP to perform audits on its financial
statements for fiscal years ended December 31, 2003 and 2002.   In connection with the audit, the
accompanying consolidated financial statements as of December 31, 2002 and for
the year then ended have been restated from those previously issued to account
for the issuance of 200,000 common stock warrants in November 2002, net of tax
effects and to correct an error related to the Companys tax provision in the
amount of $199,871.  The restatement
decreased net income for the fourth quarter and year ended December 31, 2002 by
$348,071 and both basic and diluted income per share by $0.03.
3.  Recent Accounting
Pronouncements
Effective January 1,
2003, the Company adopted SFAS No. 145, Rescission of Financial
Accounting Standards Boards (FASB) Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections. This
statement updates, clarifies and simplifies existing accounting pronouncements.
Among other provisions, prospectively, as a result of the adoption of SFAS
No. 145, debt extinguishment costs will no longer be treated as
extraordinary items. The impact of adopting SFAS No. 145 did not have any
impact on the Companys consolidated financial statements for the fiscal year
2003.
In November 2002, the
FASB issued FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires that upon issuance of a
guarantee, a guarantor must recognize a liability for the fair value of an
obligation assumed under a guarantee. 
FIN 45 also requires additional disclosures by a guarantor in its
interim and annual financial statements about the obligations associated with
guarantees issued. The recognition provisions of FIN 45 are effective
prospectively for any guarantees that are issued or modified after
December 31, 2002. The provisions of FIN 45 did not have any impact on the
Companys results of operations or financial condition.

In January 2003, the FASB
issued FASB Interpretation No. 46, Consolidation of Variable Interest
Entities  an interpretation of ARB No. 51 (FIN 46). FIN 46 clarifies the
application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 was
effective January 31, 2003 and upon adoption the Company has determined
that it does not have any variable interest entities as defined in FIN 46.
Effective May 1,
2003, the FASB issued SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
primarily requires that an issuer classifies financial instrument that is
within its scope and previously
classified as equity as a liability. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after
December 15, 2003. The adoption of this statement did not have any effect
on the Companys results of operations or financial condition.
F-8

IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002

In January 2003, the EITF
released Issue No. 00-21, (EITF 00-21), Revenue Arrangements with Multiple
Deliverables, which addresses certain aspects of the accounting by a vendor
for arrangement under which it will perform multiple revenue-generating
activities. Specifically, EITF 00-21 addresses whether an arrangement contains
more than one unit of accounting and the measurement and allocation to the separate units of accounting
in the arrangement. EITF 00-21 is effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. Management is currently
assessing the impact, if any, the adoption of EITF 00-21 will have on Companys
results of operations or financial condition.

4.   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.
Employee Stock Option Plans

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.

The Company accounts for
stock-based awards to employees and 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 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 and warrant
grants made to its employees based on specified valuation techniques that
produce estimated compensation charges. The pro forma information is as
follows:
F-9

IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002

Year Ended
  December 31,
  2003
  
  Year Ended
  December 31,
  2002Net Income - as reported
  
  $
  87,071
  
  $
  496,808Compensation expense
  options - net of tax
  
  
  246,306
  
  
  129,492Compensation expense
  warrants - net of tax
  
  
  
  
  
  148,200Compensation recorded in
  financial statement -net of tax
  
  
  (680
  )
  
  (148,200
  )Net Income (Loss) - pro
  forma
  
  $
  (159,915
  )
  $
  367,316Basic Net Income Per Share
  - as reported
  
  $
  0.01
  
  $
  0.05Diluted Net Income Per
  Share - as reported
  
  $
  0.01
  
  $
  0.05Basic Net Income (Loss) Per
  Share - pro forma
  
  $
  (0.02
  )
  $
  0.04Diluted Net Income (Loss)
  Per Share - pro forma
  
  $
  (0.02
  )
  $
  0.04The value of each 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. 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 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 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 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 269,547 and
208,590 for the year ended December 31, 2003 and 2002, respectively.
Revenue Recognition
The
Company recognized product revenues 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-10

IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
Contingent Rebates
The
Company has entered into multiple contracts with its suppliers that provide for
retroactive rebates if negotiated breakpoint of purchases is obtained.   The Company only records such rebates as an
offset to its cost of sales 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 revenues.  Shipping costs incurred by the Company are
recorded as cost of sales in the accompanying statements of operations.  For the years ended December 31, 2003 and
2002, the Company recorded shipping revenues of approximately $411,000 and
$371,000, 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 sole suppliers.  
The inability of any contract manufacturer or supplier to fulfill supply
requirements could materially impact future operating results.  The Company believes that the long-term
effect of any supplier concentration risk is significantly mitigated by the
amount of replacement suppliers that are readily available in the marketplace.
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 include adjustment clauses to pass price changes on to its
customer base.
In calendar year 2003,
one customer accounted for approximately 16% of net sales and one other
customer amounted to 11% of net sales. 
During calendar year 2002, sales to one customer amounted to 20% of net
sales and sales to two other customers each amounted to 10% of net sales.
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
  YearsBuildings
  
  
  40Machinery and equipment
  
  
  5  10Office furniture and equipment
  
  
  7F-11

IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002

Depreciation charged to
operations was approximately $1,713,000 and $1,476,000 for the years ended
December 31, 2003 and 2002, respectively. 
Of those amounts, approximately $1,645,000 and $1,420,000, 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
$21,500 and $37,000 of interest in connection with buildings and equipment
under construction in calendar years 2003 and 2002, 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 2003 and 2002.
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 $25,400 and $21,900
for 2003 and 2002, respectively.  The
following represents the estimated future amortization expense for these
intangible assets as of December 31, 2003:

Fiscal
  Year
  
  Amount2004
  
  $
  25,6002005
  
  
  25,6002006
  
  
  25,6002007
  
  
  25,6002008
  
  
  25,600Thereafter
  
  
  159,772Total
  
  $
  287,772Fair Value of Financial
Instruments
The carrying value of
cash, receivables, and accounts payable approximate fair value based upon the
liquidity and short-term nature of the items. 
The carrying value 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.
F-12

IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
Foreign Currency Translation
The Companys 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.
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 27% and 41% of sales occurred between May and August in
calendar years 2003 and 2002, 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.
5.  Business Combination

On January 28, 2002, the
Company (Acquiror) 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 Acquiror 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 Acquiror 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.
6.  Balance Sheet Details

December 31,
  2003
  
  December 31,
  2002Inventories:Raw Materials
  
  $
  595,180
  
  $
  314,090Work in Process
  
  
  66,725
  
  
  325,814Finished Goods
  
  
  1,563,542
  
  
  2,454,838Reserve for Obsolescence
  
  
  (81,875
  )
  
  (460,000
  )Total
  
  $
  2,143,572
  
  $
  2,634,742Other Assets:Deferred Transaction Costs
  
  $
  110,989
  
  $
  Long-term Equipment Receivable
  
  
  56,000
  
  
  Miscellaneous items
  
  
  
  
  
  9,173Total
  
  $
  166,989
  
  $
  9,173F-13

IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002

Primarily
due to efficiencies gained in its production processes, the Company has reduced
the carrying value of its net inventory by approximately 20%.   In December 2003, the Company disposed or
sold at reduced pricing a significant portion of its inventory which was
previously reserved as of December 31, 2002.  
The disposal benefited the Company by increasing available warehousing
space at both of its primary production facilities and maximizing inventory tax
deductions.  The Company is permitted to
borrow under its secured line of credit up to 50% of the value of all
components of its inventory.
7.  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 2003, 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 securitized collateral 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 plus $1.9 million.   As of December 31, 2003, the Company had total borrowing
capacity of $4,622,000 related to this secured line of credit.

The interest rate as of
December 31, 2003 and 2002 was is 4.0% and 4.5%, respectively.   There was $4,380,000 and $2,550,000 outstanding
under this agreement at December 31, 2003 and 2002, respectively.   The average dollar amount of the borrowings
and the average interest on its line of credit was $4,207,000 and $2,120,000
and 4.1% and 4.3% for the years ending December 31, 2003 and 2002,
respectively.
F-14

IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
Permanent Debt
Permanent debt at
December 31, 2003 and 2002 was comprised of the following:
2003
  
  20027.90% note due January 1, 2006, payable in monthly
  installments, secured by equipment
  
  $
  470,839
  
  $
  676,0197.90% note due January 1, 2006, payable in monthly
  installments, secured by equipment
  
  
  305,911
  
  
  443,2977.90% note due May 1, 2006, payable in monthly
  installments, secured by equipment
  
  
  359,667
  
  
  492,9917.50% 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
  
  
  815,831
  
  
  886,9227.50% variable interest rate note at prime, due July
  1, 2005, payable in monthly installments, secured by molds
  
  
  558,195
  
  
  1,017,0737.75% note due January 15, 2005, payable in monthly
  installments, secured by a general assignment of all assets
  
  
  331,505
  
  
  541,218Variable 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
  
  
  1,662,496
  
  
  1,900,0007.0% 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
  
  
  1,089,433
  
  
  1,135,3836.40- 7.10% notes, due October, 2005 - June, 2007,
  payable in monthly installments, secured by Company vehicles
  
  
  41,409
  
  
  55,619Subtotal
  
  
  5,635,286
  
  
  7,148,522Less - current portion of long-term debt
  
  
  (1,545,938
  )
  
  (1,416,436
  )$
  4,089,348
  
  $
  5,732,086F-15

IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002

With the exception of the
notes secured by Company vehicles, 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 the (i) maintenance of
a defined tangible net worth of not less than $3,000,000 (ii) 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, 2003, the Company was not in compliance with
two of the three financial covenants.  
The lender has granted a temporary waiver on these covenants through
January 1, 2005.   The lender has
required the ratios to be recomputed using the financial information contained
in the Companys audited 2004 consolidated financial statements.   The Company projects to be in compliance
with such covenants at that time.

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

Calendar
        Year
    
    Debt
        Reduction2004
    
    $
    1,545,9382005
    
    
    1,140,2882006
    
    
    1,452,7072007
    
    
    184,3642008
    
    
    191,174Thereafter
    
    
    1,120,815Total
        Debt Reduction
    
    $
    5,635,286Interest Rates
The Companys has its
debt portfolio concentrated at approximately 76% in variable rate interest
loans as of December 31, 2003.  The
following table provides information on the Companys interest rate structure
as of December 31 2003.

2003Fixed Rate Debt and
  Capital Lease Obligations (1)Principal
  
  $
  2,460,798Weighted Average Rate
  
  
  7.54
  %Variable Rate DebtPrincipal
  
  $
  7,644,429Weighted Average Rate
  
  
  4.08
  %(1)  See Note 11 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, 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, 2003 the letter of credit had an unused
balance of $32,000 USD and expiration date of January 30, 2005.

F-16
IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002

8.  Preferred Stock

The Company has a single class of Preferred Stock.  On April 4, 2002, the shareholders adopted
Restated Articles of Incorporation (effecting the name change to IPEC Holdings,
Inc.) and authorized additional capital stock increasing the amount to
25,000,000 shares of Preferred Stock, $.001 par value per share.

One million shares were sold for $1,000,000 in January 2000. The shares
of stock were issued without registration in reliance on an exemption in
federal securities laws that permit issuance of stock without registration of
the securities.  On March 28, 2001, the
Company entered into an agreement with the holder of the preferred stock to
repurchase the shares of stock for $1 million to be paid in installments ranging
from $100,000 to $250,000 beginning in March of 2001 through September 30,
2001.

The repurchase agreement includes a provision for a one-time additional
payment to be made by the Company to the holder of the preferred stock should,
before March 28, 2004, the Companys capital structure change as a result of an
infusion of additional equity.  The
amount of the payment is $50,000 if the capital infusion reaches $2,000,000 and
a pro-rata payment up to $150,000 for up to $4,000,000 of capital infusion.  The Company did not reach this funding level
by March 28, 2004 to trigger the payment amount.

9. 
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, 2003.

On December 31, 2001, IPEC sold 1,193,906 shares (restated for the
effect of the share exchange described in Note 5) of its common stock for
aggregate cash proceeds of $1,295,235. 
The shares of stock were issued without registration in reliance on an exemption
in federal securities laws that permits issuance of stock without registration
of the securities.

On March 1, 2002, the Company issued 18,116 shares of its common stock
valued at $1.38 per share to a firm serving as its investment advisor.  The shares issued resulted in before tax
compensation expense of $25,000 in the accompanying consolidated statement of
operations.

On February 10, 2003, one of the two principal shareholders transferred
4,124,998 shares of the Companys 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 82% of the shares of the Companys common stock, in substantially
equal amounts.

Employee Stock Option Plan

In April 2002, the Board of Directors approved the adoption of a
non-qualified and incentive stock option plan (the 2002 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 subject to shareholder approval, the
aggregate number of shares under option 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 Corporations last completed fiscal year or (ii) 1,750,000.   All options granted under the Plan expire
ten years from the grant date.

F-17
IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
Stock
Option Grants

The Company has adopted
only the disclosure provisions of Statement of Financial Accounting Standard
(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 May 21, 2002, the
Company granted 60,000 options with an exercise price of $1.38 per share to two
employees of the Company.  These options
vest 40% immediately, 40% on May 21, 2003 and 20% on May 21, 2004.
On July 1, 2002, the
Company granted an additional 600,000 options with an exercise price of $1.38
per share to one of the two employees of the Company receiving options on May
21, 2002.  These options vest 25%
immediately, and an additional 25% per year for the next three years.
On December 13, 2002, the
Company granted 6,000 options with an exercise price of $5.00 per share to six
employees of the Company.  These options
vest immediately.  All of the options
expire on December 13, 2012.
On July 25, 2003, the
Company granted 549,000 stock options with a 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
  
  SharesJuly 25, 2003
  
  
  24,000December 31, 2003
  
  
  150,000December 31, 2004
  
  
  125,000December 31, 2005
  
  
  125,000December 31, 2006
  
  
  125,000Total granted shares
  
  
  549,000Dilutive
Effect of Options

2003
  
  2002Basic Average Shares of
  Common Stock
  
  
  9,972,912
  
  
  9,934,356Granted and Assumed
  
  
  549,000
  
  
  666,000Canceled
  
  
  
  
  
  Net Options Granted
  
  
  549,000
  
  
  666,000Grant Dilution
  
  
  5.5
  %
  
  6.7
  %Exercised
  
  
  
  
  
  Exercise dilution
  
  
  0.0
  %
  
  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-18

IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
General
Option Information
A summary of option
activity follows.  During fiscal 2003
and 2002, a total of 800,000 and 950,000 shares, respectively, of the Companys
common stock have been reserved for issuance under the Plan. The following is a
schedule of option and warrant activity from December 31, 2001 to December 31,
2003:



Dilutive Securities
        Available for Grant
    
    OptionsDecember
        31, 2001
    
    
    
    
    
    
    
    Initial
        shares reserved
    
    
    
    950,000
    
    
    
    Granted
    
    
    
    (666,000
    )
    
    
    666,000Forfeitures
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    Additional
        shares reserved
    
    
    
    
    
    
    
    December
        31, 2002
    
    
    
    284,000
    
    
    
    666,000Granted
    
    
    
    (549,000
    )
    
    
    549,000Forfeitures
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    Additional
        shares reserved
    
    
    
    800,000
    
    
    
    December
        31, 2003
    
    
    
    535,000
    
    
    
    1,215,000The following table
summarizes significant ranges of outstanding and exerciseable options as of
December 31, 2003:
OPTIONS
  OUTSTANDING
  
  OPTIONS
  EXERCISABLEExercise Price
  
  Options
  
  Weighted-
  Average
  Remaining
  Contractual Life(in years)
  
  Weighted-
  Average
  Exercise
  Priceper Share
  
  Aggregated
  InstrinsicValue
  
  NumberExerciseable
  
  Weighted-
  Average
  Exercise
  Priceper Share
  
  Aggregated
  InstrinsicValue
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  $
  1.15
  
  
  549,000
  
  9.60
  
  
  
  $
  1.15
  
  
  
  411,750
  
  
  174,000
  
  
  $
  1.15
  
  
  
  130,500$
  1.38
  
  
  660,000
  
  8.50
  
  
  
  $
  1.38
  
  
  
  343,200
  
  
  348,000
  
  
  $
  1.38
  
  
  
  180,960$
  5.00
  
  
  6,000
  
  9.00
  
  
  
  $
  5.00
  
  
  
  
  
  
  6,000
  
  
  $
  5.00
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  1,215,000
  
  9.00
  
  
  
  $
  1.29
  
  
  
  754,950
  
  
  528,000
  
  
  $
  1.34
  
  
  
  311,460F-19

IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002

The aggregate intrinsic
value in the table above represents the total pre-tax intrinsic value based on
the Companys closing stock price of $1.90 as of December 31, 2003.  The total number of in-the-money options
exerciseable as of December 31, 2003 was 522,000 shares and the
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:



2003
  
  2002Expected Dividend
  
  
  
  
  
  Risk-free interest rate
  
  
  4.22
  %
  
  3.75
  %Expected Volatility
  
  
  122.00
  %
  
  20.00
  %Expected Life (Years)
  
  
  10
  
  
  10The fair value of each
option computed under this method is $1.10, $0.55, $0.55, and $2.00 for the
grants at July 25, 2003, May 21, 2002, July 1, 2002 and December 13, 2002,
respectively.
At December 31, 2003, the
Company has one stock-based employee compensation plan (described above).  The Company accounts for the plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees and related Interpretations.  No stock-based employee compensation cost is
reflected in net income, as all options granted under the plan had an exercise
price equal to the market value of the underlying common stock on the date of
grant.  The table presented in Note 4
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.

The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. The
Companys stock options and warrants had characteristics significantly
different from those of unrestricted traded options for the entire year ended
December 31, 2002.  The majority of the
stock restrictions were released during the first quarter of fiscal 2003.
Dilutive shares
outstanding include the dilutive impact of in-the-money options and warrants,
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 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
vest immediately.  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 stock
$5.00; dividend yield 0%; expected volatility of 20%; risk-free interest rate
of 3.75%; and expected life of 4 years.
The deemed exercise of
common stock warrants has not been included in the calculation since the
effects are anti-dilutive.

F-20

IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
10.  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,
  2003
  
  Year ended
  December 31,
  2002 (as restated)Federal income taxes:Current
  provision
  
  
  $
  
  
  
  
  $
  Deferred
  provision
  
  
  
  52,957
  
  
  
  
  262,371State income taxes:Current
  provision
  
  
  
  
  
  
  
  
  6,000Deferred
  provision
  
  
  
  9,238
  
  
  
  
  6,500Total
  
  
  $
  62,195
  
  
  
  $
  274,871The components of the
deferred tax assets (liabilities) are as follows:



Year ended
  December 31,
  2003
  
  Year ended December
  31,
  2002 (as restated)Assets:Allowance for doubtful accounts
  
  $
  71,245
  
  
  $
  Net operating losses
  
  
  357,306
  
  
  
  57,180Inventory obsolescence reserve
  
  
  30,863
  
  
  
  Equity compensation
  
  
  86,059
  
  
  
  85,644Total deferred tax assets
  
  $
  545,473
  
  
  $
  142,824Liabilities:Property basis difference
  
  $
  1,011,374
  
  
  $
  546,530Total
  deferred tax liabilities
  
  $
  1,011,374
  
  
  $
  546,530Net deferred tax liability
  
  $
  (465,901
  )
  
  $
  (403,706
  )Current portion
  
  
  102,108
  
  
  
  Long-term deferred tax liability
  
  $
  (568,009
  )
  
  $
  (403,706
  )F-21

IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002

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,
  2003
  
  Year ended
  December 31, 2002
  (as restated)Federal statutory rate
  
  
  
  34.00
  %
  
  
  
  34.00
  %Income tax at statutory rate
  
  
  $
  50,750
  
  
  
  $
  262,371Effect of:State and other income taxes, net of federal tax
  benefit
  
  
  
  5,482
  
  
  
  
  8,250Non-deductible meals and entertainment
  
  
  
  3,827
  
  
  
  
  4,250Non-deductible life insurance
  
  
  
  2,136
  
  
  
  
  Provision for income taxes
  
  
  $
  62,195
  
  
  
  $
  274,871As of December 31, 2003,
the Companys federal and state net operating loss carryforwards for income tax
purposes were approximately $872,000 and $940,000, respectively.   If not utilized, the federal net operating
loss carryforwards will begin to expire in fiscal 2023 and the state net
operating losses in fiscal 2021.
11.
Leases

Operating Leases

The Company leases
certain manufacturing equipment under operating leases expiring at various
dates through 2004.  Management expects
that in the normal course of business, leases will be renewed or replaced by
other leases.

Total lease expense
amounted to $32,404 and $63,300 in 2003 and 2002.
Capital Leases
The Company leases a
building and certain manufacturing and office equipment under capital leases
expiring at various dates through 2007.

F-22

IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002

The asset value and
related liability for capital leases have been reflected in the accompanying
Consolidated Balance Sheets is as follows:

2003
  
  2002Asset Value
  
  $
  873,675
  
  $
  881,632Less -
  Accumulated
  Depreciation
  
  
  (254,483
  )
  
  (206,915
  )Net Book
  Value
  
  $
  619,192
  
  $
  674,717Capital
  Lease Obligation
  
  $
  92,109
  
  $
  244,462Approximately $64,508 and
$55,100 have been charged against operations for depreciation and interest
associated with capital leases in 2003 and 2002, respectively.
Future Minimum Lease Payments

Minimum lease payments
required for future years are as follows:




Calendar
  Year
  
  Operating
  Leases
  
  Capital Leases2004
  
  
  26,650
  
  
  
  75,7952005
  
  
  9,364
  
  
  
  5,6132006
  
  
  1,561
  
  
  
  6,6852007
  
  
  
  
  
  
  4,0162008
  
  
  
  
  
  
  Therafter
  
  
  
  
  
  
  Total Lease Payments
  
  $
  37,575
  
  
  $
  92,10912.
Earnings Per Share
Earnings per share have
been computed in accordance with the provisions of SFAS No. 128. The following
table sets forth the computation of basic and diluted earnings per share for
the years ended December 31, 2003 and 2002:




2003
  
  2002Net income
  
  $
  87,071
  
  $
  496,808Weighted average shares outstanding for basic
  earnings per share
  
  
  9,972,912
  
  
  9,934,356Basic earnings per share
  
  $
  0.01
  
  $
  0.05Adjustment to weighted average shares outstanding
  for - exercise of vested stock options
  
  
  269,547
  
  
  208,590Increase in weighted average shares outstanding
  
  
  269,547
  
  
  208,590Diluted
  earnings per share
  
  $
  0.01
  
  $
  0.05F-23

IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002

Employee stock options to
purchase approximately 6,000 and 0 shares, in fiscal 2003 and 2002,
respectively, and warrants to purchase 200,000 shares in both 2003 abd 2002 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. In addition, the Company had 535,000 and
284,000 shares of authorized but unissued options available for grant as of
December 31, 2003 and 2002, respectively.

F-24

IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
13.  Related Parties
Related party
transactions are primarily with the following entities, related to the Company
by common ownership (i) Giordano Construction Co., Inc., 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.
These related party
transactions consist of the following:



2003
  
  2002Transactions with Giordano
  Construction Co., Inc.Sales
  
  $
  18,748
  
  $
  4,153Purchases
  
  $
  8,245
  
  $
  Transactions with L&G
  LeasingLeasing of Equipment
  
  $
  49,668
  
  $
  56,050In 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.

Two of the Company's principal shareholders have personally guaranteed all
Company debt. In additon, all advances made by the principal shareholders are
subordinated to the banks interest.

14.  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) Plant following 1 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 Plan for 2003 and 2002 were approximately $7,200 and
$6,800, respectively.

F-25

IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
15.  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, but
is managed out of its corporate headquarters in New Castle, Pennsylvania.
The Companys sales to
customers in the United States comprised 84% and 82% in 2003 and 2002,
respectively.  Other customers are
located principally in Canada (9%), England (6%), Ireland, Bahamas and the West
Indies. Segment revenue is determined based on the country where the sale
originates; accordingly, all sales are deemed to be in the United States.
Property and equipment
information is based on the physical location of the assets.  The following table presents property and
equipment information for geographic area:



2003
  
  2002Property and Equipment, netUnited States
  
  $
  11,432,104
  
  $
  11,320,874England
  
  
  95,638
  
  
  131,368Total
  
  $
  11,527,742
  
  $
  11,452,24216.  Commitments and Contingencies
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.  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.

17.  Subsequent Events
On
November 13, 2003, the Company obtained approval from its Board of Directors
and signed commitment letters to consummate two separate sale leaseback
transactions.  These transactions are
for the Companys two primary production facilities in Brewton, Alabama (the
Alabama Transaction) and New Castle, Pennsylvania (the Pennsylvania Transaction).  Upon closing, the properties will be
transferred to two separate single purpose entities maintained by the
Lessor.  Both transactions have a
projected closing date of May 2004 and are subject to the Lessors due
diligence requirements and Investment Committee approval.  On March 18, 2004, both transactions
received Lender Committee approval.
The
net purchase price for the Alabama Transaction is expected to be $1,750,000
which includes proceeds of $870,000 to fund the construction of a 30,000 square
foot warehouse addition to the building.  
This transaction is secured by a secured letter of credit totaling
$1,680,000 and is automatically renewable on an annual basis subject to Lender
approval.  As security for such letter
of credit, the Company is expected to fund approximately $400,000 to a a
restricted escrow account evenly over a 60 month period to be released to the
Company after the 60th month contingent upon a satisfactory
financial review performed by the lending institution. Primarily as a result of
the secured letter of credit, the Company anticipates treating this as a
financing transaction under the provisions of Statement of Financial Accounting
Standards No. 98, Accounting for Leases and, subject to the actual closing
date, recording an incremental debt obligation related to this transaction of
$1,650,000.   Annual rental payments
will be based on combination of a fixed market 
component subject to agreed upon reset provisions and a 29.30% weighted
3-month LIBOR plus 165 basis points (the Rental Rate).   The annual rent will then be determined by
multiplying the gross purchase price of the property by the Rental Rate for the
29.5 year term of the lease.
F-26


IPEC
HOLDINGS INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
The net purchase price
for the Pennsylvania Transaction is expected to be $3,450,000.   This Company expects to record, subject to
the actual closing date, a reduction in its existing debt obligations of
$1,900,000 related to this transaction.  
The Pennsylvania Transaction is expected to be treated as an operating
lease and will generate an initially deferred pre-tax gain of $1,200,000.   The gain will be amortized prospectively in
proportion to the gross rental charged to expense over the lease term. Annual
rental payments will be based on combination of a fixed market component subject
to agreed upon reset provisions and a 29.30% weighted 3-month LIBOR plus 165
basis points (the Rental Rate).   The
annual rent will then be determined by multiplying the gross purchase price of
the property by the Rental Rate for the 29.5 year term of the lease.

As of December 31, 2003, the Company had deferred transaction costs of $110,989
associated with this transaction.

F-27

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS

Allowance for
  Doubtful
  Accounts
  
  Allowance for
  InventoryYear Ended December 31, 2002:Balance at beginning of fiscal year
  
  $
  188,250
  
  $
  500,000Charged (Netted) to Expense
  
  
  50,605
  
  
  (40,000
  )Deductions
  
  
  28,855
  
  
  Balance at end of fiscal year
  
  $
  210,000
  
  $
  460,000Year Ended December 31, 2003:Balance at beginning of fiscal year
  
  $
  210,000
  
  $
  460,000Charged to Expense
  
  
  82,615
  
  
  150,655Deductions
  
  
  72,615
  
  
  528,780Balance at end of fiscal year
  
  $
  220,000
  
  $
  81,875