Exhibit 13

Five-Year
Summary of Operations*(In
thousands, except for per share and share data)

|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ------------------ | - | -------------------- | - | ------------------ | --------- | ------------------ | - | --------- | - | - | --------- | -
|Years ended December 31,                                                                                                     |  | 2005 |           | 2004(a)
  Restated |   | 2003(a,b)
  Restated |   | 2002(a)
  Restated |           | 2001(a)
  Restated |  
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |  
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|Sales, net                                                                                                                   |  | $    | 44,455    |                    | $ | 35,183               |   | $                  | 36,202    |                    | $ | 34,975    |   | $ | 37,787    |  
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|Cost of sales                                                                                                                |  |      | 32,853    |                    |   | 27,121               |   |                    | 27,638    |                    |   | 26,811    |   |   | 27,808    |  
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|Operating
  expenses                                                                                                         |  |      | 10,181    |                    |   | 11,535               |   |                    | 11,457    |                    |   | 10,484    |   |   | 10,764    |  
|Interest expense                                                                                                             |  |      | 409       |                    |   | 465                  |   |                    | 533       |                    |   | 720       |   |   | 713       |  
|Interest income                                                                                                              |  |      | (52       | )                  |   | (2                   | ) |                    | (8        | )                  |   | (34       | ) |   | (80       | )
|Gain on sale of
  asset                                                                                                      |  |      |          |                    |   | 3,110                |   |                    |          |                    |   |          |   |   |          |  
|Other (income)
  expense, net                                                                                                |  |      | (106      | )                  |   | (61                  | ) |                    | 130       |                    |   | (31       | ) |   | 87        |  
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|Income (loss)
  from continuing operations before income taxes, discontinued operations and
  change in accounting principle |  |      | 1,171     |                    |   | (765                 | ) |                    | (3,548    | )                  |   | (2,975    | ) |   | (1,505    | )
|Income tax
  expense (benefit)                                                                                               |  |      | 409       |                    |   | 1,140                |   |                    | 484       |                    |   | (1,160    | ) |   | (451      | )
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|Income (loss)
  from continuing operations before discontinued operations and change in
  accounting principle               |  |      | 762       |                    |   | (1,905               | ) |                    | (4,032    | )                  |   | (1,815    | ) |   | (1,054    | )
|Income (loss)
  from discontinued operations, net of income taxes (Note 3)                                                   |  |      | 767       |                    |   | 1,369                |   |                    | (1,013    | )                  |   | (10,544   | ) |   | (3,843    | )
|Extraordinary
  gain from discontinued operations                                                                            |  |      |          |                    |   | 684                  |   |                    |          |                    |   |          |   |   |          |  
|Cumulative
  effect of change in accounting principle                                                                        |  |      |          |                    |   |                     |   |                    |          |                    |   | (9,428    | ) |   |          |  
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|Net income
  (loss)                                                                                                          |  | $    | 1,529     |                    | $ | 148                  |   | $                  | (5,045    | )                  | $ | (21,787   | ) | $ | (4,897    | )
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|Basic income
  (loss) per share:                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|Continuing
  operations                                                                                                      |  | $    | .15       |                    | $ | (.37                 | ) | $                  | (.78      | )                  | $ | (.35      | ) | $ | (.21      | )
|Discontinued
  operations                                                                                                    |  |      | .15       |                    |   | .27                  |   |                    | (.20      | )                  |   | (2.06     | ) |   | (.75      | )
|Extraordinary
  gain discontinued operations                                                                                 |  |      |          |                    |   | .13                  |   |                    |          |                    |   |          |   |   |          |  
|Accounting
  principle change                                                                                                |  |      |          |                    |   |                     |   |                    |          |                    |   | (1.84     | ) |   |          |  
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|Net income
  (loss)                                                                                                          |  | $    | .30       |                    | $ | .03                  |   | $                  | (.98      | )                  | $ | (4.25     | ) | $ | (.96      | )
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|Diluted income
  (loss) per share:                                                                                           |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|Continuing operations                                                                                                        |  | $    | .14       |                    | $ | (.37                 | ) | $                  | (.78      | )                  | $ | (.35      | ) | $ | (.21      | )
|Discontinued
  operations                                                                                                    |  |      | .15       |                    |   | .27                  |   |                    | (.20      | )                  |   | (2.06     | ) |   | (.75      | )
|Extraordinary
  gain discontinued operations                                                                                 |  |      |          |                    |   | .13                  |   |                    |          |                    |   |          |   |   |          |  
|Accounting
  principle change                                                                                                |  |      |          |                    |   |                     |   |                    |          |                    |   | (1.84     | ) |   |          |  
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|Net income
  (loss)                                                                                                          |  | $    | .29       |                    | $ | .03                  |   | $                  | (.98      | )                  | $ | (4.25     | ) | $ | (.96      | )
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|Weighted average
  number of Shares outstanding during year:                                                                 |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|Basic                                                                                                                        |  |      | 5,135,348 |                    |   | 5,129,214            |   |                    | 5,124,433 |                    |   | 5,119,214 |   |   | 5,119,214 |  
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  
|Diluted                                                                                                                      |  |      | 5,261,491 |                    |   | 5,131,841            |   |                    | 5,124,433 |                    |   | 5,119,214 |   |   | 5,119,214 |  
|                                                                                                                             |  |      |           |                    |   |                      |   |                    |           |                    |   |           |   |   |           |  

---



Other Financial Highlights*
(In thousands, except for per share data)

|                                               |  |      |        |                    |   |                      |   |                    |        |                    |   |        |   |   |        |  
|---------------------------------------------- |  | ---- | ------ | ------------------ | - | -------------------- | - | ------------------ | ------ | ------------------ | - | ------ | - | - | ------ | -
|Years ended December 31,                       |  | 2005 |        | 2004(a)
  Restated |   | 2003(a,b)
  Restated |   | 2002(a)
  Restated |        | 2001(a)
  Restated |  
|                                               |  |      |        |                    |   |                      |   |                    |        |                    |  
|                                               |  |      |        |                    |   |                      |   |                    |        |                    |   |        |   |   |        |  
|Working capital                                |  | $    | 8,185  |                    | $ | 2,183                |   | $                  | 245    |                    | $ | 4,711  |   | $ | 16,572 |  
|                                               |  |      |        |                    |   |                      |   |                    |        |                    |   |        |   |   |        |  
|Total assets                                   |  | $    | 29,635 |                    | $ | 30,939               |   | $                  | 34,729 |                    | $ | 63,936 |   | $ | 86,513 |  
|                                               |  |      |        |                    |   |                      |   |                    |        |                    |   |        |   |   |        |  
|Long-term debt                                 |  | $    | 5,319  |                    | $ |                     |   | $                  |       |                    | $ | 2,415  |   | $ | 2,568  |  
|                                               |  |      |        |                    |   |                      |   |                    |        |                    |   |        |   |   |        |  
|Shareholders
  equity:                        |  |      |        |                    |   |                      |   |                    |        |                    |   |        |   |   |        |  
|Capital stock
  and additional paid-in capital |  | $    | 17,719 |                    | $ | 17,670               |   | $                  | 17,670 |                    | $ | 17,648 |   | $ | 17,648 |  
|Retained
  earnings (accumulated deficit)      |  |      | (2,152 | )                  |   | (3,680               | ) |                    | (3,828 | )                  |   | 1,216  |   |   | 23,004 |  
|Accumulated
  other comprehensive loss         |  |      | (213   | )                  |   | (597                 | ) |                    | (770   | )                  |   | (1,525 | ) |   | (1,008 | )
|                                               |  |      |        |                    |   |                      |   |                    |        |                    |   |        |   |   |        |  
|Treasury stock                                 |  |      | (1,265 | )                  |   | (1,265               | ) |                    | (1,265 | )                  |   | (1,265 | ) |   | (1,265 | )
|                                               |  |      |        |                    |   |                      |   |                    |        |                    |   |        |   |   |        |  
|Total
  shareholders equity                   |  | $    | 14,089 |                    | $ | 12,128               |   | $                  | 11,807 |                    | $ | 16,074 |   | $ | 38,379 |  
|                                               |  |      |        |                    |   |                      |   |                    |        |                    |   |        |   |   |        |  
|Depreciation and
  amortization                |  | $    | 2,069  |                    | $ | 2,289                |   | $                  | 2,387  |                    | $ | 2,452  |   | $ | 3,354  |  
|                                               |  |      |        |                    |   |                      |   |                    |        |                    |   |        |   |   |        |  
|Dividends per
  share                          |  | $    |       |                    | $ |                     |   | $                  |       |                    | $ |       |   | $ | .18    |  

|  |                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------
|* | See Note 14 to the Companys consolidated financial
statements included herein for quarterly results of    operations.

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | See note 2 to the
  Companys consolidated financial statement included herein for information
  pertaining to the restatement of earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (b) | For 2003, the Company
  reclassified its remaining Heat Technology business which consisted of the
  burners and components portion of the business as discontinued
  operations.  The Company sold this
  portion of the business in the first quarter of 2005.  For 2004 and 2003, the Heat Technology
  business had revenues of $9.7 and $18.4 million, respectively, with net
  income of $2.1 million for 2004 and a net loss of $2.5 million for 2003. The
  Tire Holders, Lifts and Related Products business that was sold in July 2003
  is also included in discontinued operations.
  For 2003, this segment had revenue of $8.5 million, and net income of
  $8,000.

---



Managements
Discussion and Analysis 
of Financial Condition and Results of Operations

We have embarked on a strategy to focus on our
Precision Miniature Medical and Electronics Products markets for future growth.
Consistent with this strategy, the following actions were taken in 2005:

Sale of Burners and Components Business 
In the first quarter of 2005, we sold the remainder of our Heat Technology
segment. The total purchase price was approximately $3.5 million, of which
approximately $2.7 million was paid in cash and $800,000 was paid in the form
of a subordinated promissory note. This segment consisted of the operating assets
and liabilities of Selas Corporation of America (Dresher, Pennsylvania), Nippon
Selas (Tokyo, Japan) and Selas Wäermetechnik GmbH (Ratingen, Germany).  This business was classified as a
discontinued operation in 2004. For more detailed information, see Note 3 to
the Consolidated Financial Statements included herein.

Acquisition of Amecon Inc.  On October 6,
2005, our subsidiary, RTI Electronics, Inc., acquired the assets of Amecon Inc.
Amecon is primarily engaged in the research, development, manufacture,
marketing and sale of toroidal power and low voltage instrument transformers,
current sense transformers and filter inductors, magnetic amplifiers, AC/DC
load sensors.  The purchase price for
the assets was $1,241,000 (after adjustment pursuant to the asset purchase
agreement) and required a $10,000 initial deposit and $240,000 payment made at
the time of closing.  The unpaid balance
of $862,000 at December 31, 2005 will be paid in four equal annual installments
beginning on October 6, 2006. The unpaid balance is unsecured and bears
interest at an annual rate of 5%, which shall be payable annually with each
principal payment.   The assets acquired
included $273,000 of inventory, $478,000 of fixed assets and $490,000 of
goodwill based on fair value at the date of purchase.  The goodwill is deductible for tax purposes.  The Company accounted for Amecon Inc., using
the purchase method of accounting which requires that the assets acquired and
any liabilities assumed to be recorded at the date of acquisition at their
respective fair values.  The
consolidated financial statements and results of operations reflect Amecon Inc.
after the acquisition and are not restated.
The cost to acquire the business was not allocated to the underlying
assets acquired.  The acquisition
expands the microminiature business of the Company with manufacturing of
toroidal power and low voltage instrument transformers, current sense
transformers and filter inductor, magnetic amplifiers, AD/DC load sensors.  The excess of the purchase price over
identifiable assets was recorded as goodwill.
The pro forma results of operations as if the Amecon Inc. purchase
occurred on January 1, 2003 are not material.

Reduction of Overhead In 2004, we
experienced weakness in the hearing health markets. The weakness was due to
competitive pricing pressures, customer inventory management programs resulting
in more just-in-time inventory, as well as unfavorable legislation in the
German market reducing the reimbursement amount for the purchase of hearing
aids. These factors resulted in both reduced sales and lower product margins.
In an effort to return to operating profitability, we took steps in 2004 to
reduce our overhead.  These steps
included the elimination of several management and other support positions,
resulting in an annualized savings of over $3 million. However, these
reductions were partially offset when in order to support the substantial
growth in our second and third quarters of 2005, various investments were made
in selling, general and administrative, and research and development areas.

Forward-Looking and Cautionary Statements

Certain statements included in this Annual Report to
Shareholders or documents we file with the Securities and Exchange Commission,
which are not historical facts, are forward-looking statements (as such term is
defined in the Securities Exchange Act of 1934, and the regulations
thereunder), which are intended to be covered by the safe harbors created
thereby. These statements may include, but are not limited to:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | statements in the letter to shareholders, such as
  our position and focus on our core markets achievement of a more
  cost-effective capital structure, ability to take advantage of new business
  opportunities, expected drivers to enhance profitability, ability to compete,
  the potential for growth in the medical device outsourcing industry and our
  products in that industry, the potential for growth in the hearing health
  market, growth in the broadcast and entertainment markets;
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | statements in Managements Discussion and Analysis
  of Financial Condition and Results of Operations and Notes to the
  Consolidated Financial Statements such as net operating loss carryforwards,
  the ability to meet our cash requirements for operating needs, the ability to
  meet liquidity needs, assumptions                                                                                                                                                                             

---



|  |                                                                                                                                                                                                                                                                                                                                                                           
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | used to calculate future level of funding of
  employee benefit plans, the adequacy of insurance coverage,  the impact  of recent accounting pronouncements and litigation; and                                                                                                                                                                                           
|  |                                                                                                                                                                                                                                                                                                                                                                           
| | statements in our annual report on Form 10-K for the
  year ended December 31, 2005, in Business, Legal Proceedings and Risk
  Factors, such as our ability to focus on the precision miniature medical and
  electronics products business markets, the ability to compete, the adequacy
  of insurance coverage, and potential increase in demand for our products.

Forward-looking statements include, without
limitation, statements as to our:

|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
| | expected future results of operations and growth;                                           
|  |                                                                                             
| | ability to meet working capital requirements;                                               
|  |                                                                                             
| | business strategy;                                                                          
|  |                                                                                             
| | expected increases in operating efficiencies;                                               
|  |                                                                                             
| | anticipated trends in our Precision Miniature
  Medical and Electronic Products markets; and
|  |                                                                                             
| | estimates of goodwill impairments and amortization
  expense of other intangible assets.    

In addition, forward-looking statements also include
the effects of changes in accounting pronouncements, the effects of litigation
and the amount of insurance coverage, and statements as to trends or the
Companys or managements beliefs, expectations and opinions. Forward-looking
statements are subject to risks and uncertainties and may be affected by
various factors that may cause actual results to differ materially from those
in the forward-looking statements. In addition to the factors discussed in this
Annual Report to Shareholders, certain risks, uncertainties and other factors
can cause actual results and developments to be materially different from those
expressed or implied by such forward-looking statements, including, without
limitation, the following:

|  |                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------
| | the ability to implement our business and growth
  strategy;                                                                                
|  |                                                                                                                                             
| | risks arising in connection with the insolvency of
  The Selas SAS, and potential liabilities and actions arising in connection
  therewith;
|  |                                                                                                                                             
| | the volume and timing of orders received by us;                                                                                             
|  |                                                                                                                                             
| | changes in estimated future cash flows;                                                                                                     
|  |                                                                                                                                             
| | foreign currency movements in markets we service;                                                                                           
|  |                                                                                                                                             
| | changes in the global economy and financial markets;                                                                                        
|  |                                                                                                                                             
| | changes in the mix of products sold;                                                                                                        
|  |                                                                                                                                             
| | ability to meet increasing demand;                                                                                                          
|  |                                                                                                                                             
| | changes in customer requirements;                                                                                                           
|  |                                                                                                                                             
| | timing and extent of research and development
  expenses;                                                                                   
|  |                                                                                                                                             
| | acceptance of our products;                                                                                                                 
|  |                                                                                                                                             
| | competitive pricing pressures;                                                                                                              
|  |                                                                                                                                             
| | pending and potential future litigation;                                                                                                    
|  |                                                                                                                                             
| | availability of electronic components for our
  products;                                                                                   
|  |                                                                                                                                             
| | ability to create and market products in a timely
  manner and develop products that are inexpensive to manufacture;                        
|  |                                                                                                                                             
| | ability to pay debt when it comes due;                                                                                                      
|  |                                                                                                                                             
| | the loss of one of more of our major customers;                                                                                             
|  |                                                                                                                                             
| | ability to identify and integrate acquisitions;                                                                                             
|  |                                                                                                                                             
| | effects of foreign operating;                                                                                                               
|  |                                                                                                                                             
| | ability to recruit and retain engineering and
  technical personnel;                                                                        
|  |                                                                                                                                             
| | loss of members of our senior management;                                                                                                   
|  |                                                                                                                                             
| | our ability and our customers ability to protect
  intellectual property; and                                                               
|  |                                                                                                                                             
| | risks associated with terrorist attacks, war and
  threats of attacks and wars.                                                             

For a description of these and other risks see Risk
Factors in our annual report on Form 10-K for the year ended December 31, 2005
or in other filings we makes from time to time with the Securities and Exchange
Commission. We do not undertake to update any forward-looking statement that
may be made from time to time by or on behalf of the Company.

---



Results of Operations

2005 Compared with 2004

Consolidated Net Sales

Consolidated net sales for 2005 and 2004 were as
follows (dollars in thousands):

|                       |  |      |        |      |   |         |  |         |       |  |  |       | 
|---------------------- |  | ---- | ------ | ---- | - | ------- |  | ------- | ----- |  |  | ----- | 
|                       |  |      |        |      |   |         |  | Change  |      
|                       |  |      |        |      |   |         |  |         |      
|                       |  | 2005 |        | 2004 |   | Dollars |  | Percent |      
|                       |  |      |        |      |   |         |  |         |      
|                       |  |      |        |      |   |         |  |         |       |  |  |       | 
|Consolidated net sales |  | $    | 44,455 |      | $ | 35,183  |  | $       | 9,272 |  |  | 26.4% | 

Our net sales are comprised of four main sectors:
Hearing health, electronics, medical and professional audio device.  Our net sales in 2005 increased for all four
product sectors over the prior year.  We
experienced an increase of 71 percent in net sales to the medical equipment
market in 2005.  The significant
increase for medical products was due to strengthened orders for design and
contract manufacturing with several medical OEM customers.

Despite minimal growth in the primary hearing health
industry, net sales for our hearing heath sector grew 27 percent in 2005.  The increase was primarily due to new
product offerings in our advance line of amplifier assemblies and systems based
on Digital Signal Processing (DSP).

The professional audio device product sector grew 10
percent over prior year primarily due to sales of a new microphone to a
specific customer. The electronics product sector increased 11 percent over
prior year.  Exclusive of the Amecon
Inc. acquisition, sales increased 5 percent.

Gross Profit

Gross profit, both in dollars and as a percent of
sales, for 2005 and 2004, were as follows (dollars in thousands):

|             |  |         |        |                 |  |                   |  |         |       |         |  |         |  |   |       |  |  |       | 
|------------ |  | ------- | ------ | --------------- |  | ----------------- |  | ------- | ----- | ------- |  | ------- |  | - | ----- |  |  | ----- | 
|             |  | 2005    |        | 2004
  Restated |  | Change
  Restated | 
|             |  |         |        |                 |  |                   | 
|             |  | Dollars |        | Percent         |  | Dollars           |  | Percent |       | Dollars |  | Percent | 
|             |  |         |        |                 |  |                   |  |         |       |         |  |         | 
|             |  |         |        |                 |  |                   |  |         |       |         |  |         | 
|Gross profit |  | $       | 11,602 |                 |  | 26.1%             |  | $       | 8,062 |         |  | 22.9%   |  | $ | 3,540 |  |  | 43.9% | 

In 2005, gross margins increased due to the higher
overall sales volume. This included an increase in sales to the medical
equipment products market, which generally provides higher gross profit
margins. The hearing-health product mix continued shifting away from higher
gross profit margins of mechanical components to digital products, which
typically have lower gross profit margins for us.  Additionally in 2005, we implemented various cost savings measures,
including staffing reductions, additional automation, and shifting certain
production to our Singapore facility.

---



Selling, General and Administrative Expenses

Selling, general and administrative expenses
(SG&A) for the years ended December 31, 2005 and 2004 were (dollars in
thousands):

|                           |  |         |       |                    |      |                   |  |                    |       |         |      |                                   |  |   |      |   |        |    | 
|-------------------------- |  | ------- | ----- | ------------------ | ---- | ----------------- |  | ------------------ | ----- | ------- | ---- | --------------------------------- |  | - | ---- | - | ------ | -- | 
|                           |  | 2005    |       | 2004
  Restated    |      | Change
  Restated | 
|                           |  |         |       |                    |      |                   | 
|                           |  | Dollars |       | Percent of
  Sales |      | Dollars           |  | Percent of
  Sales |       | Dollars |      | Year-over-
  year Incr.
  (Decr.) | 
|                           |  |         |       |                    |      |                   |  |                    |       |         |      |                                   | 
|                           |  |         |       |                    |      |                   |  |                    |       |         |      |                                   |  |   |      |   |        |    | 
|Selling                    |  | $       | 3,570 |                    | 8.0  | %                 |  | $                  | 3,934 |         | 11.2 | %                                 |  | $ | (364 | ) | (9.3   | )% | 
|Research and development   |  |         | 1,818 |                    | 4.1  | %                 |  |                    | 1,616 |         | 4.6  | %                                 |  | $ | 202  |   | 12.5   | %  | 
|Asset impairment           |  |         |      |                    |     |                   |  |                    | 488   |         | 1.4  | %                                 |  | $ | (488 | ) | (100.0 | )% | 
|General and administrative |  |         | 4,793 |                    | 10.8 | %                 |  |                    | 5,497 |         | 15.6 | %                                 |  | $ | (704 | ) | (12.8  | )% | 

The lower selling and general and administrative
expenses in 2005 as compared to the prior year period was mainly attributable
to a reduction in staffing that occurred in November 2004.  The staffing adjustment was a combination of
reductions due to the transfer of a portion of manufacturing to our overseas
operation and an effort to streamline administrative functions.  Additionally, as a result of the staffing
reduction, accruals for severance costs were recognized in 2004.  However, these staffing reductions were
partially offset when in order to support the substantial growth in our second
and third quarters of 2005, various investments were made in selling, general
and administrative, and research and development areas.

Impairment of Long-term Assets

In 2004, we recorded an impairment from abandonment of
long-term assets of $488,000 based on analysis of future cash flows. The 2004
abandonment was mainly associated with technology having to do with the
development of a specific microphone for use in both the professional audio and
hearing health markets; management determined that due to external
technological advances the technology was no longer viable.  There was no similar impairment in 2005.

Net Interest Expense

Net interest expense for 2005 was $357,000 a decline
of $107,000 from $464,000 in 2004.  The
decrease from the prior years expense was due to the lower outstanding debt
balance, partially offset by higher interest rates.

Other

In 2005, other income was $106,000 compared to other
income of $61,000 in 2004.

Income Taxes

Income taxes were as follows (dollars in thousands):

|                                    |  |      |      |                 |   |        |   
|----------------------------------- |  | ---- | ---- | --------------- | - | ------ | --
|                                    |  | 2005 |      | 2004
  Restated |  
|                                    |  |      |      |                 |  
|Income tax expense                  |  | $    | 409  |                 | $ | 1,140  |   
|Percentage of pre-tax income (loss) |  |      | 35.0 | %               |   | (149.0 | %)

We estimate we have approximately $18.7 million of net
operating loss (NOL) carryforwards available to offset future federal income
taxes.

---



Discontinued Operations

We recorded a net profit (loss) from discontinued
operations as follows (dollars in thousands):

|                                                  |  |      |     |      |   |       | 
|------------------------------------------------- |  | ---- | --- | ---- | - | ----- | 
|                                                  |  | 2005 |     | 2004 |  
|                                                  |  |      |     |      |  
|Net income from
  Heat Technology Business        |  | $    | 767 |      | $ | 1,369 | 
|                                                  |  |      |     |      |  
|Extraordinary
  gain from discontinued operations |  |      |    |      |   | 684   | 
|                                                  |  |      |     |      |   |       | 
|                                                  |  |      |     |      |  
|Net income from
  discontinued operations         |  | $    | 767 |      | $ | 2,053 | 
|                                                  |  |      |     |      |   |       | 

Heat
Technology Segment

The 2005 net income of $767,000 was mainly attributable
to the reduction in the Selas Postretirement Benefits liability.   As part of the March 31, 2005 asset
purchase agreement, we were required to maintain the post retirement medical
plan for all retired eligible participants, but were able to eliminate from the
plan those employees not participating at the time of the asset purchase.  The 2004 net income was a result of the
operating profits from its remaining burners and components business, and an
extraordinary gain from the reacquisition of Selas Wärmetechnik (see Note 3 and
Note 4 to the consolidated financial statements included herein). In the first
quarter of 2004, we sold its remaining burner and component business for
approximately $3 million.

2004
Compared with 2003

Consolidated Net Sales

Consolidated net sales for 2004 and 2003 were as
follows (dollars in thousands):

|                       |  |      |        |      |   |         |  |         |        |   |  |        | 
|---------------------- |  | ---- | ------ | ---- | - | ------- |  | ------- | ------ | - |  | ------ | 
|                       |  |      |        |      |   |         |  | Change  |       
|                       |  |      |        |      |   |         |  |         |       
|                       |  | 2004 |        | 2003 |   | Dollars |  | Percent |       
|                       |  |      |        |      |   |         |  |         |       
|Consolidated net sales |  | $    | 35,183 |      | $ | 36,202  |  | $       | (1,019 | ) |  | (2.8)% | 

Our net sales are comprised of four main sectors:
Hearing health, electronics, medical and professional audio device.  Our net sales continued to be impacted by
weakness in its primary hearing-health market. Competitive pricing issues, customer
inventory reduction efforts as well as unfavorable legislation in the German
market, which reduced the reimbursement amount to the end user for the purchase
of hearing aids, contributed to a 15 percent decrease in sales to the
hearing-health market in 2004.

Our also saw a decline of 15 percent in net sales to
the medical equipment market in 2004. Sales to this market are extremely
reliant on orders from two customers, and are volatile depending on sales
levels, inventory levels and acceptance of these customers end products.

The weakness in the hearing-health and medical
equipment markets was partially offset by increases in net sales to our
remaining markets. Sales of our thermistor and capacitor products, into the
telecommunication market increased 17 percent year-over-year as the overall
world telecommunications market continued to strengthen.  Sales to the professional audio market
increased 44 percent; 2004 net sales to this market included a $1.1 million
order of helmets for the Singapore military.

---



Gross Profit

Gross profit, both in dollars and as a percent of
sales, for 2004 and 2003, were as follows (dollars in thousands):

|             |  |                 |       |                 |  |                   |  |         |       |         |  |         |  |   |      |   |  |       | 
|------------ |  | --------------- | ----- | --------------- |  | ----------------- |  | ------- | ----- | ------- |  | ------- |  | - | ---- | - |  | ----- | 
|             |  | 2004
  Restated |       | 2003
  Restated |  | Change
  Restated | 
|             |  |                 |       |                 |  |                   | 
|             |  | Dollars         |       | Percent         |  | Dollars           |  | Percent |       | Dollars |  | Percent | 
|             |  |                 |       |                 |  |                   |  |         |       |         |  |         | 
|Gross profit |  | $               | 8,061 |                 |  | 22.9%             |  | $       | 8,564 |         |  | 23.7%   |  | $ | (503 | ) |  | (.8)% | 

2004 gross margins decreased due to the lower overall
sales volume, this included a decrease in sales to the medical equipment
products market, which generally provides higher gross profit margins. The
hearing-health product mix continued shifting away from higher gross profit
margins of mechanical components to digital products, which typically have
lower gross profit margins for us.
These factors were partially offset by lower inventory reserves in 2004
when compared to 2003, along with an increase in sales of electronic products,
which generally have higher gross profit margins. Inventory write-downs were
$770,000 and $1.1 million in 2004 and 2003, respectively and are the result of
more specialized inventory, changes in product mix, and shorter product life
cycles particularly in the hearing health market.

Selling, General and Administrative Expenses

Selling, general and administrative expenses
(SG&A) for the years ended December 31, 2004 and 2003 were (dollars in
thousands):

|                           |  |                 |       |                    |      |                   |  |                    |       |         |      |                                  |  |   |      |   |       |    | 
|-------------------------- |  | --------------- | ----- | ------------------ | ---- | ----------------- |  | ------------------ | ----- | ------- | ---- | -------------------------------- |  | - | ---- | - | ----- | -- | 
|                           |  | 2004
  Restated |       | 2003
  Restated    |      | Change
  Restated | 
|                           |  |                 |       |                    |      |                   | 
|                           |  | Dollars         |       | Percent of
  Sales |      | Dollars           |  | Percent of
  Sales |       | Dollars |      | Year-over-
  year Incr. (Decr. ) | 
|                           |  |                 |       |                    |      |                   |  |                    |       |         |      |                                  | 
|                           |  |                 |       |                    |      |                   |  |                    |       |         |      |                                  |  |   |      |   |       |    | 
|Selling                    |  | $               | 3,934 |                    | 11.2 | %                 |  | $                  | 3,649 |         | 10.1 | %                                |  | $ | 285  |   | 7.8   | %  | 
|Research and development   |  | $               | 1,616 |                    | 4.6  | %                 |  | $                  | 2,170 |         | 6.0  | %                                |  | $ | (554 | ) | (25.5 | )% | 
|Asset impairment           |  | $               | 488   |                    | 1.4  | %                 |  | $                  | 379   |         | 1.0  | %                                |  | $ | 109  |   | 28.8  | %  | 
|General and administrative |  | $               | 5,497 |                    | 15.6 | %                 |  | $                  | 5,259 |         | 14.5 | %                                |  | $ | 238  |   | 4.5   | %  | 

The higher SG&A expenses in 2004 were mainly
attributable to an increase in selling and administrative expense, partially
offset by a decline in development cost.
The $285,000 increase in selling expense was mainly due to the hiring of
a sales and marketing manager for our medical products market and the
associated fees paid to a third party recruiter.   Research and development decreased as a result of an increase in
customer funded development projects, as we partner with our customers to bring
new hearing health products to market. The $238,000 increase in administrative
expenses was mainly attributable to accruals of severance cost in 2004, as we
reduced our staff, to compensate for the decline in sales.

Impairment of Long-term Assets

In 2004, we recorded an impairment from abandonment of
long-term assets of $488,000 based on analysis of future cash flows; in 2003,
an impairment from abandonment of long-term assets of $379,000 was recorded.
The 2004 abandonment was mainly associated with technology having to do with
the development of a specific microphone for use in both the professional audio
and hearing health markets; management determined that due to external
technological advances the technology was no longer viable.  The 2003 abandonment was due to previously
capitalized technology costs primarily related to microphone and headset
products for the professional audio-device market. These technology costs were
no longer considered to have future value.

Net Interest Expense

Net interest expense for 2004 was $465,000 a decline
of $68,000 from $533,000 in 2003. This was principally due to a reduction in
the overall bank debt, offset by an increase in interest rates. Total bank debt
was $5.2 million at December 31, 2004 compared to $8.2 million December 31,
2003.

---



Other

In 2004, other income was $61,000 compared to other
expense of $130,000 in 2003. The difference principally stemmed from an
exchange loss of $94,000 on Euro denominated bank debt in 2003.

Income Taxes

Income taxes were as follows (dollars in thousands):

|                           |  |                 |        |                 |   |       |   
|-------------------------- |  | --------------- | ------ | --------------- | - | ----- | --
|                           |  | 2004
  Restated |        | 2003
  Restated |  
|                           |  |                 |        |                 |  
|Income tax expense         |  | $               | 1,140  |                 | $ | 484   |   
|Percentage of pre-tax loss |  |                 | (149.0 | %)              |   | (13.6 | %)

The effective tax rate of (149.0%) percent compared to
the U.S. Federal statutory rate of 34 percent in 2004 was primarily due to
three reasons:

|  |                                                                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|- | We established an $890,000 valuation reserve against
  previously established tax assets as their realizability was uncertain due to
  the operating losses we have generated for the last three years;
|  |                                                                                                                                                                                                        
|- | The estimated 2003 Federal income tax refund was
  reduced by approximately $45,000 in alternative minimum tax; and                                                                                    
|  |                                                                                                                                                                                                        
|- | We generated taxable profits in its foreign
  operations and recognized income tax expense of approximately $196,000 related
  to those operations.                                                    

Discontinued Operations

We recorded a net profit (loss) from discontinued
operations as follows (dollars in thousands):

|                                                                   |  |      |       |      |   |        |  
|------------------------------------------------------------------ |  | ---- | ----- | ---- | - | ------ | -
|                                                                   |  | 2004 |       | 2003 |  
|                                                                   |  |      |       |      |  
|Net income
  (loss) from Heat Technology Business                  |  | $    | 1,369 |      | $ | (2,512 | )
|Net income from
  Tire Holders, Lifts and related products segment |  |      |      |      |   | 1,499  |  
|Extraordinary
  gain from discontinued operations                  |  |      | 684   |      |   |       |  
|                                                                   |  |      |       |      |  
|Net income (loss) from discontinued
  operations                   |  | $    | 2,053 |      | $ | (1,013 | )
|                                                                   |  |      |       |      |  

Heat
Technology Segment

The 2004 net income was a result of the operating
profits from our remaining burners and components business, and an
extraordinary gain from the reacquisition of Selas Wärmetechnik (see Note 3 and
Note 4 to the consolidated financial statements). The 2003 net loss from the
Heat Technology business was primarily the result of the insolvency filed in
France by our wholly owned French subsidiary. This consisted of the European
heat technology operation remaining after the 2002 sale of the large
custom-engineered furnace business. The European loss in 2003 was partially
offset by $110,000 of net income from the remaining our burner and component
business with locations in Dresher, Pennsylvania, and Tokyo, Japan. In the
first quarter of 2005, we sold our remaining burner and component business for
approximately $3 million.

Tire
Holder, Lifts and Related Products Segment

The 2003 net income from the Tire Holder, Lifts and
Related Products segment was the combination of net income of $8,000 from Deuer
Manufacturing, Inc. prior to its sale In July 2003 and the approximately $1.5
million gain recognized from the sale.

---



Liquidity and Capital Resources

As of December 31, 2005, we
had approximately $1.1 million of cash on hand.  Sources of our cash for the year ended December 31, 2005 have
been from our operations, the sale of our Heat Technology business and our
senior secured credit agreement, as described below.

Consolidated net working capital increased to $8.2
million at December 31, 2005 from $2.2 million at December 31, 2004. The
primary reasons for the increase were our senior secured credit agreement with
Diversified Business Credit, Inc. and the sale of our discontinued operations
resulting in cash of $2.7 million in 2005.
Our cash flows from operating, investing and financing activities, as
reflected in the statement of cash flows at December 31, are summarized as
follows (dollars in thousands):

|                                          |  |      |        |                 |   |                 |   |   |        |  
|----------------------------------------- |  | ---- | ------ | --------------- | - | --------------- | - | - | ------ | -
|                                          |  | 2005 |        | 2004
  Restated |   | 2003
  Restated |  
|                                          |  |      |        |                 |   |                 |  
|Cash provided (used) by:                  |  |      |        |                 |   |                 |   |   |        |  
|Continuing
  operations                   |  | $    | (2,533 | )               | $ | (847            | ) | $ | 2,689  |  
|Discontinued
  operations                 |  |      | 3,811  |                 |   | 939             |   |   | 4,002  |  
|Investing
  activities                    |  |      | (1,165 | )               |   | 2,678           |   |   | (984   | )
|Financing
  activities                    |  |      | 778    |                 |   | (2,678          | ) |   | (7,373 | )
|Effect of
  exchange rate changes on cash |  |      | (28    | )               |   | (39             | ) |   | 247    |  
|                                          |  |      |        |                 |   |                 |   |   |        |  
|                                          |  |      |        |                 |   |                 |   |   |        |  
|Increase
  (decrease) in cash             |  | $    | 863    |                 | $ | 53              |   | $ | (1,419 | )
|                                          |  |      |        |                 |   |                 |   |   |        |  

Cash generated from operations may be affected by a
number of factors. See Forward Looking Statements contained herein and Item
1A: Risk Factors in our Form 10-K for the year ended December 31, 2005 for a
discussion of some of the  factors that
can negatively impact the amount of cash we generate from our operations.

We had the following bank arrangements at December 31,
(dollars in thousands):

|                                                   |  |      |        |      |   |       | 
|-------------------------------------------------- |  | ---- | ------ | ---- | - | ----- | 
|                                                   |  | 2005 |        | 2004 |  
|                                                   |  |      |        |      |  
|Total availability under existing facilities       |  | $    | 10,239 |      | $ | 7,056 | 
|                                                   |  |      |        |      |  
|                                                   |  |      |        |      |   |       | 
|Borrowings and commitments:                        |  |      |        |      |   |       | 
|Domestic credit
  facility                         |  |      | 3,754  |      |   | 3,171 | 
|Domestic term
  loans                              |  |      | 1,450  |      |   | 1,458 | 
|Foreign
  overdraft and letter of credit facility  |  |      | 765    |      |   | 569   | 
|Capital leases                                     |  |      | 239    |      |   |      | 
|                                                   |  |      |        |      |   |       | 
|Total borrowings
  and commitments                 |  |      | 6,208  |      |   | 5,198 | 
|                                                   |  |      |        |      |   |       | 
|Remaining
  availability under existing facilities |  | $    | 4,031  |      | $ | 1,857 | 
|                                                   |  |      |        |      |   |       | 

On August 31, 2005, our wholly-owned subsidiaries
Resistance Technology, Inc. and RTI Electronics, Inc. (the Borrowers) entered
into a senior secured credit agreement with Diversified Business Credit, Inc.
(the Agreement), and related Term Loan Supplement (Real Estate) and Term Loan
Supplement (Equipment). In connection with the Agreement, on August 31, 2005,
we also entered into a security agreement and a guaranty by corporation with
Diversified Business Credit, Inc. whereby we guaranteed the full amount that
the Borrowers may owe Diversified Business Credit, Inc. Under these agreements,
we and the Borrowers granted Diversified Business Credit, Inc. a security
interest in substantially all of their assets. In addition, Resistance
Technology, Inc. granted a mortgage on its Vadnais Heights, Minnesota facility.

The Agreement has a term of three years. The Agreement
provides for the following:

| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | $5.5 million asset-backed revolving credit facility
  supported by a monthly borrowing base;
| |   |                                                                                             
| |  | $1.5 million real estate term loan amortized on a
  12-year schedule; and                   
| |   |                                                                                             
| |  | $1.0 million equipment term loan amortized on a
  five-year schedule.                       

---



The domestic revolving credit facility bears interest
at 0.5% over the prime rate or, at the option of the Borrower, subject to
certain exceptions, the London InterBank Offered Rate (LIBOR) plus 3.25%,
provided that in no event will the rate be less than 5.25%. The domestic term
loans bear interest at 0.75% over the prime rate or, at the option of the
Borrower, subject to certain exceptions, LIBOR plus 3.50%, (8.0% at December
31, 2005) provided that in no event will the rate be less than 5.25%. Notwithstanding
the foregoing, interest paid on advances for each twelve month period may never
be less than $100,000. Under the Agreement, an unused line fee at the rate of
0.25% per annum on the daily average unused amount of the revolving credit
facility is due and payable monthly in arrears on the first day of the month.
In addition, the Borrowers must pay an annual fee equal to the greater of
$27,500 or one-half percent of the maximum amount permitted to be borrowed
under the revolving credit facility. In addition, if the facility is terminated
by the Borrowers prior to the end of the term, the Borrowers will also be
required to pay a termination fee equal to 3% (if terminated before the first
anniversary of the facility), 2% (if terminated before the second anniversary
of the facility) and 1% (if terminated before the third anniversary of the
facility), respectively, of the total of the maximum amount available under the
revolving credit facility plus the amounts then outstanding under the terms
loans.

The domestic revolving credit facility requires
monthly interest payments with a balloon payment at maturity. The real estate
term loan requires monthly principal payments of $10,285, with any balance due
on August 31, 2008. The equipment term loan requires monthly principal payments
based on a assumed amortization period of 60 months, with any balance due on
August 31, 2008.

The outstanding balance on the real-estate term loan
was approximately $1,450,000 and $1,458,000 at December 31, 2005 and December
31, 2004, respectively.

Under the Agreement, without the prior written consent
from Diversified Business Credit, Inc., we and the Borrowers are restricted or
limited, except as otherwise permitted in the Agreement, from, among other
things: becoming or remaining liable in any manner with respect of indebtedness
or contractual liability; declaring or paying any cash dividends (except that
Borrowers may declare and pay dividends to the Company as described in the
Agreement), purchasing or redeeming any of iour capital stock or otherwise
distributing any property on its capital stock; creating, expending or
contracting to expend, in any one calendar year, with respect to the Borrowers
collectively, more than $2.0 million in the aggregate, or more than $250,000 in
any one transaction, for the lease, purchase or other acquisition of any
capital asset, or for the lease of any other asset whether payable currently or
in the future; selling, leasing or otherwise disposing of any collateral (as
defined in the agreement) or all or any substantial part of its property;
consolidating or merging with any other corporation or acquiring stock of any
corporation or entering into any other partnership or joint venture;
substantially alter the nature of the business in which it is engaged;
permitting any breach, default or event of default to occur under any note,
loan, agreement or other contractual obligation binding the Borrowers; or
amending governing documents.

In the case of an event of default (as defined in the
Agreement), unless waived by Diversified Business Credit, Inc., Diversified
Business Credit, Inc., by notice, may terminate the Agreement and declare the
Borrowers obligations under the Agreement due and payable. Diversified
Business Credit, Inc. may also in accordance with the Agreement and the law,
exercise and enforce any and all rights and remedies available upon default to
a secured party under the Uniform Commercial Code, including, without
limitation, the right to take possession of the collateral (as defined in the
Agreement). Upon the occurrence of any default, Diversified Business Credit,
Inc. can suspend the making of advances until the default has been cured or
waived. All obligations will be immediately and automatically due and payable,
without further act or condition, if any cause under the United States
Bankruptcy Code is commenced voluntarily by any Borrower, guarantor (as defined
in the Agreement and includes the Company) or involuntary against any Borrower
or guarantor. Events of default include, among other things, the failure to
maintain certain financial covenants or insurance coverage, the failure to make
payment of any obligation due under the Agreement or the occurrence of a
default under any bond, debenture, note or other evidence of material indebtedness
of any Borrower or guarantor owed to any person or entity other than
Diversified Business Credit, Inc., or under any indenture or other instrument
under which any such evidence of indebtedness has been issued or by which it is
governed, or under any material lease or other contract, and the expiration of
the applicable period of grace, if any, specified in such evidence of
indebtedness, indenture, other instrument, lease or contract.

On August 15, 2005, our wholly-owned subsidiary, RTI
Tech, PTE LTD., entered into an international senior secured credit agreement
with Oversea-Chinese Banking Corporation Ltd. that provides for a $2.0 million
line of credit. Borrowings bear interest at a rate of 6.47%.  This facility will be reviewed annually to
determine

---



whether it will be renewed.  The outstanding balance was $764,825 and $568,946 at December 31,
2005 and 2004, respectively.

At December 31, 2005 we were in compliance with all
terms of the agreements in all of our credit facilities.  Our ability to pay the principal and
interest on our indebtedness as it comes due will depend upon our current and
future performance.  Our performance is
affected by general economic conditions and by financial, competitive, political,
business and other factors.  Many of
these factors are beyond our control.

We believe that funds expected to be generated from
operations, the available borrowing capacity through our revolving credit loan
facilities, and the control of capital spending will be sufficient to meet our
anticipated cash requirements for operating needs through April 2007.  If, however, we do not generate sufficient
cash from operations, or if we incur additional unanticipated liabilities, we
may be required to seek additional financing or sell equity on terms which may
not be as favorable as we could have otherwise obtained.  No assurance can be given that any
refinancing, additional borrowing or sale of equity will be possible when
needed or that we will be able to negotiate acceptable terms.  In addition, our access to capital is
affected by prevailing conditions in the financial and equity capital markets,
as well as our own financial condition.
While management believes that we will meet our liquidity needs through
April 2007, no assurance can be given that we will be able to do so.

Contractual
Obligations

The following table represents our contractual
obligations and commercial commitments as of December 31, 2005.

|                                                  |  |                          |            |                    |   |           |  |           |           |                    |   |           |  |   |   | 
|------------------------------------------------- |  | ------------------------ | ---------- | ------------------ | - | --------- |  | --------- | --------- | ------------------ | - | --------- |  | - | - | 
|                                                  |  | Payments
  Due by Period |            |                    |   |           |  |           |          
|                                                  |  |                          |            |                    |   |           |  |           |          
|Contractual
  Obligations                         |  | Total                    |            | Less than
  1 Year |   | 1-3 Years |  | 4-5 Years |           | More than
  5 Year |  
|                                                  |  |                          |            |                    |   |           |  |           |           |                    |  
|                                                  |  |                          |            |                    |   |           |  |           |           |                    |   |           |  |   |   | 
|Domestic credit
  facility                        |  | $                        | 3,753,597  |                    | $ |          |  | $         | 3,753,597 |                    | $ |          |  | $ |  | 
|Domestic term
  loans                             |  |                          | 1,450,146  |                    |   | 123,417   |  |           | 1,326,729 |                    |   |          |  |   |  | 
|Foreign
  overdraft and letter of credit facility |  |                          | 764,825    |                    |   | 695,021   |  |           | 69,804    |                    |   |          |  |   |  | 
|Amecon
  Acquisition payments                     |  |                          | 862,041    |                    |   | 215,511   |  |           | 431,019   |                    |   | 215,511   |  |   |  | 
|Capital leases                                    |  |                          | 239,144    |                    |   | 70,093    |  |           | 158,206   |                    |   | 10,845    |  |   |  | 
|Operating leases                                  |  |                          | 4,306,455  |                    |   | 1,096,309 |  |           | 2,322,656 |                    |   | 887,490   |  |   |  | 
|                                                  |  |                          |            |                    |   |           |  |           |           |                    |   |           |  |   |   | 
|                                                  |  |                          |            |                    |   |           |  |           |           |                    |   |           |  |   |   | 
|Total
  contractual cash obligations              |  | $                        | 11,376,208 |                    | $ | 2,200,351 |  | $         | 8,062,011 |                    | $ | 1,113,846 |  | $ |  | 
|                                                  |  |                          |            |                    |   |           |  |           |           |                    |   |           |  |   |   | 

There are certain provisions that could accelerate our
contractual obligations.  See Note 8 to
the Companys consolidated financial statements included herein.

Foreign Currency Fluctuation

A portion of the discontinued operations are
denominated in foreign currencies, primarily the Euro and Japanese Yen.
Generally, the statement of operations effect of changes in foreign currencies
is partially or wholly offset by the subsidiaries ability to make
corresponding price changes in the local currency. From time to time, the
impact of fluctuations in foreign currencies may have a material effect on the
financial results of the Company.
Foreign currency transaction amounts included in the statements of
operation include a gain of $3,000 in 2005, $14,000 in 2004 and a loss of
$141,000 in 2003. See Note 12 to the Companys consolidated financial
statements included herein.

Litigation

We are a defendant along with a number of other
parties in approximately 122 lawsuits as of December 31, 2005, (approximately
123 lawsuits as of December 31, 2004) alleging that plaintiffs have or may have
contracted asbestos-related diseases as a result of exposure to asbestos
products or equipment containing

---



asbestos sold by one or more named defendants. Due to
the noninformative nature of the complaints, we do not know whether any of the
complaints state valid claims against us. Certain carriers have informed us
that the primary policies for the period August 1, 1970-1973, have been
exhausted and that the carriers will no longer provide a defense under those
policies. We have requested that the carriers substantiate this situation. We
believe we have additional policies available for other years which have been
ignored by the carriers. As settlement payments are applied to all years a
litigant was deemed to have been exposed to asbestos, we believe when
settlement payments are applied to these additional policies, we will have
availability under the years deemed exhausted.
We do not believe that the asserted exhaustion of the primary insurance
coverage for this period will have a material adverse effect on its financial
condition, liquidity, or results of operations. Management believes that the
number of insurance carriers involved in the defense of the suits and the
significant number of policy years and policy limits, to which these insurance
carriers are insuring we, make the ultimate disposition of these lawsuits not
material to our consolidated financial position or results of operations.

We are also involved in other lawsuits arising in the
normal course of business. While it is not possible to predict with certainty
the outcome of these matters, management is of the opinion that the disposition
of these lawsuits and claims will not materially affect our consolidated
financial position, liquidity or results of operations.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123R, Share-Based Compensation, which supersedes
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees,and its related implementation guidance. SFAS No. 123R focuses
primarily on accounting for transactions in which an entity obtains employee
services through share-based payment transactions. SFAS No. 123R requires a
public entity to measure the cost of employee services received in exchange for
the award of equity investments based on the fair value of the award at the
date of grant. The cost will be recognized over the period during which an
employee is required to provide services in exchange for the award. SFAS No.
123R is effective as of the first annual reporting period that begins after
June 15, 2005. The impact on net earnings as a result of the adoption of SFAS
No. 123R, from a historical perspective, can be found in Note 1 to the
Consolidated Financial Statements of this Annual Report. We adopted SFAS No.
123R starting on January 1, 2006 as required.
Based on options outstanding and unvested at December 31, 2005, we
expect our future expense related to stock options to be immaterial.

In November 2004, the FASB issued SFAS No. 151, Inventory
Costs, which amends the guidance in Accounting Research Bulletin
(ARB) No. 43, Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material. SFAS No. 151 requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of so abnormal. In addition, SFAS No. 151 requires allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No. 151 is effective for fiscal
years beginning after June 15, 2005. We will adopt SFAS No. 151 starting on
January 1, 2006 as required.  We do not
expect the adoption of SFAS No. 151 to have a material effect on its
consolidated financial statements.

In June 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3.  The statement applies
to all voluntary changes in accounting principle, and changes the requirements
for accounting for and reporting of a change in accounting principle.  SFAS No. 154 requires retrospective
application to prior periods financial statements of a voluntary change in
accounting principle unless it is impracticable.  SFAS No. 154 is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005.  The statement does not change the transition
provisions of any existing accounting pronouncements, including those that are
in a transition phase as of the effective date of this statement.  We do not expect the adoption of SFAS No.
154 to have a material effect on its consolidated financial statements.

---



Critical
Accounting Policies

The significant accounting policies of the Company are
described in note 1 to the consolidated financial statements and have been
reviewed with the audit committee of our Board of Directors. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period.

Certain accounting estimates and assumptions are
particularly sensitive because of their importance to the consolidated
financial statements and possibility that future events affecting them may
differ markedly. The accounting policies of the Company with significant
estimates and assumptions are described below.

Revenue Recognition

Our continuing operations recognizes revenue when
products are shipped and the customer takes ownership and assumes risk of loss,
collection of the relevant receivable is probable, persuasive evidence of an
arrangement exists and the sales price is fixed or determinable.  Under contractual terms shipments are
generally FOB shipment point.

Customers have 30 days to notify the Company if the product
is damaged or defective.  Beyond that,
there are no significant obligations that remain after shipping other than
warranty obligations.  Contracts with
customers do not include product return rights, however, we may elect in
certain circumstances to accept returns for product.  We record revenue for product sales net of returns.  Net sales also include
amounts billed to
customers for shipping and handling, if applicable.  The corresponding shipping and handling costs are included in the
cost of sales.

In general, we warrant our products to be free from
defects in material and workmanship and will fully conform to and perform to
specifications for a period of one year.
While the our warranty costs have historically been within our
expectations, we cannot guarantee that we will continue to experience the same
warranty return rates or repair costs that we have experienced in the past.

Accounts Receivable
Reserves

This reserve is an estimate of the amount of accounts
receivable that are uncollectible. The reserve is based on a combination of
specific customer knowledge, general economic conditions and historical trends.
Management believes the results could be materially different if economic
conditions change for our customers.

Inventory Reserves

This reserve is an estimate of the future net
realizable value of our inventory. It is based on historical trends, product
life cycles, forecast of future inventory needs and on-hand inventory levels.
Management believes reserve levels could be materially affected by changes in
technology, our customer base, customer needs, general economic conditions and
the success of certain Company sales programs.

Discontinued Operations

We continuously assess the return on our business
segments. When management with the appropriate level of authority determines
that a plan is in place to restructure the operations of a business or
discontinue an operation, contractual commitments and obligations are recorded.
See a discussion in Note 3 to the consolidated financial statements.

Goodwill

We perform an annual assessment of the carrying value
of goodwill. As part of this assessment, we estimate future cash flows, as well
as making a risk assessment of investing in our company versus other investment
opportunities. Changes in either the risk assessment or estimated future cash
flows could have a material adverse impact on the carrying value of goodwill.

---



Long-lived Assets

The carrying value of long-lived assets is
periodically assessed to insure their carrying value does not exceed their
estimated net realizable future value. This assessment includes certain
assumptions related to future needs for the asset to help generate future cash
flow. Changes in those assessments, future economic conditions or technological
changes could have a material adverse impact of the carrying value of these
assets.

Deferred Taxes

The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities and projected future taxable
income in making this assessment. Actual future operating results, as well as
changes in our future performance, could have a material adverse impact on the
valuation reserves.

Employee Benefit
Obligations

We provide retirement and health care insurance for
certain domestic retirees and employees. We measure the costs of our obligation
based on our best estimate. The net periodic costs are recognized as employees
render the services necessary to earn the post-retirement benefit. Several
assumptions and statistical variables are used in the models to calculate the
expense and liability related to the plans.
We determine assumptions about the discount rate, the expected rate of
return on plan assets and the future rate of compensation increases. The
actuarial models also use assumptions on demographic factors such as
retirement, mortality and turnover. Changes in actuarial assumptions could vary
materially from actual results due to economic events and different rates of
retirement, mortality and withdrawal.

Quantitative and Qualitative Disclosures About Market Risk

Our consolidated cash flows and earnings are subject
to fluctuations due to changes in foreign currency exchange rates. Our attempts
to limit our exposure to changing foreign currency exchange rates through
operational and financial market actions. We do not hold derivatives for
trading purposes.

We manufacture and sell our products in a number of
locations around the world, resulting in a diversified revenue and cost base
that is exposed to fluctuations in European and Asian currencies. This diverse
base of foreign currency revenues and costs serves to create a hedge that
limits our net exposure to fluctuations in these foreign currencies.

Short-term exposures to changing foreign currency
exchange rates are occasionally managed by financial market transactions,
principally through the purchase of forward foreign exchange contracts (with
maturities of six months or less) to offset the earnings and cash flow impact
of the nonfunctional currency denominated receivables and payables relating to
select contracts. The decision by management to hedge any such transaction is
made on a case-by-case basis. Foreign exchange forward contracts are
denominated in the same currency as the receivable or payable being covered,
and the term and amount of the forward foreign exchange contract substantially
mirrors the term and amount of the underlying receivable or payable. The
receivables and payables being covered arise from bank debt, trade and
intercompany transactions of and among our foreign subsidiaries. At December
31, 2005, we did not have any forward foreign exchange contracts outstanding.  If the prime rate debt was to increase by
one percentage point interest expense would increase approximately
$60,000.

---



REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders, Audit Committee and Board of
Directors
IntriCon Corporation (formerly Selas Corporation of America)

We have audited the accompanying consolidated balance
sheet of IntriCon Corporation (formerly Selas Corporation of America) as of
December 31, 2005, and the related consolidated statements of operations,
shareholders equity and comprehensive income and cash flows for the year 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 audit.

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

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of IntriCon Corporation (formerly Selas Corporation of America) as of
December 31, 2005 and the results of their
operations and their  cash flows
for the year then ended, in conformity with U.S. generally accepted accounting
principles.

/s/ Virchow,
Krause & Company, LLP

Minneapolis, Minnesota
February 18, 2006

---



REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
IntriCon Corporation:

We have audited the accompanying consolidated balance
sheet of IntriCon Corporation (formerly Selas Corporation of America) and
subsidiaries as of December 31, 2004, and the related consolidated statements
of operations, shareholders equity and comprehensive income (loss) and cash
flows for each of the years in the two-year period ended December 31, 2004.
These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of IntriCon Corporation and subsidiaries as of December 31, 2004 and
2003, and the results of their operations and their cash flows for each of the
years in the two-year period ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles.

As discussed in note 2 to the consolidated financial
statements, the Company has restated its consolidated financial statements as
of December 31, 2004 and for each of the years in the two-year period ended
December 31, 2004.

/s/ KPMG LLP

Minneapolis, Minnesota
March 18, 2005, except as to notes 3, 4, 8 and 18, 
which are as of March 31, 2005 and 
note 2 which is as of June 24, 2005

---



IntriCon CorporationConsolidated Statements of OperationsYears ended December 31

|                                                                                           |  |      |            |                 |   |                 |   |   |            |  
|------------------------------------------------------------------------------------------ |  | ---- | ---------- | --------------- | - | --------------- | - | - | ---------- | -
|                                                                                           |  | 2005 |            | 2004
  Restated |   | 2003
  Restated |  
|                                                                                           |  |      |            |                 |   |                 |  
|                                                                                           |  |      |            |                 |   |                 |   |   |            |  
|Sales, net                                                                                 |  | $    | 44,455,251 |                 | $ | 35,182,612      |   | $ | 36,202,164 |  
|                                                                                           |  |      |            |                 |   |                 |   |   |            |  
|Costs of sales                                                                             |  |      | 32,853,426 |                 |   | 27,120,897      |   |   | 27,638,208 |  
|                                                                                           |  |      |            |                 |   |                 |   |   |            |  
|                                                                                           |  |      |            |                 |   |                 |   |   |            |  
|Gross profit                                                                               |  |      | 11,601,825 |                 |   | 8,061,715       |   |   | 8,563,956  |  
|Operating
  expenses:                                                                      |  |      |            |                 |   |                 |   |   |            |  
|Selling expense                                                                            |  |      | 3,569,948  |                 |   | 3,933,657       |   |   | 3,649,027  |  
|General and
  administrative expense                                                       |  |      | 4,793,239  |                 |   | 5,496,798       |   |   | 5,258,721  |  
|Impairment of
  long-term assets                                                           |  |      |           |                 |   | 488,214         |   |   | 378,864    |  
|Research and
  development expense                                                         |  |      | 1,817,384  |                 |   | 1,616,085       |   |   | 2,170,415  |  
|                                                                                           |  |      |            |                 |   |                 |   |   |            |  
|Total operating
  expenses                                                                 |  |      | 10,180,571 |                 |   | 11,534,754      |   |   | 11,457,027 |  
|Gain on sale of
  asset                                                                    |  |      |           |                 |   | 3,109,627       |   |   |           |  
|Operating income
  (loss)                                                                  |  |      | 1,421,254  |                 |   | (363,412        | ) |   | (2,893,071 | )
|Interest expense                                                                           |  |      | 409,199    |                 |   | 465,272         |   |   | 533,461    |  
|Interest income                                                                            |  |      | (52,482    | )               |   | (1,626          | ) |   | (7,919     | )
|Other (income)
  expense, net                                                              |  |      | (106,343   | )               |   | (61,618         | ) |   | 129,173    |  
|                                                                                           |  |      |            |                 |   |                 |   |   |            |  
|Income (loss)
  from continuing operations before income taxes and discontinued operations |  |      | 1,170,880  |                 |   | (765,440        | ) |   | (3,547,786 | )
|Income tax
  expense                                                                       |  |      | 409,423    |                 |   | 1,139,797       |   |   | 484,599    |  
|                                                                                           |  |      |            |                 |   |                 |   |   |            |  
|Income (loss)
  from continuing operations before discontinued operations                  |  |      | 761,457    |                 |   | (1,905,237      | ) |   | (4,032,385 | )
|Income (loss)
  from discontinued operations, net of income taxes (Note 3)                 |  |      | 767,230    |                 |   | 1,369,433       |   |   | (1,012,937 | )
|Extraordinary
  gain from discontinued operations                                          |  |      |           |                 |   | 683,630         |   |   |           |  
|                                                                                           |  |      |            |                 |   |                 |   |   |            |  
|Net income
  (loss)                                                                        |  | $    | 1,528,687  |                 | $ | 147,826         |   | $ | (5,045,322 | )
|                                                                                           |  |      |            |                 |   |                 |   |   |            |  
|                                                                                           |  |      |            |                 |   |                 |   |   |            |  
|Basic income
  (loss) per share:                                                           |  |      |            |                 |   |                 |   |   |            |  
|Continuing
  operations                                                                    |  | $    | .15        |                 | $ | (.37            | ) | $ | (.78       | )
|Discontinued
  operations                                                                  |  |      | .15        |                 |   | .27             |   |   | (.20       | )
|Extraordinary
  gain from discontinued operations                                          |  |      |           |                 |   | .13             |   |   |           |  
|                                                                                           |  |      |            |                 |   |                 |   |   |            |  
|Net income
  (loss)                                                                        |  | $    | .30        |                 | $ | .03             |   | $ | (.98       | )
|                                                                                           |  |      |            |                 |   |                 |   |   |            |  
|Diluted income
  (loss) per share:                                                         |  |      |            |                 |   |                 |   |   |            |  
|Continuing
  operations                                                                    |  | $    | .14        |                 | $ | (.37            | ) | $ | (.78       | )
|Discontinued
  operations                                                                  |  |      | .15        |                 |   | .27             |   |   | (.20       | )
|Extraordinary
  gain from discontinued operations                                          |  |      |           |                 |   | .13             |   |   |           |  
|                                                                                           |  |      |            |                 |   |                 |   |   |            |  
|Net income
  (loss)                                                                        |  | $    | .29        |                 | $ | .03             |   | $ | (.98       | )
|                                                                                           |  |      |            |                 |   |                 |   |   |            |  

See accompanying notes to the consolidated financial statements.

---



Consolidated
Balance Sheets

At December 31

|                                                                                                                                 |  |      |            |                 |   |            | 
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | --------------- | - | ---------- | 
|Assets                                                                                                                           |  | 2005 |            | 2004
  Restated |  
|                                                                                                                                 |  |      |            |                 |  
|                                                                                                                                 |  |      |            |                 |   |            | 
|Current assets                                                                                                                   |  |      |            |                 |   |            | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|Cash                                                                                                                             |  | $    | 1,109,402  |                 | $ | 246,430    | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|Restricted cash                                                                                                                  |  |      | 60,158     |                 |   | 449,613    | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|Accounts
  receivable, less allowance for doubtful accounts of $370,000 at December 31,
  2005 and $177,000 at December 31, 2004 |  |      | 6,925,357  |                 |   | 4,996,705  | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|Inventories                                                                                                                      |  |      | 6,950,243  |                 |   | 4,287,643  | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|Refundable
  income taxes                                                                                                        |  |      | 77,143     |                 |   | 46,163     | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|Other current
  assets                                                                                                           |  |      | 454,053    |                 |   | 379,318    | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|Assets of
  discontinued operations                                                                                              |  |      |           |                 |   | 6,834,256  | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|Total current
  assets                                                                                                           |  |      | 15,576,356 |                 |   | 17,240,128 | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|Property, plant
  and equipment                                                                                                  |  |      |            |                 |   |            | 
|Land                                                                                                                             |  |      | 170,500    |                 |   | 170,500    | 
|Buildings and
  improvements                                                                                                     |  |      | 1,732,914  |                 |   | 1,732,914  | 
|Machinery and
  equipment                                                                                                        |  |      | 26,423,956 |                 |   | 25,635,452 | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|                                                                                                                                 |  |      | 28,327,370 |                 |   | 27,538,866 | 
|Less:
  accumulated depreciation and amortization                                                                                |  |      | 21,455,955 |                 |   | 20,260,792 | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|Net property,
  plant and equipment                                                                                              |  |      | 6,871,415  |                 |   | 7,278,074  | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|Note receivable
  from sale of discontinued operations, less allowance of $296,000                                               |  |      | 503,923    |                 |   |           | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|Goodwill                                                                                                                         |  |      | 5,754,219  |                 |   | 5,264,585  | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|Other assets,
  net                                                                                                              |  |      | 929,474    |                 |   | 1,156,449  | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|                                                                                                                                 |  |      |            |                 |   |            | 
|                                                                                                                                 |  | $    | 29,635,387 |                 | $ | 30,939,236 | 
|                                                                                                                                 |  |      |            |                 |   |            | 

See accompanying notes to the consolidated financial statements.

---



At December 31

|                                                                                                                                    |  |      |            |                 |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | --------------- | - | ---------- | -
|Liabilities and Shareholders Equity                                                                                                |  | 2005 |            | 2004
  Restated |  
|                                                                                                                                    |  |      |            |                 |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Current
  liabilities                                                                                                               |  |      |            |                 |   |            |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Notes payable                                                                                                                       |  | $    |           |                 | $ | 3,740,393  |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Checks written
  in excess of cash                                                                                                  |  |      | 397,999    |                 |   | 665,098    |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Current
  maturities of long-term debt                                                                                              |  |      | 888,531    |                 |   | 1,458,470  |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Accounts payable                                                                                                                    |  |      | 3,136,555  |                 |   | 2,211,909  |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Customers
  advance payments on contracts                                                                                          |  |      | 59,210     |                 |   | 75,000     |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Income tax
  payable                                                                                                                |  |      | 298,914    |                 |   |           |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Liabilities of
  discontinued operations                                                                                            |  |      |           |                 |   | 4,266,899  |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Other accrued
  liabilities                                                                                                         |  |      | 2,610,474  |                 |   | 2,638,889  |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Total current
  liabilities                                                                                                         |  |      | 7,391,683  |                 |   | 15,056,658 |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Long-term debt,
  less current maturities                                                                                           |  |      | 5,319,181  |                 |   |           |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Other
  post-retirement benefit obligations                                                                                         |  |      | 1,516,939  |                 |   | 2,710,106  |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Note payable,
  net of current portion (Amecon)                                                                                     |  |      | 646,530    |                 |   |           |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Deferred income
  taxes                                                                                                             |  |      | 37,725     |                 |   | 143,902    |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Accrued pension
  liability                                                                                                         |  |      | 633,818    |                 |   | 900,713    |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Commitments and
  contingencies (notes 8 and 16)                                                                                    |  |      |            |                 |   |            |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Shareholders
  equity                                                                                                              |  |      |            |                 |   |            |  
|Common shares,
  $1 par; 10,000,000 shares authorized; 5,665,568 and 5,644,968 shares issued;
  5,149,814 and 5,129,214 outstanding |  |      | 5,665,568  |                 |   | 5,644,968  |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Additional
  paid-in capital                                                                                                        |  |      | 12,053,590 |                 |   | 12,025,790 |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Accumulated
  deficit                                                                                                               |  |      | (2,152,017 | )               |   | (3,680,704 | )
|                                                                                                                                    |  |      |            |                 |   |            |  
|Accumulated
  other comprehensive loss                                                                                              |  |      | (212,552   | )               |   | (597,119   | )
|                                                                                                                                    |  |      |            |                 |   |            |  
|                                                                                                                                    |  |      | 15,354,589 |                 |   | 13,392,935 |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Less: 515,754
  common shares held in treasury, at cost                                                                             |  |      | (1,265,078 | )               |   | (1,265,078 | )
|                                                                                                                                    |  |      |            |                 |   |            |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|Total
  shareholders equity                                                                                                        |  |      | 14,089,511 |                 |   | 12,127,857 |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|                                                                                                                                    |  |      |            |                 |   |            |  
|                                                                                                                                    |  | $    | 29,635,387 |                 | $ | 30,939,236 |  
|                                                                                                                                    |  |      |            |                 |   |            |  

See accompanying
notes to the consolidated financial statements.

---



Consolidated
Statements of Cash Flows

|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|---------------------------------------------------------------------------------------- |  | ---- | ---------- | --------------- | - | --------------- | - | - | ---------- | -
|Years ended December 31,                                                                 |  | 2005 |            | 2004
  Restated |   | 2003
  Restated |  
|                                                                                         |  |      |            |                 |   |                 |  
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|Cash flows from
  operating activities:                                                  |  |      |            |                 |   |                 |   |   |            |  
|Net income
  (loss)                                                                      |  | $    | 1,528,687  |                 | $ | 147,826         |   | $ | (5,045,322 | )
|Adjustments to
  reconcile net loss to net cash provided (used) by operating activities: |  |      |            |                 |   |                 |   |   |            |  
|(Income) loss
  from discontinued operations                                             |  |      | (767,230   | )               |   | (1,369,433      | ) |   | 1,012,937  |  
|Extraordinary
  gain from discontinued operations                                        |  |      |           |                 |   | (683,630        | ) |   |           |  
|Impairment of long-term
  assets                                                         |  |      |           |                 |   | 488,214         |   |   | 378,864    |  
|Depreciation and
  amortization                                                          |  |      | 2,069,170  |                 |   | 2,289,181       |   |   | 2,387,227  |  
|(Gains) losses
  on sale of property and equipment                                       |  |      | (2,215     | )               |   | (1,541          | ) |   | 29,265     |  
|Deferred taxes                                                                           |  |      | (103,593   | )               |   | 905,615         |   |   | 1,147,740  |  
|Allowance for doubtful
  accounts                                                        |  |      | (193,809   | )               |   | 77,246          |   |   | 160,669    |  
|Gain on sale of
  asset held for sale                                                    |  |      |           |                 |   | (3,109,627      | ) |   |           |  
|Changes in
  operating assets and liabilities:                                           |  |      |            |                 |   |                 |   |   |            |  
|Accounts
  receivable                                                                    |  |      | (2,197,276 | )               |   | (430,324        | ) |   | 181,318    |  
|Inventories                                                                              |  |      | (2,407,509 | )               |   | 1,464,236       |   |   | 356,119    |  
|Other assets                                                                             |  |      | (545,111   | )               |   | 732,640         |   |   | (1,092,489 | )
|Accounts payable                                                                         |  |      | 1,328,757  |                 |   | (687,363        | ) |   | 1,483,787  |  
|Accrued expenses                                                                         |  |      | 78,840     |                 |   | (579,576        | ) |   | 1,798,476  |  
|Customers
  advance payments on contracts                                                |  |      | (12,764    | )               |   | (97,279         | ) |   | (5,741     | )
|Other liabilities                                                                        |  |      | (1,309,218 | )               |   | 6,822           |   |   | (103,421   | )
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|Net cash
  provided (used) by continuing operations                                      |  |      | (2,533,271 | )               |   | (846,993        | ) |   | 2,689,429  |  
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|Net cash
  provided (used) by discontinued operations                                    |  |      | 3,810,723  |                 |   | 980,428         |   |   | (2,573,594 | )
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|Net cash
  provided by operating activities                                              |  |      | 1,277,452  |                 |   | 133,435         |   |   | 115,835    |  
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|Cash flows from
  investing activities:                                                  |  |      |            |                 |   |                 |   |   |            |  
|Purchases of
  property, plant and equipment                                             |  |      | (794,192   | )               |   | (976,043        | ) |   | (985,086   | )
|Cash paid for
  acquisition of assets of Amecon, Inc                                     |  |      | (378,365   | )               |   |                |   |   |           |  
|Proceeds from
  sales of property, plant and equipment                                   |  |      | 7,600      |                 |   | 3,800           |   |   | 500        |  
|Proceeds from
  sale of asset held for sale                                              |  |      |           |                 |   | 3,649,802       |   |   |           |  
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|Net cash
  provided (used) by continuing operations                                      |  |      | (1,164,957 | )               |   | 2,677,559       |   |   | (984,586   | )
|Net cash
  provided (used) by discontinued operations                                    |  |      |           |                 |   | (41,890         | ) |   | 6,575,496  |  
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|Net cash
  provided (used) by investing activities                                       |  |      | (1,164,957 | )               |   | 2,635,669       |   |   | 5,590,909  |  
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|Cash flows from
  financing activities:                                                  |  |      |            |                 |   |                 |   |   |            |  
|Proceeds from
  short-term borrowings                                                    |  |      | 164,865    |                 |   | 716,133         |   |   | 291,205    |  
|Proceeds from
  issuance of stock                                                        |  |      |           |                 |   |                |   |   | 23,250     |  
|Repayments of
  short-term borrowings                                                    |  |      | (3,171,447 | )               |   | (432,806        | ) |   | (6,089,228 | )
|Proceeds from
  long term borrowings                                                     |  |      | 5,128,968  |                 |   | 800,001         |   |   |           |  
|Repayments of
  long-term debt                                                           |  |      | (1,458,470 | )               |   | (4,092,879      | ) |   | (1,203,742 | )
|Change in
  restricted cash                                                              |  |      | 381,379    |                 |   | (2,706          | ) |   | (12,811    | )
|Change in checks
  written in excess of cash                                             |  |      | (267,099   | )               |   | 334,399         |   |   | (381,785   | )
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|Net cash
  provided (used) by financing activities                                       |  |      | 778,196    |                 |   | (2,677,858      | ) |   | (7,373,111 | )
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|Effect of
  exchange rate changes on cash                                                |  |      | (27,719    | )               |   | (38,627         | ) |   | 246,733    |  
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|Increase
  (decrease) in cash                                                            |  |      | 862,972    |                 |   | 52,619          |   |   | (1,419,634 | )
|Cash beginning
  of year                                                                 |  |      | 246,430    |                 |   | 193,811         |   |   | 1,613,445  |  
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  
|Cash end of year                                                                         |  | $    | 1,109,402  |                 | $ | 246,430         |   | $ | 193,811    |  
|                                                                                         |  |      |            |                 |   |                 |   |   |            |  

See accompanying notes to the consolidated financial statements.

---



Consolidated
Statements of Shareholders Equity and Comprehensive Income (Loss)

Years
ended December 31, 2005, 2004 and 2003

|                                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          |   |            |   |   |            |   |   |            |  
|------------------------------------ |  | ------------------------------- | --------- | ------------------ | - | ------------------------------ |  | ------------------- | ---------- | ------------------------------------ | - | ----------------------------- | - | ---------------- | ---------- | ------------------------ | - | ---------- | - | - | ---------- | - | - | ---------- | -
|                                     |  | Common
  StockNumber
  ofShares |           | CommonStock$Amount |   | Additional
  Paid in
  Capital |  | Retained
  Earnings |            | AccumulatedOther
  ComprehensiveLoss |   | Comprehensive
  Income (Loss) |   | Treasury
  Stock |            | TotalShareholdersEquity |  
|                                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          |  
|Balance December 31, 2002            |  |                                 | 5,634,968 |                    |   | 5,634,968                      |  |                     | 12,012,541 |                                      |   | 1,216,792                     |   |                  | (1,525,271 | )                        |   |            |   |   | (1,265,078 | ) |   | 16,073,952 |  
|Issuance of stock                    |  |                                 | 10,000    |                    |   | 10,000                         |  |                     | 13,249     |                                      |   |                               |   |                  |            |                          |   |            |   |   |            |   |   | 23,249     |  
|Net loss                             |  |                                 |           |                    |   |                                |  |                     |            |                                      |   | (5,045,322                    | ) |                  |            |                          |   | (5,045,322 | ) |   |            |   |   | (5,045,322 | )
|Translation gain                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  | 1,338,722  |                          |   | 1,338,722  |   |   |            |   |   | 1,338,722  |  
|Additional minimum pension liability |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  | (583,566   | )                        |   | (583,566   | ) |   |            |   |   | (583,566   | )
|                                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          |   |            |   |   |            |   |   |            |  
|Comprehensive loss                   |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          | $ | (4,290,166 | ) |   |            |   |   |            |  
|                                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          |   |            |   |   |            |   |   |            |  
|                                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          |   |            |   |   |            |   |   |            |  
|Balance December 31, 2003            |  |                                 | 5,644,968 |                    |   | 5,644,968                      |  |                     | 12,025,790 |                                      |   | (3,828,530                    | ) |                  | (770,115   | )                        |   |            |   |   | (1,265,078 | ) |   | 11,807,035 |  
|                                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          |   |            |   |   |            |   |   |            |  
|Net income                           |  |                                 |           |                    |   |                                |  |                     |            |                                      |   | 147,826                       |   |                  |            |                          |   | 147,826    |   |   |            |   |   | 147,826    |  
|Translation gain                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  | 172,996    |                          |   | 172,996    |   |   |            |   |   | 172,996    |  
|                                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          |   |            |   |   |            |   |   |            |  
|Comprehensive income                 |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          | $ | 320,822    |   |   |            |   |   |            |  
|                                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          |   |            |   |   |            |   |   |            |  
|                                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          |   |            |   |   |            |   |   |            |  
|Balance December 31, 2004            |  |                                 | 5,644,968 |                    | $ | 5,644,968                      |  | $                   | 12,025,790 |                                      | $ | (3,680,704                    | ) | $                | (597,119   | )                        |   |            |   | $ | (1,265,078 | ) | $ | 12,127,857 |  
|                                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          |   |            |   |   |            |   |   |            |  
|Exercise of stock options            |  |                                 | 20,600    |                    |   | 20,600                         |  |                     | 27,800     |                                      |   |                               |   |                  |            |                          |   |            |   |   |            |   |   | 48,400     |  
|                                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          |   |            |   |   |            |   |   |            |  
|Net income                           |  |                                 |           |                    |   |                                |  |                     |            |                                      |   | 1,528,687                     |   |                  |            |                          |   | 1,528,687  |   |   |            |   |   | 1,528,687  |  
|                                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          |   |            |   |   |            |   |   |            |  
|Translation gain                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  | 384,567    |                          |   | 384,567    |   |   |            |   |   | 384,567    |  
|                                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          |   |            |   |   |            |   |   |            |  
|Comprehensive income                 |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          | $ | 1,913,254  |   |   |            |   |   |            |  
|                                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          |   |            |   |   |            |   |   |            |  
|Balance December 31, 2005            |  |                                 | 5,665,568 |                    | $ | 5,665,568                      |  | $                   | 12,053,590 |                                      | $ | (2,152,017                    | ) | $                | (212,552   | )                        |   |            |   | $ | (1,265,078 | ) | $ | 14,089,511 |  
|                                     |  |                                 |           |                    |   |                                |  |                     |            |                                      |   |                               |   |                  |            |                          |   |            |   |   |            |   |   |            |  

See accompanying
notes to the consolidated financial statements.

---



Notes to Consolidated Financial
Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Headquartered in Arden Hills, Minnesota, IntriCon
Corporation (formerly Selas Corporation of America) (The Company) is an
international firm that designs, develops, engineers and manufactures
microminiaturized medical and electronic products. The Company supplies
microminiaturized components, systems and molded plastic parts, primarily to
the hearing instrument manufacturing industry, as well as the computer,
electronics, telecommunications and medical equipment industries. In addition
to its Arden Hills headquarters, the Company has facilities in California,
Singapore, and Germany.

Basis of Presentation  A portion of the
Companys prior Heat Technology segment, operating through a wholly-owned
subsidiary located in France, filed insolvency in 2003. The Company has
reclassified the historical financial data related to this operation into
discontinued operations. In the fourth quarter of 2003, the Company initiated
its plan to dispose of the remaining Heat Technology segment. This segment
consists of the operating assets of Selas Corporation of America in Dresher,
Pa., and subsidiaries located in Tokyo, Japan and Ratingen, Germany. The Company
has accounted for the plan to dispose of the subsidiaries as a discontinued
operation and, accordingly, has reclassified the historical financial data.
Consequently, the financial statements reflect in continuing operations the
business previously known as its Precision Miniature Medical and Electronics
segment.

In the fourth quarter of 2002, the Company initiated
its plan to dispose of its Tire Holders, Lifts and Related Products segment.
This segment consisted of one wholly owned subsidiary that operated on a stand
alone basis. The Company had accounted for the plan to dispose of the
subsidiary as a discontinued operation and, accordingly, had reclassified the
historical financial data. The sale of this business was completed in 2003 and
the results of operations for 2003 are included in discontinued operations.

See further information in Note 3.

Consolidation  The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. The Company owns 90 percent of its Germany subsidiary, with the
remaining 10 percent owned by the general manager.  All material intercompany transactions and balances have been
eliminated in consolidation.

Segment Disclosures  The Company has
reviewed Statement of Financial Accounting Standards No. 131 (SFAS No. 131),
Disclosures about Segments of an Enterprise and Related Information, and has
determined that the Company meets the aggregation criteria as its various
operations do not have discrete assets and are managed as one business.

Reclassifications  Certain prior-year
balances have been reclassified to be consistent with the current-year
presentation.

Use of Estimates  Management of the
Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities, the recording of reported amounts of
revenues and expenses and the disclosure of contingent assets and liabilities
to prepare these financial statements. Actual results could differ from those
estimates.

Revenue Recognition  The Companys continuing
operations recognizes revenue when products are shipped and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable is
probable, persuasive evidence of an arrangement exists and the sales price is
fixed or determinable.  Under
contractual terms shipments are generally FOB shipment point.

Customers have 30 days to notify the Company if the
product is damaged or defective.  Beyond
that, there are no significant obligations that remain after shipping other
than warranty obligations.  Contracts
with customers do not include product return rights, however, the Company may
elect in certain circumstances to accept returns for product.  The Company records revenue for product
sales net of returns.  Net sales also
include amounts billed to customers for shipping and handling, if
applicable.  The corresponding shipping
and handling costs are included in the cost of sales.

---



In general, the Company warrants its products to be
free from defects in material and workmanship and will fully conform to and
perform to specifications for a period of one year.   While the Companys warranty costs have historically been within
its expectations, the Company cannot guarantee that it will continue to
experience the same warranty return rates or repair costs that it has
experienced in the past

Shipping and Handling Costs  In accordance
with Emerging Issues Task Force (ETIF) Issue 00-10, Accounting for Shipping
and Handling Fees and Costs, the Company is including shipping and handling revenues
in sales and shipping and handling costs in cost of sales.

Fair Value of Financial Instruments  The
carrying value of cash, short-term accounts and notes receivable, other current
assets, notes payable, trade accounts payables, and other accrued expenses
approximate fair value because of the short maturity of those instruments.  The fair values of the Companys long-term
debt approximate their carrying values based upon current market rates of
interest.

Concentration of Cash  The Company
deposits its cash in high credit quality financial institutions.  The balance, at times, may exceed federally
insured limits.

Restricted Cash  Restricted cash consists
of cash deposits required to secure a credit facility at our Singapore
location.

Accounts Receivable The Company reviews
customers credit history before extending unsecured credit and established an
allowance for uncollectible accounts based upon factors surrounding the credit
risk of specific customers and other information.  Credit risk on accounts receivable is minimized as a result of
the large and diverse nature of the Companys customer base.  Invoices are generally due 30 days after
presentation.  Accounts receivable over
30 days are considered past due.  The
Company does not accrue interest on past due accounts receivables.  Receivables are written off once all
collection attempts have failed and are based on individual credit evaluation
and specific circumstances of the customer.
Accounts receivable are shown net of allowance for uncollectible
accounts of $370,000 and $177,000 at December 31, 2005 and 2004,
respectively.   Accounts receivable over
90 days were $664,000 and $300,000 at December 31, 2005 and 2004, respectively

Inventories  Inventories are stated at the
lower of cost or market. The cost of the inventories was determined by the
average cost and first-in, first-out methods.

Property, Plant and Equipment  Property,
plant and equipment are carried at cost. Depreciation is computed by
straight-line and accelerated methods using estimated useful lives of 5 to 40
years for buildings and improvements, and 3 to 12 years for machinery and
equipment. Leasehold improvements are amortized using the straight-line method
over the shorter of the lease term of the estimated useful life of the
asset.  Improvements are capitalized and
expenditures for maintenance, repairs and minor renewals are charged to expense
when incurred. At the time assets are retired or sold, the costs and
accumulated depreciation are eliminated and the resulting gain or loss, if any,
is reflected in the consolidated statement of operations.  Depreciation expense was $1,967,000
$2,141,000, and $2,299,000 for the years ended December 31, 2005, 2004, and
2003, respectively.

Impairment of Long-lived Assets and Long-lived Assets to be
Disposed Of  The Company reviews its long-lived assets,
certain identifiable intangibles, and goodwill for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset group to future net cash flows
expected to be generated by the asset group. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.

The test for goodwill impairment is a two-step
process, and is performed at least annually. The first step is a comparison of
the fair value of the reporting unit with its carrying amount, including
goodwill. If this step reflects impairment, then the loss would be measured as
the excess of recorded goodwill over its implied fair value. Implied fair value
is the excess of fair value of the reporting unit over the fair value of all
identified assets and liabilities.

---



Income Taxes  Income taxes are accounted
for under the asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Valuation
reserves are established to the extent the future benefit from the deferred tax
assets realization is uncertain. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

Employee Benefit Obligations  The Company
provides pension and health care insurance for certain domestic retirees and
employees of its discontinued operations. These obligations have been included
in continuing operations as the Company expects to retain these obligations. The
Company also provides retirement related benefits for certain foreign
employees. The Company measures the costs of its obligation based on actuarial
determinations. The net periodic costs are recognized as employees render the
services necessary to earn the post-retirement benefit.

Several assumptions and statistical variables are used
in the models to calculate the expense and liability related to the plans.
Assumptions about the discount rate, the expected rate of return on plan assets
and the future rate of compensation increases are determined by the
Company.  Note 11 includes disclosure of
these rates on a weighted-average basis, encompassing the plans. The actuarial
models also use assumptions on demographic factors such as retirement,
mortality and turnover. The Company believes the assumptions are within
accepted guidelines and ranges. However, these actuarial assumptions could vary
materially from actual results due to economic events and different rates of
retirement, mortality and withdrawal.

Stock Option Plan  The Company applies the
intrinsic-value-based method of accounting prescribed by Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations including Financial Accounting Standard Board (FASB)
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25, issued in March 2000,
to account for its fixed-plan stock options. Under this method, compensation
expense is recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. As allowed by Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for
Stock-Based Compensation, as amended by Statement of Financial Accounting
Standards No. 148 (SFAS No. 148), Accounting for Stock-Based Compensation -
Transition and Disclosure, the Company has elected to continue to apply the
intrinsic-value-based method, and has adopted only the disclosure requirements
of SFAS No. 123.  Therefore, no
compensation expense has been recognized for the stock option plans. SFAS No.
123, amended by SFAS No. 148, requires the Company to disclose pro forma net
income (loss) and pro forma income (loss) per share amounts as if compensation
expense was recognized for options granted after 1995. Using this approach, net
income (loss) per share would have been changed to the pro forma amounts
indicated in the table:

|                                                                                                                                                |  |      |                           |                 |   |                 |   |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------------------------- | --------------- | - | --------------- | - | - | ---------- | -
|                                                                                                                                                |  |      | Year Ended
  December 31, |                
|                                                                                                                                                |  |      |                           |                
|                                                                                                                                                |  | 2005 |                           | 2004
  Restated |   | 2003
  Restated |  
|                                                                                                                                                |  |      |                           |                 |   |                 |  
|                                                                                                                                                |  |      |                           |                 |   |                 |   |   |            |  
|Net Income
  (loss) as reported                                                                                                                 |  | $    | 1,528,687                 |                 | $ | 147,826         |   | $ | (5,045,322 | )
|Deduct: total
  stock-based employee compensation expense determined under fair value based
  method for all awards, net of related tax effects |  |      | (129,103                  | )               |   | (245,040        | ) |   | (173,987   | )
|                                                                                                                                                |  |      |                           |                 |   |                 |   |   |            |  
|Pro forma net
  income loss                                                                                                                     |  | $    | 1,399,584                 |                 | $ | (97,214         | ) | $ | (5,219,309 | )
|                                                                                                                                                |  |      |                           |                 |   |                 |   |   |            |  
|                                                                                                                                                |  |      |                           |                 |   |                 |   |   |            |  
|Net Income
  (loss) per share:                                                                                                                  |  |      |                           |                 |   |                 |   |   |            |  
|Basic-as
  reported                                                                                                                             |  | $    | .30                       |                 | $ | .03             |   | $ | (0.98      | )
|Basic-pro forma                                                                                                                                 |  | $    | .27                       |                 | $ | (.02            | ) | $ | (1.02      | )
|                                                                                                                                                |  |      |                           |                 |   |                 |   |   |            |  
|Net Income
  (loss) per share:                                                                                                                  |  |      |                           |                 |   |                 |   |   |            |  
|Diluted-as
  reported                                                                                                                           |  | $    | .29                       |                 | $ | .03             |   | $ | (0.98      | )
|Diluted-pro
  forma                                                                                                                             |  | $    | .27                       |                 | $ | (.02            | ) | $ | (1.02      | )

---



For disclosure purposes, the fair value of each stock
option granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:

|                        |  |  |      |   |      |      |      |  |      |  
|----------------------- |  |  | ---- | - | ---- | ---- | ---- |  | ---- | -
|                        |  |  | 2005 |   | 2004 |      | 2003
|                        |  |  |      |   |      |      |     
|Dividend yield          |  |  | 0.0  | % |      | 2.0  | %    |  | 2.1  | %
|Expected volatility     |  |  | 66.2 | % |      | 78.0 | %    |  | 66.9 | %
|Risk-free interest rate |  |  | 4.1  | % |      | 4.3  | %    |  | 4.2  | %
|Expected life (years)   |  |  | 6.1  |   |      | 6.3  |      |  | 6.3  |  

The Black-Scholes option-pricing model was developed
for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option-pricing models
require the input of subjective assumptions, including the expected stock price
volatility. Because the Companys options have characteristics different from
those of traded options, in the opinion of management, the existing models do
not necessarily provide a reliable single measure of the fair value of its
options.

Product Warranty  The Company offers a
warranty on various products and services.
The Company estimates the costs that may be incurred under its warranties
and records a liability in the amount of such costs at the time the product is
sold.  Factors that affect the Companys
warranty liability include the number of units sold, historical and anticipated
rates of warranty claims and cost per claim.
The Company periodically assesses the adequacy of its recorded warranty
liabilities and adjusts the amounts as necessary.  The amount of the reserve recorded is equal to the costs to
repair or otherwise satisfy the claim.
The following table presents changes in the Companys warranty liability
as of December 31, 2005 and 2004:

|                              |  |      |          |      |   |        |  
|----------------------------- |  | ---- | -------- | ---- | - | ------ | -
|                              |  | 2005 |          | 2004 |  
|                              |  |      |          |      |  
|                              |  |      |          |      |   |        |  
|Beginning of the year balance |  | $    | 92,317   |      | $ | 60,694 |  
|                              |  |      |          |      |   |        |  
|Warranty expense              |  |      | 197,417  |      |   | 35,000 |  
|Closed warranty claims        |  |      | (165,251 | )    |   | (3,377 | )
|                              |  |      |          |      |   |        |  
|                              |  |      |          |      |   |        |  
|End of the year balance       |  | $    | 124,483  |      | $ | 92,317 |  
|                              |  |      |          |      |   |        |  

Advertising Costs  Advertising costs are
charged to expense as incurred.
Advertising costs were $101,000, $139,000, and $109,000, for the years
ended December 31, 2005, 2004, and 2003, respectively, and are included in
selling expenses in the consolidated statements of operations.

Research and Development Costs  Research
and development costs, net of customer funding amounted to $1.8 million, $1.6
million and $2.1 million in 2005, 2004 and 2003, respectively. Such costs are
charged to expense when incurred.

The following table sets forth development costs
associated with customer funding:

|                           |  |                           |          |      |   |          |   |   |          |  
|-------------------------- |  | ------------------------- | -------- | ---- | - | -------- | - | - | -------- | -
|                           |  | Year ended
  December 31, |         
|                           |  |                           |         
|                           |  | 2005                      |          | 2004 |   | 2003     |  
|                           |  |                           |          |      |   |          |  
|Total cost incurred        |  | $                         | 358,803  |      | $ | 435,000  |   | $ | 746,000  |  
|Amount funded by customers |  |                           | (182,711 | )    |   | (366,000 | ) |   | (469,000 | )
|                           |  |                           |          |      |   |          |   |   |          |  
|Net expense                |  | $                         | 176,092  |      | $ | 69,000   |   | $ | 277,000  |  
|                           |  |                           |          |      |   |          |   |   |          |  

Income (Loss) Per Share  Basic income
(loss) per share are computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding during the year. Diluted
income (loss) per common share reflect the potential dilution of securities
that could share in the earnings.

Comprehensive Income (Loss)  Comprehensive
income (loss) consists of net income (loss), foreign currency translation
adjustments, and minimum pension liability adjustments is presented in the
consolidated statements of shareholders equity and comprehensive income
(loss).

---



New Accounting Pronouncements

In December 2004, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123R,
Share-Based
Compensation, which supersedes Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services through share-based
payment transactions. SFAS No. 123R requires a public entity to measure the
cost of employee services received in exchange for the award of equity
investments based on the fair value of the award at the date of grant. The cost
will be recognized over the period during which an employee is required to
provide services in exchange for the award. SFAS No. 123R is effective as of
the first annual reporting period that begins after June 15, 2005. The impact
on net earnings as a result of the adoption of SFAS No. 123R, from a historical
perspective, can be found in Note 1 to the Consolidated Financial Statements of
this Annual Report. The Company will adopt SFAS No. 123R starting on January 1,
2006 as required.  Based on options
outstanding and unvested at December 31, 2005, we expect our future expense
related to stock options to be immaterial.

In November 2004, the FASB issued SFAS No. 151, Inventory
Costs, which amends the guidance in Accounting Research Bulletin
(ARB) No. 43, Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material. SFAS No. 151 requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of so
abnormal. In addition, SFAS No. 151 requires allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for fiscal years beginning
after June 15, 2005. The Company will adopt SFAS No. 151 starting on January 1,
2006 as required.  The Company does not
expect the adoption of SFAS No. 151 to have a material effect on its consolidated
financial statements.

In June 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20
and FASB Statement No. 3.  The statement
applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle.  SFAS No. 154 requires
retrospective application to prior periods financial statements of a voluntary
change in accounting principle unless it is impracticable.  SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005.  The statement does not change
the transition provisions of any existing accounting pronouncements, including
those that are in a transition phase as of the effective date of this
statement.  The Company does not expect
the adoption of SFAS No. 154 to have a material effect on its consolidated
financial statements.

2. RESTATEMENT OF FINANCIAL STATEMENTS

The Company restated its
consolidated financial statements for the years 2003 and 2004 (the
Restatement).  The determination to
restate these financial statements was made after errors were discovered in
May, 2005.  In addition, certain
disclosures in other notes to the Company consolidated financial statements
have been restated to reflect the Restatement adjustments.  In the Restatement, the Company has:

| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Corrected the accounting
  for certain research and development expenditures that were erroneously
  capitalized to the balance sheet by recording charges to the statement of
  operations.
| |   |                                                                                                                                                                                             
| |  | Reversed amortization
  expense related to the erroneously capitalized research and development
  expenditures.                                                                             
| |   |                                                                                                                                                                                             
| |  | Adjusted income tax
  reserves as a function of the impact on pre-tax income relating to the
  correction of accounting for certain research and development expenditures
  noted above.    

The Restatement narrative
below includes only the 2003 and 2004 audited amounts as well as the impact of
prior period Restatement amounts on beginning retained earnings at January 1,
2003.

The Restatement reduced the
Companys earnings before income taxes for 2002 and 2003 by $314,000 and
$98,000, respectively.  For 2004, the
Restatement increased our earnings before income taxes by $49,000.

The 2002 Restatement was
comprised of a $24,000 reduction in cost of sales to reverse amortization
expense and a $338,000 charge to research and development expense to reverse
capitalized research and development costs.
The 2003 Restatement was comprised of a $347,000 reduction in cost of
sales to reverse

---



amortization expense, a $37,000 charge to general and
administrative expense to reverse capitalized engineering support costs, and a
$408,000 charge to research and development expense to reverse capitalized
research and development costs. The 2004 Restatement was comprised of a
$193,000 reduction in cost of sales to reverse amortization expense, a
$15,000 charge to general and administrative expense to reverse capitalized
engineering support costs, and a $129,000 charge to research and development
expense to reverse capitalized research and development costs.

The impact of the Restatement
on the consolidated statements of operations for these periods is shown on the
accompanying table.  The quarterly
impact of the Restatement for 2003 and 2004 is presented in the note,
Supplementary Quarterly Data.

The Restatement decreased
beginning retained earnings for the year ended December 31, 2001 presented on
our consolidated statements of stockholders equity from $23,297,000 as
previously reported to $23,004,000 as restated.  This $293,000 decrease, net of tax of $127,000 represented the
cumulative impact of restating 2000 and 2001 for the accounting errors
described above.

The Restatement had no impact on historical cash balances.  For 2003 the Restatement decreased net cash
provided by operating activities by $418,000 with an offsetting reduction in
cash used in investing activities of $418,000.
For 2004 the Restatement decreased net cash provided by operating
activities by $118,000 with an offsetting reduction in cash used in investing
activities of $118,000.

---



The following tables present the effect of the
Restatement on the consolidated statements of operations (in thousands except
for per share data).

|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  
|------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------ | ---------- | - | -------- | - | - | ------ | -
|                                                                                                                    |  | For the
  Year Ending December 31, 2004 |       
|                                                                                                                    |  |                                         |       
|                                                                                                                    |  | As
  Presented                          |        | Adjustment |   | Restated |  
|                                                                                                                    |  |                                         |        |            |   |          |  
|                                                                                                                    |  |                                         |        |            |   |          |  
|Sales, net                                                                                                          |  | $                                       | 35,183 |            | $ |         |   | $ | 35,183 |  
|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  
|Cost of sales                                                                                                       |  |                                         | 27,314 |            |   | (193     | ) |   | 27,121 |  
|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  
|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  
|Gross profit                                                                                                        |  |                                         | 7,869  |            |   | 193      |   |   | 8,062  |  
|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  
|Operating expenses:                                                                                                 |  |                                         |        |            |   |          |   |   |        |  
|Selling expense                                                                                                     |  |                                         | 3,934  |            |   |         |   |   | 3,934  |  
|General and administrative expense                                                                                  |  |                                         | 5,482  |            |   | 15       |   |   | 5,497  |  
|Impairment of long term assets                                                                                      |  |                                         | 488    |            |   |         |   |   | 488    |  
|Research and development expense                                                                                    |  |                                         | 1,487  |            |   | 129      |   |   | 1,616  |  
|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  
|Total operating expenses                                                                                            |  |                                         | 11,391 |            |   | 144      |   |   | 11,535 |  
|                                                                                                                    |  |                                         |       
|Gain on sale of asset                                                                                               |  |                                         | 3,110  |            |   |         |   |   | 3,110  |  
|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  
|Operating loss                                                                                                      |  |                                         | (412   | )          |   | 49       |   |   | (363   | )
|                                                                                                                    |  |                                         |       
|Interest expense                                                                                                    |  |                                         | (465   | )          |   |         |   |   | (465   | )
|Interest income                                                                                                     |  |                                         | 2      |            |   |         |   |   | 2      |  
|Other (income) expense, net                                                                                         |  |                                         | (61    | )          |   |         |   |   | (61    | )
|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  
|Loss from
  continuing operations before income taxes, discontinued operations and change
  in accounting principle |  |                                         | (814   | )          |   | 49       |   |   | (765   | )
|Income tax
  expense                                                                                                |  |                                         | 1,144  |            |   | (4       | ) |   | 1,140  |  
|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  
|Loss from
  continuing operations before discontinued operations and change in accounting
  principle               |  |                                         | (1,958 | )          |   | 53       |   |   | (1,905 | )
|Income from
  discontinued operations, net of income taxes                                                          |  |                                         | 1,369  |            |   |         |   |   | 1,369  |  
|Extraordinary
  gain from discontinued operations                                                                   |  |                                         | 684    |            |   |         |   |   | 684    |  
|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  
|Net income
  (loss)                                                                                                 |  | $                                       | 95     |            | $ | 53       |   | $ | 148    |  
|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  
|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  
|Basic earnings
  (loss) per share:                                                                                  |  |                                         |        |            |   |          |   |   |        |  
|Continuing
  operations                                                                                             |  | $                                       | (.38   | )          | $ | .01      |   | $ | (.37   | )
|Discontinued
  operations                                                                                           |  |                                         | .27    |            |   |         |   |   | .27    |  
|Extraordinary
  gain from discontinued operations                                                                   |  |                                         | .13    |            |   |         |   |   | .13    |  
|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  
|Net income
  (loss)                                                                                                 |  | $                                       | .02    |            | $ | .01      |   | $ | .03    |  
|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  
|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  
|Diluted income
  (loss) per share:                                                                                  |  |                                         |        |            |   |          |   |   |        |  
|Continuing
  operations                                                                                             |  | $                                       | (.38   | )          | $ | .01      |   | $ | (.37   | )
|Discontinued
  operations                                                                                           |  |                                         | .27    |            |   |         |   |   | .27    |  
|Extraordinary
  gain from discontinued operations                                                                   |  |                                         | .13    |            |   |         |   |   | .13    |  
|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  
|Net income
  (loss)                                                                                                 |  | $                                       | .02    |            | $ | .01      |   | $ | .03    |  
|                                                                                                                    |  |                                         |        |            |   |          |   |   |        |  

---



|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ---------- | - | -------- | - | - | ------ | -
|                                                                                  |  | For the Year Ending December 31, 2003 |       
|                                                                                  |  |                                       |       
|                                                                                  |  | As Presented                          |        | Adjustment |   | Restated |  
|                                                                                  |  |                                       |        |            |   |          |  
|                                                                                  |  |                                       |        |            |   |          |  
|Sales, net                                                                        |  | $                                     | 36,202 |            | $ |         |   | $ | 36,202 |  
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|Cost of sales                                                                     |  |                                       | 27,985 |            |   | (347     | ) |   | 27,638 |  
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|Gross profit                                                                      |  |                                       | 8,217  |            |   | 347      |   |   | 8,564  |  
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|Operating expenses:                                                               |  |                                       |        |            |   |          |   |   |        |  
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|Selling expense                                                                   |  |                                       | 3,649  |            |   |         |   |   | 3,649  |  
|General and administrative expense                                                |  |                                       | 5,222  |            |   | 37       |   |   | 5,259  |  
|Impairment of long term assets                                                    |  |                                       | 379    |            |   |         |   |   | 379    |  
|Research and development expense                                                  |  |                                       | 1,763  |            |   | 408      |   |   | 2,171  |  
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|Total operating expenses                                                          |  |                                       | 11,013 |            |   | 445      |   |   | 11,458 |  
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|Operating loss                                                                    |  |                                       | (2,796 | )          |   | (97      | ) |   | (2,893 | )
|Interest expense                                                                  |  |                                       | (533   | )          |   |         |   |   | (533   | )
|Interest income                                                                   |  |                                       | 8      |            |   |         |   |   | 8      |  
|Other (income) expense, net                                                       |  |                                       | 129    |            |   |         |   |   | 129    |  
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|Loss from
  continuing operations before income taxes and discontinued operations |  |                                       | (3,450 | )          |   | (97      | ) |   | (3,547 | )
|Income tax expense (benefit)                                                      |  |                                       | 511    |            |   | (26      | ) |   | 485    |  
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|Loss from
  continuing operations before discontinued operations                  |  |                                       | (3,961 | )          |   | (71      | ) |   | (4,032 | )
|Loss from
  discontinued operations, net of income taxes                          |  |                                       | (1,013 | )          |   |         |   |   | (1,013 | )
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|Net income
  (loss)                                                               |  | $                                     | (4,974 | )          | $ | (71      | ) | $ | (5,045 | )
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|Basic earnings
  (loss) per share:                                                |  |                                       |        |            |   |          |   |   |        |  
|Continuing
  operations                                                           |  | $                                     | (.77   | )          | $ | (.01     | ) | $ | (.78   | )
|Discontinued
  operations                                                         |  |                                       | (.20   | )          |   |         |   |   | (.20   | )
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|Net income
  (loss)                                                               |  | $                                     | (.97   | )          | $ | (.01     | ) | $ | (.98   | )
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|Diluted income
  (loss) per share:                                                |  |                                       |        |            |   |          |   |   |        |  
|Continuing
  operations                                                           |  | $                                     | (.77   | )          | $ | (.01     | ) | $ | (.78   | )
|Discontinued
  operations                                                         |  |                                       | (.20   | )          |   |         |   |   | (.20   | )
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  
|Net income
  (loss)                                                               |  | $                                     | (.97   | )          | $ | (.01     | ) | $ | (.98   | )
|                                                                                  |  |                                       |        |            |   |          |   |   |        |  

---



The following tables present the effect of the
Restatement on the consolidated balance sheet for December 31, 2004 (in
thousands).

|                                           |  |                   |         |            |   |          |   |   |         |  
|------------------------------------------ |  | ----------------- | ------- | ---------- | - | -------- | - | - | ------- | -
|                                           |  | December 31, 2004 |        
|                                           |  |                   |        
|                                           |  | As Presented      |         | Adjustment |   | Restated |  
|                                           |  |                   |         |            |   |          |  
|Assets                                     |  |                   |         |            |   |          |   |   |         |  
|Cash                                       |  | $                 | 246     |            |   |         |   | $ | 246     |  
|Restricted cash                            |  |                   | 450     |            |   |         |   |   | 450     |  
|Accounts receivable                        |  |                   | 4,997   |            |   |         |   |   | 4,997   |  
|Inventories                                |  |                   | 4,288   |            |   |         |   |   | 4,288   |  
|Refundable income tax                      |  |                   |        |            |   | 46       |   |   | 46      |  
|Other current assets                       |  |                   | 379     |            |   |         |   |   | 379     |  
|Assets of discontinued operations          |  |                   | 6,834   |            |   |         |   |   | 6,834   |  
|                                           |  |                   |         |            |   |          |   |   |         |  
|Total current
  assets                     |  |                   | 17,194  |            |   | 46       |   |   | 17,240  |  
|                                           |  |                   |         |            |   |          |   |   |         |  
|Property, plant and equipment              |  |                   |         |            |   |          |   |   |         |  
|Land                                       |  |                   | 171     |            |   |         |   |   | 171     |  
|Buildings and
  improvements               |  |                   | 1,733   |            |   |         |   |   | 1,733   |  
|Machinery and
  equipment                  |  |                   | 26,498  |            |   | (863     | ) |   | 25,635  |  
|                                           |  |                   |         |            |   |          |   |   |         |  
|                                           |  |                   | 28,402  |            |   | (863     | ) |   | 27,539  |  
|Less accumulated depreciation              |  |                   | (20,402 | )          |   | 141      |   |   | (20,261 | )
|                                           |  |                   |         |            |   |          |   |   |         |  
|Net property,
  plant and equipment        |  |                   | 8,000   |            |   | (722     | ) |   | 7,278   |  
|                                           |  |                   |         |            |   |          |   |   |         |  
|Goodwill                                   |  |                   | 5,265   |            |   |         |   |   | 5,265   |  
|Other assets, net                          |  |                   | 1,261   |            |   | (104     | ) |   | 1,156   |  
|                                           |  |                   |         |            |   |          |   |   |         |  
|                                           |  |                   |         |            |   |          |   |   |         |  
|Total assets                               |  | $                 | 31,720  |            | $ | (781     | ) | $ | 30,939  |  
|                                           |  |                   |         |            |   |          |   |   |         |  
|                                           |  |                   |         |            |   |          |   |   |         |  
|Liabilities and
  Shareholders Equity     |  |                   |         |            |   |          |   |   |         |  
|Current liabilities                        |  |                   |         |            |   |          |   |   |         |  
|Notes Payable                              |  | $                 | 3,740   |            |   |         |   | $ | 3,740   |  
|Checks written in excess of cash           |  |                   | 665     |            |   |         |   |   | 665     |  
|Current maturities of long-term debt       |  |                   | 1,458   |            |   |         |   |   | 1,458   |  
|Accounts payable                           |  |                   | 2,212   |            |   |         |   |   | 2,212   |  
|Federal, state and foreign income taxes    |  |                   | 179     |            |   | (179     | ) |   |        |  
|Customers advance payments on contracts   |  |                   | 75      |            |   |         |   |   | 75      |  
|Liabilities of discontinued operations     |  |                   | 4,267   |            |   |         |   |   | 4,267   |  
|Other accrued liabilities                  |  |                   | 2,639   |            |   |         |   |   | 2,639   |  
|                                           |  |                   |         |            |   |          |   |   |         |  
|Total current
  liabilities                |  |                   | 15,235  |            |   | (179     | ) |   | 15,056  |  
|                                           |  |                   |         |            |   |          |   |   |         |  
|Other post-retirement benefit obligations  |  |                   | 2,710   |            |   |         |   |   | 2,710   |  
|Deferred income taxes                      |  |                   | 144     |            |   |         |   |   | 144     |  
|Accrued pension liability                  |  |                   | 901     |            |   |         |   |   | 901     |  
|                                           |  |                   |         |            |   |          |   |   |         |  
|Shareholders equity                       |  |                   |         |            |   |          |   |   |         |  
|Common shares                              |  |                   | 5,645   |            |   |         |   |   | 5,645   |  
|Additional paid-in capital                 |  |                   | 12,026  |            |   |         |   |   | 12,026  |  
|Accumulated deficit                        |  |                   | (3,136  | )          |   | (545     | ) |   | (3,681  | )
|Accumulated other comprehensive loss       |  |                   | (540    | )          |   | (57      | ) |   | (597    | )
|                                           |  |                   |         |            |   |          |   |   |         |  
|                                           |  |                   | 13,995  |            |   | (602     | ) |   | 13,393  |  
|                                           |  |                   |         |            |   |          |   |   |         |  
|Less: treasury stock                       |  |                   | (1,265  | )          |   |         |   |   | (1,265  | )
|                                           |  |                   |         |            |   |          |   |   |         |  
|Total shareholders equity                 |  |                   | 12,730  |            |   | (602     | ) |   | 12,128  |  
|                                           |  |                   |         |            |   |          |   |   |         |  
|Total liabilities and shareholders equity |  | $                 | 31,720  |            | $ | (781     | ) | $ | 30,939  |  
|                                           |  |                   |         |            |   |          |   |   |         |  

---



3. DISCONTINUED OPERATIONS

The Company has embarked on a strategy to focus on its
Precision Miniature Medical and Electronics Products markets for future growth.

Consistent with this strategy, the Company completed
its planned sale of its Tire Holders, Lifts and Related Products segment in July
of 2003. This segment consisted of one wholly owned subsidiary, Deuer
Manufacturing, Inc. (Deuer) that operated on a stand alone basis. The net
purchase price of $6.6 million was determined by negotiations between the
parties. The Company recognized a gain of approximately $1.5 million, net of
tax, on the transaction. Proceeds from the transaction were used primarily to
reduce the Companys outstanding bank debt. The Company accounted for the plan
to sell the subsidiary as a discontinued operation beginning in 2002.

The following table shows the results of operations of
Deuer:

|                                           |  |                |       |   |  | 
|------------------------------------------ |  | -------------- | ----- | - |  | 
|Year  ended December
  31,                 |  |                | 2003  |  
|                                           |  |                |       |  
|                                           |  | (in thousands) |      
|Sales, net                                 |  | $              | 8,522 |  
|Operating costs and expenses               |  |                | 8,520 |  
|                                           |  |                |       |  
|Operating income                           |  |                | 2     |  
|Other income, net (including gain on sale) |  |                | 1,491 |  
|                                           |  |                |       |  
|Income before income taxes                 |  |                | 1,493 |  
|Income tax benefit                         |  |                | (6    | )
|                                           |  |                |       |  
|                                           |  |                |       |  
|Net income from discontinued operations    |  | $              | 1,499 |  
|                                           |  |                |       |  

The Companys Heat Technology segment consisted of
three components: a primary custom-engineered furnace business, a small furnace
business, and a burners and components business.

Primary Custom-Engineered
Furnace Business  In the fourth quarter of 2002, the Company
disposed of the assets held by Selas SAS (Paris, France), together with the
stock of its subsidiary, Selas U.K. (Derbyshire, United Kingdom). These
subsidiaries formed the Companys large custom-engineered furnaces division
used primarily in the steel and glass industries worldwide. The furnaces
designed by this division were custom-engineered to meet customer specific
requirements. The purchase price was approximately $645,000 above the net asset
value at the time of sale, and the $645,000 was paid at closing in 2002. The
buyer assumed the underlying liabilities. In addition, the purchaser acquired a
receivable of $1.5 million (1,290,000) representing 85 percent of a receivable
due on a completed construction contract.
The Company agreed to repurchase that portion of the receivable that was
not collected by May 2003. During 2003, the following was determined:

|  |                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|- | Liabilities assumed by the buyer exceeded assets by
  approximately $548,000;                                                                        
|- | Selas SAS collected approximately $489,000 from
  assets sold to the buyer, but did not remit these funds to the buyer prior to
  its insolvency; and
|- | Selas SAS collected $350,000 on the receivable
  assumed by the purchaser, but did not remit the funds to the buyer prior to
  insolvency.           

As a result of these events, including the insolvency
of the Companys French subsidiary, the Company agreed to a settlement with the
buyer pursuant to which the Company agreed to pay approximately $2,540,000
(2,180,000) to the buyer, payable in an initial installment of $466,000
(400,000) plus monthly installment of approximately $125,000 per month (100,000).
The December 31, 2003, balance sheet reflected a net outstanding liability of
$796,000 related to the above matter. The Company paid this liability in 2004,
and the receivable on the aforementioned construction contract has been
collected.  As of December 31, 2005, no
additional liability related to this matter exists.

Small Furnace Business  In July 2003, the Companys
subsidiary Selas SAS, filed insolvency in France and is under the control of a
French insolvency court administrator.
Selas SAS and its subsidiaries constituted the Companys small furnace
business. Because Selas SAS and its
subsidiaries are no longer under the control of the Company, their results of
operations are excluded from the continuing operations and the historical financial
information has been reclassified to reflect these subsidiaries as discontinued
operations

---



Burners and Components
Business  In 2003, the Company initiated its plan to sell
the remainder of its Heat Technology segment and has classified it as a discontinued
operation. This segment consisted of the operating assets of Selas Corporation
of America located in Dresher, Pennsylvania, Nippon Selas located in Tokyo,
Japan and Selas Waermetechnik in Ratingen, Germany.  In the third quarter of 2004, Selas Corporation of America
reacquired Selas Waermetechnik GmbH, which was previously part of Selas SAS.
Selas SAS filed insolvency in August of 2003 (Note 4).  The Company recorded an extraordinary gain
of approximately $684,000 on the reacquisition of Selas Waermetechnik, GmbH
(Note 4). In the first quarter of 2005, the Company sold the remainder of its
Heat Technology segment. The total purchase price was approximately $3.5
million, subject to adjustment, of which approximately $2.7 million was paid in
cash and $800,000 was paid in the form of a unsecured subordinated promissory
note.  The note is payable in twelve
quarterly installments commencing on April 1, 2006 and bears 8 percent per
annum on the outstanding principal balance.
The Company has set-up an allowance for the note of $296,000.

The following table shows the results of operations of
the Companys Heat Technology segment:

|                                                                           |  |                           |       |      |   |       |   |   |        |  
|-------------------------------------------------------------------------- |  | ------------------------- | ----- | ---- | - | ----- | - | - | ------ | -
|                                                                           |  | Year ended
  December 31, |      
|                                                                           |  |                           |      
|                                                                           |  | 2005                      |       | 2004 |   | 2003  |  
|                                                                           |  |                           |       |      |   |       |  
|                                                                           |  | (in thousands)            |      
|Sales, net                                                                 |  | $                         | 2,128 |      | $ | 9,732 |   | $ | 18,370 |  
|Operating costs and expenses                                               |  |                           | 1,648 |      |   | 8,263 |   |   | 19,154 |  
|                                                                           |  |                           |       |      |   |       |   |   |        |  
|Operating income (loss)                                                    |  |                           | 480   |      |   | 1,469 |   |   | (784   | )
|Other expense, net (including loss on abandonment)                         |  |                           | 218   |      |   | (10   | ) |   | (3,054 | )
|                                                                           |  |                           |       |      |   |       |   |   |        |  
|Income (loss) from operations before income tax
  (benefit)                |  |                           | 698   |      |   | 1,459 |   |   | (3,838 | )
|Income tax expense (benefit)                                               |  |                           | (69   | )    |   | 90    |   |   | (1,326 | )
|                                                                           |  |                           |       |      |   |       |   |   |        |  
|Net income (loss) from discontinued operations
  before extraordinary gain |  |                           | 767   |      |   | 1,369 |   |   | (2,512 | )
|Extraordinary gain                                                         |  |                           |      |      |   | 684   |   |   |       |  
|                                                                           |  |                           |       |      |   |       |   |   |        |  
|Net income (loss) from discontinued operations                             |  | $                         | 767   |      | $ | 2,053 |   | $ | (2,512 | )
|                                                                           |  |                           |       |      |   |       |   |   |        |  

The following table shows the component assets and
liabilities of the Heat Technology business segment:

|                                  |  |                        |   |      |   |       | 
|--------------------------------- |  | ---------------------- | - | ---- | - | ----- | 
|                                  |  | December
  31,         |  
|                                  |  |                        |  
|                                  |  | 2005                   |   | 2004 |  
|                                  |  |                        |   |      |  
|                                  |  | (dollars in thousands) |  
|Current assets                    |  | $                      |  |      | $ | 6,479 | 
|Property plant and equipment, net |  |                        |  |      |   | 216   | 
|Other assets                      |  |                        |  |      |   | 139   | 
|                                  |  |                        |   |      |   |       | 
|Total assets                      |  | $                      |  |      | $ | 6,834 | 
|                                  |  |                        |   |      |   |       | 
|                                  |  |                        |   |      |   |       | 
|Current liabilities               |  | $                      |  |      | $ | 2,422 | 
|Other liabilities                 |  |                        |  |      |   | 1,845 | 
|                                  |  |                        |   |      |   |       | 
|Total
  liabilities               |  | $                      |  |      | $ | 4,267 | 
|                                  |  |                        |   |      |   |       | 

Certain notes to these consolidated financial
statements have been restated to reflect the Companys presentation of what
constitutes its discontinued operations.

4. ACQUISITIONS

In the third quarter of 2004, the Company reacquired
Selas Wärmetechnik GmbH, which was previously part of Selas SAS. Selas SAS
filed insolvency in August of 2003. Since that time Selas Wäermetechnik GmbH
was under the control of a French court administrator. The Company owned the
rights to the Selas name and the technology for the European market. This
enabled the Company to reacquire the subsidiary for the minimal amount of
$10,500 and record an extraordinary gain within discontinued operations of
approximately $684,000 on the acquisition. The components of the gain are
illustrated in the following table.

---



|                                         |  |   |           |  
|---------------------------------------- |  | - | --------- | -
|Fair market value of assets acquired     |  | $ | 1,060,666 |  
|Fair market value of liabilities assumed |  |   | (366,528  | )
|                                         |  |   |           |  
|Net fair market value acquired           |  |   | 694,138   |  
|Purchase price                           |  |   | 10,508    |  
|                                         |  |   |           |  
|Gain on acquisition                      |  | $ | 683,630   |  
|                                         |  |   |           |  

The Company sold the subsidiary during the first
quarter of 2005, as part of its Burners and Components business; therefore it
has classified the segment as a discontinued operation and, accordingly, has
reclassified the historical data.

On October 6, 2005, our subsidiary, RTI Electronics,
Inc., acquired the assets of Amecon Inc. Amecon is primarily engaged in the
research, development, manufacture, marketing and sale of toroidal power and
low voltage instrument transformers, current sense transformers and filter
inductors, magnetic amplifiers, AC/DC load sensors.  The purchase price for the assets was $1,241,000 (after
adjustment pursuant to the asset purchase agreement) and required a $10,000
initial deposit and $240,000 payment made at the time of closing.  The unpaid balance of $862,000 at December
31, 2005 will be paid in four equal annual installments beginning on October 6,
2006. The unpaid balance is unsecured and bears interest at an annual rate of
5%, which shall be payable annually with each principal payment.   The assets acquired included $273,000 of
inventory, $478,000 of fixed assets and $490,000 of goodwill based on fair
value at the date of purchase.  The
goodwill is deductible for tax purposes.
The Company accounted for Amecon Inc., using the purchase method of
accounting which requires that the assets acquired and any liabilities assumed
to be recorded at the date of acquisition at their respective fair values.  The consolidated financial statements and
results of operations reflect Amecon Inc. after the acquisition and are not
restated.  The cost to acquire the
business was allocated to the underlying assets acquired.  The acquisition expands the microminiature
business of the Company with manufacturing of toroidal power and low voltage
instrument transformers, current sense transformers and filter inductor,
magnetic amplifiers, AD/DC load sensors.
The excess of the purchase price over identifiable assets was recorded
as goodwill.  The pro forma results of
operations as if the Amecon Inc. purchase occurred on January 1, 2003 are not
material.

5. GEOGRAPHIC
INFORMATION

The geographical distribution of long-lived assets and
net sales to geographical areas for the years ended December 31, 2005, 2004 and
2003 are set forth below:

Long-lived
Assets

|              |  |      |            |                 |   |                 |  |   |            | 
|------------- |  | ---- | ---------- | --------------- | - | --------------- |  | - | ---------- | 
|              |  | 2005 |            | 2004
  Restated |   | 2003
  Restated | 
|              |  |      |            |                 |   |                 | 
|              |  |      |            |                 |   |                 |  |   |            | 
|United States |  | $    | 12,075,118 |                 | $ | 13,041,036      |  | $ | 14,624,054 | 
|Other         |  |      | 550,516    |                 |   | 658,072         |  |   | 679,248    | 
|              |  |      |            |                 |   |                 |  |   |            | 
|              |  |      |            |                 |   |                 |  |   |            | 
|Consolidated  |  | $    | 12,625,634 |                 | $ | 13,699,108      |  | $ | 15,303,302 | 
|              |  |      |            |                 |   |                 |  |   |            | 

Long-lived assets consist primarily of property and
equipment, goodwill and other intangibles. The Company capitalizes long-lived
assets pertaining to the production of specialized parts. These assets are
periodically reviewed to assure the net realizable value from the estimated
future production based on forecasted sales exceeds the carrying value of the
assets. In 2004, the Company recorded an impairment from abandonment of
long-term assets of $488,000 based on analysis of future cash flows; in 2003,
an impairment from abandonment of long-term assets of $379,000 was recorded.

---



|                                  |  |      |            |      |   |            |  |   |            | 
|--------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ---------- | 
|Net
  Sales to Geographical Areas |  |      |            |      |   |            |  |   |            | 
|                                  |  |      |            |      |   |            |  |   |            | 
|                                  |  | 2005 |            | 2004 |   | 2003       | 
|                                  |  |      |            |      |   |            | 
|                                  |  |      |            |      |   |            | 
|United States                     |  | $    | 30,550,130 |      | $ | 23,016,596 |  | $ | 23,114,839 | 
|Germany                           |  |      | 3,338,149  |      |   | 2,299,733  |  |   | 1,921,226  | 
|Japan                             |  |      | 1,502,430  |      |   | 2,045,673  |  |   | 2,180,837  | 
|China                             |  |      | 1,310,064  |      |   | 1,332,322  |  |   | 694,265    | 
|Singapore                         |  |      | 1,294,019  |      |   | 1,225,414  |  |   | 1,735,565  | 
|Switzerland                       |  |      | 1,157,116  |      |   | 886,183    |  |   | 834,585    | 
|Canada                            |  |      | 835,732    |      |   | 862,588    |  |   | 1,684,001  | 
|United Kingdom                    |  |      | 793,079    |      |   | 862,314    |  |   | 854,302    | 
|Hong Kong                         |  |      | 427,287    |      |   | 643,628    |  |   | 546,602    | 
|France                            |  |      | 259,790    |      |   | 201,369    |  |   | 149,000    | 
|All other countries               |  |      | 2,987,455  |      |   | 1,806,792  |  |   | 2,485,942  | 
|                                  |  |      |            |      |   |            |  |   |            | 
|                                  |  |      |            |      |   |            |  |   |            | 
|Consolidated                      |  | $    | 44,455,251 |      | $ | 35,182,612 |  | $ | 36,201,164 | 
|                                  |  |      |            |      |   |            |  |   |            | 

Geographic net sales are allocated based on the
location of the customer. All other countries include net sales primarily to
various countries in Europe and in the Asian Pacific.

In 2005 and 2004 no one customer accounted for more
than 10 percent of the Companys consolidated net sales.  During 2005 the top five customers accounted
for approximately $15 million or 35 percent of the Companys consolidated net
sales. During 2004 the top five customers accounted for approximately $12
million or 34 percent of the Companys consolidated net sales. In 2003, Sonic
Innovations, one of the Companys hearing-health customers accounted for $4.5
million or 12.4 percent of the Companys consolidated net sales.

In 2005 one customer accounted for 20 percent of the
Companys consolidated accounts receivable.
In 2004 no one customer accounted for more than 10 percent of the
Companys consolidated accounts receivable.

6. GOODWILL

The Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, which sets forth new financial and reporting standards for
the acquisition of intangible assets, other than those acquired in a business
combination, and for goodwill and other intangible assets subsequent to their
acquisition. This accounting standard requires that goodwill no longer be
amortized but tested for impairment on a periodic basis.

In conjunction with the acquisition of Amecon Inc., on
October 6, 2005 approximately $490,000 of goodwill was recognized.

The Company performed the required goodwill impairment
test during the years ended December 31, 2005, 2004, and 2003.  As part of compliance with this standard,
the Company obtained an independent appraisal to assess the fair value of its
business units to determine whether goodwill carried on its books was impaired
and the extent of such impairment, if any for the years ended December 31,
2005, 2004, and 2003.  For each year,
the independent appraisal used the discounted future returns method; future
benefits over a period of time are estimated and then discounted back to
present value.  Based upon this
independent appraisal, the Company determined that its current goodwill
balances were not impaired as of December 31, 2005 and 2004.

---



7. INVENTORIES

Inventories consisted of the following:

|               |  |                  |           |                   |   |                                      |  |       |           |  |   |           | 
|-------------- |  | ---------------- | --------- | ----------------- | - | ------------------------------------ |  | ----- | --------- |  | - | --------- | 
|               |  | Raw 
  materials |           | Work-in
  process |   | Finished
  products and
  components |  | Total |          
|               |  |                  |           |                   |   |                                      |  |       |          
|               |  |                  |           |                   |   |                                      |  |       |          
|December
  31, |  |                  |           |                   |   |                                      |  |       |           |  |   |           | 
|               |  |                  |           |                   |   |                                      |  |       |           |  |   |           | 
|2005           |  |                  |           |                   |   |                                      |  |       |           |  |   |           | 
|Domestic       |  | $                | 2,854,064 |                   | $ | 1,103,986                            |  | $     | 1,130,021 |  | $ | 5,088,071 | 
|Foreign        |  |                  | 1,094,266 |                   |   | 662,167                              |  |       | 105,739   |  |   | 1,862,172 | 
|               |  |                  |           |                   |   |                                      |  |       |           |  |   |           | 
|               |  |                  |           |                   |   |                                      |  |       |           |  |   |           | 
|Total          |  | $                | 3,948,330 |                   | $ | 1,766,153                            |  | $     | 1,235,760 |  | $ | 6,950,243 | 
|               |  |                  |           |                   |   |                                      |  |       |           |  |   |           | 
|               |  |                  |           |                   |   |                                      |  |       |           |  |   |           | 
|2004           |  |                  |           |                   |   |                                      |  |       |           |  |   |           | 
|Domestic       |  | $                | 1,635,079 |                   | $ | 668,059                              |  | $     | 863,320   |  | $ | 3,166,458 | 
|Foreign        |  |                  | 605,115   |                   |   | 340,647                              |  |       | 175,423   |  |   | 1,121,185 | 
|               |  |                  |           |                   |   |                                      |  |       |           |  |   |           | 
|               |  |                  |           |                   |   |                                      |  |       |           |  |   |           | 
|Total          |  | $                | 2,240,194 |                   | $ | 1,008,706                            |  | $     | 1,038,743 |  | $ | 4,287,643 | 
|               |  |                  |           |                   |   |                                      |  |       |           |  |   |           | 
|               |  |                  |           |                   |   |                                      |  |       |           |  |   |           | 

8. Short and Long-Term Debt

Short and long-term debt at December 31, 2005 and 2004
were as follows:

|                                                  |  |      |           |      |   |            |  
|------------------------------------------------- |  | ---- | --------- | ---- | - | ---------- | -
|                                                  |  | 2005 |           | 2004 |  
|                                                  |  |      |           |      |  
|                                                  |  |      |           |      |  
|Domestic
  Asset-Based Revolving Credit Facility  |  | $    | 3,753,597 |      | $ | 3,171,447  |  
|Foreign
  Overdraft and Letter of Credit Facility |  |      | 764,825   |      |   | 568,946    |  
|Domestic Term
  Loans (Real Estate Based in 2005) |  |      | 1,450,146 |      |   | 1,458,470  |  
|Domestic Capital
  Equipment Leases               |  |      | 239,144   |      |   |           |  
|                                                  |  |      |           |      |   |            |  
|Total Long Term
  Debt                            |  |      | 6,207,712 |      |   | 5,198,863  |  
|                                                  |  |      |           |      |   |            |  
|Less: Current
  maturities                        |  |      | (888,531  | )    |   | (5,198,863 | )
|                                                  |  |      |           |      |   |            |  
|                                                  |  |      |           |      |   |            |  
|Total Long Term
  Debt                            |  | $    | 5,319,181 |      | $ |           |  
|                                                  |  |      |           |      |   |            |  

|                                                |  |                          |         |      |   |         |  |      |           |      |   |            |  |       |        |  |   |   |  |   |           | 
|----------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- |  | ---- | --------- | ---- | - | ---------- |  | ----- | ------ |  | - | - |  | - | --------- | 
|                                                |  | Payments
  Due by Period |         |      |   |         |  |      |          
|                                                |  |                          |         |      |   |         |  |      |          
|                                                |  | 2006                     |         | 2007 |   | 2008    |  | 2009 |           | 2010 |   | Thereafter |  | Total |       
|                                                |  |                          |         |      |   |         |  |      |           |      |   |            |  |       |       
|                                                |  |                          |         |      |   |         |  |      |           |      |   |            |  |       |        |  |   |   |  |   |           | 
|Domestic credit facility                        |  | $                        |        |      | $ |        |  | $    | 3,753,597 |      | $ |           |  | $     |       |  | $ |  |  | $ | 3,753,597 | 
|Domestic term loans                             |  |                          | 123,417 |      |   | 123,417 |  |      | 1,203,312 |      |   |           |  |       |       |  |   |  |  |   | 1,450,146 | 
|Foreign overdraft and letter of credit facility |  |                          | 695,021 |      |   | 41,235  |  |      | 28,569    |      |   |           |  |       |       |  |   |  |  |   | 764,825   | 
|Capital leases                                  |  |                          | 70,093  |      |   | 74,985  |  |      | 41,878    |      |   | 41,343     |  |       | 10,845 |  |   |  |  |   | 239,144   | 
|                                                |  |                          |         |      |   |         |  |      |           |      |   |            |  |       |        |  |   |   |  |   |           | 
|                                                |  |                          |         |      |   |         |  |      |           |      |   |            |  |       |        |  |   |   |  |   |           | 
|Total long-term debt                            |  | $                        | 888,531 |      | $ | 239,637 |  | $    | 5,027,356 |      | $ | 41,343     |  | $     | 10,845 |  | $ |  |  | $ | 6,207,712 | 
|                                                |  |                          |         |      |   |         |  |      |           |      |   |            |  |       |        |  |   |   |  |   |           | 

The Company has a series of loan facilities available including a
$5,500,000 domestic asset-based revolving credit facility supported by a
borrowing base, to mature on August 31, 2008 with annual interest computed at
the greater of 5.25%, or 0.5% over prime (8.0% as of December 31, 2005).  The Company also has a $1,500,000 domestic
real estate term loan supported by the Companys Vadnais Heights, MN
manufacturing facility, amortized on a 12-year schedule, to mature on August
31, 2008 with annual interest computed at the greater of 5.25%, or 0.75% over
prime (8.25% as of December 31, 2005).
The Company also has an unutilized $1,000,000 domestic equipment term
loan which is collateralized by the assets.
The loan is amortized on a

---



five-year
schedule, to mature on August 31, 2008 with annual interest computed at the
greater of 5.25%, or 0.75% over prime. The domestic asset-based revolving
facility carries a commitment fee of 0.25% per annum, payable on the unborrowed
portion of the line. Additionally, the entire package of credit lines carries
with it an annual fee of $27,500 due on August 31, 2006, 2007, and 2008.

The $8,000,000
domestic program ($5,500,000 revolver, $1,500,000 real estate, and $1,000,000
equipment line) also provides for one-, three- and six-month London Interbank
Offered Rate (LIBOR) interest rate options at the applicable LIBOR rate plus
3.25% for the revolver, or 3.50% for the term loans.

In addition to
the Companys domestic facilities, the Companys operation in Singapore
maintains an overdraft and letter of credit facility. The facility is secured
and with annual interest computed at approximately 6.5 percent. As of December
31, 2005, the overdraft and letter of credit facility has an outstanding
balance of $764,825.

At December
31, 2005 the Company was in compliance with all terms and covenants of the
agreements in all of its credit facilities. The outstanding balance of the
revolving credit facilities was $3,753,597 and $3,171,447 at December 31, 2005
and 2004, respectively.

The terms of
the domestic loan agreements require monthly interest payments on the revolving
line with a balloon payment due at the end of the loan, and monthly interest
and principal payments on the real estate and equipment lines consistent with
their respective 12-year and five-year amortization periods.

The Companys
ability to pay the principal and interest on its indebtedness as it comes due
will depend upon its current and future performance. The Companys performance
is affected by general economic conditions and by financial, competitive,
political, business and other factors. Many of these factors are beyond our
control.

The Company
believes that funds expected to be generated from operations, the available
borrowing capacity through our revolving credit loan facilities, and the
control of capital spending will be sufficient to meet its anticipated cash
requirements for operating needs through April 2007. If, however, the Company
does not generate sufficient cash from operations, or if it incurs additional
unanticipated liabilities, the Company may be required to seek additional
financing or sell equity on terms which may not be as favorable as it could
have otherwise obtained. No assurance can be given that any refinancing, additional
borrowing or sale of equity will be possible when needed or that the Company
will be able to negotiate acceptable terms. In addition, the Companys access
to capital is affected by prevailing conditions in the financial and equity
capital markets, as well as its own financial condition. While management
believes that the Company will meet its liquidity needs through April 2007, no
assurance can be given that the Company will be able to do so.

During 2005,
the Company entered into several capital lease agreements to fund the
acquisition of machinery and equipment. The total principal amount of these
leases is $314,000 with an effective interest rates ranging from 6.7 to 8.0
percent. These agreements range from 3 to 5 years. The outstanding balance at
December 31, 2005 was $239,000.

Credit Facilities

On August 31, 2005, the
Companys wholly-owned subsidiaries Resistance Technology, Inc. and RTI
Electronics, Inc. (the Borrowers) entered into a senior secured credit
agreement with Diversified Business Credit, Inc. (the Agreement), and related
Term Loan Supplement (Real Estate) and Term Loan Supplement (Equipment). In
connection with the Agreement, on August 31, 2005, the Company also entered
into a security agreement and a guaranty by corporation with Diversified
Business Credit, Inc. whereby the Company guaranteed the full amount that the
Borrowers may owe Diversified Business Credit, Inc. Under these agreements, the
Company and the Borrowers granted Diversified Business Credit, Inc. a security
interest in substantially all of their assets. In addition, Resistance
Technology, Inc. granted a mortgage on its Vadnais Heights, Minnesota facility.

---



The Agreement has a term of
three years. The Agreement provides for the following:

| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | $5.5 million asset-backed
  revolving credit facility supported by a monthly borrowing base;
| |   |                                                                                             
| |  | $1.5 million real estate
  term loan amortized on a 12-year schedule; and                   
| |   |                                                                                             
| |  | $1.0 million equipment
  term loan amortized on a five-year schedule.                       

The domestic revolving
credit facility bears interest at 0.5% over the prime rate or, at the option of
the Borrower, subject to certain exceptions, the London InterBank Offered Rate
(LIBOR) plus 3.25%, provided that in no event will the rate be less than
5.25%. The domestic term loans bear interest at 0.75% over the prime rate or,
at the option of the Borrower, subject to certain exceptions, LIBOR plus 3.50%,
(8.0% at December 31, 2005) provided that in no event will the rate be less
than 5.25%. Notwithstanding the foregoing, interest paid on advances for each
twelve month period may never be less than $100,000. Under the Agreement, an
unused line fee at the rate of 0.25% per annum on the daily average unused
amount of the revolving credit facility is due and payable monthly in arrears
on the first day of the month. In addition, the Borrowers must pay an annual
fee equal to the greater of $27,500 or one-half percent of the maximum amount
permitted to be borrowed under the revolving credit facility. In addition, if
the facility is terminated by the Borrowers prior to the end of the term, the
Borrowers will also be required to pay a termination fee equal to 3% (if
terminated before the first anniversary of the facility), 2% (if terminated
before the second anniversary of the facility) and 1% (if terminated before the
third anniversary of the facility), respectively, of the total of the maximum
amount available under the revolving credit facility plus the amounts then
outstanding under the terms loans.

The domestic revolving
credit facility requires monthly interest payments with a balloon payment at
maturity. The real estate term loan requires monthly principal payments of
$10,285, with any balance due on August 31, 2008. The equipment term loan
requires monthly principal payments based on a assumed amortization period of
60 months, with any balance due on August 31, 2008.

The outstanding balance on
the real-estate term loan was approximately $1,450,000 and $1,458,000 at
December 31, 2005 and December 31, 2004, respectively.

Under the Agreement, without
the prior written consent from Diversified Business Credit, Inc., the Company
and the Borrowers are restricted or limited, except as otherwise permitted in
the Agreement, from, among other things: becoming or remaining liable in any
manner with respect of indebtedness or contractual liability; declaring or
paying any cash dividends (except that Borrowers may declare and pay dividends
to the Company as described in the Agreement), purchasing or redeeming any of
its capital stock or otherwise distributing any property on its capital stock;
creating, expending or contracting to expend, in any one calendar year, with
respect to the Borrowers collectively, more than $2.0 million in the aggregate,
or more than $250,000 in any one transaction, for the lease, purchase or other
acquisition of any capital asset, or for the lease of any other asset whether
payable currently or in the future; selling, leasing or otherwise disposing of
any collateral (as defined in the agreement) or all or any substantial part of its
property; consolidating or merging with any other corporation or acquiring
stock of any corporation or entering into any other partnership or joint
venture; substantially alter the nature of the business in which it is engaged;
permitting any breach, default or event of default to occur under any note,
loan, agreement or other contractual obligation binding the Borrowers; or
amending governing documents.

In the case of an event of
default (as defined in the Agreement), unless waived by Diversified Business
Credit, Inc., Diversified Business Credit, Inc., by notice, may terminate the
Agreement and declare the Borrowers obligations under the Agreement due and
payable. Diversified Business Credit, Inc. may also in accordance with the
Agreement and the law, exercise and enforce any and all rights and remedies
available upon default to a secured party under the Uniform Commercial Code,
including, without limitation, the right to take possession of the collateral
(as defined in the Agreement). Upon the occurrence of any default, Diversified
Business Credit, Inc. can suspend the making of advances until the default has
been cured or waived. All obligations will be immediately and automatically due
and payable, without further act or condition, if any cause under the United
States Bankruptcy Code is commenced voluntarily by any Borrower, guarantor (as
defined in the Agreement and includes the Company) or involuntary against any
Borrower or guarantor. Events of default include, among other things, the
failure to maintain certain financial covenants or insurance coverage, the
failure to make payment of any obligation due under the Agreement or the
occurrence of a default under any bond, debenture, note or other evidence of
material indebtedness of any Borrower or guarantor owed to any person or entity
other than Diversified Business Credit, Inc., or under any

---



indenture or other
instrument under which any such evidence of indebtedness has been issued or by
which it is governed, or under any material lease or other contract, and the
expiration of the applicable period of grace, if any, specified in such
evidence of indebtedness, indenture, other instrument, lease or contract.

On August 15, 2005, the
Companys wholly-owned subsidiary, RTI Tech, PTE LTD., entered into an
international senior secured credit agreement with Oversea-Chinese Banking
Corporation Ltd. that provides for a $2.0 million line of credit. Borrowings
bear interest at a rate of 6.47%. This facility will be reviewed annually to
determine whether it will be renewed. The outstanding balance was
$764,825 and $568,946 at December 31, 2005 and 2004, respectively.

9. OTHER ACCRUED
LIABILITIES

Other accrued
liabilities at December 31, 2005, and 2004 were as follows:

|                                                                   |  |      |           |      |   |           | 
|------------------------------------------------------------------ |  | ---- | --------- | ---- | - | --------- | 
|                                                                   |  | 2005 |           | 2004 |  
|                                                                   |  |      |           |      |  
|                                                                  
|Salaries, wages and commissions                                    |  | $    | 1,414,749 |      | $ | 1,889,769 | 
|Taxes, including payroll withholdings and
  excluding income taxes |  |      | 56,066    |      |   | 45,112    | 
|Accrued severance benefits                                         |  |      | 25,000    |      |   | 100,000   | 
|Accrued professional fees                                          |  |      | 179,336   |      |   | 230,756   | 
|Current portion of note payable                                    |  |      | 215,511   |      |   |          | 
|Deferred revenue                                                   |  |      | 159,900   |      |   |          | 
|Other                                                              |  |      | 559,912   |      |   | 373,252   | 
|                                                                   |  |      |           |      |   |           | 
|                                                                   |  |      |           |      |   |           | 
|                                                                   |  | $    | 2,610,474 |      | $ | 2,638,889 | 
|                                                                   |  |      |           |      |   |           | 

10. DOMESTIC AND
FOREIGN INCOME TAXES

Domestic and
foreign income taxes (benefits) were comprised as follows:

|                                                                              |  | Years
  ended December 31, |          
|----------------------------------------------------------------------------- |  | -------------------------- | ---------
|                                                                              |  |                            |          
|                                                                              |  | 2005                       |          
|                                                                              |  |                            |          
|Current                                                                       |  |                            |          
|Federal                                                                       |  | $                          | 223,028  
|State                                                                         |  |                            | 6,396    
|Foreign                                                                       |  |                            | 286,176  
|                                                                              |  |                            |          
|                                                                              |  |                            | 515,600  
|                                                                              |  |                            |          
|Deferred                                                                      |  |                            |          
|Federal                                                                       |  |                            | (106,177 
|State                                                                         |  |                            |         
|Foreign                                                                       |  |                            |         
|                                                                              |  |                            |          
|                                                                              |  |                            |          
|                                                                              |  |                            | (106,177 
|                                                                              |  |                            |          
|                                                                              |  |                            |          
|Income taxes                                                                  |  | $                          | 409,423  
|                                                                              |  |                            |          
|                                                                              |  |                            |          
|Income (loss) from continuing operations
  before income taxes is as follows: |  |                            |          
|Foreign                                                                       |  | $                          | 1,166,891
|Domestic                                                                      |  |                            | 3,989    
|                                                                              |  |                            |          
|                                                                              |  |                            |          
|                                                                              |  | $                          | 1,170,880
|                                                                              |  |                            |          

---



The following
is a reconciliation of the statutory federal income tax rate to the effective
tax rate based on income (loss):

|                                       |  |                  |       |                 |  |                 |    |  |       |   
|-------------------------------------- |  | ---------------- | ----- | --------------- |  | --------------- | -- |  | ----- | --
|                                       |  | Years
  ended 31 |      
|                                       |  |                  |      
|                                       |  | 2005             |       | 2004
  Restated |  | 2003
  Restated |   
|                                       |  |                  |       |                 |  |                 |   
|                                       |  |                  |       |                 |  |                 |   
|Tax
  provision at statutory rate      |  |                  | 34.0  | %               |  | 34.0            | %  |  | 34.0  | % 
|Change in
  valuation allowance        |  |                  | (24.0 | )               |  | (187.0          | )  |  | (48.7 | ) 
|Effect of
  foreign tax rates          |  |                  | 20.0  |                 |  | 3.5             |    |  | .1    |   
|State taxes
  net of federal benefit   |  |                  | .6    |                 |  | (.6             | )  |  | (.2   | ) 
|Tax benefits
  related to export sales |  |                  | (1.0  | )               |  | 3.6             |    |  | 1.6   |   
|Other                                  |  |                  | 5.4   |                 |  | (2.4            | )  |  | (.4   | ) 
|                                       |  |                  |       |                 |  |                 |    |  |       |   
|                                       |  |                  |       |                 |  |                 |    |  |       |   
|Domestic and
  foreign income tax rate |  |                  | 35.0  | %               |  | (148.9          | )% |  | (13.6 | )%
|                                       |  |                  |       |                 |  |                 |    |  |       |   

The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2005, and 2004
are presented below:

|                                                                                               |  |      |           |      |   |           |  
|---------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|                                                                                               |  | 2005 |           | 2004 |  
|                                                                                               |  |      |           |      |  
|Deferred tax assets:                                                                           |  |      |           |      |   |           |  
|Net operating loss carry forwards                                                              |  | $    | 6,534,206 |      | $ | 5,811,346 |  
|Post-retirement benefit obligations                                                            |  |      | 663,079   |      |   | 1,143,141 |  
|Goodwill amortization                                                                          |  |      |          |      |   | 566,462   |  
|State income taxes                                                                             |  |      | 605,554   |      |   | 605,554   |  
|Inventory reserves                                                                             |  |      | 770,895   |      |   | 497,244   |  
|Guarantee obligations and estimated future
  costs of service accruals                         |  |      | 35,689    |      |   | 85,996    |  
|Compensated absences, principally due to
  accrual for financial reporting purposes            |  |      | 175,271   |      |   | 154,713   |  
|Other                                                                                          |  |      | 180,725   |      |   | 180,206   |  
|                                                                                               |  |      |           |      |   |           |  
|Total gross deferred tax assets                                                                |  |      | 8,965,419 |      |   | 9,044,662 |  
|Less: valuation allowance                                                                      |  |      | 8,593,829 |      |   | 8,317,505 |  
|                                                                                               |  |      |           |      |   |           |  
|Net deferred tax assets                                                                        |  |      | 371,590   |      |   | 727,157   |  
|                                                                                               |  |      |           |      |   |           |  
|Deferred tax liabilities:                                                                      |  |      |           |      |   |           |  
|Plant and equipment, principally due to
  differences in depreciation and capitalized interest |  |      | (409,315  | )    |   | (609,315  | )
|Other                                                                                          |  |      |          |      |   | (261,744  | )
|                                                                                               |  |      |           |      |   |           |  
|Total gross deferred tax liabilities                                                           |  |      | (409,315  | )    |   | (871,059  | )
|                                                                                               |  |      |           |      |   |           |  
|Net deferred tax assets (liabilities)                                                          |  | $    | (37,725   | )    | $ | (143,902  | )
|                                                                                               |  |      |           |      |   |           |  

Domestic and
foreign deferred taxes were comprised as follows:

|                                         |  |         |   |       |   |         |  |       |          |   |   |          |  
|---------------------------------------- |  | ------- | - | ----- | - | ------- |  | ----- | -------- | - | - | -------- | -
|December 31, 2005                        |  | Federal |   | State |   | Foreign |  | Total |         
|                                         |  |         |   |       |   |         |  |       |         
|                                         |  |         |   |       |   |         |  |       |         
|Current
  deferred asset                 |  | $       |  |       | $ |        |  | $     |         |   | $ |         |  
|Non-current
  deferred asset (liability) |  |         |  |       |   |        |  |       | (37,725  | ) |   | (37,725  | )
|                                         |  |         |   |       |   |         |  |       |          |   |   |          |  
|                                         |  |         |   |       |   |         |  |       |          |   |   |          |  
|Net deferred
  tax asset (liability)     |  | $       |  |       | $ |        |  | $     | (37,725  | ) | $ | (37,725  | )
|                                         |  |         |   |       |   |         |  |       |          |   |   |          |  
|                                         |  |         |   |       |   |         |  |       |          |   |   |          |  
|December
  31, 2004                      |  | Federal |   | State |   | Foreign |  | Total |         
|                                         |  |         |   |       |   |         |  |       |         
|Current
  deferred asset                 |  | $       |  |       | $ |        |  | $     |         |   | $ |         |  
|Non-current
  deferred asset (liability) |  |         |  |       |   |        |  |       | (143,902 | ) |   | (143,902 | )
|                                         |  |         |   |       |   |         |  |       |          |   |   |          |  
|                                         |  |         |   |       |   |         |  |       |          |   |   |          |  
|Net deferred
  tax asset (liability)     |  | $       |  |       | $ |        |  | $     | (143,902 | ) | $ | (143,902 | )
|                                         |  |         |   |       |   |         |  |       |          |   |   |          |  

---



The net change
in the total valuation allowance for the year ended December 31, 2005 was an
increase of approximately $275,000. The valuation allowance is maintained
against deferred tax assets which the Company has determined are not likely to
be realized. In addition, the Company has net operating loss carryforwards for
Federal tax purposes of approximately $18.7 million that begin to expire in
2022. Subsequently recognized tax benefits, if any, relating to the valuation
allowance for deferred tax assets or realization of net operating loss
carryforwards will be reported in the consolidated statements of operations.

In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, historical taxable income including
available net operating loss carryforwards to offset taxable income, and
projected future taxable income in making this assessment. Based upon the level
of historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, along with reasonable and
prudent tax planning strategies and the expiration dates of carryforwards,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences, net of the existing valuation
allowances, at December 31, 2005.

11. EMPLOYEE BENEFIT
PLANS

The Company
has defined contribution plans for most of its domestic employees. Under these
plans, eligible employees may contribute amounts through payroll deductions
supplemented by employer contributions for investment in various investments
specified in the plans. The Company contribution to these plans for 2005, 2004
and 2003 was $253,568, $267,796 and $277,378, respectively.

The Company
provides post-retirement medical benefits to certain domestic full-time
employees who meet minimum age and service requirements. In 1999, a plan
amendment was instituted which limits the liability for post-retirement
benefits beginning January 1, 2000 for certain employees who retire after that
date. This plan amendment resulted in a $1.1 million unrecognized prior service
cost reduction which will be recognized as employees render the services
necessary to earn the post-retirement benefit. The Companys policy is to pay
the cost of these post-retirement benefits when required on a cash basis. The
Company also has provided certain foreign employees with retirement related
benefits.

---



The following
table presents the amounts recognized in the Companys consolidated balance
sheet at December 31, 2005 and 2004 for post-retirement medical benefits:

|                                                   |  |      |           |      |   |           |  
|-------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|                                                   |  | 2005 |           | 2004 |  
|                                                   |  |      |           |      |  
|Change in
  Projected Benefit Obligation           |  |      |           |      |   |           |  
|Projected
  benefit obligation at January 1        |  | $    | 1,921,633 |      | $ | 2,142,274 |  
|Service cost
  (excluding administrative expenses) |  |      | 8,899     |      |   | 25,246    |  
|Interest
  cost                                    |  |      | 91,948    |      |   | 110,231   |  
|Settlement                                         |  |      | (353,319  | )    |   |          |  
|Actuarial
  (gain) loss                            |  |      |          |      |   | (177,901  | )
|Benefits
  paid                                    |  |      | (178,412  | )    |   | (178,217  | )
|                                                   |  |      |           |      |   |           |  
|                                                   |  |      |           |      |   |           |  
|Projected
  benefit obligation at December 31      |  |      | 1,490,749 |      |   | 1,921,633 |  
|                                                   |  |      |           |      |   |           |  
|                                                   |  |      |           |      |   |           |  
|Change in
  Fair Value of Plan Assets              |  |      |           |      |   |           |  
|Employer
  contribution                            |  |      | 178,412   |      |   | 178,217   |  
|Benefits
  paid                                    |  |      | (178,412  | )    |   | (178,217  | )
|                                                   |  |      |           |      |   |           |  
|                                                   |  |      |           |      |   |           |  
|Fair value
  of plan assets at December 31         |  |      |          |      |   |          |  
|                                                   |  |      |           |      |   |           |  
|                                                   |  |      |           |      |   |           |  
|Funded
  status                                    |  |      | 1,490,749 |      |   | 1,921,633 |  
|Unrecognized
  net actuarial gain (loss)           |  |      | (26,190   | )    |   | (42,760   | )
|Unrecognized
  prior service cost                  |  |      |          |      |   | (745,713  | )
|                                                   |  |      |           |      |   |           |  
|                                                   |  |      |           |      |   |           |  
|Accrued
  post-retirement benefit cost             |  | $    | 1,516,939 |      | $ | 2,710,106 |  
|                                                   |  |      |           |      |   |           |  

Accrued
post-retirement medical benefit costs are classified as other post-retirement
benefit obligations as of December 31, 2005 and 2004.

Net periodic
post-retirement medical benefit costs for 2005, 2004 and 2003 include the
following components:

|                                                    |  |      |            |      |   |         |   |   |         |  
|--------------------------------------------------- |  | ---- | ---------- | ---- | - | ------- | - | - | ------- | -
|                                                    |  | 2005 |            | 2004 |   | 2003    |  
|                                                    |  |      |            |      |   |         |  
|                                                    |  |      |            |      |   |         |  
|Service cost                                        |  | $    | 8,899      |      | $ | 25,246  |   | $ | 25,461  |  
|Interest
  cost                                     |  |      | 91,948     |      |   | 110,231 |   |   | 131,506 |  
|Amortization
  of unrecognized prior service cost   |  |      | (24,857    | )    |   | (74,571 | ) |   | (71,575 | )
|Curtailment                                         |  |      | (1,090,746 | )    |   |        |   |   |        |  
|                                                    |  |      |            |      |   |         |   |   |         |  
|                                                    |  |      |            |      |   |         |   |   |         |  
|Net periodic
  post-retirement medical benefit cost |  | $    | (1,014,756 | )    | $ | 60,906  |   | $ | 85,392  |  
|                                                    |  |      |            |      |   |         |   |   |         |  

The $1.1
million curtailment primarily related to the sale of our Heat Technology
business. As part of the March 31, 2005 asset purchase agreement the Company
was required to maintain the post retirement medical plan for all retired
eligible participants, but was able to eliminate from the plan those employees
not participating at the time of the asset purchase. This charge was included
in discontinued operations.

For
measurement purposes, a 10.0% annual rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) was assumed for 2005; the
rate was assumed to decrease gradually to 5% by the year 2010 and remain at
that level thereafter. The health care cost trend rate assumption may have a
significant effect on the amounts reported. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would
increase the accumulated post-retirement medical benefit obligation as of
December 31, 2005 by $134,167 and the aggregate of the service and interest
cost components of net periodic post-retirement medical benefit cost for the
year ended December 31, 2005 by $7,715.

---



The
assumptions used years ended December 31 were as follows:

|                                                       |  |      |       |      |  |       |  
|------------------------------------------------------ |  | ---- | ----- | ---- |  | ----- | -
|                                                       |  | 2005 |       | 2004 | 
|                                                       |  |      |       |      | 
|                                                       |  |      |       |      | 
|Annual
  increase in cost of benefits                  |  |      | 10.00 | %    |  | 10.00 | %
|Discount
  rate used to determine year-end obligations |  |      | 5.75  | %    |  | 5.75  | %
|Discount
  rate used to determine year-end expense     |  |      | 5.75  | %    |  | 6.00  | %

The following
benefit payments, which reflect expected future service, are expected to be
paid:

|                    |  |   |         | 
|------------------- |  | - | ------- | 
|2006                |  | $ | 175,000 | 
|2007                |  | $ | 180,000 | 
|2008                |  | $ | 180,000 | 
|2009                |  | $ | 185,000 | 
|2010                |  | $ | 185,000 | 
|Years 2011 
  2015 |  | $ | 940,000 | 

The Company
provides retirement related benefits to former executive employees and to
certain employees of foreign subsidiaries. The liabilities established for
these benefits at December 31, 2005 and 2004 are illustrated below.

|                                 |  |      |         |      |   |         | 
|-------------------------------- |  | ---- | ------- | ---- | - | ------- | 
|                                 |  | 2005 |         | 2004 |  
|                                 |  |      |         |      |  
|                                 |  |      |         |      |  
|Current
  portion                |  | $    | 90,656  |      | $ | 104,861 | 
|Long term
  portion              |  |      | 633,818 |      |   | 795,852 | 
|                                 |  |      |         |      |   |         | 
|                                 |  |      |         |      |   |         | 
|Total
  liability at December 31 |  | $    | 724,474 |      | $ | 900,713 | 
|                                 |  |      |         |      |   |         | 

12. CURRENCY
TRANSLATION ADJUSTMENTS

All assets and
liabilities of foreign operations are translated into U.S. dollars at
prevailing rates of exchange in effect at the balance sheet date. Revenues and
expenses are translated using average rates of exchange for the year. The
functional currency of the Companys foreign operations is the currency of the
country in which the entity resides; such currencies are the European euro, and
the Singapore dollar. Adjustments resulting from the process of translating the
financial statements of foreign subsidiaries into U.S. dollars are reported as
a separate component of shareholders equity, net of tax, where appropriate. As
a result of the insolvency of the Companys French subsidiary Selas SAS, a
considerable amount of Euro denominated debt, has been recorded by the parent
company. This debt is adjusted as of the balance sheet date to reflect
fluctuations in the Euro exchange rate. Gains and losses arising from foreign
currency transactions are reflected in the consolidated statements of
operations as incurred. This debt was refinanced in 2004, as a result, as of
December 31, 2004 the Company no longer has any Euro denominated debt. Foreign
currency transaction amounts included in the statements of operation include a
gain of $3,000 in 2005, $14,000 in 2004 a loss of $141,000 in 2003.

---



13. COMMON STOCK AND
STOCK OPTIONS

Under the
various plans, executives, employees and outside directors receive awards of
options to purchase common stock. Under all awards, the terms are fixed at the
grant date. Generally, the exercise price equals the market price of the
Companys stock on the date of the grant. Options under the plans generally
vest from one to five years, and the options maximum term is 10 years. Options
issued to directors vest from one to three years.

Stock option
activity during the periods indicated is as follows:

|                                                  |  |                    |           |                                   |  |   |      |  | 
|------------------------------------------------- |  | ------------------ | --------- | --------------------------------- |  | - | ---- |  | 
|                                                  |  | Number of
  Shares |           | Weighted-average
  Exercise Price | 
|                                                  |  |                    |           |                                   | 
|                                                  |  |                    |           |                                   |  |   |     
|Outstanding at December 31, 2002                  |  |                    | 711,550   |                                   |  | $ | 5.48 |  | 
|Options forfeited                                 |  |                    | (93,400   | )                                 |  |   | 7.34 |  | 
|Options expired                                   |  |                    | (151,250  | )                                 |  |   | 5.32 |  | 
|Options granted                                   |  |                    | 75,000    |                                   |  |   | 3.05 |  | 
|                                                  |  |                    |           |                                   |  |   |      |  | 
|                                                  |  |                    |           |                                   |  |   |      |  | 
|Outstanding at December 31, 2003                  |  |                    | 541,900   |                                   |  | $ | 4.86 |  | 
|Options forfeited                                 |  |                    | (127,000  | )                                 |  |   | 3.07 |  | 
|Options granted                                   |  |                    | 246,000   |                                   |  |   | 2.70 |  | 
|                                                  |  |                    |           |                                   |  |   |      |  | 
|                                                  |  |                    |           |                                   |  |   |      |  | 
|Outstanding at December 31, 2004                  |  |                    | 660,900   |                                   |  | $ | 4.40 |  | 
|Options forfeited                                 |  |                    | (107,900  | )                                 |  |   | 3.53 |  | 
|Options expired                                   |  |                    | (30,000   | )                                 |  |   | 5.35 |  | 
|Options granted                                   |  |                    | 227,500   |                                   |  |   | 2.75 |  | 
|Options exercised                                 |  |                    | (20,600   | )                                 |  |   | 2.35 |  | 
|                                                  |  |                    |           |                                   |  |   |      |  | 
|                                                  |  |                    |           |                                   |  |   |      |  | 
|Outstanding at December 31, 2005                  |  |                    | 729,900   |                                   |  | $ | 3.98 |  | 
|                                                  |  |                    |           |                                   |  |   |      |  | 
|Exercisable at December 31, 2003                  |  |                    | 321,005   |                                   |  |   |      |  | 
|                                                  |  |                    |           |                                   |  |   |      |  | 
|Exercisable at December 31, 2004                  |  |                    | 380,215   |                                   |  |   |      |  | 
|                                                  |  |                    |           |                                   |  |   |      |  | 
|Exercisable at December 31, 2005                  |  |                    | 389,400   |                                   |  | $ | 5.06 |  | 
|                                                  |  |                    |           |                                   |  |   |      |  | 
|Available for future grant at January 1,
  2005   |  |                    | 1,489,100 |                                   |  |   |      |  | 
|                                                  |  |                    |           |                                   |  |   |      |  | 
|Available for future grant at December
  31, 2005 |  |                    | 1,399,500 |                                   |  |   |      |  | 
|                                                  |  |                    |           |                                   |  |   |      |  | 

The
weighted-average per share fair market value of options granted was $1.77,
$2.22, and $1.67, in 2005, 2004, and 2003, respectively, using the
Black-Scholes option-pricing model. For more information on the assumptions
used in the Black-Scholes option-pricing model, refer to note 1, Stock Option
Plan.

The following
summarizes information about the Companys stock options outstanding at
December 31, 2005:

|                           |  |                                    |         |                                                   |  |                                       |  |                                    |       |                                       |  |         |  |   |       | 
|-------------------------- |  | ---------------------------------- | ------- | ------------------------------------------------- |  | ------------------------------------- |  | ---------------------------------- | ----- | ------------------------------------- |  | ------- |  | - | ----- | 
|                           |  | Options
  Outstanding              |         | Options
  Exercisable                             | 
|                           |  |                                    |         |                                                   | 
|Range of
  Exercise Prices |  | Number
  Outstanding At
  12/31/05 |         | Weighted
  Average
  Remaining
  Contractual Life |  | Weighted
  Average
  Exercise
  Price |  | Number
  Exercisable
  At 12/31/05 |       | Weighted
  Average
  Exercise
  Price | 
|                           |  |                                    |         |                                                   |  |                                       |  |                                    |       |                                       | 
|$0    3.00                |  |                                    | 449,000 |                                                   |  | 8.49                                  |  | $                                  | 2.41  |                                       |  | 143,500 |  | $ | 2.30  | 
|$3.01    4.40             |  |                                    | 127,400 |                                                   |  | 4.68                                  |  | $                                  | 3.24  |                                       |  | 122,400 |  | $ | 3.22  | 
|$4.41    5.80             |  |                                    | 30,000  |                                                   |  | 9.75                                  |  | $                                  | 5.55  |                                       |  |        |  |   |      | 
|$8.60  20.00              |  |                                    | 123,500 |                                                   |  | 1.10                                  |  | $                                  | 10.08 |                                       |  | 123,500 |  | $ | 10.08 | 
|                           |  |                                    |         |                                                   |  |                                       |  |                                    |       |                                       |  |         |  |   |       | 
|                           |  |                                    | 729,900 |                                                   |  | 6.63                                  |  | $                                  | 3.98  |                                       |  | 389,400 |  | $ | 5.06  | 
|                           |  |                                    |         |                                                   |  |                                       |  |                                    |       |                                       |  |         |  |   |       | 

---



14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a tabulation of unaudited quarterly
results of operations (in thousands, except for per share data).

|                                                          |  |                 |       |                  |   |                 |   |                  |        |                         |   |                          |  |                         |       |                          |   |       |  |   |       |   |   |        |  
|--------------------------------------------------------- |  | --------------- | ----- | ---------------- | - | --------------- | - | ---------------- | ------ | ----------------------- | - | ------------------------ |  | ----------------------- | ----- | ------------------------ | - | ----- |  | - | ----- | - | - | ------ | -
|                                                          |  | 2005            |       | 2004 (a)         |  
|                                                          |  |                 |       |                  |  
|                                                          |  | First
  Quarter |       | Second
  Quarter |   | Third
  Quarter |   | Fourth
  Quarter |        | First
  QuarterRestated |   | Second
  QuarterRestated |  | Third
  QuarterRestated |       | Fourth
  QuarterRestated |  
|                                                          |  |                 |       |                  |   |                 |   |                  |        |                         |   |                          |  |                         |       |                          |  
|                                                          |  |                 |       |                  |   |                 |   |                  |        |                         |   |                          |  |                         |       |                          |   |       |  |   |       |   |   |        |  
|Sales, net                                                |  | $               | 9,786 |                  | $ | 11,601          |   | $                | 11,896 |                         | $ | 11,171                   |  | $                       | 9,338 |                          | $ | 8,354 |  | $ | 8,524 |   | $ | 8,965  |  
|                                                          |  |                 |       |                  |   |                 |   |                  |        |                         |   |                          |  |                         |       |                          |   |       |  |   |       |   |   |        |  
|Gross profit                                              |  |                 | 2,382 |                  |   | 3,411           |   |                  | 2,907  |                         |   | 2,901                    |  |                         | 2,421 |                          |   | 2,058 |  |   | 1,675 |   |   | 1,908  |  
|                                                          |  |                 |       |                  |   |                 |   |                  |        |                         |   |                          |  |                         |       |                          |   |       |  |   |       |   |   |        |  
|Income (loss) from continuing operations net of tax       |  |                 | (254  | )                |   | 673             |   |                  | 174    |                         |   | 167                      |  |                         | (714  | )                        |   | 1,359 |  |   | (975  | ) |   | (1,576 | )
|Income (loss) from discontinued operations net of
tax (b) |  |                 | 464   |                  |   | (356            | ) |                  | (49    | )                       |   | 709                      |  |                         | (79   | )                        |   | 609   |  |   | 286   |   |   | 554    |  
|Extraordinary gain from discontinued
operations           |  |                 |      |                  |   |                |   |                  |       |                         |   |                         |  |                         |      |                          |   |      |  |   | 684   |   |   |       |  
|Net income (loss)                                         |  |                 | 210   |                  |   | 317             |   |                  | 125    |                         |   | 876                      |  |                         | (793  | )                        |   | 1,968 |  |   | (5    | ) |   | (1,022 | )
|                                                          |  |                 |       |                  |   |                 |   |                  |        |                         |   |                          |  |                         |       |                          |   |       |  |   |       |   |   |        |  
|Income (loss) per share (c):                              |  |                 |       |                  |   |                 |   |                  |        |                         |   |                          |  |                         |       |                          |   |       |  |   |       |   |   |        |  
|Basic income (loss) per share                             |  |                 |       |                  |   |                 |   |                  |        |                         |   |                          |  |                         |       |                          |   |       |  |   |       |   |   |        |  
|Continuing operations                                     |  | $               | (.05  | )                | $ | .13             |   | $                | .03    |                         | $ | .03                      |  | $                       | (.14  | )                        | $ | .26   |  | $ | (.19  | ) | $ | (.31   | )
|Discontinued operations                                   |  |                 | .09   |                  |   | (.07            | ) |                  | (.01   | )                       |   | .14                      |  |                         | (.02  | )                        |   | .12   |  |   | .06   |   |   | .11    |  
|Extraordinary gain from discontinued
operations           |  |                 |      |                  |   |                |   |                  |       |                         |   |                         |  |                         |      |                          |   |      |  |   | .13   |   |   |       |  
|Net income (loss)                                         |  | $               | .04   |                  | $ | .06             |   | $                | .02    |                         | $ | .17                      |  | $                       | (.16  | )                        | $ | .38   |  | $ |      |   | $ | (.20   | )
|                                                          |  |                 |       |                  |   |                 |   |                  |        |                         |   |                          |  |                         |       |                          |   |       |  |   |       |   |   |        |  
|                                                          |  |                 |       |                  |   |                 |   |                  |        |                         |   |                          |  |                         |       |                          |   |       |  |   |       |   |   |        |  
|Diluted income (loss) per share                           |  |                 |       |                  |   |                 |   |                  |        |                         |   |                          |  |                         |       |                          |   |       |  |   |       |   |   |        |  
|Continuing operations                                     |  | $               | (.05  | )                | $ | .13             |   | $                | .03    |                         | $ | .03                      |  | $                       | (.14  | )                        | $ | .26   |  | $ | (.19  | ) | $ | (.31   | )
|Discontinued operations                                   |  |                 | .09   |                  |   | (.07            | ) |                  | (.01   | )                       |   | .13                      |  |                         | (.02  | )                        |   | .12   |  |   | .06   |   |   | .11    |  
|Extraordinary gain from discontinued
operations           |  |                 |      |                  |   |                |   |                  |       |                         |   |                         |  |                         |      |                          |   |      |  |   | .13   |   |   |       |  
|Net income (loss)                                         |  | $               | .04   |                  | $ | .06             |   | $                | .02    |                         | $ | .16                      |  | $                       | (.16  | )                        | $ | .38   |  | $ |      |   | $ | (.20   | )
|                                                          |  |                 |       |                  |   |                 |   |                  |        |                         |   |                          |  |                         |       |                          |   |       |  |   |       |   |   |        |  

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) | The effect of the Restatement on the Companys
  quarterly income from continuing operations net of tax and the Companys
  quarterly net income for 2004 was $11,000 for the first quarter; ($29,000)
  for the second quarter; ($6,000) for the third quarter; and $77,000 for the
  fourth quarter. The effect of the Restatement for 2003 was ($45,000) for the
  first quarter; $19,000 for the second quarter; ($68,000) for the third
  quarter; and $24,000 for the fourth quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|b) | The Company reclassified its Heat Technology
  business, as discontinued operations in the fourth quarter of 2004; this
  includes the burners and components portion of the business which the Company
  sold in the first quarter of 2005. The Company Tire Holders, Lifts and
  Related Products business was also included in discontinued operations until
  it was sold in July 2003. Accordingly, the historical financial information
  has been reclassified. See note 3 to the consolidated financial statements.
  In the fourth quarter of 2005 the Company had a significant gain from
  discontinued operations related to the Post Retirement Plan for Selas. As
  part of the March 31, 2005 asset purchase agreement the Company was required
  to maintain the post retirement medical plan for all retired eligible
  participants, but was able to eliminate from the plan those employees not
  participating at the time of the asset purchase. See note 11 to the
  consolidated financial statements
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|c) | Per share amounts for the quarters have each been
  calculated separately. Accordingly, quarterly amounts may not add to the
  annual amounts because of differences in the average common shares
  outstanding during each period. Additionally, in regard to diluted per share
  amounts only, quarterly amounts may not add to the annual amounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

---



15. INCOME (LOSS) PER SHARE

The following table sets forth the computation of
basic and diluted income (loss) per share:

|                                               |  |                    |           |                      |  |                    |  |                  |     |                      |   |                    |  |                  |           |                      |   |                    |  |   |            |   |  |           |  |   |      |  
|---------------------------------------------- |  | ------------------ | --------- | -------------------- |  | ------------------ |  | ---------------- | --- | -------------------- | - | ------------------ |  | ---------------- | --------- | -------------------- | - | ------------------ |  | - | ---------- | - |  | --------- |  | - | ---- | -
|                                               |  | 2005               |           | 2004                 |  | 2003               | 
|                                               |  |                    |           |                      |  |                    | 
|                                               |  | Income
  Numerator |           | Shares
  Denominator |  | Per Share
  Amount |  | Loss
  Numerator |     | Shares
  Denominator |   | Per Share
  Amount |  | Loss
  Numerator |           | Shares
  Denominator |   | Per Share
  Amount | 
|                                               |  |                    |           |                      |  |                    |  |                  |     |                      |   |                    |  |                  |           |                      |   |                    | 
|Basic
  income (loss) per share                |  |                    |           |                      |  |                    |  |                  |     |                      |   |                    |  |                  |           |                      |   |                    |  |   |            |   |  |           |  |   |      |  
|                                               |  |                    |           |                      |  |                    |  |                  |     |                      |   |                    |  |                  |           |                      |   |                    |  |   |            |   |  |           |  |   |      |  
|Income (loss) available to common shareholders |  | $                  | 1,528,687 |                      |  | 5,135,348          |  | $                | .30 |                      | $ | 147,826            |  |                  | 5,129,214 |                      | $ | .03                |  | $ | (5,045,322 | ) |  | 5,124,433 |  | $ | (.98 | )
|                                               |  |                    |           |                      |  |                    |  |                  |     |                      |   |                    |  |                  |           |                      |   |                    |  |   |            |   |  |           |  |   |      |  
|                                               |  |                    |           |                      |  |                    |  |                  |     |                      |   |                    |  |                  |           |                      |   |                    |  |   |            |   |  |           |  |   |      |  
|Effect of
  dilutive Securities                |  |                    |           |                      |  |                    |  |                  |     |                      |   |                    |  |                  |           |                      |   |                    |  |   |            |   |  |           |  |   |      |  
|                                               |  |                    |           |                      |  |                    |  |                  |     |                      |   |                    |  |                  |           |                      |   |                    |  |   |            |   |  |           |  |   |      |  
|Stock options                                  |  |                    |          |                      |  | 126,143            |  |                  |     |                      |   |                   |  |                  | 2,627     |                      |   |                    |  |   |           |   |  |          |  |   |      |  
|                                               |  |                    |           |                      |  |                    |  |                  |     |                      |   |                    |  |                  |           |                      |   |                    |  |   |            |   |  |           |  |   |      |  
|                                               |  |                    |           |                      |  |                    |  |                  |     |                      |   |                    |  |                  |           |                      |   |                    |  |   |            |   |  |           |  |   |      |  
|Diluted
  income (loss) per share              |  | $                  | 1,528,687 |                      |  | 5,261,491          |  | $                | .29 |                      | $ | 147,826            |  |                  | 5,131,841 |                      | $ | .03                |  | $ | (5,045,322 | ) |  | 5,124,433 |  | $ | (.98 | )
|                                               |  |                    |           |                      |  |                    |  |                  |     |                      |   |                    |  |                  |           |                      |   |                    |  |   |            |   |  |           |  |   |      |  

The Company excluded stock options of 153,500,
367,800, 348,300, in 2005, 2004, and 2003, respectively, from the computation
of the diluted income (loss) per share as their effect would be anti-dilutive.
For additional disclosures regarding the stock options, see Note 13.

16. CONTINGENCIES AND COMMITMENTS.

The Company is a defendant along with a number of
other parties in approximately 122 lawsuits as of December 31, 2005,
(approximately 123 lawsuits as of December 31, 2004) alleging that plaintiffs
have or may have contracted asbestos-related diseases as a result of exposure
to asbestos products or equipment containing asbestos sold by one or more named
defendants. Due to the noninformative nature of the complaints, the Company
does not know whether any of the complaints state valid claims against the
Company. Certain carriers have informed the Company that the primary policies
for the period August 1, 1970-1973, have been exhausted and that the carriers
will no longer provide a defense under those policies. The Company has
requested that the carriers substantiate this situation. The Company believes
it has additional policies available for other years which have been ignored by
the carriers. As settlement payments are applied to all years a litigant was
deemed to have been exposed to asbestos, the Company believes when settlement
payments are applied to these additional policies, the Company will have
availability under the years deemed exhausted. The Company does not believe
that the asserted exhaustion of the primary insurance coverage for this period
will have a material adverse effect on its financial condition, liquidity, or
results of operations. Management believes that the number of insurance
carriers involved in the defense of the suits and the significant number of
policy years and policy limits, to which these insurance carriers are insuring
the Company, make the ultimate disposition of these lawsuits not material to
the Companys consolidated financial position or results of operations.

The Company is also involved in other lawsuits arising
in the normal course of business. While it is not possible to predict with
certainty the outcome of these matters, management is of the opinion that the
disposition of these lawsuits and claims will not materially affect the
Companys consolidated financial position, liquidity or results of operations.

Total rent expense for 2005, 2004 and 2003 under
leases pertaining primarily to engineering, manufacturing, sales and
administrative facilities, with an initial term of one year or more, aggregated
$1,035,000, $1,156,000, and $1,096,000, respectively. Remaining rentals payable
under such leases are as follows: 2006 - $1,016,000; 2007 - $941,000; 2008 -
$819,000; 2009 - $475,000; 2010 - $475,000 and thereafter - $396,000.

---



On March 30, 2005, the Company entered into an employment
agreement with Mark Gorder, the President and Chief Executive Officer of the
Company, dated as of December 4, 2004, whereby Mr. Gorder agreed to serve as
the Companys Chief Executive Officer and President. The employment
agreement will expire on April 30, 2006, unless further extended by Mr. Gorder
and the Company. If Mr. Gorders employment is terminated by the
Company during the term of the employment agreement for any reason other
than for Cause (as defined in the employment agreement) or if he terminates his
employment during the term of the employment agreement under circumstances that
would constitute an Involuntary Termination (as defined in the
Change-of-Control Agreement), then any stock options granted to him which have
not been exercised prior to his termination will accelerate and be exercisable
in full and any base salary or performance bonus accrued during the remainder
of the employment agreement is payable as defined in the agreement.

On December 14, 2004 and April 25, 2005 the Company
entered into a change of control or asset sale agreement with Mark Gorder and
William Kullback, the Chief Executive Officer and Chief Financial Officer of the
Company, respectively. The agreements call for payments of two years base salary
and unpaid bonus, if any, to Mr. Gorder and Mr. Kullback should there be a
change of control or asset sale as defined in the agreements and Mr. Gorder or
Mr. Kullback are not retained for a period of at least one year following such
change of control or asset sale. Under the agreements, all stock options granted
to Mr. Gorder or Mr. Kullback would vest immediately and be exercisable in
accordance with the terms of such stock options. The Company also agreed that if
it enters into an agreement to sell substantially all of its assets, it will
obligate the buyer to fulfill its obligations pursuant to the agreements. The
agreements terminate, except to the extent that any obligation remains unpaid,
upon the earlier of termination of Mr. Gorder or Mr. Kullbacks employment
prior to a change of control or asset sale for any reason or the termination of
Mr. Gorder or Mr. Kullback after a change of control or asset sale for any
reason other than by involuntary termination as defined in the agreements.

17. RELATED-PARTY TRANSACTIONS

One of the Companys subsidiaries leases office and
factory space from a partnership consisting of three present or former officers
of the subsidiary, including Mark Gorder, the President and Chief Executive
Officer of the Company. The subsidiary is required to pay all real estate taxes
and operating expenses. In the opinion of management, the terms of the lease
agreement are comparable to those which could be obtained from unaffiliated
third parties. The total base rent expense incurred under the lease was approximately $368,000 for 2005, $368,000
for 2004, and $336,000 for 2003. Annual lease commitments approximate $368,000
through October 2011.

18. STATEMENTS OF CASH
FLOWS

Supplemental disclosures of cash flow information:

|                                                       |  |                            |         |      |   |         |  |   |         | 
|------------------------------------------------------ |  | -------------------------- | ------- | ---- | - | ------- |  | - | ------- | 
|                                                       |  | Years
  ended December 31, |        
|                                                       |  |                            |        
|                                                       |  | 2005                       |         | 2004 |   | 2003    | 
|                                                       |  |                            |         |      |   |         | 
|Interest
  received                                    |  | $                          | 50,832  |      | $ | 3,091   |  | $ | 7,455   | 
|Interest paid                                          |  |                            | 408,133 |      |   | 431,148 |  |   | 507,157 | 
|Income taxes
  paid                                    |  |                            | 91,403  |      |   | 44,070  |  |   | 38,969  | 
|Acquisition of
  assets of Amecon, Inc                 |  |                            |         |      |   |         |  |   |         | 
|Goodwill                                               |  |                            | 489,634 |      |   |        |  |   |        | 
|Inventories                                            |  |                            | 272,575 |      |   |        |  |   |        | 
|Property and
  equipment                               |  |                            | 478,195 |      |   |        |  |   |        | 
|Equipment
  purchased through capital lease obligation |  |                            | 313,919 |      |   |        |  |   |        | 

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