Exhibit 13

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

|Years ended December 31,                                                    | 2006 |  | 2005 |           | 2004(a)Restated |   | 2003(a,b)Restated |   | 2002(a)Restated
|--------------------------------------------------------------------------- | ---- |  | ---- | --------- | --------------- | - | ----------------- | - | ---------------
|                                                                           
|Sales, net                                                                  |      |  | $    | 51,726    |                 | $ | 44,455            |   | $              
|                                                                           
|Cost of sales                                                               |      |  |      | 39,304    |                 |   | 32,853            |   |                
|                                                                           
|Operating expenses                                                          |      |  |      | 10,455    |                 |   | 10,181            |   |                
|Interest expense                                                            |      |  |      | 499       |                 |   | 409               |   |                
|Interest income                                                             |      |  |      | (48       | )               |   | (52               | ) |                
|Gain on sale of asset                                                       |      |  |      |          |                 |   |                  |   |                
|Other (income) expense, net                                                 |      |  |      | 102       |                 |   | (106              | ) |                
|                                                                            |      |  |      |           |                 |   |                   |   |                
|Income (loss) from continuing operations                                   
|before income taxes, discontinued                                          
|operations and change in accounting                                        
|principle                                                                   |      |  |      | 1,415     |                 |   | 1,171             |   |                
|Income tax expense (benefit)                                                |      |  |      | 174       |                 |   | 409               |   |                
|                                                                            |      |  |      |           |                 |   |                   |   |                
|Income (loss) from continuing operations                                   
|before discontinued operations and change in                               
|accounting principle                                                        |      |  |      | 1,241     |                 |   | 762               |   |                
|Income (loss) from discontinued    operations, net of income taxes (Note 3) |      |  |      | (78       | )               |   | 767               |   |                
|Extraordinary gain from discontinued     operations                         |      |  |      |          |                 |   |                  |   |                
|Cumulative effect of change in    accounting principle                      |      |  |      |          |                 |   |                  |   |                
|                                                                            |      |  |      |           |                 |   |                   |   |                
|Net income (loss)                                                           |      |  | $    | 1,163     |                 | $ | 1,529             |   | $              
|                                                                            |      |  |      |           |                 |   |                   |   |                
|Basic income (loss) per share:                                              |      | 
|Continuing operations                                                       |      |  | $    | .24       |                 | $ | .15               |   | $              
|Discontinued operations                                                     |      |  |      | (.01      | )               |   | .15               |   |                
|Extraordinary gain discontinued       operations                            |      |  |      |          |                 |   |                  |   |                
|Accounting principle change                                                 |      |  |      |          |                 |   |                  |   |                
|                                                                            |      |  |      |           |                 |   |                   |   |                
|Net income (loss)                                                           |      |  | $    | .23       |                 | $ | .30               |   | $              
|                                                                            |      |  |      |           |                 |   |                   |   |                
|                                                                           
|Diluted income (loss) per share:                                            |      | 
|Continuing operations                                                       |      |  | $    | .23       |                 | $ | .14               |   | $              
|Discontinued operations                                                     |      |  |      | (.01      | )               |   | .15               |   |                
|Extraordinary gain discontinued       operations                            |      |  |      |          |                 |   |                  |   |                
|Accounting principle change                                                 |      |  |      |          |                 |   |                  |   |                
|                                                                            |      |  |      |           |                 |   |                   |   |                
|Net income (loss)                                                           |      |  | $    | .22       |                 | $ | .29               |   | $              
|                                                                            |      |  |      |           |                 |   |                   |   |                
|                                                                           
|Weighted average number of  Shares outstanding during year:                 |      | 
|Basic                                                                       |      |  |      | 5,159,216 |                 |   | 5,135,348         |   |                
|                                                                            |      |  |      |           |                 |   |                   |   |                
|Diluted                                                                     |      |  |      | 5,319,802 |                 |   | 5,261,491         |   |                
|                                                                            |      |  |      |           |                 |   |                   |   |                

---

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

|Years ended December 31,                            | 2006 |  | 2005 |        | 2004(a)Restated |   | 2003(a,b)Restated |   | 2002(a)Restated
|--------------------------------------------------- | ---- |  | ---- | ------ | --------------- | - | ----------------- | - | ---------------
|                                                   
|Working capital (c)                                 |      |  | $    | 8,445  |                 | $ | 8,185             |   | $              
|                                                   
|Total assets                                        |      |  | $    | 34,281 |                 | $ | 29,635            |   | $              
|                                                   
|Long-term debt                                      |      |  | $    | 3,830  |                 | $ | 5,319             |   | $              
|                                                   
|Shareholders equity:                               |      | 
|Capital stock and additional        paid-in capital |      |  | $    | 18,046 |                 | $ | 17,719            |   | $              
|Retained earnings       (accumulated deficit)       |      |  |      | (990   | )               |   | (2,152            | ) |                
|Accumulated other       comprehensive loss          |      |  |      | (185   | )               |   | (213              | ) |                
|                                                   
|Treasury stock                                      |      |  |      | (1,265 | )               |   | (1,265            | ) |                
|                                                    |      |  |      |        |                 |   |                   |   |                
|Total shareholders equity                          |      |  | $    | 15,607 |                 | $ | 14,089            |   | $              
|                                                   
|Depreciation and    amortization                    |      |  | $    | 1,849  |                 | $ | 2,069             |   | $              

|* |  | 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 the remaining
portion of its Heat Technology business, which consisted of the burners and components portion of that 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 Companys 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | Working capital is equal to current assets less
current liabilities.
|--- |  | --------------------------------------------------------------------

---

# Stock Performance Graph

The following graph shows the cumulative total return for the last five
years, calculated as of December 31 of each such year, for the Common Shares, the Standard & Poors 500 Index and the
American Stock Exchange Market Value Index. The graph assumes that the value of the investment in each of the three was $100 at
December 31, 2001 and that all dividends were reinvested.



# Market and Dividend Information

|        | 2006 |  | 2005
|------- | ---- |  | ----
|
|
|       
|Quarter |      |  |     
|First   |      |  | $   
|Second  |      |  |     
|Third   |      |  |     
|Fourth  |      |  |     

The closing sale price of the Companys common shares on March 9, 2007,
was $5.95 per share.

At March 9, 2007 the Company had 355 shareholders of record of common shares.
Such number of recordholders does not reflect shareholders who beneficially own common stock in nominee or street name.

The Company ceased paying quarterly cash dividends in the fourth quarter of
2001 and has no intention of paying cash dividends in the foreseeable future. The payment of any future cash dividends is subject
to the discretion of the Board of Directors and is dependent on a number of factors, including the Companys capital
requirements, financial condition, financial covenants and cash availability. Terms of the Companys banking agreements
prohibit the payment of cash dividends without prior bank approval.

---

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

We design, develop, engineer and manufacture advanced miniature and
micro-miniature medical and electronic products. 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 2006 and 2005:

Sale of Manufacturing Facility  In June 2006, the Company
completed a sale-leaseback of the Vadnais Heights manufacturing facility. The transaction generated proceeds of $2,650,000, of
which $1,388,000 was used to repay the associated real estate loan and the remainder to pay down the Companys domestic
revolver. The gain on the sale of $1,045,799 will be recognized over the initial 10-year lease term as the renewal options in the
lease are not assured and a penalty does not exist if the Company does not exercise the renewal options.

Investment in HIMPP Partnership  On December 31, 2006, the
Company joined the Hearing Instrument Manufacturers Patent Partnership (HIMPP). Members of the partnership include the largest six
hearing aid manufacturers as well as several other smaller manufacturers. The purchase price of $1,800,000 includes an equity
interest in K/S HIMPP as well as a license agreement that will grant the Company access to over 45 US registered patents. The
Company accounted for the K/S HIMPP investment using equity method of accounting for common stock. The investment required a
payment of $260,000 to be made at the time of closing. The unpaid principal balance which was $1,540,000 at December 31, 2006,
will be paid in five annual installments of $260,000 in 2007 through 2011, with a final installment of $240,000 in 2012. The
unpaid balance is unsecured and bears interest at an annual rate of 4%, which shall be payable annually with each installment. The
Company is in the process of completing the allocation of the investment in the underlying equity in net assets of HIMPP,
therefore the amount recorded as investment is subject to refinement.

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 our remaining Heat Technology business (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). 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 $1,275,000 (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 principal balance which was $769,080 at December 31, 2006 will be paid in three equal annual installments beginning on
October 6, 2007. 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 $228,000 of inventory, $516,000 of fixed assets, and $663,000 of goodwill
based on fair value at the date of purchase and direct and out-of-pocket acquisition costs. The goodwill is deductible for tax
purposes. The Company accounted for the acquisition of Amecon 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 after the acquisition and are not restated. The cost to
acquire the business was allocated to the underlying assets acquired. The acquisition expanded 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.

---

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. In order to support the substantial growth in
2006 and 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 Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933, 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, and
potential 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, and the impact of recent accounting pronouncements and litigation; and
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | statements in our annual report on Form 10-K for the
year ended December 31, 2006, 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 successfully implement our business
and growth strategy;
|- | -----------------------------------------------------------------------

| | risks arising in connection with the insolvency of
our former subsidiary 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;
|- | ---------------------------------------

| | ability to collect our accounts receivable;
|- | -------------------------------------------

| | 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 repay debt when it comes due;
|- | ----------------------------------------

| | the loss of one of more of our major customers;
|- | -----------------------------------------------

| | ability to identify and integrate acquisitions;
|- | -----------------------------------------------

| | effects of legislation;
|- | -----------------------

| | effects of foreign operations;
|- | ------------------------------

| | 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, 2006 or in other filings we make 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.

# 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 recognize 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 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 the 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 on 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.

---

# Results of Operations

2006 Compared with 2005

# Consolidated Net Sales

Consolidated net sales for 2006 and 2005 were as follows (dollars in thousands):

|                       | Change
|---------------------- | ------
|
|                      
|Consolidated net sales |       

Our net sales are comprised of four main sectors: Hearing health,
electronics, medical and professional audio device. Our net sales in 2006 increased for all four product sectors over the prior
year. We experienced an increase of 18 percent in net sales in the medical equipment market in 2006. The significant increase for
medical products was due to strengthened orders for design and contract manufacturing with several medical OEM customers. Net
sales for our hearing heath sector grew 9 percent in 2006. 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 21 percent over the prior
year primarily due to sales of a new microphone to a specific customer. The electronics product sector increased 32 percent over
prior year. Exclusive of sales resulting from the Amecon Inc. acquisition, sales in this sector increased 1 percent.

# Gross Profit

Gross profit, both in dollars and as a percent of sales, for 2006 and 2005,
were as follows (dollars in thousands):

|             | 2006 |  | 2005 |        | Change
|------------ | ---- |  | ---- | ------ | ------
|
|            
|Gross profit |      |  | $    | 12,422 |       

In 2006, gross margin dollars increased due to the higher overall sales
volume; however, gross profit margin as a percentage of sales decreased. This decrease was primarily due to a lower margin product
mix including increased sales to the electronics market, which provided lower gross profit margins due to increased precious metal
material costs, and decreased sales of high margin chip components. Additionally, 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.

---

# Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) for the years ended
December 31, 2006 and 2005 were (dollars in thousands):

|                           | 2006 |  | 2005 |       | Change
|-------------------------- | ---- |  | ---- | ----- | ------
|
|                          
|Selling                    |      |  | $    | 3,410 |       
|Research and development   |      |  |      | 2,123 |       
|General and administrative |      |  |      | 4,922 |       

The increased general and administrative expenses and research and
development expenses in 2006 as compared to the prior year were primarily driven by the expenses incurred to adequately support
our growth, $214,000 of stock option expense recognized due to the adoption of FAS 123R and the October 6, 2005 acquisition of
Amecon, Inc., offset in part, by customer reimbursement for research and development expenses. The Company has also made an effort
to invest in strategic research and development opportunities in 2006.

# Net Interest Expense

Net interest expense for 2006 was $451,000, an increase of $94,000 from
$357,000 in 2005. The increase from the prior years expense was primarily due to the higher outstanding debt balance. The
higher outstanding debt balance was primarily driven by the debt related to the purchase of Amecon, Inc.

# Other

In 2006, other expense was $102,000 compared to other income of $106,000 in
2005. The other expense for 2006 primarily related to the loss on foreign currency exchange.

# Income Taxes

Income taxes were as follows (dollars in thousands):

|                             | 2006 |  | 2005
|---------------------------- | ---- |  | ----
|                            
|Income tax expense           |      |  | $   
|Percentage of pre-tax income |      |  |     

On February 22, 2006 the Company received approval from the Singapore
Ministry of Trade and Industry to lower the effective tax rate in Singapore from 20% to 13%. This change was retroactive to
September 2003. As such a $106,000 benefit was recognized in the first quarter of 2006. The expense in 2005 was primarily due to
foreign taxes on German and Singapore operations. The Company is in a net operating loss position (NOL) for federal income tax
purposes and, consequently, minimal expense from the current period domestic operations was recognized. We estimate we have
approximately $16.9 million of 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):

|                                                             | 2006 |  | 2005
|------------------------------------------------------------ | ---- |  | ----
|                                                            
|Net income (loss) from discontinued Heat Technology Business |      |  | $   

Heat Technology Segment

The 2006 net loss of $(78,000), or $(0.01) per diluted share, was primarily
due to a write-off of a portion of the note receivable recorded upon sale of the assets. The 2005 net income of $767,000, or $0.15
per diluted share, 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.

2005 Compared with 2004

# Consolidated Net Sales

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

|                       |  | Change
|---------------------- |  | ------
|
|                      
|Consolidated net sales |  |       

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 sales resulting from the Amecon Inc. acquisition, sales in this sector 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 |  | 2004Restated |        |  | ChangeRestated
|------------ | ---- |  | ------------ | ------ |  | --------------
|
|            
|Gross profit |      |  | $            | 11,602 |  |               

---

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 |  | 2004Restated |       | ChangeRestated
|-------------------------- | ---- |  | ------------ | ----- | --------------
|
|                          
|Selling                    |      |  | $            | 3,570 |               
|Research and development   |      |  |              | 1,818 |               
|Asset impairment           |      |  |              |      |               
|General and administrative |      |  |              | 4,793 |               

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 |  | 2004Restated
|----------------------------------- | ---- |  | ------------
|                                   
|Income tax expense                  |      |  | $           
|Percentage of pre-tax income (loss) |      |  |             

---

# Discontinued Operations

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

|                                                | 2005 |  | 2004
|----------------------------------------------- | ---- |  | ----
|                                               
|Net income from Heat Technology Business        |      |  | $   
|                                               
|Extraordinary gain from discontinued operations |      |  |     
|                                                |      |  |     
|                                               
|Net income from discontinued operations         |      |  | $   
|                                                |      |  |     

Heat Technology Segment

The 2005 net income of $767,000 was mainly attributable to the reduction in
the postretirement benefits liability. In the first quarter of 2005, we sold our remaining burner and component business for
approximately $3.5 million. As part of the agreement of sale, 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).

# Liquidity and Capital Resources

As of December 31, 2006, we had approximately $0.6 million of cash on hand.
Sources of our cash for the year ended December 31, 2006 have been from our operations, the sale of property and our senior
secured credit agreement, as described below.

Consolidated net working capital decreased to $8.1 million at December 31,
2006 from $8.2 million at December 31, 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):

|                                        | 2006 |  | 2005 |        | 2004Restated
|--------------------------------------- | ---- |  | ---- | ------ | ------------
|                                       
|Cash provided (used) by:                |      |  |      |        |             
|Continuing operations                   |      |  | $    | 1,656  |             
|Discontinued operations                 |      |  |      | (78    | )           
|Investing activities                    |      |  |      | (565   | )           
|Financing activities                    |      |  |      | (1,568 | )           
|Effect of exchange rate changes on cash |      |  |      | 45     |             
|                                        |      |  |      |        |             
|                                       
|Increase (decrease) in cash             |      |  | $    | (510   | )           
|                                        |      |  |      |        |             

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, 2006 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):

|                                                 | 2006 |  | 2005
|------------------------------------------------ | ---- |  | ----
|                                                
|Total availability under existing facilities     |      |  | $   
|                                                 |      |  |     
|                                                
|Borrowings and commitments:                      |      | 
|Domestic credit facility                         |      |  |     
|Domestic term loans                              |      |  |     
|Foreign overdraft and letter  of credit facility |      |  |     
|Capital leases                                   |      |  |     
|                                                 |      |  |     
|Total borrowings and commitments                 |      |  |     
|Remaining availability under existing facilities |      |  | $   
|                                                 |      |  |     

---

Our subsidiaries, Resistance Technology, Inc. and RTI Electronics, Inc.,
referred to as the borrowers, entered into a credit facility with Diversified Business Credit, Inc., referred to as the lender.
The credit facility provides for:

| |  | a $5,500,000 domestic revolving credit facility,
bearing interest at an annual rate equal to the greater of 5.25%, or 0.5% over prime (prime was 8.25% as of December 31, 2006).
Under the revolving credit facility, the availability of funds depends on a borrowing base composed of stated percentages of our
eligible trade receivables and eligible inventory, less a reserve.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a $1,000,000 domestic equipment term loan, bearing
interest at an annual rate equal to the greater of 5.25%, or 0.75% over the prime rate.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------

The revolving credit facility and equipment term loan also provide 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 and 3.50% for the term loan, but in no event will the loan rate be less than 5.25%. Notwithstanding the foregoing,
interest paid on loans under the credit facility for each twelve month period will not be less than $100,000.

Weighted average interest on the domestic asset-based revolving credit
facility was 8.17% and 8.15% for 2006 and 2005, respectively.

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

IntriCon has guaranteed the obligations of the borrowers under the credit
facility. The obligations under the credit facility are collateralized by a security interest in substantially all of our assets.

The outstanding balance of the revolving credit facility was $3,569,349 and
$3,753,597 at December 31, 2006 and 2005, respectively. The total remaining availability on the revolving credit facility was
$1,930,651 at December 31, 2006.

The revolving facility carries a commitment fee of 0.25% per year, payable on
the unborrowed portion of the line. Additionally, the credit facility requires an annual fee of $27,500 due on August 31, 2007,
and 2008. If the credit facility is terminated by us prior to maturity, we will be required to pay a termination fee equal to 2%
(if terminated prior to August 31, 2007) or 1% (if terminated prior to August 31, 2008) of the total of the maximum amount
available under the revolving credit facility plus the amounts then outstanding under the term loan.

The credit facility originally included a real estate loan with an original
principal balance of $1,500,000, which was associated with our Vadnais Heights manufacturing facility. In June 2006, we completed
a sale-leaseback of the Vadnais Heights manufacturing facility. The transaction generated proceeds of $2,650,000, of which
$1,388,000 was used to repay the associated real estate loan and the remainder to pay down our domestic revolver. The gain on the
sale of $1,045,799 will be recognized over the initial 10-year lease term as the renewal options in the lease are not assured and
a penalty does not exist if we do not exercise the renewal options. The outstanding balance on the real-estate term loan was
approximately $1,450,000 at December 31, 2005.

We are subject to various covenants under the credit facility, including
financial covenants relating to minimum book net worth, minimum tangible net worth, maximum liabilities to tangible net worth,
minimum net income and minimum fixed charge coverage ratio. Under the credit facility, without the prior written consent of the
lender, we may not, among other things, subject to certain exceptions: incur indebtedness; grant security interests; declare or
pay any cash dividends; purchase or redeem any of our capital stock or otherwise distribute any property on our capital stock;
incur capital expenditures of more than $2.5 million in the aggregate in 2007 or more than $250,000 in any one transaction;
dispose of any collateral pledged to the lender or all or any substantial part of our property; consolidate or merge with any
other corporation or acquire the stock of any corporation or enter into any other partnership or joint venture; substantially
alter the nature of our business; make investments; permit any breach, default or event of default to occur under any note, loan,
agreement or other contractual obligation binding us; or amend our governing documents.

---

The credit facility was amended effective as of the third quarter of 2006.
Under the amendment, in connection with the calculation and measurement of the financial covenants during fiscal year 2006, no
reduction will be made for any non-cash expense charge incurred after January 1, 2006 and attributable to such period under
accounting rule FAS 123R with respect to our approved stock option and equity plans; provided however that aggregate amount of
such expense may not exceed $1,000,000. The non-cash stock option expense for the year ended December 31, 2006, was $214,000.

For the year ended December 31, 2006 we were in default of our capital
expenditure and restricted investment covenants under the credit agreement. On February 26, 2007, we received a waiver from the
lender for the covenants that were in default. The waiver granted was effective only in this specific instance and only for the
year ended December 31, 2006. This waiver does not entitle us to any other or further waiver in any similar or other
circumstances.

Upon an event of default, as defined in the credit facility, the lender may
declare all amounts payable under the credit facility to be immediately due and payable and 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 assets that we pledged as collateral. The lender can suspend further advances until the
default has been cured or waived. Events of default include, among other things, default in the payment of any obligations due
under the credit facility, breach of the credit facility which is not cured within any applicable grace period, a change of
control (as defined in the credit facility), the failure to maintain certain financial covenants or insurance coverage,
events of bankruptcy or insolvency, the rendering of any award or judgment against us in excess of $50,000 or the occurrence of a
default under any evidence of indebtedness or material lease or contract that is not cured before the end of any applicable grace
period.

In addition to our domestic credit facilities, 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 $1,044,791 and $764,825 at
December 31, 2006 and December 31, 2005, respectively. The total remaining availability on the international senior secured credit
agreement was $955,209 at December 31, 2006.

After giving effect to the waiver described above, we were in compliance with
all of the terms 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 the our revolving credit loan facilities and the control of capital spending will be sufficient to meet
its anticipated cash requirements for operating needs through March 2008. 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 or
debt 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 or debt 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
its own financial condition. While management believes that we will meet our liquidity needs through March 2008, no assurance can
be given that we will be able to do so.

During 2005, the Company entered into several capital lease agreements to
fund the acquisition of machinery and equipment. For 2005, the total principal amount of these leases was $314,000 with effective
interest rates ranging from 6.7% to 8.0%. These agreements range from 3 to 5 years. The outstanding balance under these capital
lease agreements at December 31, 2006 and December 31, 2005 was $169,000 and $239,000, respectively.

---

# Contractual Obligations

The following table represents our contractual obligations and commercial
commitments as of December 31, 2006.

|                                                      | Payments Due by Period
|----------------------------------------------------- | ----------------------
|
|                                                     
|Domestic credit facility                              |                       
|Foreign overdraft and letter of credit facility       |                       
|Amecon Acquisition note payments                      |                       
|Partnership payable                                   |                       
|Pension and other post-retirement benefit obligations |                       
|Capital leases                                        |                       
|Operating leases                                      |                       
|                                                      |                       
|Total contractual cash obligations                    |                       
|                                                      |                       

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 continuing and 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 loss of $100,000 in 2006, a
gain of $3,000 in 2005, and a gain of $14,000 in 2004. See Note 12 to the Companys consolidated financial statements
included herein.

# Off-Balance Sheet Obligations

We have no material off-balance sheet obligations as of December 31, 2006.

# Related Party Transactions

For a discussion of related party transactions, see Note 17 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, 2006, (approximately 122 lawsuits as of December 31, 2005) 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 insurance 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 us, make the ultimate disposition of these lawsuits not material to our consolidated financial position or
results of operations.

---

A claim has been made against the Company by BET Investments
(BET) for recovery of costs allegedly incurred by BET in connection with the removal of drums containing hazardous
materials and related clean-up costs from real estate which the Company sold to BET in 2003 and upon which the Company formerly
operated a manufacturing facility. Based upon invoices submitted by BET, the maximum amount of BETs claim is approximately
$270,000. The Company and its counsel are currently evaluating the extent of the Companys liability, if any, for this claim.
Although we are unable to estimate the exact amount of loss, we believe at this time the loss estimate could range from $0 to
$270,000. Based on the information available to us at this time, no amount in this range appears to be a better estimate than any
other amount. As such, as of December 31, 2006 we have not recorded a reserve for this claim.

The Companys former wholly owned French subsidiary, Selas SAS, filed
for insolvency in France and is being managed by a court appointed judiciary administrator. The Company may be subject to
additional litigation or liabilities as a result of the French insolvency proceeding.

The Company is a defendant, along with a number of other parties, in a
lawsuit made by Energy Transportation Group, Inc. (ETG) alleging infringement of certain patents. Based upon the
discovery provided thus far by the Plaintiff, the Company and its counsel believe the Company has meritorious defenses in this
matter. As such, as of December 31, 2006 we have not recorded a reserve for this claim.

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

The Financial Accounting Standards Board (FASB) has published FASB
Interpretation (FIN) No. 48 (FIN No. 48), Accounting for Uncertainty in Income Taxes, to address the noncomparability
in reporting tax assets and liabilities resulting from a lack of specific guidance in FASB Statement of Financial Accounting
Standards (SFAS) No. 109 (SFAS 109), Accounting for Income Taxes, on the uncertainty in income taxes recognized in an
enterprises financial statements. Specifically, FIN No. 48 prescribes (a) a consistent recognition threshold and (b) a
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a
tax return, and provides related guidance on derecognition, classification, interest and penalties, accounting interim periods,
disclosure and transition. FIN No. 48 will apply to fiscal years beginning after December 15, 2006, with earlier adoption
permitted. The Company does not expect the adoption of FIN No. 48 to have a material impact on the consolidated financial
statements.

FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157) in
September 2006. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles (GAAP), and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements, FASB having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements.
However, for some entities, the application of this statement will change current practice. The Company is currently evaluating
the impact of SFAS 157 on its financial statements. This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years.

FASB issued SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans (SFAS 158) in September 2006. This statement requires an employer to: (1)
recognize in its statement of financial position an asset for a plans over-funded status or a liability for the plans
under-funded status, (2) measure the plans assets and obligations that determine its funded status as of the end of the
employers fiscal year (with limited exceptions) and (3) recognize as a component of other comprehensive income, the changes
in the funded status of the plan that arise during the year but are not recognized as components of net periodic benefit cost
pursuant to other relevant accounting standards. SFAS 158 also requires an employer to disclose in the notes to the financial
statements additional information on how delayed recognition of certain changes in the funded status of a defined benefit
postretirement plan affects net periodic benefit cost for the next fiscal year. Adoption of SFAS 158 is required for public
companies by the end of the fiscal year ending after December 15, 2006. Measurement of the plans assets and obligations
that determine its funded status as of the end of the employers fiscal year is required to be adopted for fiscal years
ending after December 15, 2008. The Company does not expect the measurement as of the end of the fiscal year to have a
material impact on the consolidated financial statements.

---

# 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 and interest rates.

# Foreign Currency Risk

We attempt 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, 2006, we did not have any forward foreign exchange contracts
outstanding. For more information regarding foreign currency risks, see Management Discussion and Analysis  Foreign
Currency Fluctuation on page 14.

# Interest Rate Risk

At December 31, 2006, we had $3.6 million in outstanding variable rate
borrowings. A material change in interest rates could adversely affect our operating results and cash flows. For example, 100
basis-point increase in interest rates could increase our annual interest expense by $10,000 for each $1.0 million of variable
debt outstanding for the entire year.

---

# Change in Independent Registered Public Accountants

On August 23, 2005, the Corporation dismissed KPMG LLP (KPMG) as
its independent registered public accountants. The Corporations Audit Committee made and approved the decision to change the
independent registered public accountants. The report of KPMG on the Corporations financial statements for the years ended
December 31, 2004 and 2003 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principle except that the report for the years ended December 31, 2004 and 2003 included a
separate paragraph which indicated that the Corporation restated its consolidated financial statements as of and for the years
ended December 31, 2004 and 2003. In connection with its audits for the years ended December 31, 2004 and 2003 and through August
23, 2005, there have been no disagreements with KPMG on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have caused
them to make reference thereto in their report on the financial statements for such years.

Effective as of August 23, 2005, the Corporation engaged Virchow, Krause
& Company, LLP as its new independent registered public accountants. The decision to engage Virchow, Krause & Company, LLP
was made and approved by the Audit Committee of the Board of Directors. Prior to August 23, 2005, the Corporation did not consult
with Virchow, Krause & Company, LLP regarding (A) either: the application of accounting principles to a specified transaction,
either completed or proposed; or the type of audit opinion that might be rendered on the Corporations financial statements;
or (ii) any matter that was either subject of a disagreement, as that term is defined in Item 304 (a)(1)(iv) of Regulation S-K and
the related instructions to Item 304 of Regulation S-K, or a reportable event, as that term is described in Item 304(a)(1)(v) of
Regulation S-K.

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders, Audit Committee and Board of Directors
IntriCon Corporation and Subsidiaries
Minneapolis, Minnesota

We have audited the accompanying consolidated balance sheets of IntriCon
Corporation and Subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations,
shareholders equity and comprehensive income and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2006, the Company adopted Financial Accounting Standards Board Statement No. 123(R), Share-Based Payment.

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, 2006
and 2005 and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally
accepted accounting principles.

/s/   Virchow, Krause & Company, LLP

Minneapolis, Minnesota
March 12, 2007

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
IntriCon Corporation:

We have audited the consolidated statements of operations, shareholders
equity and comprehensive income (loss) and cash flow of IntriCon Corporation (formerly Selas Corporation of America) and
subsidiaries as of December 31, 2004, and the related for the year 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 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 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, of IntriCon Corporation and subsidiaries the results of operations and cash flow for the
year 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 for the year 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 Corporation
Consolidated Statements of Operations
Years ended December 31

|                                                                                            | 2006 |  | 2005 |            | 2004Restated
|------------------------------------------------------------------------------------------- | ---- |  | ---- | ---------- | ------------
|                                                                                           
|Sales, net                                                                                  |      |  | $    | 51,725,952 |             
|                                                                                           
|Costs of sales                                                                              |      |  |      | 39,304,003 |             
|                                                                                            |      |  |      |            |             
|                                                                                           
|Gross profit                                                                                |      |  |      | 12,421,949 |             
|                                                                                           
|Operating expenses:                                                                         |      | 
|Selling expense                                                                             |      |  |      | 3,410,226  |             
|General and administrative expense                                                          |      |  |      | 4,921,818  |             
|Impairment of long-term assets                                                              |      |  |      |           |             
|Research and development expense                                                            |      |  |      | 2,122,594  |             
|                                                                                            |      |  |      |            |             
|Total operating expenses                                                                    |      |  |      | 10,454,638 |             
|                                                                                           
|Gain on sale of asset                                                                       |      |  |      |           |             
|                                                                                           
|Operating income (loss)                                                                     |      |  |      | 1,967,311  |             
|Interest expense                                                                            |      |  |      | 498,521    |             
|Interest income                                                                             |      |  |      | (48,003    | )           
|Other (income) expense, net                                                                 |      |  |      | 101,831    |             
|                                                                                            |      |  |      |            |             
|Income (loss) from continuing operations before    income taxes and discontinued operations |      |  |      | 1,414,962  |             
|Income tax expense                                                                          |      |  |      | 174,460    |             
|                                                                                            |      |  |      |            |             
|Income (loss) from continuing operations    before discontinued operations                  |      |  |      | 1,240,502  |             
|Income (loss) from discontinued    operations, net of income taxes (Note 3)                 |      |  |      | (77,990    | )           
|                                                                                            |      | 
|Extraordinary gain from discontinued operations                                             |      |  |      |           |             
|                                                                                            |      |  |      |            |             
|Net income                                                                                  |      |  | $    | 1,162,512  |             
|                                                                                            |      |  |      |            |             
|                                                                                           
|Basic income (loss) per share:                                                              |      | 
|Continuing operations                                                                       |      |  | $    | .24        |             
|Discontinued operations                                                                     |      |  |      | (.01       | )           
|Extraordinary gain from discontinued operations                                             |      |  |      |           |             
|                                                                                            |      |  |      |            |             
|Net income                                                                                  |      |  | $    | .23        |             
|                                                                                            |      |  |      |            |             
|Diluted income (loss) per share:                                                            |      | 
|Continuing operations                                                                       |      |  | $    | .23        |             
|Discontinued operations                                                                     |      |  |      | (.01       | )           
|Extraordinary gain from discontinued operations                                             |      |  |      |           |             
|                                                                                            |      |  |      |            |             
|Net income                                                                                  |      |  | $    | .22        |             
|                                                                                            |      |  |      |            |             

See accompanying notes to the consolidated financial statements.

---

# Consolidated Balance Sheets
At December 31

|Assets                                                                                                                                               | 2006 |  | 2005
|---------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | ----
|                                                                                                                                                    
|Current assets                                                                                                                                       |      |  |     
|                                                                                                                                                    
|Cash                                                                                                                                                 |      |  | $   
|                                                                                                                                                    
|Restricted cash                                                                                                                                      |      |  |     
|                                                                                                                                                    
|Accounts receivable, less allowance for doubtful accounts of $246,000 at December 31,  2006 and        $370,000 at December 31, 2005                 |      |  |     
|                                                                                                                                                    
|Inventories                                                                                                                                          |      |  |     
|                                                                                                                                                    
|Refundable income taxes                                                                                                                              |      |  |     
|                                                                                                                                                    
|Other current assets                                                                                                                                 |      |  |     
|                                                                                                                                                     |      |  |     
|                                                                                                                                                    
|Total current assets                                                                                                                                 |      |  |     
|                                                                                                                                                    
|Property, plant and equipment                                                                                                                        |      | 
|Land                                                                                                                                                 |      |  |     
|Buildings and improvements                                                                                                                           |      |  |     
|Machinery and equipment                                                                                                                              |      |  |     
|                                                                                                                                                     |      |  |     
|                                                                                                                                                     |      |  |     
|Less: accumulated depreciation and amortization                                                                                                      |      |  |     
|                                                                                                                                                     |      |  |     
|Net property, plant and equipment                                                                                                                    |      |  |     
|                                                                                                                                                    
|Long-term note receivable from sale of discontinued operations, less allowance of $225,000 at    December 31, 2006 and $296,000 at December 31, 2005 |      |  |     
|                                                                                                                                                    
|Goodwill                                                                                                                                             |      |  |     
|                                                                                                                                                    
|Investment in partnership                                                                                                                            |      |  |     
|                                                                                                                                                    
|Other assets, net                                                                                                                                    |      |  |     
|                                                                                                                                                     |      |  |     
|                                                                                                                                                    
|                                                                                                                                                     |      |  | $   
|                                                                                                                                                     |      |  |     

See accompanying notes to the consolidated financial statements.

---

# At December 31

|Liabilities and Shareholders Equity                                                                                               | 2006 |  | 2005
|---------------------------------------------------------------------------------------------------------------------------------- | ---- |  | ----
|                                                                                                                                  
|Current liabilities                                                                                                                |      |  |     
|                                                                                                                                  
|Checks written in excess of cash                                                                                                   |      |  | $   
|                                                                                                                                  
|Current maturities of long-term debt                                                                                               |      |  |     
|                                                                                                                                  
|Accounts payable                                                                                                                   |      |  |     
|                                                                                                                                  
|Customers' advance payments on contracts                                                                                           |      |  |     
|                                                                                                                                  
|Income tax payable                                                                                                                 |      |  |     
|                                                                                                                                  
|Deferred gain on building sale and other                                                                                           |      |  |     
|                                                                                                                                  
|Partnership payable                                                                                                                |      |  |     
|                                                                                                                                  
|Other accrued liabilities                                                                                                          |      |  |     
|                                                                                                                                   |      |  |     
|                                                                                                                                  
|Total current liabilities                                                                                                          |      |  |     
|                                                                                                                                  
|Long-term debt, less current maturities                                                                                            |      |  |     
|                                                                                                                                  
|Other post-retirement benefit obligations                                                                                          |      |  |     
|                                                                                                                                  
|Partnership payable                                                                                                                |      |  |     
|                                                                                                                                  
|Note payable, net of current portion (Amecon)                                                                                      |      |  |     
|                                                                                                                                  
|Deferred income taxes                                                                                                              |      |  |     
|                                                                                                                                  
|Accrued pension liability                                                                                                          |      |  |     
|                                                                                                                                  
|Deferred gain on building sale and other                                                                                           |      |  |     
|                                                                                                                                  
|Commitments and contingencies (notes 8 and 16)                                                                                     |      | 
|                                                                                                                                  
|Shareholders equity                                                                                                               |      | 
|Common shares, $1 par; 10,000,000 shares authorized;    5,706,235 and 5,665,568 shares issued; 5,190,481 and 5,149,814 outstanding |      |  |     
|                                                                                                                                  
|Additional paid-in capital                                                                                                         |      |  |     
|                                                                                                                                  
|Accumulated deficit                                                                                                                |      |  |     
|                                                                                                                                  
|Accumulated other comprehensive loss                                                                                               |      |  |     
|                                                                                                                                   |      |  |     
|                                                                                                                                   |      |  |     
|                                                                                                                                  
|Less: 515,754 common shares held in treasury, at cost                                                                              |      |  |     
|                                                                                                                                   |      |  |     
|                                                                                                                                  
|Total shareholders equity                                                                                                         |      |  |     
|                                                                                                                                   |      |  |     
|                                                                                                                                  
|                                                                                                                                   |      |  | $   
|                                                                                                                                   |      |  |     

See accompanying notes to the consolidated financial statements.

---

# Consolidated Statements of Cash Flows

|Years ended December 31,                                                               | 2006 |  | 2005 |            | 2004Restated
|-------------------------------------------------------------------------------------- | ---- |  | ---- | ---------- | ------------
|                                                                                      
|Cash flows from operating activities:                                                  |      |  |      |            |             
|Net income                                                                             |      |  | $    | 1,162,512  |             
|Adjustments to reconcile net loss to net cash provided (used) by operating activities: |      | 
|(Income) loss from discontinued operations                                             |      |  |      | 77,990     |             
|Extraordinary gain from discontinued operations                                        |      |  |      |           |             
|Impairment of long-term assets                                                         |      |  |      |           |             
|Depreciation and amortization                                                          |      |  |      | 1,849,354  |             
|Stock-based compensation                                                               |      |  |      | 213,531    |             
|Gains on sale of property and equipment                                                |      |  |      | (334       | )           
|Deferred taxes                                                                         |      |  |      | 41,548     |             
|Change in deferred gain                                                                |      |  |      | (55,033    | )           
|Allowance for doubtful accounts                                                        |      |  |      | (124,651   | )           
|Allowance for doubtful accounts                                                        |      |  |      | 78,923     |             
|Gain on sale of asset held for sale                                                    |      |  |      |           |             
|Changes in operating assets and liabilities:                                           |      | 
|Accounts receivable                                                                    |      |  |      | (1,379,448 | )           
|Inventories                                                                            |      |  |      | (2,119,322 | )           
|Other assets                                                                           |      |  |      | 210,846    |             
|Accounts payable                                                                       |      |  |      | 2,024,771  |             
|Accrued expenses                                                                       |      |  |      | (123,553   | )           
|Customers advance payments on contracts                                                |      |  |      |           |             
|Other liabilities                                                                      |      |  |      | (200,745   | )           
|                                                                                       |      |  |      |            |             
|                                                                                      
|Net cash provided (used)  by continuing operations                                     |      |  |      | 1,656,389  |             
|                                                                                      
|Net cash provided (used)  by discontinued operations                                   |      |  |      | (77,990    | )           
|                                                                                       |      |  |      |            |             
|                                                                                      
|Net cash provided by operating activities                                              |      |  |      | 1,578,399  |             
|                                                                                      
|Cash flows from investing activities:                                                  |      | 
|Purchases of property, plant and equipment                                             |      |  |      | (3,180,322 | )           
|Cash paid for acquisition of assets of Amecon, Inc                                     |      |  |      | (3,141     | )           
|Proceeds from sales of property, plant and equipment                                   |      |  |      | 2,568,363  |             
|Proceeds from note receivable                                                          |      |  |      | 50,000     |             
|Proceeds from sale of asset held for sale                                              |      |  |      |           |             
|                                                                                       |      |  |      |            |             
|                                                                                      
|Net cash provided (used) by  continuing operations                                     |      |  |      | (565,100   | )           
|Net cash used by discontinued operations                                               |      |  |      |           |             
|                                                                                       |      |  |      |            |             
|Net cash provided (used) by investing activities                                       |      |  |      | (565,100   | )           
|                                                                                      
|Cash flows from financing activities:                                                  |      | 
|Proceeds from short-term borrowings                                                    |      |  |      | 425,513    |             
|Proceeds from exercise of stock options                                                |      |  |      | 113,534    |             
|Repayments of short-term borrowings                                                    |      |  |      | (142,382   | )           
|Proceeds from long term borrowings                                                     |      |  |      | 2,654,034  |             
|Repayments of long-term debt                                                           |      |  |      | (4,622,893 | )           
|Payments of partnership payable                                                        |      |  |      | (260,000   | )           
|Change in restricted cash                                                              |      |  |      |           |             
|Change in checks written in excess of cash                                             |      |  |      | 263,757    |             
|                                                                                       |      |  |      |            |             
|                                                                                      
|Net cash provided (used) by financing activities                                       |      |  |      | (1,568,437 | )           
|                                                                                       |      |  |      |            |             
|                                                                                      
|Effect of exchange rate changes on cash                                                |      |  |      | 45,195     |             
|                                                                                       |      |  |      |            |             
|Increase (decrease) in cash                                                            |      |  |      | (509,943   | )           
|Cash beginning of year                                                                 |      |  |      | 1,109,402  |             
|                                                                                       |      |  |      |            |             
|                                                                                      
|Cash end of year                                                                       |      |  | $    | 599,459    |             
|                                                                                       |      |  |      |            |             

See accompanying notes to the consolidated financial statements.

---

# Consolidated Statements of Shareholders Equity and Comprehensive Income
Years ended December 31, 2006, 2005 and 2004

|                                             | CommonStockNumber ofShares |  | CommonStock$Amount |           | AdditionalPaid-inCapital |   | AccumulatedDeficit |  | AccumulatedOtherComprehensiveLoss |            | ComprehensiveIncome |   | TreasuryStock |   | TotalShareholders'Equity
|-------------------------------------------- | -------------------------- |  | ------------------ | --------- | ------------------------ | - | ------------------ |  | --------------------------------- | ---------- | ------------------- | - | ------------- | - | ------------------------
|                                            
|Balance December 31, 2003                    |                            |  |                    | 5,644,968 |                          | $ | 5,644,968          |  | $                                 | 12,025,790 |                     | $ | (3,828,530    | ) | $                       
|                                            
|Net income                                   |                            |  |                    |           |                          |   |                    |  |                                   |            |                     |   | 147,826       |   |                         
|                                            
|Translation gain, net of  income taxes of $0 |                            |  |                    |           |                          |   |                    |  |                                   |            |                     |   |               |   |                         
|                                             |                            |  |                    |           |                          |   |                    |  |                                   |            |                     |   |               |   |                         
|                                            
|Comprehensive income                         |                            |  |                    |           |                          |   |                    |  |                                   |            |                     |   |               |   |                         
|                                             |                            |  |                    |           |                          |   |                   
|                                            
|Balance December 31, 2004                    |                            |  |                    | 5,644,968 |                          |   | 5,644,968          |  |                                   | 12,025,790 |                     |   | (3,680,704    | ) |                         
|                                            
|Exercise of stock options                    |                            |  |                    | 20,600    |                          |   | 20,600             |  |                                   | 27,800     |                     |   |               |   |                         
|                                            
|Net income                                   |                            |  |                    |           |                          |   |                    |  |                                   |            |                     |   | 1,528,687     |   |                         
|                                            
|Translation gain, net of  income taxes of $0 |                            |  |                    |           |                          |   |                    |  |                                   |            |                     |   |               |   |                         
|                                             |                            |  |                    |           |                          |   |                    |  |                                   |            |                     |   |               |   |                         
|                                            
|Comprehensive income                         |                            |  |                    |           |                          |   |                    |  |                                   |            |                     |   |               |   |                         
|                                             |                            |  |                    |           |                          |   |                   
|                                            
|Balance December 31, 2005                    |                            |  |                    | 5,665,568 |                          |   | 5,665,568          |  |                                   | 12,053,590 |                     |   | (2,152,017    | ) |                         
|                                            
|Exercise of stock options                    |                            |  |                    | 40,667    |                          |   | 40,667             |  |                                   | 72,867     |                     |   |               |   |                         
|                                            
|Stock option expense                         |                            |  |                    |           |                          |   |                    |  |                                   | 213,531    |                     |   |               |   |                         
|                                            
|Net income                                   |                            |  |                    |           |                          |   |                    |  |                                   |            |                     |   | 1,162,512     |   |                         
|                                            
|Translation gain, net of  income taxes of $0 |                            |  |                    |           |                          |   |                    |  |                                   |            |                     |   |               |   |                         
|                                             |                            |  |                    |           |                          |   |                    |  |                                   |            |                     |   |               |   |                         
|                                            
|Comprehensive income                         |                            |  |                    |           |                          |   |                    |  |                                   |            |                     |   |               |   |                         
|                                             |                            |  |                    |           |                          |   |                   
|                                            
|Balance December 31, 2006                    |                            |  |                    | 5,706,235 |                          | $ | 5,706,235          |  | $                                 | 12,339,988 |                     |   | (989,505      | ) |                         
|                                             |                            |  |                    |           |                          |   |                    |  |                                   |            |                     |   |               |   |                         

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) 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.

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, including $48,400 of proceeds from stock options previously
included in proceeds from long-term borrowings in the statement of cash flows for the year ended December 31, 2005.

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 establishes 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 $246,000 and $370,000
at December 31, 2006 and 2005, respectively. Accounts receivable over 90 days were $589,000 and $664,000 at December 31, 2006 and
2005, 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 or 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 $1,849,000, $1,967,000, and $2,141,000 for the years ended December
31, 2006, 2005, and 2004, 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.

---

Investment in Equity Instruments  On December 27, 2006, the
Company joined the Hearing Instrument Manufacturers Patent Partnership (HIMPP). Members of the partnership include the largest six
hearing aid manufacturers as well as several other smaller manufacturers. The purchase price of $1,800,000 includes an equity
interest in K/S HIMPP as well as a license agreement that will grant the company access to over 45 US registered patents. The
Company accounted for the K/S HIMPP investment using the equity method of accounting for common stock. The investment required a
$260,000 payment made at the time of closing. The unpaid balance of $1,540,000 at December 31, 2006 will be paid in five annual
installments of $260,000 in 2007 through 2011, with a final installment of $240,000 in 2012. The unpaid balance is unsecured and
bears interest at an annual rate of 4%, which shall be payable annually with each installment. The Company is in the process of
determining the allocation of the investment in the underlying equity in net assets of K/S HIMPP, therefore the amount recorded as
investment is subject to refinement.

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  Under the various Company stock-based
compensation 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. One plan also permits the granting of stock awards, stock
appreciation rights, restricted stock units and other equity based awards.

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 an 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.

The Company adopted SFAS 123R on January 1, 2006 using the modified
prospective approach. SFAS 123R applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently
modified, repurchased, cancelled or unvested. Please see Note 13 for additional information.

---

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
for the years ended December 31, 2006, 2005 and 2004:

|                              | 2006 |  | 2005 |         | 2004
|----------------------------- | ---- |  | ---- | ------- | ----
|                             
|Beginning of the year balance |      |  | $    | 124,483 |     
|                             
|Warranty expense              |      |  |      | 52,558  |     
|Closed warranty claims        |      |  |      | (72,541 | )   
|                              |      |  |      |         |     
|                             
|End of the year balance       |      |  | $    | 104,500 |     
|                              |      |  |      |         |     

Advertising Costs  Advertising costs are charged to expense as
incurred. Advertising costs were $133,000, $101,000, and $139,000, for the years ended December 31, 2006, 2005, and 2004,
respectively, and are included in selling expense in the consolidated statements of operations.

Research and Development Costs  Research and development costs,
net of customer funding amounted to $2.1 million, $1.8 million, and $1.6 million in 2006, 2005 and 2004, respectively. Such costs
are charged to expense when incurred.

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

|                           | Year ended December 31,
|-------------------------- | -----------------------
|
|                          
|Total cost incurred        |                        
|Amount funded by customers |                        
|                           |                        
|Net expense                |                        
|                           |                        

Income Per Share  Basic income per share are computed by
dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted income per
common share reflects the potential dilution of securities that could share in the earnings. The Company uses the treasury stock
method for calculating the dilutive effect of stock options.

Comprehensive Income  Comprehensive income consists of net
income and foreign currency translation adjustments, which is presented in the consolidated statements of shareholders
equity and comprehensive income.

# New Accounting Pronouncements

The FASB has published FASB Interpretation (FIN) No. 48 (FIN No. 48),
Accounting for Uncertainty in Income Taxes, to address the noncomparability in reporting tax assets and liabilities
resulting from a lack of specific guidance in SFAS No. 109 (SFAS 109), Accounting for Income Taxes, on the uncertainty
in income taxes recognized in an enterprises financial statements. Specifically, FIN No. 48 prescribes (a) a consistent
recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return, and provides related guidance on derecognition, classification, interest and
penalties, accounting interim periods, disclosure and transition. FIN No. 48 will apply to fiscal years beginning after December
15, 2006, with earlier adoption permitted. The Company does not expect the adoption of FIN No. 48 to have a material impact on the
consolidated financial statements.

FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157) in
September 2006. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles (GAAP), and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements, FASB having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements.
However, for some entities, the application of this statement will change current practice. This statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal
years. The Company does not expect the adoption of SFAS 157 to have a material impact on the consolidated financial statements.

---

FASB issued SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans (SFAS 158) in September 2006. This statement requires an employer to: (1)
recognize in its statement of financial position an asset for a plans over-funded status or a liability for the plans
under-funded status, (2) measure the plans assets and obligations that determine its funded status as of the end of the
employers fiscal year (with limited exceptions) and (3) recognize as a component of other comprehensive income, the changes
in the funded status of the plan that arise during the year but are not recognized as components of net periodic benefit cost
pursuant to other relevant accounting standards. SFAS 158 also requires an employer to disclose in the notes to the financial
statements additional information on how delayed recognition of certain changes in the funded status of a defined benefit
postretirement plan affects net periodic benefit cost for the next fiscal year. Adoption of SFAS 158 is required for public
companies by the end of the fiscal year ending after December 15, 2006. Measurement of the plans assets and obligations
that determine its funded status as of the end of the employers fiscal year is required to be adopted for fiscal years
ending after December 15, 2008. The Company does not expect the measurement as of the end of the fiscal year to have a
material impact on the consolidated financial statements.

# 2.   RESTATEMENT OF FINANCIAL STATEMENTS

The Company restated its consolidated financial statements for the year 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 2004 audited amounts as
well as the impact of prior period Restatement amounts on beginning retained earnings at January 1, 2004.

For 2004, the Restatement reduced our loss from continuing operations before
income taxes by $49,000.

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 2004 is shown on the accompanying table.

The Restatement had no impact on historical cash balances.

---

The following table presents the effect of the Restatement on the
consolidated statements of operations for December 31, 2004 (in thousands except for per share data).

|                                                                                | For the Year Ending December 31, 2004
|------------------------------------------------------------------------------- | -------------------------------------
|
|                                                                               
|Sales, net                                                                      |                                      
|                                                                               
|Cost of sales                                                                   |                                      
|                                                                                |                                      
|                                                                               
|Gross profit                                                                    |                                      
|                                                                               
|Operating expenses:                                                             |                                      
|Selling expense                                                                 |                                      
|General and administrative expense                                              |                                      
|Impairment of long term assets                                                  |                                      
|Research and development expense                                                |                                      
|                                                                                |                                      
|Total operating expenses                                                        |                                      
|                                                                               
|Gain on sale of asset                                                           |                                      
|                                                                                |                                      
|Operating loss                                                                  |                                      
|                                                                               
|Interest expense                                                                |                                      
|Interest income                                                                 |                                      
|Other (income) expense, net                                                     |                                      
|                                                                                |                                      
|Loss from continuing operations before income taxes and discontinued operations |                                      
|Income tax expense                                                              |                                      
|                                                                                |                                      
|Loss from continuing operations before discontinued operations                  |                                      
|Income from discontinued operations, net of income taxes of $343                |                                      
|Extraordinary gain from discontinued operations                                 |                                      
|                                                                                |                                      
|Net income                                                                      |                                      
|                                                                                |                                      
|                                                                               
|Basic income (loss) per share:                                                  |                                      
|Continuing operations                                                           |                                      
|Discontinued operations                                                         |                                      
|Extraordinary gain from discontinued operations                                 |                                      
|                                                                                |                                      
|Net income                                                                      |                                      
|                                                                                |                                      
|                                                                               
|Diluted income (loss) per share:                                                |                                      
|Continuing operations                                                           |                                      
|Discontinued operations                                                         |                                      
|Extraordinary gain from discontinued operations                                 |                                      
|                                                                                |                                      
|Net income                                                                      |                                      
|                                                                                |                                      

---

# 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, in 2003, the Company initiated its plan to
sell the remainder of its Heat Technology segment and 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 (See Note 4). The Company recorded an
extraordinary gain of approximately $684,000 on the reacquisition of Selas Waermetechnik, GmbH (See Note 4). In the first quarter
of 2005, the Company sold the remainder of its Heat Technology segment, including the stock of Nippon Selas and Selas
Waermetechnik GmbH. 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 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 $225,000 and $296,000 at December 31, 2006 and 2005, respectively.

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

|                                                                          | Year ended December 31,
|------------------------------------------------------------------------- | -----------------------
|
|
|                                                                         
|Sales, net                                                                |                        
|Operating costs and expenses                                              |                        
|                                                                          |                        
|Operating income (loss)                                                   |                        
|Other expense, net (including loss on abandonment)                        |                        
|Income (loss) from operations before income tax (benefit)                 |                        
|                                                                          |                        
|Income tax expense (benefit)                                              |                        
|                                                                          |                        
|Net income (loss ) from discontinued operations before extraordinary gain |                        
|Extraordinary gain, net of income taxes of $343                           |                        
|                                                                          |                        
|Net income (loss) from discontinued operations                            |                        
|                                                                          |                        

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 discontinued Heat Technology 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 $1,275,000 (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 $769,080 at December 31, 2006 will
be paid in three equal annual installments beginning on October 6, 2007. 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 $228,000 of
inventory, $516,000 of fixed assets, and $663,000 of goodwill based on fair value at the date of purchase and direct and
out-of-pocket acquisition costs. 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 expanded 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.

# 5.   GEOGRAPHIC INFORMATION

The geographical distribution of long-lived assets and net sales to
geographical areas for the years ended December 31, 2006, 2005 and 2004 are set forth below:

# Long-lived Assets

|              | 2006 |  | 2005 |            | 2004Restated
|------------- | ---- |  | ---- | ---------- | ------------
|             
|United States |      |  | $    | 13,403,520 |             
|Other         |      |  |      | 1,097,221  |             
|              |      |  |      |            |             
|             
|Consolidated  |      |  | $    | 14,500,741 |             
|              |      |  |      |            |             

Long-lived assets consist primarily of property and equipment, investment in
partnership and goodwill. 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.

# Net Sales to Geographical Areas

|                    | 2006 |  | 2005 |            | 2004
|------------------- | ---- |  | ---- | ---------- | ----
|                   
|United States       |      |  | $    | 35,429,666 |     
|Germany             |      |  |      | 2,293,875  |     
|China               |      |  |      | 2,232,405  |     
|Japan               |      |  |      | 1,919,659  |     
|Singapore           |      |  |      | 1,786,344  |     
|Switzerland         |      |  |      | 1,653,803  |     
|United Kingdom      |      |  |      | 736,670    |     
|Belgium             |      |  |      | 687,475    |     
|Canada              |      |  |      | 502,203    |     
|France              |      |  |      | 405,713    |     
|All other countries |      |  |      | 4,078,139  |     
|                    |      |  |      |            |     
|Consolidated        |      |  | $    | 51,725,952 |     
|                    |      |  |      |            |     

---

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 2006, 2005 and 2004, no one customer accounted for more than 10 percent of
the Companys consolidated net sales. During 2006 the top five customers accounted for approximately $16 million or 30
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.

At December 31, 2006, one customer accounted for 10 percent of the
Companys consolidated accounts receivable. At December 31, 2005 one customer accounted for 20 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 $663,000 of goodwill was recognized (see Note 4). The increase in goodwill for the years ended December 31, 2006,
2005 and 2004 was $172,962, $489,634 and $0, respectively, and relates entirely to the Amecon purchase (see Note 4).

The Company performed the required goodwill impairment test during the years
ended December 31, 2006, 2005, and 2004. As part of compliance with this standard, the Company completed or obtained an analysis
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, 2006, 2005, and 2004. For each year, the analysis 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 analysis, the Company determined that its current goodwill balances were not impaired as of December 31, 2006 and 2005.

# 7.   INVENTORIES

Inventories consisted of the following:

|             | Raw materials |  | Work-in process |           | Finishedproducts andcomponents |   | Total    
|------------ | ------------- |  | --------------- | --------- | ------------------------------ | - | ---------
|            
|December 31,
|            
|2006         |               |  |                 |           |                                |   |          
|Domestic     |               |  | $               | 3,608,967 |                                | $ | 1,497,706
|Foreign      |               |  |                 | 1,162,716 |                                |   | 876,277  
|             |               |  |                 |           |                                |   |          
|Total        |               |  | $               | 4,771,683 |                                | $ | 2,373,983
|             |               |  |                 |           |                                |   |          
|            
|2005         |               |  |                 |           |                               
|Domestic     |               |  | $               | 2,854,064 |                                | $ | 1,103,986
|Foreign      |               |  |                 | 1,094,266 |                                |   | 662,167  
|             |               |  |                 |           |                                |   |          
|Total        |               |  | $               | 3,948,330 |                                | $ | 1,766,153
|             |               |  |                 |           |                                |   |          

---

# 8.   Short and Long-Term Debt

Short and long-term debt at December 31, 2006 and 2005 were as follows:

|                                                | 2006 |  | 2005
|----------------------------------------------- | ---- |  | ----
|                                               
|Domestic Asset-Based Revolving Credit Facility  |      |  | $   
|Foreign Overdraft and Letter of Credit Facility |      |  |     
|Domestic Term Loans (Real Estate Based in 2005) |      |  |     
|Domestic Capital Equipment Leases               |      |  |     
|                                                |      |  |     
|Total Long Term Debt                            |      |  |     
|Less: Current maturities                        |      |  |     
|                                                |      |  |     
|                                               
|Total Long Term Debt                            |      |  | $   
|                                                |      |  |     

|                                                | Payments Due by Period
|----------------------------------------------- | ----------------------
|
|                                               
|Domestic credit facility                        |                       
|Foreign overdraft and letter of credit facility |                       
|Capital leases                                  |                       
|                                                |                       
|Total long-term debt                            |                       
|                                                |                       

Our subsidiaries, Resistance Technology, Inc. and RTI Electronics, Inc.,
referred to as the borrowers, entered into a credit facility with Diversified Business Credit, Inc., referred to as the lender.
The credit facility provides for:

| |  | a $5,500,000 domestic revolving credit facility,
bearing interest at an annual rate equal to the greater of 5.25%, or 0.5% over prime (prime was 8.25% as of December 31, 2006).
Under the revolving credit facility, the availability of funds depends on a borrowing base composed of stated percentages of our
eligible trade receivables and eligible inventory, less a reserve.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a $1,000,000 domestic equipment term loan, bearing
interest at an annual rate equal to the greater of 5.25%, or 0.75% over the prime rate.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------

The revolving credit facility and equipment term loan also provide 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 and 3.50% for the term loan, but in no event will the loan rate be less than 5.25%. Notwithstanding the foregoing,
interest paid on loans under the credit facility for each twelve month period will not be less than $100,000.

Weighted average interest on the domestic asset-based revolving credit
facility was 8.17% and 8.15% for 2006 and 2005, respectively.

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

IntriCon has guaranteed the obligations of the borrowers under the credit
facility. The obligations under the credit facility are collateralized by a security interest in substantially all of our assets.

---

The outstanding balance of the revolving credit facility was $3,569,349 and
$3,753,597 at December 31, 2006 and 2005, respectively. The total remaining availability on the revolving credit facility was
$1,930,651 at December 31, 2006.

The revolving facility carries a commitment fee of 0.25% per year, payable on
the unborrowed portion of the line. Additionally, the credit facility requires an annual fee of $27,500 due on August 31, 2007,
and 2008. If the credit facility is terminated by us prior to maturity, we will be required to pay a termination fee equal to 2%
(if terminated prior to August 31, 2007) or 1% (if terminated prior to August 31, 2008) of the total of the maximum amount
available under the revolving credit facility plus the amounts then outstanding under the term loan.

The credit facility originally included a real estate loan with an original
principal balance of $1,500,000, which was associated with our Vadnais Heights manufacturing facility. In June 2006, we completed
a sale-leaseback of the Vadnais Heights manufacturing facility. The transaction generated proceeds of $2,650,000, of which
$1,388,000 was used to repay the associated real estate loan and the remainder to pay down our domestic revolver. The gain on the
sale of $1,045,799 will be recognized over the initial 10-year lease term as the renewal options in the lease are not assured and
a penalty does not exist if we do not exercise the renewal options. The outstanding balance on the real-estate term loan was
approximately $1,450,000 at December 31, 2005.

We are subject to various covenants under the credit facility, including
financial covenants relating to minimum book net worth, minimum tangible net worth, maximum liabilities to tangible net worth,
minimum net income and minimum fixed charge coverage ratio. Under the credit facility, without the prior written consent of the
lender, we may not, among other things, subject to certain exceptions: incur indebtedness; grant security interests; declare or
pay any cash dividends; purchase or redeem any of our capital stock or otherwise distribute any property on our capital stock;
incur capital expenditures of more than $2.5 million in the aggregate in 2007 or more than $250,000 in any one transaction;
dispose of any collateral pledged to the lender or all or any substantial part of our property; consolidate or merge with any
other corporation or acquire the stock of any corporation or enter into any other partnership or joint venture; substantially
alter the nature of our business; make investments; permit any breach, default or event of default to occur under any note, loan,
agreement or other contractual obligation binding us; or amend our governing documents.

The credit facility was amended effective as of the third quarter of 2006.
Under the amendment, in connection with the calculation and measurement of the financial covenants during fiscal year 2006, no
reduction will be made for any non-cash expense charge incurred after January 1, 2006 and attributable to such period under
accounting rule FAS 123R with respect to our approved stock option and equity plans; provided however that aggregate amount of
such expense may not exceed $1,000,000. The non-cash stock option expense for the year ended December 31, 2006, was $214,000.

For the year ended December 31, 2006 we were in default of our capital
expenditure and restricted investment covenants under the credit agreement. On February 26, 2007, we received a waiver from the
lender for the covenants that were in default. The waiver granted was effective only in this specific instance and only for the
year ended December 31, 2006. This waiver does not entitle us to any other or further waiver in any similar or other
circumstances.

Upon an event of default, as defined in the credit facility, the lender may
declare all amounts payable under the credit facility to be immediately due and payable and 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 assets that we pledged as collateral. The lender can suspend further advances until the
default has been cured or waived. Events of default include, among other things, default in the payment of any obligations due
under the credit facility, breach of the credit facility which is not cured within any applicable grace period, a change of
control (as defined in the credit facility), the failure to maintain certain financial covenants or insurance coverage,
events of bankruptcy or insolvency, the rendering of any award or judgment against us in excess of $50,000 or the occurrence of a
default under any evidence of indebtedness or material lease or contract that is not cured before the end of any applicable grace
period.

In addition to our domestic credit facilities, 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 $1,044,791 and $764,825 at
December 31, 2006 and December 31, 2005, respectively. The total remaining availability on the international senior secured credit
agreement was $955,209 at December 31, 2006.

---

During 2005, the Company entered into several capital lease agreements to
fund the acquisition of machinery and equipment. For 2005, the total principal amount of these leases was $314,000 with effective
interest rates ranging from 6.7% to 8.0%. These agreements range from 3 to 5 years. The outstanding balance under these capital
lease agreements at December 31, 2006 and December 31, 2005 was $169,000 and $239,000, respectively. The cost and accumulated
amortization of leased equipment was $314,000 and $314,000 and $74,129 and $29,284 at December 31, 2006 and 2005, respectively.
The amortization of capital leases is included in depreciation expense for 2006 and 2005.

# 9.   OTHER ACCRUED LIABILITIES

Other accrued liabilities at December 31, 2006, and 2005 were as follows:

|                                                                 | 2006 |  | 2005
|---------------------------------------------------------------- | ---- |  | ----
|                                                                
|Salaries, wages and commissions                                  |      |  | $   
|Taxes, including payroll withholdings and excluding income taxes |      |  |     
|Accrued severance benefits                                       |      |  |     
|Accrued professional fees                                        |      |  |     
|Current portion of note payable                                  |      |  |     
|Deferred revenue                                                 |      |  |     
|Other                                                            |      |  |     
|                                                                 |      |  |     
|                                                                
|                                                                 |      |  | $   
|                                                                 |      |  |     

# 10.   DOMESTIC AND FOREIGN INCOME TAXES

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

|                                         | Years ended December 31,
|---------------------------------------- | ------------------------
|
|                                        
|Current                                  |                         
|Federal                                  |                         
|State                                    |                         
|Foreign                                  |                         
|                                         |                         
|                                         |                         
|                                         |                         
|Deferred                                 |                         
|Federal                                  |                         
|State                                    |                         
|Foreign                                  |                         
|                                         |                         
|                                         |                         
|                                         |                         
|Income taxes                             |                         
|                                         |                         
|Income (loss) from continuing operations |                         
|before income taxes is as follows:       |                         
|Foreign                                  |                         
|Domestic                                 |                         
|                                         |                         
|                                         |                         
|                                         |                         

---

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

|                                     | Years ended December 31,
|------------------------------------ | ------------------------
|
|                                    
|Tax provision at statutory rate      |                         
|Change in valuation allowance        |                         
|Effect of foreign tax rates          |                         
|State taxes net of federal benefit   |                         
|Tax benefits related to export sales |                         
|Other                                |                         
|                                     |                         
|                                    
|Domestic and foreign income tax rate |                         
|                                     |                         

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31, 2006, and 2005 are presented below:

|                                                                                             | 2006 |  | 2005
|-------------------------------------------------------------------------------------------- | ---- |  | ----
|                                                                                            
|Deferred tax assets:                                                                         |      |  |     
|Net operating loss carry forwards                                                            |      |  | $   
|Post-retirement benefit obligations                                                          |      |  |     
|Goodwill amortization                                                                        |      |  |     
|State income taxes                                                                           |      |  |     
|Inventory reserves                                                                           |      |  |     
|Guarantee obligations and estimated future costs of service accruals                         |      |  |     
|Compensated absences, principally due to accrual for financial reporting purposes            |      |  |     
|Other                                                                                        |      |  |     
|                                                                                             |      |  |     
|Total gross deferred tax assets                                                              |      |  |     
|Less:  valuation allowance                                                                   |      |  |     
|                                                                                             |      |  |     
|Net deferred tax assets                                                                      |      |  |     
|                                                                                             |      |  |     
|Deferred tax liabilities:                                                                    |      | 
|Plant and equipment, principally due to differences in depreciation and capitalized interest |      |  |     
|                                                                                             |      |  |     
|Total gross deferred tax liabilities                                                         |      |  |     
|                                                                                             |      |  |     
|Net deferred tax liabilities                                                                 |      |  | $   
|                                                                                             |      |  |     

Domestic and foreign deferred taxes were comprised as follows:

|December 31, 2006              | Federal |  | State |   | Foreign |   | Total
|------------------------------ | ------- |  | ----- | - | ------- | - | -----
|                              
|Current deferred asset         |         |  | $     |  |         | $ |     
|Non-current deferred liability |         |  |       |  |         |   |     
|                               |         |  |       |   |         |   |      
|                              
|Net deferred tax liability     |         |  | $     |  |         | $ |     
|                               |         |  |       |   |         |   |      
|                              
|
|                              
|Current deferred asset         |         |  | $     |  |         | $ |     
|Non-current deferred liability |         |  |       |  |         |   |     
|                               |         |  |       |   |         |   |      
|                              
|Net deferred tax liability     |         |  | $     |  |         | $ |     
|                               |         |  |       |   |         |   |      

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 $16.9 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.

# 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 2006,
2005, and 2004 was $288,726, $253,568, and $267,796, 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, 2006 and 2005 for post-retirement medical benefits:

|                                                     | 2006 |  | 2005
|---------------------------------------------------- | ---- |  | ----
|                                                    
|Change in Projected Benefit Obligation               |      |  |     
|Projected benefit obligation at January 1            |      |  | $   
|Service cost (excluding administrative expenses)     |      |  |     
|Interest cost                                        |      |  |     
|Settlement                                           |      |  |     
|Actuarial (gain) loss                                |      |  |     
|Participant contributions                            |      |  |     
|Benefits paid                                        |      |  |     
|                                                     |      |  |     
|                                                    
|Projected benefit obligation at December 31          |      |  |     
|                                                     |      |  |     
|                                                    
|Change in Fair Value of Plan Assets                  |      | 
|Employer contributions                               |      |  |     
|Participant contributions                            |      |  |     
|Benefits paid                                        |      |  |     
|                                                     |      |  |     
|                                                    
|Fair value of plan assets at December 31             |      |  |     
|                                                     |      |  |     
|                                                    
|Funded status                                        |      |  |     
|                                                    
|Amount recognized in statement of financial position |      | 
|Current Liabilities                                  |      |  |     
|Noncurrent Liabilities                               |      |  |     
|                                                     |      |  |     
|Net Amount                                           |      |  |     
|                                                    
|Amount recognized in other comprehensive income      |      | 
|Unrecognized net actuarial gain (loss)               |      |  |     
|                                                     |      |  |     
|Total                                                |      |  |     
|                                                     |      |  |     

---

Accrued post-retirement medical benefit costs are classified as other
post-retirement benefit obligations as of December 31, 2006 and 2005.

Net periodic post-retirement medical benefit costs for 2006, 2005 and 2004
include the following components:

|                                                   | 2006 |  | 2005 |         | 2004
|-------------------------------------------------- | ---- |  | ---- | ------- | ----
|                                                  
|Service cost                                       |      |  | $    | 5,029   |     
|Interest cost                                      |      |  |      | 71,175  |     
|Amortization of unrecognized prior service cost    |      |  |      | (24,857 | )   
|Amortization of unrecognized actuarial gain (loss) |      |  |      | (5,908  | )   
|Curtailment                                        |      |  |      |        |     
|                                                   |      |  |      |         |     
|                                                  
|Net periodic post-retirement medical benefit cost  |      |  | $    | 70,296  |     
|                                                   |      |  |      |         |     

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 2006; the rate was assumed to decrease gradually to
5% by the year 2011 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, 2006 by $15,903 and the aggregate of
the service and interest cost components of net periodic post-retirement medical benefit cost for the year ended December 31, 2006
by $900.

The assumptions used years ended December 31 were as follows:

|                                                     | 2006 |  | 2005 |       | 2004
|---------------------------------------------------- | ---- |  | ---- | ----- | ----
|                                                    
|Annual increase in cost of benefits                  |      |  |      | 10.00 | %   
|Discount rate used to determine year-end obligations |      |  |      | 6.00  | %   
|Discount rate used to determine year-end expense     |      |  |      | 6.00  | %   

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

|2007              |  |  | $ | 180,000 | 
|----------------- |  |  | - | ------- | 
|2008              |  |  | $ | 180,000 | 
|2009              |  |  | $ | 185,000 | 
|2010              |  |  | $ | 185,000 | 
|2011              |  |  | $ | 190,000 | 
|Years 2012 - 2016 |  |  | $ | 945,000 | 

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, 2006
and 2005 are illustrated below.

|                               | 2006 |  | 2005
|------------------------------ | ---- |  | ----
|                              
|Current portion                |      |  | $   
|Long term portion              |      |  |     
|                               |      |  |     
|                              
|Total liability at December 31 |      |  | $   
|                               |      |  |     

---

# 12.   CURRENCY TRANSLATION ADJUSTMENTS

All assets and liabilities of foreign operations in which the functional
currency is foreign 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 German
operations is the European euro. As of January 1, 2006, the functional currency of the Companys Singapore operations changed
from the Singapore dollar to the U.S. 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. Foreign currency transaction amounts included in the statements of operation include a loss of $100,000 in 2006, a
gain of $3,000 in 2005, and a gain of $14,000 in 2004.

# 13.   COMMON STOCK AND STOCK OPTIONS

The Company adopted SFAS 123R on January 1, 2006 using the modified
prospective approach. Under the modified prospective approach, SFAS 123R applies to new awards and to awards that were outstanding
on January 1, 2006 that are subsequently modified, repurchased, cancelled or vest. Prior periods were not restated to reflect the
impact of adopting the new standard.

As a result of adopting SFAS 123R on January 1, 2006, the net income and net
income per share for the year ended December 31, 2006 were $214,000 or $0.04 lower than if the Company had continued to account
for stock-based compensation under APB Opinion No. 25.

The Company has a 1994 stock option plan, a 2001 stock option plan, a
non-employee directors stock option plan and a 2006 equity incentive plan. The time for granting options under the 1994 plan
has expired, however certain option grants under this plan remain exercisable as of December 31, 2006. Upon approval of the 2006
Equity Incentive Plan by the shareholders at the 2006 annual meeting of shareholders, no further grants will be made pursuant to
the non-employee directors and 2001 stock option plans, and the 12,500 shares that would have been available for future
issuance under the non-employee directors stock option plan will be available for issuance pursuant to the 2006 Equity
Incentive Plan. The aggregate number of shares of common stock for which awards could be granted under the 2006 Equity Incentive
Plan as of the date of adoption was 698,500 shares. Additionally, as outstanding options under the 2001 stock option plan and
non-employee directors stock option plan expire, such shares of the Companys common stock subject to the expired
options will become available for issuance under the 2006 Equity Incentive Plan.

Under the various plans, executives, employees and outside directors receive
awards of options to purchase common stock. Under the 2006 equity incentive plan, the Company may also grant stock awards, stock
appreciation rights, restricted stock units and other equity-based awards, although no such awards had been granted as of December
31, 2006.

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-averageExercise Price |           | Aggregate IntrinsicValue
|----------------------------------------------- | ---------------- |  | ------------------------------ | --------- | ------------------------
|                                               
|Outstanding at December 31, 2003                |                  |  |                                | 541,900   |                         
|Options forfeited                               |                  |  |                                | (127,000  | )                       
|Options granted                                 |                  |  |                                | 246,000   |                         
|                                                |                  | 
|                                               
|Outstanding at December 31, 2004                |                  |  |                                | 660,900   |                         
|Options forfeited                               |                  |  |                                | (107,900  | )                       
|Options expired                                 |                  |  |                                | (30,000   | )                       
|Options granted                                 |                  |  |                                | 227,500   |                         
|Options exercised                               |                  |  |                                | (20,600   | )                       
|                                                |                  | 
|                                               
|Outstanding at December 31, 2005                |                  |  |                                | 729,900   |                         
|Options forfeited                               |                  |  |                                | (51,500   | )                       
|Options granted                                 |                  |  |                                | 160,000   |                         
|Options exercised                               |                  |  |                                | (40,667   | )                       
|                                                |                  | 
|                                               
|Outstanding at December 31, 2006                |                  |  |                                | 797,733   |                         
|                                               
|Exercisable at December 31, 2004                |                  |  |                                | 380,215   |                         
|                                               
|Exercisable at December 31, 2005                |                  |  |                                | 389,400   |                         
|                                               
|Exercisable at December 31, 2006                |                  |  |                                | 465,900   |                         
|                                               
|Available for future grant at January 1, 2006   |                  |  |                                | 1,399,500 |                         
|                                               
|Available for future grant at December 31, 2006 |                  |  |                                | 588,500   |                         
|                                                |                  | 

The number of shares available for future grant at December 31, 2006, does
not include a total of up to 443,833 shares outstanding under the 2001 stock option plan and non-employee directors stock
option plan which will become available for issue under the 2006 Equity Incentive Plan in the event of the expiration of said
options.

The weighted-average remaining contractual term of options exercisable at
December 31, 2006, was 6.3 years. The total intrinsic value of options exercised during fiscal 2006 and 2005 was $111,874 and
$69,910, respectively. No options were exercised during fiscal 2004.

The weighted-average per share fair market value of options granted was
$2.77, $1.77, and $2.22, in 2006, 2005, and 2004, respectively, using the Black-Scholes option-pricing model.

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:

|                        | 2006 |  | 2005 |      | 2004
|----------------------- | ---- |  | ---- | ---- | ----
|                       
|Dividend yield          |      |  |      | 0.0  | %   
|Expected volatility     |      |  |      | 57.5 | %   
|Risk-free interest rate |      |  |      | 4.6  | %   
|Expected life (years)   |      |  |      | 4.0  |     

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.

---

The Company calculates expected volatility for stock options and awards using
both historical volatility as well as the average volatility of our peer competitors. The reason historical volatility was not
strictly used is the material changes in the Companys operations as a result of the sales of business segments that occurred
in 2004 and 2005 (see Note 3 and Note 4).

The Company currently estimates a nine percent forfeiture rate for stock
options but will continue to review this estimate in future periods.

The risk-free rates for the expected terms of the stock options and awards
and the employee stock purchase plan is based on the U.S. Treasury yield curve in effect at the time of grant.

The following summarizes information about the Companys stock options
outstanding at December 31, 2006:

|  | Options Outstanding |  | Options Exercisable
|- | ------------------- |  | -------------------
|
| 
|$ | 0 -   3.00          |  |                    
|$ | 3.01 -   4.40       |  |                    
|$ | 4.41 -   5.80       |  |                    
|$ | 8.60 - 20.00        |  |                    
|  |                     |  |                    
|  |                     |  |                    
|  |                     |  |                    

As of December 31, 2006, there was $568,685 of total unrecognized
compensation costs related to non-vested awards that is expected to be recognized over a weighted-average period of 2.1 years.

The following table illustrates the effect on net income and income (loss)
per share for the years ended December 31, 2005 and 2004 if the Company had applied the fair value recognition of SFAS 123:

|                                                                                                                                                     | Year Ended December 31,
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------
|
|                                                                                                                                                    
|Net income as reported                                                                                                                               |                        
|Deduct:  total stock-based employee compensation expense     determined under fair value based method for all awards,     net of related tax effects |                        
|                                                                                                                                                     |                        
|Pro forma net income (loss)                                                                                                                          |                        
|                                                                                                                                                     |                        
|                                                                                                                                                    
|Income (loss) per share:                                                                                                                             |                        
|Basic-as reported                                                                                                                                    |                        
|Basic-pro forma                                                                                                                                      |                        
|                                                                                                                                                    
|Income (loss) per share:                                                                                                                             |                        
|Diluted-as reported                                                                                                                                  |                        
|Diluted-pro forma                                                                                                                                    |                        

---

# 14.   QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

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

|                                                             | 2006 |  | 2005
|------------------------------------------------------------ | ---- |  | ----
|
|                                                            
|Sales, net                                                   |      |  | $   
|                                                            
|Gross profit                                                 |      |  |     
|                                                            
|Income (loss) from continuing operations     net of tax      |      |  |     
|Income (loss) from discontinued    operations net of tax (a) |      |  |     
|Net income (loss)                                            |      |  |     
|                                                            
|Income (loss) per share (b):                                 |      | 
|Basic income (loss) per share                                |      | 
|Continuing operations                                        |      |  | $   
|Discontinued operations                                      |      |  |     
|Net income (loss)                                            |      |  | $   
|                                                             |      |  |     
|                                                            
|Diluted income (loss) per share                              |      | 
|Continuing operations                                        |      |  | $   
|Discontinued operations                                      |      |  |     
|Net income (loss)                                            |      |  | $   
|                                                             |      |  |     

|a) |  | 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. 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 medical 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.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | 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:

|                                        | 2006 |  | 2005 |           | 2004
|--------------------------------------- | ---- |  | ---- | --------- | ----
|
|                                       
|Basic income   per share                |      |  |      |           |     
|                                       
|Income available to common shareholders |      |  | $    | 1,162,512 |     
|                                        |      |  |      |           |     
|                                       
|Effect of dilutive                      |      | 
|Securities                              |      | 
|                                       
|Stock options                           |      |  |      |          |     
|                                        |      |  |      |           |     
|                                       
|Diluted income   per share              |      |  | $    | 1,162,512 |     
|                                        |      |  |      |           |     

The Company excluded stock options of 196,000, 153,500, 367,800, in 2006.
2005, and 2004, respectively, from the computation of the diluted income per share as their effect would be anti-dilutive. For
additional disclosures regarding the stock options, see Note 13.

# 16.   CONTINGENCIES AND COMMITMENTS

We are a defendant along with a number of other parties in approximately 122
lawsuits as of December 31, 2006, (approximately 122 lawsuits as of December 31, 2005) 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 insurance 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.

A claim has been made against the Company by BET Investments
(BET) for recovery of costs allegedly incurred by BET in connection with the removal of drums containing hazardous
materials and related clean-up costs from real estate which the Company sold to BET in 2003 and upon which the Company formerly
operated a manufacturing facility. Based upon invoices submitted by BET, the maximum amount of BETs claim is approximately
$270,000. The Company and its counsel are currently evaluating the extent of the Companys liability, if any, for this claim.
Although we are unable to estimate the exact amount of loss, we believe at this time the loss estimate could range from $0 to
$270,000. Based on the information available to us at this time, no amount in this range appears to be a better estimate than any
other amount. As such, as of December 31, 2006 we have not recorded a reserve for this claim.

The Companys former wholly owned French subsidiary, Selas SAS, filed
for insolvency in France and is being managed by a court appointed judiciary administrator. The Company may be subject to
additional litigation or liabilities as a result of the French insolvency proceeding.

---

The Company is a defendant, along with a number of other parties, in a
lawsuit made by Energy Transportation Group, Inc. (ETG) alleging infringement of certain patents. Based upon the
discovery provided thus far by the Plaintiff, the Company and its counsel believe the Company has meritorious defenses in this
matter. As such, as of December 31, 2006 we have not recorded a reserve for this claim.

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.

Total rent expense for 2006, 2005 and 2004 under leases pertaining primarily
to engineering, manufacturing, sales and administrative facilities, with an initial term of one year or more, aggregated
$1,082,000, $1,035,000, and $1,156,000, respectively. Remaining rentals payable under such leases are as follows: 2007 
$1,284,000; 2008  $1,125,000; 2009  $736,000; 2010  $707,000; 2011  $620,000 and thereafter 
$1,039,000. Certain leases contain renewal options as defined in the agreements. The non-related lease agreement in Minnesota
includes three renewal options with each option an extension for five years. The California lease includes two renewal options
with each option an extension for five years and an option to purchase.

On December 14, 2004, the Company entered into a change of control or asset
sale agreement with Mark Gorder. The agreement calls for payments of two years base salary and unpaid bonus, if any, to Mr. Gorder
should there be a change of control or asset sale as defined in the agreement and Mr. Gorder is not retained for a period of at
least one year following such change of control or asset sale. Under the agreement, all stock options granted to Mr. Gorder would
vest immediately and be exercisable in accordance with the terms of such stock options. The Corporation 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 agreement. The agreement terminates, except to the extent that any obligation remains unpaid, upon the earlier of
termination of Mr. Gorders employment prior to a change of control or asset sale for any reason or the termination of Mr.
Gorder after a change of control or asset sale for any reason other than by involuntary termination as defined in the agreement.

# 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 2006, $368,000 for 2005, and $368,000 for
2004. Annual lease commitments approximate $475,000 through October 2011.

The Company uses the law firm of Blank Rome LLP for legal services. A partner
of that firm is the son-in-law of the Chairman of our Board of Directors.   In 2006, we paid that firm
approximately $282,000 for legal services and costs.

# 18.   STATEMENTS OF CASH FLOWS

Supplemental disclosures of cash flow information:

|                                                         | Years ended December 31,
|-------------------------------------------------------- | ------------------------
|
|                                                        
|Interest received                                        |                         
|Interest paid                                            |                         
|Income taxes paid                                        |                         
|Deferred gain recorded on sale of manufacturing facility |                         
|Acquisition of assets of Amecon, Inc.                    |                         
|Goodwill                                                 |                         
|Inventories                                              |                         
|Property and equipment                                   |                         
|Equipment purchased through capital lease obligation     |                         

The adjustment to the assets of Amecon, Inc. which were acquired in October
2005, was due to the final adjustment to the working capital requirement pursuant to the asset purchase agreement. The Company
believes no future material adjustment is likely.

---