##### 



SELECTED FINANCIAL DATA  (in $000s except for per share data)
 Years Ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001Net sales
    
    $
    60,774
    
    
    $
    51,535
    
    
    $
    46,681
    
    
    $
    $49,309
    
    
    $
    42,550Moving related costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,334Operating (loss) earnings
    
    
    (2,716
    )
    
    
    1,069
    
    
    
    (540
    )
    
    
    1,097
    
    
    
    (2,372
    )(Loss) earnings from continuing operations
    
    
    (2,996
    )
    
    
    1,068
    
    
    
    (697
    )
    
    
    763
    
    
    
    (2,894
    )Loss on discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,813
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52
    
    
    
    Net (loss) earnings
    
    
    ($2,996
    )
    
    $
    1,068
    
    
    
    ($697
    )
    
    $
    815
    
    
    
    ($5,707
    )Basic net (loss) earnings per common share
    
    
    ($0.35
    )
    
    $
    0.14
    
    
    
    ($0.10
    )
    
    $
    0.13
    
    
    
    (      $0.92
    )Diluted net (loss) earnings per common share
    
    
    ($0.35
    )
    
    $
    0.14
    
    
    
    ($0.10
    )
    
    $
    0.13
    
    
    
    (      $0.92
    )Total assets
    
    $
    29,077
    
    
    $
    28,478
    
    
    $
    21,172
    
    
    $
    22,909
    
    
    $
    21,575Long-term liabilities
    
    $
    8,187
    
    
    $
    3,168
    
    
    $
    5,968
    
    
    $
    8,352
    
    
    $
    8,925Working capital
    
    $
    16,626
    
    
    $
    14,244
    
    
    $
    10,052
    
    
    $
    12,269
    
    
    $
    11,607
 COMMON SHARE MARKET PRICE
 
    2005 Prices
    
    2004 PricesHigh
    
    Low
    
    High
    
    LowQuarter ended:March 31
    
    $
    6.35
    
    
    $
    4.68
    
    
    $
    4.65
    
    
    $
    3.22June 30
    
    $
    4.77
    
    
    $
    3.18
    
    
    $
    4.95
    
    
    $
    3.68September 30
    
    $
    3.58
    
    
    $
    1.65
    
    
    $
    6.03
    
    
    $
    4.47December 31
    
    $
    2.19
    
    
    $
    1.42
    
    
    $
    6.74
    
    
    $
    4.25




---



##### 



2005 PRESIDENTS REPORT


TO OUR SHAREHOLDERS, CUSTOMERS, SUPPLIERS &
EMPLOYEES:








|  |                                                                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys 2005 revenue grew by 18% to
    $60.8 million from $51.5 million the prior year.                                                                                                                                       
| 
| | The Companys 2005 net loss was ($3.0 million) or
    ($0.35) per share, compared to a profit of $1.1 million or
    $0.14 per share in 2004. The 2005 results included
    non-recurring charges of ($931,000) or ($0.11) per share.
| 
| | The Company sold a total of 30,100 LCDs generating revenue of
    $18.0 million in 2005 compared to 3,500 LCDs generating
    $2.4 million in 2004.                                                                                  
| 
| | This includes American Gaming & Electronics
    (AGE) who sold over 650 LCDs generating $512,000 of
    revenue, all in the fourth quarter.                                                                                          
| 
| | The major issue the Company faced was the LCD gross margin,
    which was 8.0% in 2005 compared to 14.0% in 2004.                                                                                                                    
| 
| | The Company paid a 5% stock dividend to shareholders for the
    7th consecutive year.                                                                                                                                               
| 
| | The Company secured another of the top 9 global gaming
    manufacturers as a customer and now sells to 7 of the top 9.                                                                                                              

Strategic Plan


Gaming sales continued to
dominate the Companys revenues and accounted for 76% of
the Companys revenue in 2005 compared to 72% in 2004.


The LCD Technology Transition Continues to Represent a
Huge Growth Opportunity for Wells-Gardner


The Company expects
that the percentage of gaming machines manufactured with LCDs
will grow from 30% in 2005 to virtually 100% by 2007.


Increasing LCD Margins is First Priority for Wells
Gardner




1



---



##### 









|  |                                                                               
|- | ------------------------------------------------------------------------------
| | Approximately 80% of the LCDs will be produced in Mainland China
    in 2006  
| 
| | There is an effective program in place to obtain tooled metalwork             
| 
| | There is an aggressive program to reduce airfreight.                          
| 
| | AGE is selling LCDs to casinos at higher margins than to
    manufacturers    
| 
| | There is an aggressive engineering program to cost reduce new
    LCD products

American Gaming & Electronics (AGE)


AGE now sells to
virtually every casino in North America.


Wells Eastern Asia (WEA)


WEA manufactured
over 70% of Wells-Gardners CRT monitors for the gaming
market in 2005.


Gaming Strategy


The Company
is now participating in four areas of the gaming market




|  |                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------
| | Monitor manufacturing in Malaysia and the US and LCD
    manufacturing in Mainland China and the US for the gaming
    industry.      
| 
| | Distributing Wells-Gardners and other manufacturers
    parts to casinos throughout North America and Central and South
    America.
| 
| | Servicing games and game parts for casinos throughout North
    America                                                               
| 
| | Refurbishing and selling used gaming equipment to customers
    worldwide                                                             



Wells-Gardner is the Largest Monitor and LCD Manufacturer
in the Global Gaming Industry.


The company sells to 7 of the top
9 global gaming manufacturers.


2



---



##### 



Quality Continues To Be the Top Priority


best-in certified supplier


2006 Global Gaming Outlook


 the number of gaming devices worldwide is
expected to grow by 15% over the next 2 years from
1.48 million to 1.7 million. In addition, the market share of video gaming devices using
CRT or LCD monitors is expected to grow from 50% in 2004 to 70%
in 2006 further increasing Wells-Gardners market
potential.


2006 Wells-Gardner Outlook

















3



---



##### 



MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION & 
 RESULTS OF OPERATIONS


Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004
















Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003














4



---



##### 





Market & Credit Risks




Critical Accounting Policies




Revenue Recognition




Inventory Obsolescence & Costing Methods


(first-in,


Provision for Bad Debts




Valuation Allowance for Deferred Taxes




5



---



##### 



Provision for Warranty




Contingencies




Liquidity & Capital Resources














Contractual Obligations




| |  |                            |                                          |  |       |        |  |  |      |   |     |  |      |  |   |       |      |  |  |   |      |  |  |  |      |   |  |  |       |   |   |  |  |  |   |   |  |  |  | 
| |  | -------------------------- | ---------------------------------------- |  | ----- | ------ |  |  | ---- | - | --- |  | ---- |  | - | ----- | ---- |  |  | - | ---- |  |  |  | ---- | - |  |  | ----- | - | - |  |  |  | - | - |  |  |  | 
| | 
| |  |                            | Payments Due In Year Ending December 31, |  |       |        | 
| |  |                            |                                          | 
| |  | (in $000s)                |                                          |  | Total |        |  |  | 2006 |   |     |  | 2007 |  |   |       | 2008 |  |  |   | 2009 |  |  |  | 2010 |   |  |  | 2011+ |   |   |  | 
| | 
| |  | Note Payable (Note 4)      |                                          |  | $     | 8,187  |  |  |      | $ |    |  |      |  | $ | 8,187 |      |  |  | $ |     |  |  |  | $    |  |  |  |       | $ |  |  |  |  | $ |  |  |  |  | 
| |  | Operating Leases (Note 12) |                                          |  | $     | 1,826  |  |  |      | $ | 896 |  |      |  | $ | 708   |      |  |  | $ | 201  |  |  |  | $    | 7 |  |  |       | $ | 7 |  |  |  | $ | 7 |  |  |  | 
| |  |                            |                                          |  |       |        |  |  |      |   |     |  |      |  |   |       |      |  |  |   |      |  |  |  |      |   |  | 
| |  |                            |                                          |  | $     | 10,013 |  |  |      | $ | 896 |  |      |  | $ | 8,895 |      |  |  | $ | 201  |  |  |  | $    | 7 |  |  |       | $ | 7 |  |  |  | $ | 7 |  |  |  | 
| |  |                            |                                          |  |       |        |  |  |      |   |     |  |      |  |   |       |      |  |  |   |      |  |  |  |      |   |  | 

Inflation




6



---



##### 



CONSOLIDATED BALANCE SHEETS As of December 31, 
 (in $000s except for share information)


| |  |                                          |                                                                                                                                                |  |      |        |        |   |      |   |        |        |   |  |  | 
| |  | ---------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ------ | - | ---- | - | ------ | ------ | - |  |  | 
| |  |                                          |                                                                                                                                                |  |      |       
| |  |                                          |                                                                                                                                                |  | 2005 |        |        |   | 2004 |   |        |        |  
| |  |                                          |                                                                                                                                                | 
| |  | ASSETS                                   |                                                                                                                                                |  |      |        |        |   |      |   |        |        |   |  | 
| |  | Current Assets:                          |                                                                                                                                                |  |      |        |        |   |      |   |        |        |   |  | 
| |  |                                          | Cash                                                                                                                                           |  |      | $      | 332    |   |      |   | $      | 534    |   |  |  | 
| |  |                                          | Accounts receivable, net of allowances of $134 in
    2005 & $100 in 2004                                                                      |  |      |        | 5,103  |   |      |   |        | 5,757  |   |  |  | 
| |  |                                          | Accounts receivable, affiliates                                                                                                                |  |      |        | 5,624  |   |      |   |        | 3,635  |   |  |  | 
| |  |                                          | Inventory                                                                                                                                      |  |      |        | 12,731 |   |      |   |        | 13,556 |   |  |  | 
| |  |                                          | Prepaid expenses & other assets                                                                                                                |  |      |        | 1,283  |   |      |   |        | 793    |   |  |  | 
| |  |                                          |                                                                                                                                                |  |      |        |        |  
| |  | Total current assets                     |                                                                                                                                                |  | $    | 25,073 |        |   |      | $ | 24,275 |        |   |  | 
| |  |                                          |                                                                                                                                                |  |      |        |        |  
| |  | Property, Plant & Equipment (at cost):   |                                                                                                                                                |  |      |        |        |   |      |   |        |        |   |  | 
| |  |                                          | Leasehold improvements                                                                                                                         |  |      |        | 365    |   |      |   |        | 279    |   |  |  | 
| |  |                                          | Machinery, equipment & software                                                                                                                |  |      |        | 8,791  |   |      |   |        | 8,679  |   |  |  | 
| |  |                                          | less: Accumulated depreciation & amortization                                                                                                  |  |      |        | (7,825 | ) |      |   |        | (7,222 | ) |  |  | 
| |  |                                          |                                                                                                                                                |  |      |        |        |  
| |  | Property, plant & equipment, net         |                                                                                                                                                |  | $    | 1,331  |        |   |      | $ | 1,736  |        |   |  | 
| |  |                                          |                                                                                                                                                |  |      |        |        |  
| |  | Other Assets:                            |                                                                                                                                                |  |      |        |        |   |      |   |        |        |   |  | 
| |  |                                          | Investment in joint venture                                                                                                                    |  |      |        | 1,344  |   |      |   |        | 1,138  |   |  |  | 
| |  |                                          | Goodwill                                                                                                                                       |  |      |        | 1,329  |   |      |   |        | 1,329  |   |  |  | 
| |  |                                          |                                                                                                                                                |  |      |        |        |  
| |  | Total other assets                       |                                                                                                                                                |  | $    | 2,673  |        |   |      | $ | 2,467  |        |   |  | 
| |  |                                          |                                                                                                                                                |  |      |        |        |  
| |  | Total Assets                             |                                                                                                                                                |  | $    | 29,077 |        |   |      | $ | 28,478 |        |   |  | 
| |  |                                          |                                                                                                                                                |  |      |        |        |  
| |  | LIABILITIES & SHAREHOLDERS EQUITY       |                                                                                                                                                |  |      |        |        |   |      |   |        |        |   |  | 
| |  | Current Liabilities:                     |                                                                                                                                                |  |      |        |        |   |      |   |        |        |   |  | 
| |  |                                          | Accounts payable                                                                                                                               |  |      |        | 3,894  |   |      |   |        | 4,333  |   |  |  | 
| |  |                                          | Accounts payable, affiliates                                                                                                                   |  |      |        | 3,805  |   |      |   |        | 5,023  |   |  |  | 
| |  |                                          | Accrued expenses                                                                                                                               |  |      |        | 748    |   |      |   |        | 675    |   |  |  | 
| |  |                                          |                                                                                                                                                |  |      |        |        |  
| |  | Total current liabilities                |                                                                                                                                                |  | $    | 8,447  |        |   |      | $ | 10,031 |        |   |  | 
| |  |                                          |                                                                                                                                                |  |      |        |        |  
| |  | Long-Term Liabilities:                   |                                                                                                                                                |  |      |        |        |   |      |   |        |        |   |  | 
| |  |                                          | Note payable                                                                                                                                   |  |      |        | 8,187  |   |      |   |        | 3,168  |   |  |  | 
| |  |                                          |                                                                                                                                                |  |      |        |        |  
| |  | Total long-term liabilities              |                                                                                                                                                |  | $    | 8,187  |        |   |      | $ | 3,168  |        |   |  | 
| |  |                                          |                                                                                                                                                |  |      |        |        |  
| |  | Total Liabilities                        |                                                                                                                                                |  | $    | 16,634 |        |   |      | $ | 13,199 |        |   |  | 
| |  |                                          |                                                                                                                                                |  |      |        |        |  
| |  | Shareholders Equity:                    |                                                                                                                                                |  |      |        |        |   |      |   |        |        |   |  | 
| |  |                                          | Common shares:                                                                                                                                 |  |      |        |        |   |      |   |        |        |   |  |  | 
| |  |                                          | $1 par value; 25,000,000 shares authorized;
    8,643,868 shares issued at December 31, 2005;
    8,153,077 shares issued at December 31, 2004 |  |      |        | 8,644  |   |      |   |        | 8,153  |   |  |  | 
| |  |                                          | Capital in excess of par value                                                                                                                 |  |      |        | 11,587 |   |      |   |        | 9,618  |   |  |  | 
| |  |                                          | Accumulated deficit                                                                                                                            |  |      |        | (7,524 | ) |      |   |        | (2,405 | ) |  |  | 
| |  |                                          | Unearned compensation                                                                                                                          |  |      |        | (264   | ) |      |   |        | (87    | ) |  |  | 
| |  |                                          |                                                                                                                                                |  |      |        |        |  
| |  | Total Shareholders Equity               |                                                                                                                                                |  | $    | 12,443 |        |   |      | $ | 15,279 |        |   |  | 
| |  |                                          |                                                                                                                                                |  |      |        |        |  
| |  | Total Liabilities & Shareholders Equity |                                                                                                                                                |  | $    | 29,077 |        |   |      | $ | 28,478 |        |   |  | 
| |  |                                          |                                                                                                                                                |  |      |        |        |  



7



---



##### 



CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 
 (in $000s except for share & per share
data)


| |  |                                              |                                       |  |      |           |        |   |      |   |           |        |      |  |   |           |        |   |  |  | 
| |  | -------------------------------------------- | ------------------------------------- |  | ---- | --------- | ------ | - | ---- | - | --------- | ------ | ---- |  | - | --------- | ------ | - |  |  | 
| |  |                                              |                                       |  |      |          
| |  |                                              |                                       |  | 2005 |           |        |   | 2004 |   |           |        | 2003 |  |   |           |       
| |  |                                              |                                       | 
| |  | Net sales                                    |                                       |  | $    | 60,774    |        |   |      | $ | 51,535    |        |      |  | $ | 46,681    |        |   |  | 
| |  |                                              | Cost of sales                         |  |      |           | 54,307 |   |      |   |           | 42,296 |      |  |   |           | 38,664 |   |  |  | 
| |  |                                              |                                       |  |      |           |        |   |      |   |           |       
| |  | Gross margin                                 |                                       |  |      | 6,467     |        |   |      |   | 9,239     |        |      |  |   | 8,017     |        |   |  | 
| |  |                                              | Engineering, selling & administrative |  |      |           | 9,183  |   |      |   |           | 8,170  |      |  |   |           | 8,557  |   |  |  | 
| |  |                                              |                                       |  |      |           |        |   |      |   |           |       
| |  | Operating (loss) earnings                    |                                       |  |      | (2,716    | )      |   |      |   | 1,069     |        |      |  |   | (540      | )      |   |  | 
| |  | Other (income) expense:                      |                                       |  |      |           |        |   |      |   |           |        |      |  |   |           |        |   |  | 
| |  |                                              | Interest                              |  |      |           | 444    |   |      |   |           | 302    |      |  |   |           | 327    |   |  |  | 
| |  |                                              | Joint venture income                  |  |      |           | (206   | ) |      |   |           | (340   | )    |  |   |           | (262   | ) |  |  | 
| |  |                                              | Other (income) expense                |  |      |           | (6     | ) |      |   |           | 5      |      |  |   |           | 78     |   |  |  | 
| |  |                                              |                                       |  |      |           |        |   |      |   |           |       
| |  | (Loss) earnings before income tax            |                                       |  |      | (2,948    | )      |   |      |   | 1,102     |        |      |  |   | (683      | )      |   |  | 
| |  | Income tax                                   |                                       |  |      | 48        |        |   |      |   | 34        |        |      |  |   | 14        |        |   |  | 
| |  |                                              |                                       |  |      |           |        |   |      |   |           |       
| |  | Net (loss) earnings                          |                                       |  | $    | (2,996    | )      |   |      | $ | 1,068     |        |      |  | $ | (697      | )      |   |  | 
| |  |                                              |                                       |  |      |           |        |   |      |   |           |       
| |  | Basic net (loss) earnings per common share   |                                       |  | $    | (0.35     | )      |   |      | $ | 0.14      |        |      |  | $ | (0.10     | )      |   |  | 
| |  | Diluted net (loss) earnings per common share |                                       |  | $    | (0.35     | )      |   |      | $ | 0.14      |        |      |  | $ | (0.10     | )      |   |  | 
| |  |                                              |                                       |  |      |           |        |   |      |   |           |       
| |  | Basic common shares outstanding              |                                       |  |      | 8,633,511 |        |   |      |   | 7,520,627 |        |      |  |   | 6,656,910 |        |   |  | 
| |  | Diluted common shares outstanding            |                                       |  |      | 8,633,511 |        |   |      |   | 7,706,037 |        |      |  |   | 6,656,910 |        |   |  | 
| |  |                                              |                                       |  |      |           |        |   |      |   |           |       



8



---



##### 



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (in $000s)


| |  |                                              |  |  |        |       |  |            |           |   |        |  |             |  |       |        |              |  |  |   |               |   |  |  |   |        |   |  |  | 
| |  | -------------------------------------------- |  |  | ------ | ----- |  | ---------- | --------- | - | ------ |  | ----------- |  | ----- | ------ | ------------ |  |  | - | ------------- | - |  |  | - | ------ | - |  |  | 
| |  |                                              |  |  |        |      
| |  |                                              |  |  |        |       |  | Capital In |           |   |        |  |             |  | Total |        |              |  | 
| |  |                                              |  |  | Common |       |  |            | Excess Of |   |        |  | Accumulated |  |       |        | Unearned     |  |  |   | Shareholders |   |  |  |  
| |  |                                              |  |  | Shares |       |  |            | Par Value |   |        |  | Deficit     |  |       |        | Compensation |  |  |   | Equity        |   |  |  |  
| |  |                                              |  | 
| |  | December 31, 2002                            |  |  | $      | 5,583 |  |            |           | $ | 3,827  |  |             |  | $     | (1,032 | )            |  |  | $ | (138          | ) |  |  | $ | 8,240  |   |  |  | 
| |  |                                              |  |  |        |       |  |            |           |   |        |  |             |  |       |        |              |  |  |  
| |  | Net loss                                     |  |  |        |      |  |            |           |   |       |  |             |  |       | (697   | )            |  |  |   |              |   |  |  |   | (697   | ) |  |  | 
| |  | Stock dividend issued                        |  |  |        | 290   |  |            |           |   | 315    |  |             |  |       | (605   | )            |  |  |   |              |   |  |  |   |       |   |  |  | 
| |  | Issuance/ cancellation of stock awards (net) |  |  |        | 61    |  |            |           |   | 33     |  |             |  |       |       |              |  |  |   | (52           | ) |  |  |   | 42     |   |  |  | 
| |  | Shares issued from stock purchase plan       |  |  |        | 6     |  |            |           |   | 7      |  |             |  |       |       |              |  |  |   |              |   |  |  |   | 13     |   |  |  | 
| |  | Stock options exercised                      |  |  |        | 281   |  |            |           |   | 349    |  |             |  |       |       |              |  |  |   |              |   |  |  |   | 630    |   |  |  | 
| |  | Amortization of unearned compensation        |  |  |        |      |  |            |           |   |       |  |             |  |       |       |              |  |  |   | 33            |   |  |  |   | 33     |   |  |  | 
| |  |                                              |  |  |        |       |  |            |           |   |        |  |             |  |       |        |              |  |  |  
| |  | December 31, 2003                            |  |  | $      | 6,221 |  |            |           | $ | 4,531  |  |             |  | $     | (2,334 | )            |  |  | $ | (157          | ) |  |  | $ | 8,261  |   |  |  | 
| |  |                                              |  |  |        |       |  |            |           |   |        |  |             |  |       |        |              |  |  |  
| |  | Net earnings                                 |  |  |        |      |  |            |           |   |       |  |             |  |       | 1,068  |              |  |  |   |              |   |  |  |   | 1,068  |   |  |  | 
| |  | Stock dividend issued                        |  |  |        | 319   |  |            |           |   | 820    |  |             |  |       | (1,139 | )            |  |  |   |              |   |  |  |   |       |   |  |  | 
| |  | Issuance/ cancellation of stock awards (net) |  |  |        | 4     |  |            |           |   | 44     |  |             |  |       |       |              |  |  |   | 16            |   |  |  |   | 64     |   |  |  | 
| |  | Private placement shares and warrants        |  |  |        | 1,217 |  |            |           |   | 3,816  |  |             |  |       |       |              |  |  |   |              |   |  |  |   | 5,033  |   |  |  | 
| |  | Shares issued from stock purchase plan       |  |  |        | 1     |  |            |           |   | 4      |  |             |  |       |       |              |  |  |   |              |   |  |  |   | 5      |   |  |  | 
| |  | Stock options exercised                      |  |  |        | 391   |  |            |           |   | 403    |  |             |  |       |       |              |  |  |   |              |   |  |  |   | 794    |   |  |  | 
| |  | Amortization of unearned compensation        |  |  |        |      |  |            |           |   |       |  |             |  |       |       |              |  |  |   | 54            |   |  |  |   | 54     |   |  |  | 
| |  |                                              |  |  |        |       |  |            |           |   |        |  |             |  |       |        |              |  |  |  
| |  | December 31, 2004                            |  |  | $      | 8,153 |  |            |           | $ | 9,618  |  |             |  | $     | (2,405 | )            |  |  | $ | (87           | ) |  |  | $ | 15,279 |   |  |  | 
| |  |                                              |  |  |        |       |  |            |           |   |        |  |             |  |       |        |              |  |  |  
| |  | Net loss                                     |  |  |        |      |  |            |           |   |       |  |             |  |       | (2,996 | )            |  |  |   |              |   |  |  |   | (2,996 | ) |  |  | 
| |  | Stock dividend issued                        |  |  |        | 412   |  |            |           |   | 1,711  |  |             |  |       | (2,123 | )            |  |  |   |              |   |  |  |   |       |   |  |  | 
| |  | Issuance/ cancellation of stock awards (net) |  |  |        | 36    |  |            |           |   | 226    |  |             |  |       |       |              |  |  |   | (271          | ) |  |  |   | (9     | ) |  |  | 
| |  | Shares issued from stock purchase plan       |  |  |        | 9     |  |            |           |   | 28     |  |             |  |       |       |              |  |  |   |              |   |  |  |   | 37     |   |  |  | 
| |  | Stock options exercised                      |  |  |        | 34    |  |            |           |   | 4      |  |             |  |       |       |              |  |  |   |              |   |  |  |   | 38     |   |  |  | 
| |  | Amortization of unearned compensation        |  |  |        |      |  |            |           |   |       |  |             |  |       |       |              |  |  |   | 94            |   |  |  |   | 94     |   |  |  | 
| |  |                                              |  |  |        |       |  |            |           |   |        |  |             |  |       |        |              |  |  |  
| |  | December 31, 2005                            |  |  | $      | 8,644 |  |            |           | $ | 11,587 |  |             |  | $     | (7,524 | )            |  |  | $ | (264          | ) |  |  | $ | 12,443 |   |  |  | 
| |  |                                              |  |  |        |       |  |            |           |   |        |  |             |  |       |        |              |  |  |  



9



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##### 



CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 
 (in $000s)


| |  |                                                     |                                                                                                          |                                       |      |        |        |        |      |   |        |        |        |   |   |        |        |        |   |  |  | 
| |  | --------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ------------------------------------- | ---- | ------ | ------ | ------ | ---- | - | ------ | ------ | ------ | - | - | ------ | ------ | ------ | - |  |  | 
| |  |                                                     |                                                                                                          |                                       |      |       
| |  |                                                     |                                                                                                          |                                       | 2005 |        |        |        | 2004 |   |        |        | 2003   |   |   |        |       
| |  |                                                     |                                                                                                          |                                      
| |  | Cash flows from operating activities:               |                                                                                                          |                                       |      |        |        |        |      |   |        |        |        |   |   |        |        |        |   | 
| |  |                                                     | Net (loss) earnings                                                                                      |                                       |      | $      | (2,996 | )      |      |   | $      | 1,068  |        |   |   | $      | (697   | )      |   |  | 
| |  |                                                     | Adjustments to reconcile net (loss) earnings to net cash (used
    in) provided by operating activities: |                                       |      |        |        |        |      |   |        |        |        |   |   |        |        |        |   |  | 
| |  |                                                     |                                                                                                          | Depreciation and amortization         |      |        |        | 603    |      |   |        |        | 515    |   |   |        |        | 521    |   |  |  | 
| |  |                                                     |                                                                                                          | Bad debt expense                      |      |        |        | 38     |      |   |        |        | 14     |   |   |        |        | 31     |   |  |  | 
| |  |                                                     |                                                                                                          | Amortization of unearned compensation |      |        |        | 85     |      |   |        |        | 54     |   |   |        |        | 33     |   |  |  | 
| |  |                                                     |                                                                                                          | Share of earnings of joint venture    |      |        |        | (206   | )    |   |        |        | (340   | ) |   |        |        | (262   | ) |  |  | 
| |  |                                                     | Changes in current assets & liabilities:                                                                 |                                       |      |        |        |        |      |   |        |        |        |   |   |        |        |        |   |  | 
| |  |                                                     |                                                                                                          | Accounts receivable, net              |      |        |        | 616    |      |   |        |        | (1,081 | ) |   |        |        | 3,114  |   |  |  | 
| |  |                                                     |                                                                                                          | Inventory                             |      |        |        | 825    |      |   |        |        | (4,652 | ) |   |        |        | 91     |   |  |  | 
| |  |                                                     |                                                                                                          | Prepaid expenses & other              |      |        |        | (490   | )    |   |        |        | 248    |   |   |        |        | (67    | ) |  |  | 
| |  |                                                     |                                                                                                          | Accounts payable, net                 |      |        |        | (439   | )    |   |        |        | 1,698  |   |   |        |        | (1,640 | ) |  |  | 
| |  |                                                     |                                                                                                          | Due to/from affiliates                |      |        |        | (3,207 | )    |   |        |        | (214   | ) |   |        |        | 1,493  |   |  |  | 
| |  |                                                     |                                                                                                          | Accrued expenses                      |      |        |        | 72     |      |   |        |        | 46     |   |   |        |        | (104   | ) |  |  | 
| |  |                                                     |                                                                                                          |                                       |      |        |        |        |      |   |        |       
| |  | Net cash (used in) provided by operating activities |                                                                                                          |                                       | $    | (5,099 | )      |        |      | $ | (2,644 | )      |        |   | $ | 2,513  |        |        |   | 
| |  |                                                     |                                                                                                          |                                       |      |        |        |        |      |   |        |       
| |  | Cash flows used in investing activities:            |                                                                                                          |                                       |      |        |        |        |      |   |        |        |        |   |   |        |        |        |   | 
| |  |                                                     | Additions to property, plant & equipment, net                                                            |                                       |      |        | (198   | )      |      |   |        | (201   | )      |   |   |        | (113   | )      |   |  | 
| |  |                                                     |                                                                                                          |                                       |      |        |        |        |      |   |        |       
| |  | Net cash used in investing activities               |                                                                                                          |                                       | $    | (198   | )      |        |      | $ | (201   | )      |        |   | $ | (113   | )      |        |   | 
| |  |                                                     |                                                                                                          |                                       |      |        |        |        |      |   |        |       
| |  | Cash flows from financing activities:               |                                                                                                          |                                       |      |        |        |        |      |   |        |        |        |   |   |        |        |        |   | 
| |  |                                                     | Borrowings (repayments) from note payable                                                                |                                       |      |        | 5,019  |        |      |   |        | (2,800 | )      |   |   |        | (2,984 | )      |   |  | 
| |  |                                                     | Repayment from installment note payable                                                                  |                                       |      |        |       |        |      |   |        |       |        |   |   |        | (600   | )      |   |  | 
| |  |                                                     | Proceeds (net) from private placement stock issuance                                                     |                                       |      |        |       |        |      |   |        | 5,037  |        |   |   |        |       |        |   |  | 
| |  |                                                     | Proceeds from stock issued, options exercised &
    employee stock purchase plan                         |                                       |      |        | 76     |        |      |   |        | 859    |        |   |   |        | 685    |        |   |  | 
| |  |                                                     |                                                                                                          |                                       |      |        |        |        |      |   |        |       
| |  | Net cash provided by (used in) financing activities |                                                                                                          |                                       | $    | 5,095  |        |        |      | $ | 3,096  |        |        |   | $ | (2,899 | )      |        |   | 
| |  |                                                     |                                                                                                          |                                       |      |        |        |        |      |   |        |       
| |  | Net (decrease) increase in cash                     |                                                                                                          |                                       |      | (202   | )      |        |      |   | 251    |        |        |   |   | (499   | )      |        |   | 
| |  | Cash at beginning of year                           |                                                                                                          |                                       |      | 534    |        |        |      |   | 283    |        |        |   |   | 782    |        |        |   | 
| |  |                                                     |                                                                                                          |                                       |      |        |        |        |      |   |        |       
| |  | Cash at end of year                                 |                                                                                                          |                                       | $    | 332    |        |        |      | $ | 534    |        |        |   | $ | 283    |        |        |   | 
| |  |                                                     |                                                                                                          |                                       |      |        |        |        |      |   |        |       
| |  | Supplemental cash flows disclosure:                 |                                                                                                          |                                       |      |        |        |        |      |   |        |        |        |   |   |        |        |        |   | 
| |  |                                                     | Income taxes paid                                                                                        |                                       |      | $      | 48     |        |      |   | $      | 34     |        |   |   | $      | 14     |        |   |  | 
| |  |                                                     | Interest paid                                                                                            |                                       |      | $      | 444    |        |      |   | $      | 302    |        |   |   | $      | 328    |        |   |  | 
| |  |                                                     |                                                                                                          |                                       |      |        |        |        |      |   |        |       



10



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##### 



NOTES TO THE FINANCIAL STATEMENTS


Note 1. DESCRIPTION OF THE BUSINESS




Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Principles of Consolidation




Management Estimates




Revenue Recognition




Financial Instruments




Receivables




Inventory Obsolescence & Costing Methods


(first-in,


11



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##### 



Provision For Warranty




| |  |                        |              |  |      |      |   |  |      |   |      |   |      |  |   |      |   |  |  | 
| |  | ---------------------- | ------------ |  | ---- | ---- | - |  | ---- | - | ---- | - | ---- |  | - | ---- | - |  |  | 
| | 
| |  |                        | December 31, |  |      |      |  
| |  |                        |              | 
| |  | (in $000s)            |              |  | 2005 |      |   |  | 2004 |   |      |   | 2003 |  |   |      |  
| | 
| |  | Beginning Balance      |              |  | $    | 100  |   |  |      | $ | 184  |   |      |  | $ | 100  |   |  |  | 
| |  | Increases To Provision |              |  | $    | 308  |   |  |      | $ | 311  |   |      |  | $ | 313  |   |  |  | 
| |  | Charges To Provision   |              |  | $    | (239 | ) |  |      | $ | (395 | ) |      |  | $ | (229 | ) |  |  | 
| |  |                        |              |  |      |      |   |  |      |   |      |  
| |  | Ending Balance         |              |  | $    | 169  |   |  |      | $ | 100  |   |      |  | $ | 184  |   |  |  | 
| |  |                        |              |  |      |      |   |  |      |   |      |  

Property, Plant & Equipment




Internal Use Software




Investments




Goodwill




Engineering Research & Development




Income Taxes




Earnings (Loss) Per Share




12



---



##### 





Stock Based Compensation




| |  |                                                              |                     |           |      |        |       |        |      |   |       |      |       |  |   |      |       |      |   |  |  | 
| |  | ------------------------------------------------------------ | ------------------- | --------- | ---- | ------ | ----- | ------ | ---- | - | ----- | ---- | ----- |  | - | ---- | ----- | ---- | - |  |  | 
| | 
| |  | (in $000s except per share data)                            |                     |           | 2005 |        |       |        | 2004 |   |       |      | 2003  |  |   |      |      
| | 
| |  | Net (loss) earnings:                                         |                     |           |      |        |       |        |      |   |       |      |       |  |   |      |       |      |   | 
| |  | As reported                                                  |                     |           | $    | (2,996 | )     |        |      | $ | 1,068 |      |       |  | $ | (697 | )     |      |   | 
| |  | Total stock-based employee compensation expense (fair value) |                     |           | $    | (13    | )     |        |      | $ | (26   | )    |       |  | $ | (99  | )     |      |   | 
| |  |                                                              |                     |           |      |        |       |        |      |   |       |     
| |  |                                                              |                     | Pro forma |      |        | $     | (3,009 | )    |   |       | $    | 1,042 |  |   |      | $     | (796 | ) |  |  | 
| |  | Net (loss) earnings per common and common equivalent share:  |                     |           |      |        |       |        |      |   |       |      |       |  |   |      |       |      |   | 
| |  |                                                              | Basic as reported   |           |      | $      | (0.35 | )      |      |   | $     | 0.14 |       |  |   | $    | (0.10 | )    |   |  | 
| |  |                                                              | Diluted as reported |           |      | $      | (0.35 | )      |      |   | $     | 0.14 |       |  |   | $    | (0.10 | )    |   |  | 
| |  |                                                              | Pro forma  Basic   |           |      | $      | (0.35 | )      |      |   | $     | 0.14 |       |  |   | $    | (0.12 | )    |   |  | 
| |  |                                                              | Pro forma  Diluted |           |      | $      | (0.35 | )      |      |   | $     | 0.14 |       |  |   | $    | (0.12 | )    |   |  | 
| |  |                                                              |                     |           |      |        |       |        |      |   |       |     

Reclassifications




Recently Issued Accounting Pronouncements




Note 3. INVENTORY




| |  |                  |              |  |      |        |  |  |      |   |        |  |  |  | 
| |  | ---------------- | ------------ |  | ---- | ------ |  |  | ---- | - | ------ |  |  |  | 
| | 
| |  |                  | December 31, |  |      |        | 
| |  |                  |              | 
| |  | (in $000s)      |              |  | 2005 |        |  |  | 2004 |   |        |  | 
| | 
| |  | Raw materials    |              |  | $    | 5,821  |  |  |      | $ | 6,297  |  |  |  | 
| |  | Work in progress |              |  | $    | 127    |  |  |      | $ | 908    |  |  |  | 
| |  | Finished goods   |              |  | $    | 6,783  |  |  |      | $ | 6,351  |  |  |  | 
| |  |                  |              |  |      |        |  | 
| |  | Total            |              |  | $    | 12,731 |  |  |      | $ | 13,556 |  |  |  | 
| |  |                  |              |  |      |        |  | 

13



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##### 



Note 4. DEBT




Note 5. STOCK PLANS






| |  |                                      |      |  |         |          |      |  |       |   |      |  |          |  |  |          |       |  |  |          |         |  |  |  |       |           |   |  |  |   |      |  |  |  | 
| |  | ------------------------------------ | ---- |  | ------- | -------- | ---- |  | ----- | - | ---- |  | -------- |  |  | -------- | ----- |  |  | -------- | ------- |  |  |  | ----- | --------- | - |  |  | - | ---- |  |  |  | 
| | 
| |  |                                      | 2005 |  |         |          | 2004 |  |       |   | 2003 |  |          |  | 
| |  |                                      |      |  |         | Weighted |      |  |       |   |      |  | Weighted |  |  |          |       |  |  | Weighted |         |  |  | 
| |  |                                      |      |  |         | average  |      |  |       |   |      |  | average  |  |  |          |       |  |  | average  |         |  |  | 
| |  |                                      |      |  |         | exercise |      |  |       |   |      |  | exercise |  |  |          |       |  |  | exercise |         |  |  | 
| |  |                                      |      |  | Options |          |      |  | price |   |      |  | Options  |  |  |          | price |  |  |          | Options |  |  |  | price |           |   |  | 
| | 
| |  | Outstanding at beginning of year     |      |  |         | 373,702  |      |  |       | $ | 2.45 |  |          |  |  | 879,019  |       |  |  | $        | 2.82    |  |  |  |       | 1,240,729 |   |  |  | $ | 2.87 |  |  |  | 
| |  | Granted                              |      |  |         | 0        |      |  |       | $ | 0.00 |  |          |  |  | 5,000    |       |  |  | $        | 2.56    |  |  |  |       | 10,000    |   |  |  | $ | 2.20 |  |  |  | 
| |  | Issued Pursuant to 5% Stock Dividend |      |  |         | 16,695   |      |  |       | $ | 2.44 |  |          |  |  | 69,681   |       |  |  | $        | 2.56    |  |  |  |       | 72,303    |   |  |  | $ | 2.20 |  |  |  | 
| |  | Forfeited                            |      |  |         | 0        |      |  |       | $ | 0.00 |  |          |  |  | (13,423  | )     |  |  | $        | 2.70    |  |  |  |       | (124,975  | ) |  |  | $ | 2.76 |  |  |  | 
| |  | Exercised                            |      |  |         | (40,150  | )    |  |       | $ | 1.84 |  |          |  |  | (566,575 | )     |  |  | $        | 2.33    |  |  |  |       | (319,038  | ) |  |  | $ | 2.45 |  |  |  | 
| |  |                                      |      |  |         |          |      |  |       |   |      |  |          |  |  |          |       |  |  |          |         |  |  | 
| |  | Outstanding at end of year           |      |  |         | 350,247  |      |  |       | $ | 2.39 |  |          |  |  | 373,702  |       |  |  | $        | 2.45    |  |  |  |       | 879,019   |   |  |  | $ | 2.82 |  |  |  | 
| |  |                                      |      |  |         |          |      |  |       |   |      |  |          |  |  |          |       |  |  |          |         |  |  | 



14



---



##### 





|                    |  |                 |                  |                     |             |         |  |  |                  |  |     |  |                  |  |   |      |             |  |  |  |                  |  |  |  |   |      |  |  |  | 
|------------------- |  | --------------- | ---------------- | ------------------- | ----------- | ------- |  |  | ---------------- |  | --- |  | ---------------- |  | - | ---- | ----------- |  |  |  | ---------------- |  |  |  | - | ---- |  |  |  | 
|                    |  |                 |                  |                     |            
|Options Outstanding |  |                 |                  | Options Exercisable |             |         |  | 
|                    |  |                 |                  |                     |            
|                    |  |                 | Weighted average |                     |             |         |  |  |                  |  |    
|                    |  | Range of        |                  |                     | Options     |         |  |  | remaining        |  |     |  | Weighted average |  |   |      | Options     |  |  |  | Weighted average |  |  |  |  
|                    |  | exercise prices |                  |                     | outstanding |         |  |  | contractual life |  |     |  | exercise price   |  |   |      | exercisable |  |  |  | exercise price   |  |  |  |  
|                    |  |                 |                  |                     |            
|                    |  | $1.71  $2.14   |                  |                     |             | 140,201 |  |  |                  |  | 4.1 |  |                  |  | $ | 1.86 |             |  |  |  | 140,201          |  |  |  | $ | 1.86 |  |  |  | 
|                    |  | $2.15  $2.67   |                  |                     |             | 85,939  |  |  |                  |  | 2.1 |  |                  |  | $ | 2.41 |             |  |  |  | 85,939           |  |  |  | $ | 2.41 |  |  |  | 
|                    |  | $2.68  $3.03   |                  |                     |             | 99,383  |  |  |                  |  | 2.5 |  |                  |  | $ | 2.89 |             |  |  |  | 99,383           |  |  |  | $ | 2.89 |  |  |  | 
|                    |  | $3.04  $3.55   |                  |                     |             | 24,724  |  |  |                  |  | 4.1 |  |                  |  | $ | 3.32 |             |  |  |  | 24,724           |  |  |  | $ | 3.32 |  |  |  | 
|                    |  |                 |                  |                     |             |         |  |  |                  |  |     |  |                  |  |   |      |             |  |  | 
|                    |  |                 |                  |                     |             | 350,247 |  |  |                  |  | 3.1 |  |                  |  | $ | 2.39 |             |  |  |  | 350,247          |  |  |  | $ | 2.39 |  |  |  | 
|                    |  |                 |                  |                     |             |         |  |  |                  |  |     |  |                  |  |   |      |             |  |  | 





Note 6. ACCRUED EXPENSES




| |  |                         |              |  |      |     |     |  |      |   |     |     |  |  |  | 
| |  | ----------------------- | ------------ |  | ---- | --- | --- |  | ---- | - | --- | --- |  |  |  | 
| | 
| |  |                         | December 31, |  |      |     |    
| |  |                         |              | 
| |  | (in $000s)             |              |  | 2005 |     |     |  | 2004 |   |     |     | 
| | 
| |  | Payroll & related costs |              |  | $    | 101 |     |  |      | $ | 294 |     |  |  | 
| |  | Sales commissions       |              |  | $    | 72  |     |  |      | $ | 43  |     |  |  | 
| |  | Warranty                |              |  | $    | 169 |     |  |      | $ | 100 |     |  |  | 
| |  | Other accrued expenses  |              |  | $    | 406 |     |  |      | $ | 238 |     |  |  | 
| |  |                         |              |  |      |     |     | 
| |  |                         | Total        |  |      | $   | 748 |  |      |   | $   | 675 |  |  |  | 
| |  |                         |              |  |      |     |     | 

15



---



##### 



Note 7. SIGNIFICANT CUSTOMERS




Note 8. INCOME TAXES




| |  |                                                               |  |  |      |        |   |  |      |   |      |   |      |  |   |      |   |  |  | 
| |  | ------------------------------------------------------------- |  |  | ---- | ------ | - |  | ---- | - | ---- | - | ---- |  | - | ---- | - |  |  | 
| | 
| |  | (in $000s)                                                   |  |  | 2005 |        |   |  | 2004 |   |      |   | 2003 |  |   |      |  
| | 
| |  | Computed expected tax (benefit) expense                       |  |  | $    | (1,002 | ) |  |      | $ | 374  |   |      |  | $ | (232 | ) |  |  | 
| |  | State income tax (benefit) expense, net of Federal tax effect |  |  | $    | (138   | ) |  |      | $ | 49   |   |      |  | $ | (33  | ) |  |  | 
| |  | Other, net                                                    |  |  | $    | (20    | ) |  |      | $ | (93  | ) |      |  | $ | (35  | ) |  |  | 
| |  | Change in valuation allowance                                 |  |  | $    | 1,208  |   |  |      | $ | (296 | ) |      |  | $ | 314  |   |  |  | 
| |  |                                                               |  |  |      |        |   |  |      |   |      |  
| |  |                                                               |  |  | $    | 48     |   |  |      | $ | 34   |   |      |  | $ | 14   |   |  |  | 
| |  |                                                               |  |  |      |        |   |  |      |   |      |  



| |  |                           |                                                                   |                                 |      |   |       |        |      |  |   |       |        |   |  |  | 
| |  | ------------------------- | ----------------------------------------------------------------- | ------------------------------- | ---- | - | ----- | ------ | ---- |  | - | ----- | ------ | - |  |  | 
| | 
| |  |                           | December 31,                                                      |                                 |      |   |      
| |  |                           |                                                                   |                                
| |  | (in $000s)               |                                                                   |                                 | 2005 |   |       |        | 2004 |  |   |       |       
| | 
| |  | Deferred tax assets:      |                                                                   |                                 |      |   |       |        |      |  |   |       |        |   | 
| |  |                           | Allowance for doubtful accounts                                   |                                 |      | $ | 52    |        |      |  | $ | 39    |        |   |  | 
| |  |                           | Warranty reserve                                                  |                                 |      | $ | 65    |        |      |  | $ | 39    |        |   |  | 
| |  |                           | Inventory reserve                                                 |                                 |      | $ | 384   |        |      |  | $ | 147   |        |   |  | 
| |  |                           | Net operating loss carryforwards                                  |                                 |      | $ | 3,564 |        |      |  | $ | 2,748 |        |   |  | 
| |  |                           | Alternative minimum tax credit carryforwards                      |                                 |      | $ | 62    |        |      |  | $ | 62    |        |   |  | 
| |  |                           | General business credit carryforwards                             |                                 |      | $ | 129   |        |      |  | $ | 129   |        |   |  | 
| |  |                           | Other                                                             |                                 |      | $ | 47    |        |      |  | $ | 36    |        |   |  | 
| |  |                           |                                                                   |                                 |      |   |       |       
| |  |                           |                                                                   | Total gross deferred tax assets |      |   | $     | 4,303  |      |  |   | $     | 3,200  |   |  |  | 
| |  |                           |                                                                   | Less valuation allowance        |      |   | $     | (3,886 | )    |  |   | $     | (2,678 | ) |  |  | 
| |  |                           |                                                                   |                                 |      |   |       |       
| |  |                           |                                                                   | Total deferred tax assets       |      |   | $     | 417    |      |  |   | $     | 522    |   |  |  | 
| |  | Deferred tax liabilities: |                                                                   |                                 |      |   |       |        |      |  |   |       |        |   | 
| |  |                           | Property, plant, equipment and software, principally depreciation |                                 |      | $ | 265   |        |      |  | $ | 410   |        |   |  | 
| |  |                           | Goodwill                                                          |                                 |      | $ | 152   |        |      |  | $ | 112   |        |   |  | 
| |  |                           |                                                                   |                                 |      |   |       |       
| |  |                           |                                                                   | Total deferred tax liabilities  |      |   | $     | 417    |      |  |   | $     | 522    |   |  |  | 
| |  |                           |                                                                   |                                 |      |   |       |       
| |  | Net deferred taxes        |                                                                   |                                 |      |  |       |        |      |  |  |       |        |   | 
| |  |                           |                                                                   |                                 |      |   |       |       



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Note 9. EARNINGS PER SHARE




| |  |                                              |                                                     |  |      |       |        |   |      |   |      |       |      |  |   |       |       |   |  |  | 
| |  | -------------------------------------------- | --------------------------------------------------- |  | ---- | ----- | ------ | - | ---- | - | ---- | ----- | ---- |  | - | ----- | ----- | - |  |  | 
| | 
| |  | (in $000s except for per share data)        |                                                     |  | 2005 |       |        |   | 2004 |   |      |       | 2003 |  |   |       |      
| | 
| |  | Basic (loss) earnings per common share:      |                                                     |  |      |       |        |   |      |   |      |       |      |  |   |       |       |   |  | 
| |  |                                              | Net (loss) earnings                                 |  |      | $     | (2,996 | ) |      |   | $    | 1,068 |      |  |   | $     | (697  | ) |  |  | 
| |  |                                              | Weighted-average common shares outstanding          |  |      |       | 8,634  |   |      |   |      | 7,521 |      |  |   |       | 6,657 |   |  |  | 
| |  |                                              |                                                     |  |      |       |        |   |      |   |      |      
| |  | Basic net (loss) earnings per common share   |                                                     |  | $    | (0.35 | )      |   |      | $ | 0.14 |       |      |  | $ | (0.10 | )     |   |  | 
| |  |                                              |                                                     |  |      |       |        |   |      |   |      |      
| |  | Diluted (loss) earnings per common share:    |                                                     |  |      |       |        |   |      |   |      |       |      |  |   |       |       |   |  | 
| |  |                                              | Net (loss) earnings                                 |  |      | $     | (2,996 | ) |      |   | $    | 1,068 |      |  |   | $     | (697  | ) |  |  | 
| |  |                                              | Weighted-average common shares outstanding          |  |      |       | 8,634  |   |      |   |      | 7,521 |      |  |   |       | 6,657 |   |  |  | 
| |  |                                              | Add: Effect of dilutive stock options               |  |      |       |       |   |      |   |      | 185   |      |  |   |       |      |   |  |  | 
| |  |                                              |                                                     |  |      |       |        |   |      |   |      |      
| |  |                                              | Adjusted weighted-average common shares outstanding |  |      |       | 8,634  |   |      |   |      | 7,706 |      |  |   |       | 6,657 |   |  |  | 
| |  |                                              |                                                     |  |      |       |        |   |      |   |      |      
| |  | Diluted net (loss) earnings per common share |                                                     |  | $    | (0.35 | )      |   |      | $ | 0.14 |       |      |  | $ | (0.10 | )     |   |  | 
| |  |                                              |                                                     |  |      |       |        |   |      |   |      |      



Note 10. OPERATING SEGMENTS




| |  |                            |                                  |  |      |   |        |   |      |  |   |        |      |  |  |   |        |   |  |  | 
| |  | -------------------------- | -------------------------------- |  | ---- | - | ------ | - | ---- |  | - | ------ | ---- |  |  | - | ------ | - |  |  | 
| | 
| |  |                            | December 31,                     |  |      |   |       
| |  |                            |                                  | 
| |  | (in $000s)                |                                  |  | 2005 |   |        |   | 2004 |  |   |        | 2003 |  |  |   |       
| | 
| |  | Net Sales:                 |                                  |  |      |   |        |   |      |  |   |        |      |  |  |   |        |   |  | 
| |  |                            | Gaming                           |  |      | $ | 46,409 |   |      |  | $ | 37,205 |      |  |  | $ | 35,115 |   |  |  | 
| |  |                            | Amusement                        |  |      | $ | 13,467 |   |      |  | $ | 12,174 |      |  |  | $ | 10,322 |   |  |  | 
| |  |                            | Other                            |  |      | $ | 898    |   |      |  | $ | 2,156  |      |  |  | $ | 1,244  |   |  |  | 
| |  |                            |                                  |  |      |   |        |   |      |  |   |       
| |  |                            | Total Net Sales                  |  |      | $ | 60,774 |   |      |  | $ | 51,535 |      |  |  | $ | 46,681 |   |  |  | 
| |  |                            |                                  |  |      |   |        |   |      |  |   |       
| |  | Operating (loss) earnings: |                                  |  |      |   |        |   |      |  |   |        |      |  |  |   |        |   |  | 
| |  |                            | Gaming                           |  |      | $ | 897    |   |      |  | $ | 2,648  |      |  |  | $ | 1,487  |   |  |  | 
| |  |                            | Amusement                        |  |      | $ | 222    |   |      |  | $ | 1,354  |      |  |  | $ | 900    |   |  |  | 
| |  |                            | Other                            |  |      | $ | 71     |   |      |  | $ | 281    |      |  |  | $ | 219    |   |  |  | 
| |  |                            | Unallocated Administration Costs |  |      | $ | (3,906 | ) |      |  | $ | (3,214 | )    |  |  | $ | (3,146 | ) |  |  | 
| |  |                            |                                  |  |      |   |        |   |      |  |   |       
| |  |                            | Total operating (loss) earnings  |  |      | $ | (2,716 | ) |      |  | $ | 1,069  |      |  |  | $ | (540   | ) |  |  | 
| |  |                            |                                  |  |      |   |        |   |      |  |   |       

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Note 11. JOINT VENTURE/ AFFILIATES










Note 12. LEASE COMMITMENTS




| |  |             |              |  |             |       |  |  |  | 
| |  | ----------- | ------------ |  | ----------- | ----- |  |  |  | 
| | 
| |  |             | Years ending |  |             |       | 
| |  | (in $000s) |              |  | December 31 |       |  |  | 
| | 
| |  | 2006        |              |  | $           | 896   |  |  |  | 
| |  | 2007        |              |  | $           | 708   |  |  |  | 
| |  | 2008        |              |  | $           | 201   |  |  |  | 
| |  | 2009        |              |  | $           | 7     |  |  |  | 
| |  | 2010        |              |  | $           | 7     |  |  |  | 
| |  | Thereafter  |              |  | $           | 7     |  |  |  | 
| |  |             |              | 
| |  |             |              |  | $           | 1,826 |  |  |  | 
| |  |             |              | 



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|         |                                   
|-------- | ----------------------------------
|Note 13. | UNAUDITED QUARTERLY FINANCIAL DATA



| |  |                                   |      |  |       |        |   |  |        |   |        |   |       |  |   |        |        |  |  |   |        |   |  |  | 
| |  | --------------------------------- | ---- |  | ----- | ------ | - |  | ------ | - | ------ | - | ----- |  | - | ------ | ------ |  |  | - | ------ | - |  |  | 
| | 
| |  |                                   | 2005 |  |       |        |  
| |  |                                   |      | 
| |  | (in $000s except per share data) |      |  | First |        |   |  | Second |   |        |   | Third |  |   |        | Fourth |  |  |   |       
| | 
| |  | Net sales                         |      |  | $     | 13,174 |   |  |        | $ | 19,358 |   |       |  | $ | 14,879 |        |  |  | $ | 13,363 |   |  |  | 
| |  | Net loss                          |      |  | $     | (815   | ) |  |        | $ | (509   | ) |       |  | $ | (993   | )      |  |  | $ | (679   | ) |  |  | 
| |  | Basic net loss per share          |      |  | $     | (0.09  | ) |  |        | $ | (0.06  | ) |       |  | $ | (0.11  | )      |  |  | $ | (0.08  | ) |  |  | 
| |  | Diluted net loss per share        |      |  | $     | (0.09  | ) |  |        | $ | (0.06  | ) |       |  | $ | (0.11  | )      |  |  | $ | (0.08  | ) |  |  | 
| |  |                                   |      |  |       |        |   |  |        |   |        |   |       |  |   |       

| |  |                                   |      |  |       |        |  |  |        |   |        |  |       |  |   |        |        |  |  |   |        |  |  |  | 
| |  | --------------------------------- | ---- |  | ----- | ------ |  |  | ------ | - | ------ |  | ----- |  | - | ------ | ------ |  |  | - | ------ |  |  |  | 
| | 
| |  |                                   | 2004 |  |       |        | 
| |  |                                   |      | 
| |  | (in $000s except per share data) |      |  | First |        |  |  | Second |   |        |  | Third |  |   |        | Fourth |  |  |   |       
| | 
| |  | Net sales                         |      |  | $     | 12,745 |  |  |        | $ | 12,885 |  |       |  | $ | 12,529 |        |  |  | $ | 13,376 |  |  |  | 
| |  | Net earnings                      |      |  | $     | 260    |  |  |        | $ | 278    |  |       |  | $ | 213    |        |  |  | $ | 317    |  |  |  | 
| |  | Basic net earnings per share      |      |  | $     | 0.04   |  |  |        | $ | 0.04   |  |       |  | $ | 0.03   |        |  |  | $ | 0.04   |  |  |  | 
| |  | Diluted net earnings per share    |      |  | $     | 0.04   |  |  |        | $ | 0.04   |  |       |  | $ | 0.03   |        |  |  | $ | 0.04   |  |  |  | 
| |  |                                   |      |  |       |        |  |  |        |   |        |  |       |  |   |       

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM












Blackman Kallick Bartelstein, LLP






20



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##### 



BOARD OF DIRECTORS
    
    EXECUTIVE OFFICERSAnthony Spier
    
    Anthony SpierChairman, President
    
    Chairman, President& Chief Executive Officer
    
    & Chief Executive OfficerMarshall L. Burman
    
    James F. BraceCounsel to Wildman,
    
    Vice President, Secretary, Treasurer &Harrold, Allen & Dixon
    
    Chief Financial OfficerMerle H. BantaChairman & Chief Executive OfficerBHH Management, Inc.Frank R. MartinAttorney and Principal of Righeimer,Martin & Cinquino, P.C.CORPORATE INFORMATIONANNUAL MEETING
    
    BANKERThe Annual Meeting of Shareholders will take
    
    LaSalle Bank N.A.place at 2:00 p.m. on Tuesday, April 25, 2006
    
    Chicago, Illinoisat the corporate offices of the Company.FORM 10-K
    
    AUDITORA copy of the Companys annual report on Form
    
    Blackman Kallick Bartelstein LLP10-K, as filed with the Securities and Exchange
    
    Chicago, IllinoisCommission, is available without charge uponwritten request to James F. Brace at thecorporate offices of the CompanyTRANSFER AGENT
    
    COUNSELLaSalle Bank N.A.
    
    Levenfeld Pearlstein, LLC135 South LaSalle Street
    
    Chicago, IllinoisChicago, Illinois 60603