(NOTE 1) – Basis of Presentation and Summary of Significant Accounting Policies:

General

The interim financial information herein is unaudited. However, in the opinion of management, such information reflects all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods being reported. Additionally, it should be noted that the accompanying condensed consolidated financial statements do not purport to contain complete disclosures required for annual financial statements in accordance with accounting principles generally accepted in the United States of America.

The results of operations for the nine and three months ended September 30, 2011 are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 2011.

These condensed consolidated statements should be read in conjunction with the Company's consolidated financial statements for the year ended December 31, 2010 contained in the Company's Annual Report on Form 10-K.

Reclassification

For comparability, certain 2010 amounts have been reclassified where appropriate, to conform to the financial presentation in 2011.

Marketable Securities

The Company's investments are classified as available-for-sale securities and are stated at fair value, based on quoted market prices, with the unrealized gains and losses, net of income tax, reported in other comprehensive income (loss). Realized gains and losses are included in investment income. Any decline in value judged to be other-than-temporary on available-for-sale securities are included in earnings to the extent they relate to a credit loss. A credit loss is the difference between the present value of cash flows expected to be collected from the security and the amortized cost basis. The amount of any impairment related to other factors will be recognized in comprehensive income. The cost of securities is based on the specific-identification method. Interest and dividends on such securities are included in investment and other income.

Revenue and Cost Recognition

The Company recognizes a substantial portion of its revenue upon delivery of product, however for certain products, revenue and costs under larger, long-term contracts are reported on the percentage-of-completion method. For projects where materials have been purchased but have not been placed into production, the costs of such materials are excluded from costs incurred for the purpose of measuring the extent of progress toward completion. The amount of earnings recognized at the financial statement date is based on an efforts-expended method, which measures the degree of completion on a contract based on the amount of labor dollars incurred compared to the total labor dollars expected to complete the contract. When an ultimate loss is indicated on a contract, the entire estimated loss is recorded in the period the loss is identified. Costs and estimated earnings in excess of billings on uncompleted contracts represent an asset that will be liquidated in the normal course of contract completion, which at times may require more than one year. The components of cost and estimated earnings in excess of billings on uncompleted contracts are the sum of the related contract's direct material, direct labor, and manufacturing overhead and estimated earnings less accounts receivable billings. We had no contracts outstanding at September 30, 2011 accounted for under the percentage-of completion method.

Stock Based Compensation

At September 30, 2011, the Company has various stock-based employee compensation plans. These plans provide for the granting of nonqualified and incentive stock options as well as restricted stock awards to officers, key employees and nonemployee directors. The terms and vesting schedules of stock-based awards vary by type of grant and generally the awards vest based upon time-based conditions. The Company estimates the fair value of its stock option awards on the date of grant using the Black-Scholes valuation model. Share-based compensation expense was $118,000 and $38,000 for the nine and three months ended September 30, 2011, respectively, and was $257,000 and $88,000, respectively, for the comparable 2010 periods.

The Company's stock-based employee compensation plans allow for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned stock-based compensation related to restricted stock granted is being amortized to compensation expense over the vesting period, which ranges from two to ten years. The share based expense for these awards was determined based on the market price of the Company's stock at the date of grant applied to the total number of shares that were anticipated to vest. As of September 30, 2011, the Company had unearned compensation of $325,000 associated with all of the Company's restricted stock awards, which will be expensed over approximately the next three years.

Stock option activity during the nine months ended September 30, 2011, under all stock option plans is as follows:

	Number of Shares			Weighted Average Exercise Price		Average Remaining Contractual Term (in years)

Options outstanding, January 1, 2011		314,000		$	4.24		3

Granted		-			-		-

Forfeited		(62,000	)		5.24		-

Exercised		(2,000	)		0.60		-

Options outstanding, September 30, 2011		250,000		$	4.03		3

Outstanding exercisable at September 30, 2011		207,000		$	4.44		3

At September 30, 2011 the aggregate intrinsic value of options outstanding and exercisable was $128,000 and $62,000, respectively. At the comparable 2010 period, the aggregate intrinsic value of options outstanding and exercisable was $231,000 and $151,000, respectively.

The following table summarizes the Company's nonvested stock option activity for the nine months ended September 30, 2011:

	Number of Shares			Weighted-Average Grant- Date Fair Value
Nonvested stock options at January 1, 2011		57,000		$	1.02

Granted		-			-

Vested		(14,000	)		1.02

Forfeited		-			-

Nonvested stock options at September 30, 2011		43,000		$	1.02

At September 30, 2011, there was approximately $7,000 of unearned compensation cost related to the above non-vested stock options. The cost is expected to be recognized over approximately the next two years.