10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

or

o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________.

Commission File Number 1-5005

INTRICON CORPORATION
(Exact name of registrant as specified in its charter)

Pennsylvania	23-1069060
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
Incorporation or organization)
1260 Red Fox Road
Arden Hills, Minnesota	55112
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code (651) 636-9770
Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Name of each exchange on which registered
Common Shares, $1 par value per share	American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the securities act.  Yes  o    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the act.  Yes  o    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer  o    Accelerated filer  o    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined by rule 12b-2 of the Act)   Yes  o    No  x

The aggregate market value of the voting common shares held by non-affiliates of the registrant on June 30, 2006 was $23,469,953. Common shares held by each officer and director and by each person who owns 10% or more of the outstanding common shares have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of outstanding shares of the registrant’s common shares on March 9, 2007 was 5,710,235.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s 2006 annual report to shareholders are incorporated by reference into Part II of this report. Portions of the Company’s definitive proxy statement for the 2007 annual meeting of shareholders are incorporated by reference into Part III of this report; provided, however, that the Compensation Committee Report, the Audit committee Report and any other information in such Proxy Statement that is not required to be included in this Annual Report on Form 10-K, shall not be deemed to be incorporated herein or filed for the purposes of the Securities Act of 1933 or the Securities Exchange Act of 1934.

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Table of Contents

		Page No.
PART I
Item 1.	Business	4
Item 1A.	Risk Factors	12
Item 1B.	Unresolved Staff Comments	18
Item 2.	Properties	18
Item 3.	Legal Proceedings	18
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 4A.	Executive Officers of the Registrant	20
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6.	Selected Financial Data	21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 8.	Financial Statements and Supplementary Data	22
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	22
Item 9A.	Controls and Procedures	22
Item 9B.	Other Information	23
PART III
Item 10.	Directors, Executive Officers and Corporate Governance of the Registrant	24
Item 11.	Executive Compensation	24
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	24
Item 13.	Certain Relationships and Related Transactions, and Director Independence	25
Item 14.	Principal Accounting Fees and Services	25
PART IV
Item 15.	Exhibits, Financial Statement Schedules	26
SIGNATURES		33

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PART I

ITEM 1. Business

IntriCon Corporation, formerly Selas Corporation of America (together with its subsidiaries referred herein as the “Company”)is an international firm engaged in the design, development, engineering and manufacturing of micro-miniature components, systems and molded plastic parts primarily for the hearing instrument, electronics, telecommunications, computer and medical equipment industries. The Company, headquartered in Arden Hills, Minnesota has facilities in Minnesota, California, Singapore, and Germany, and operates directly or through subsidiaries. Within discontinued operations, the Company had facilities in Pennsylvania, Japan and Germany. The Company is a Pennsylvania corporation that was founded in 1930.

Currently, the Company has one operating segment, its precision miniature medical and electronics products segment. In the past, the Company had operated in three segments: precision miniature medical and electronics products segment, heat technology segment, and tire holders, lifts and related products segment. Since 2001, the Company began focusing on its precision miniature medical and electronics products segment and developing plans to exit the businesses that comprised the heat technology segment, and tire holders, lifts and related products segment. The Company exited the tire holders, lifts and related products business in 2003 and the heat technology segment in the first quarter of 2005. For all periods presented, the Company classified its heat technology segment as discontinued operations.

Major Events in 2006

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.

In the fourth quarter of 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 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 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.

Major Events in 2005

Sale of Burners and Components Business – In the first quarter of 2005, the Company sold the remainder of its Heat Technology segment. The total purchase price was approximately $3.5 million, subject to adjustment, of which approximately $2.7 million was paid in cash and $800,000 was paid in the form of a 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 Waermetechnik GmbH (Ratingen, Germany). This business was classified as a discontinued operation for all periods presented. For more detailed information, see note 3 to the Consolidated Financial Statements contained in the Company’s 2006 annual report to shareholders, which is filed as an exhibit to this Form 10-K.

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With the completed sale of the burner and components business, the Company successfully completed the shift from its traditional business segments to the emerging prospects in its precision miniature medical and electronic products business. To reflect the Company’s redefined focus, it changed its name to IntriCon Corporation as of April 4, 2005.

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 remaining unpaid principal balance of $769,000 at December 31, 2006 will be paid in three equal annual installments with the next installment payable 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.

Forward-Looking Statements

Certain statements included or incorporated by reference in this Annual Report on Form 10-K or the Company’s other public filings and releases, 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 “Business,” “Legal Proceedings” and “Risk Factors”, such as the Company’s ability to focus on the precision miniature medical and electronics products markets, the ability to compete, the adequacy of insurance coverage, and potential increase in demand for the Company’s products; and

• statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” statements in “Notes to the Consolidated Financial Statements,” which are incorporated by reference into this Annual Report on Form 10-K from the 2006 Annual Report to Shareholders, such as the; net operating loss carryforwards, the ability to meet cash requirements for operating needs, the ability to meet liquidity needs, assumptions used to calculate future level of funding of employee benefit plans, the adequacy of insurance coverage, the impact of new accounting pronouncements and litigation.

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Forward-looking statements also include, without limitation, statements as to the Company’s expected future results of operations and growth, the Company’s ability to meet working capital requirements, the Company’s business strategy, the expected increases in operating efficiencies, anticipated trends in the Company’s precision miniature medical and electronic products markets, estimates of goodwill impairments and amortization expense of other intangible assets, 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 on Form 10-K, 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 the Company’s 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 the Company;

• changes in estimated future cash flows;

• ability to collect our accounts receivable;

• foreign currency movements in markets the Company services;

• 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 the Company’s products;

• competitive pricing pressures;

• pending and potential future litigation;

• availability of electronic components for the Company’s 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 or 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 team;

• our ability and the ability of our customers to protect intellectual property; and

• risks associated with terrorist attacks, war and threats of attacks and wars.

The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.

PRECISION MINIATURE MEDICAL AND ELECTRONIC PRODUCTS

Resistance Technology, Inc. (“RTI”),and RTI Tech PTE LTD (“RTI Tech”), both wholly-owned subsidiaries of the Company, manufacture microminiature components, systems and molded plastic parts for hearing instrument, medical equipment, electronics, professional audio, telecommunications and computer industry manufacturers. RTI Electronics, Inc. (“RTIE”), a wholly owned subsidiary of the company, has expanded RTI’s microminiature components business through the manufacture of thermistors and film capacitors.

Products and Industries Serviced. RTI is a leading manufacturer and supplier of microminiature electromechanical components to hearing instrument manufacturers. These components consist of volume controls, microphones, trimmer potentiometers and switches. RTI also manufactures hybrid amplifiers and integrated circuit components (“hybrid amplifiers”), along with faceplates for in-the-ear and in-the-canal hearing instruments. Components are offered in a variety of sizes, colors and capacities in order to accommodate a hearing manufacturer’s individualized specifications.

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Hearing instruments, which fit behind or in a person’s ear to amplify and process sound for a hearing impaired person, generally are composed of four basic parts and several supplemental components for control or fitting purposes. The four basic parts are microphones, amplifier circuits, miniature receivers/speakers and batteries. RTI’s hybrid amplifiers are a type of amplifier circuit. Supplemental components include volume controls, trimmer potentiometers, which shape sound frequencies to respond to the particular nature of a person’s hearing loss, and switches used to turn the instrument on and off and to go from telephone to normal speech modes. Faceplates and an ear shell, molded to fit the user’s ear, often serve as a housing for hearing instruments. RTI manufactures its components on a short lead-time basis in order to supply “just-in-time” delivery to its customers and, consequently, order backlog amounts are not meaningful.

Using DSP technology, RTI is building a new generation of affordable, high-quality hearing aids and similar amplifier devices. Compared to most products currently on the market, DSP devices have better clarity, attractive pricing points and an improved ability to filter out background noise. Low to moderately-priced DSP hearing aids, like newly introduced line of ClariD Digital ONE™ DSP hearing-aid amplifiers, represent the fastest-growing segment in the hearing-aid market.

In the medical market, the Company is focused on sales of microelectronics, micromechanical assemblies and high-precision plastic molded components to medical device manufacturers. Targeted customers include medical product manufacturers of portable and lightweight battery powered devices, large AC-powered units often found in clinics and hospitals, as well as a variety of sensors designed to connect a patient to an electronic device.

The medical industry is faced with pressures to reduce the costs of healthcare. RTI offers medical manufacturers the capabilities to design, develop and manufacture components for medical devices that are easier to use, measure with greater accuracy and provide more functions while reducing the costs to manufacture these devices. Examples of RTI products used by medical device manufacturers include components found in intravenous fluid administration pumps that introduce drugs into the bloodstream. RTI manufactures and supplies bubble sensors and flow restrictors that monitor and control the flow of fluid in an intravenous infusion system.

RTI also manufactures a family of safety needle products for an OEM customer that utilizes RTI’s insert and straight molding capabilities. These products are assembled using full automation including built-in quality checks within the production lines. Other examples include sensors used to detect pathologies in specific organs of the body and monitoring devices to detect cardiac and respiratory functions. The early and accurate detection of pathologies allows for increased likelihood for successful treatment of chronic diseases and cancers. Accurate monitoring of multiple functions of the body, such as heart rate and breathing, aids in generating more accurate diagnosis and treatments for patients.

RTI entered the high-quality audio communication device market in 2001, and now has a line of miniature, professional audio headset products used by performers and support staff in the music and stage performance markets. For customers focusing on homeland security needs, the line includes several communication devices that are more portable and perform well in noisy or hazardous environments. These products are also well suited for applications in the fire, law enforcement, safety, aviation and military markets.

RTIE manufactures and sells thermistors and thermistor assemblies, which are solid state devices that produce precise changes in electrical resistance as a function of any change in absolute body temperature. The balance of sales represents various industrial, commercial and military sales for thermistor and thermistor assemblies to domestic and international markets.

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RTI’s and RTIE’s principal raw materials are plastics, polymers, metals, various metal oxide powders and silver paste, for which there are multiple sources of supply.

Marketing and Competition. RTI sells its hearing instrument components directly to domestic hearing instrument manufacturers through an internal sales force. Sales of microphone products and of molded plastic parts to industries other than hearing instrument manufacturers are made mainly through an internal sales force. In recent years, five companies have accounted for a substantial portion of the sales in the United States hearing instrument industry. In 2006, 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. See note 5 to the consolidated financial statements for a discussion of net sales and long-lived assets by geographic area.

Internationally, sales representatives employed by Resistance Technology, GmbH (“RT, GmbH”), a German company 90% of whose capital stock is owned by RTI, solicits sales from European hearing instrument manufacturers on behalf of RTI.

RTI believes that it is the largest supplier worldwide of micro-miniature electromechanical components to hearing instrument manufacturers and that its full product line and automated manufacturing process allow it to compete effectively with the two other manufacturers within this market.

In the market of hybrid amplifiers and molded plastic faceplates, RTI’s primary competition is from the hearing instrument manufacturers themselves. The hearing instrument manufacturers produce a substantial portion of their internal needs for these components.

RTI markets its high performance microphone products to the radio communication and professional audio industries and has several larger competitors who have greater financial resources. RTI holds a small market share in the global market for microphone capsules and other related products.

RTIE sells its thermistors and film capacitors through a combination of independent sales representatives and internal sales force.

RTIE has many competitors, both domestic and foreign, that sell various thermistor and film capacitors and some of these competitors are larger and have greater financial resources. In addition, RTIE holds a relatively small market share in the world-market of thermistor and film capacitor products.

Employees. As of February 28, 2007, we had a total of 561 employees. RTI currently employs 293 people, of whom 17 are executive and administrative personnel, 9 sales, and 267 engineering and operations personnel at RTI’s two facilities near Minneapolis, Minnesota. At RT, GmbH, the Company employs 3 sales personnel located in Munich, Germany. In Singapore, RTI Tech PTE Ltd. employs 157 people, of whom 7 are administrative personnel, 2 sales, and 148 engineering and operations personnel. At its facilities in Anaheim, California, RTIE employs 108 employees, of which 6 are administrative, 5 are sales, and 97 are engineering and operations personnel. The Company considers its relations with its employees to be satisfactory. None of the Company’s employees are represented by a union.

As a supplier of parts for consumer and medical products, RTI is subject to claims for personal injuries allegedly caused by its products. The Company maintains what it believes to be adequate insurance coverage.

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Research and Development. RTI and RTIE conduct research and development activities primarily to improve its existing products and technology. Their research and development expenditures were $2,123,000, $1,817,000, and $1,616,000 in 2006, 2005 and 2004, respectively. See note 1 to the consolidated financial statements for information regarding customer funded research and development projects.

RTI owns a number of United States patents which cover a number of product designs and processes. The Company believes that, although these patents collectively add some value to the Company, no one patent or group of patents is of material importance to its business as a whole.

The Company’s consolidated financial statements are incorporated by reference as contained in the Company’s 2006 annual report to shareholders, which is filed as an exhibit to this Form 10-K.

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DISCONTINUED OPERATIONS - HEAT TECHNOLOGY

The Company specialized in the controlled application of heat to achieve precise process and temperature control. The Company’s principal heat technology equipment and systems were smaller standard-engineered systems, burners and combustion control equipment. The Company sold this business in the first quarter of 2005 and has accounted for it as discontinued operations in the accompanying consolidated financial statements, which are incorporated herein by reference as contained in the Company’s 2006 annual report to shareholders, which is filed as an exhibit to this Form 10-K.

Standard Engineered Systems. The Company engineered and fabricated a variety of small heat treating furnaces and heat processing equipment. This standard equipment and small-furnace business was conducted principally by its then subsidiaries, Nippon Selas (Tokyo, Japan) and Selas Waermetechnik (Ratingen, Germany).

Burners and Combustion Control Equipment. At its Dresher, Pennsylvania facility and through its then subsidiaries in Japan, Nippon Selas (Tokyo) and in Germany, Selas Waermetechnik, (Ratingen), the Company designed, manufactured and sold an array of original equipment and replacement gas-fired industrial burners for many applications.

The Company was a producer of burners used in fluid processing furnaces serving the petrochemical industry. The Company also produced burners suitable for creating a high temperature furnace environment desirable in steel and glass heat treating furnaces. The Company’s burners accommodated a wide variety of fuel types, environmental constraints and customer production requirements.

The Company furnished many industries with gas combustion control equipment sold both as component parts and as systems that were engineered to meet a particular customer’s needs. This equipment was provided with the Company’s original custom-engineered and standard heat treating equipment, as replacement or additional components for existing furnaces being refurbished or upgraded, and as original components for heat treating equipment manufactured by others.

Marketing and Competition. The Company marketed its standard-engineered systems products on a global basis through its sales and marketing personnel located in Dresher, Pennsylvania, and also sold these products through licensees and agents located in various parts of the world.

Operations. The heat technology segment had a total of 48 employees. At its Dresher facility, the Company had 32 employees; 6 were executive and administrative personnel, 10 were sales and engineering personnel and 16 were personnel engaged in manufacturing. The hourly personnel were represented by a union. The Company considered its relations with its employees to be satisfactory. Selas Waermetechnik had 6 employees; 1 was an administrative personnel, 3 were sales and engineering personnel and 2 were personnel engaged in manufacturing.

In April 2001, the Company sold a minority interest of Nippon Selas to three directors of Nippon Selas. This minority interest was reacquired by the Company in the first quarter of 2005 in contemplation of the sale of this business, which was completed in the first quarter of 2005. Its Tokyo facility employed 10 people; 3 administrative and 7 sales and engineering.

Research and Development. The Company conducted limited research and development activities at its Dresher facility to support its heat processing services and products. Research and development expenditures for heat processing aggregated $4,000 and $18,000, in 2005 and 2004, respectively.

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Available Information

The Company files or furnishes its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the SEC. You may read and copy any reports, statements and other information that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company’s filings are also available on the SEC’s Internet site as part of the EDGAR database (http://www.sec.gov).

The Company maintains an internet web site at www.IntriCon.com. The Company maintains a link to the SEC’s website by which you may review its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.

The information on the website listed above, is not and should not be considered part of this annual report on Form 10-K and is not incorporated by reference in this document. This website is and is only intended to be an inactive textual reference.

In addition, we will provide, at no cost (other than for exhibits), paper or electronic copies of our reports and other filings made with the SEC. Requests should be directed to:

Corporate Secretary

IntriCon Corporation

1260 Red Fox Road

Arden Hills, MN 55112

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ITEM 1A.Risk Factors

You should carefully consider the risks described below. If any of the risks actually occur, our business, financial condition or results of future operations could be materially adversely affected. This Annual Report on Form 10-K contains forward-looking statements that involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including the risks faced by us described below and elsewhere in this Annual Report on Form 10-K.

We have experienced and expect to continue to experience fluctuations in our results of operations, which could adversely affect us.

Factors that affect our results of operations include, but are not limited to, the volume and timing of orders received, changes in the global economy and financial markets, changes in the mix of products sold, market acceptance of our products and our customer’s products, competitive pricing pressures, global currency valuations, the availability of electronic components that we purchase from suppliers, our ability to meet increasing demand, our ability to introduce new products on a timely basis, the timing of new product announcements and introductions by our or our competitors, changing customer requirements, delays in new product qualifications, and the timing and extent of research and development expenses. These factors have caused and may continue to cause us to experience material fluctuations in operating results on a quarterly and/or annual basis. These fluctuations could materially adversely affect our business, financial condition and results of operations, which in turn, could adversely affect the price of our common stock.

The loss of one or more of our major customers could adversely affect our results of operations.

We are dependent on a small number of customers for a large portion of our revenues. In fiscal year 2006, our five largest customers accounted for 30% of our net sales. A significant decrease in the sales to or loss of any of our major customers would have a material adverse effect on our business and results of operations. Our revenues are largely dependent upon the ability of customers to develop and sell products that incorporate our products. No assurance can be given that our major customers will not experience financial, technical or other difficulties that could adversely affect their operations and, in turn, our results of operations.

We may not be able to collect outstanding accounts receivable from our customers.

Some of our customers purchase our products on credit, which may cause a concentration of accounts receivable among some of our customers. As of December 31, 2006, we had accounts receivable, less allowance for doubtful accounts, of $8,456,450, which represented approximately 54.2 percent of our shareholders’ equity as of that date. As of that date, one customer accounted for approximately 10 percent of our accounts receivable. Our financial condition and profitability may be harmed if one or more of our customers are unable or unwilling to pay these accounts receivable when due.

If we are unable to continue to develop new products that are inexpensive to manufacture, our results of operations could be adversely affected.

We may not be able to continue to achieve our historical profit margins in our precision miniature medical and electronic products business due to advancements in technology. The ability to continue our profit margins is dependent upon our ability to stay competitive by developing products that are technologically advanced and inexpensive to manufacture.

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Our precision miniature medical and electronic products business has also been affected by unfavorable conditions in the hearing instrument market and the impact of the Asian economic situation. We are unable to predict with any certainty when and if these conditions will improve.

Our need for continued investment in research and development may increase expenses and reduce our profitability.

Our industry is characterized by the need for continued investment in research and development. If we fail to invest sufficiently in research and development, our products could become less attractive to potential customers and our business and financial condition could be materially and adversely affected. As a result of the need to maintain or increase spending levels in this area and the difficulty in reducing costs associated with research and development, our operating results could be materially harmed if our research and development efforts fail to result in new products or if revenues fall below expectations. In addition, as a result of our commitment to invest in research and development, spending levels of research and development expenses as a percentage of revenues may fluctuate in the future.

We operate in a highly competitive business and if we are unable to be competitive, our financial condition could be adversely affected.

Several of our competitors have been able to offer more standardized and less technologically advanced hearing products at lower prices. Price competition has had an adverse effect on our sales and margins. There can be no assurance that we will be able to maintain or enhance our technical capabilities or compete successfully with our existing and future competitors.

Merger and acquisition activity in our hearing health market has resulted in a smaller customer base. Reliance on fewer customers may have an adverse effect on us.

Several of our customers in the hearing health market, have undergone mergers or acquisitions, resulting in a smaller customer base with larger customers. If we are unable to maintain satisfactory relationships with the reduced customer base, it may adversely affect our operating profits and revenue.

Unfavorable legislation in the hearing health market may decrease the demand for our products, and may negatively impact our financial condition.

In some of our foreign markets, government subsidies cover a portion of the cost of hearing aids. A change in legislation that would reduce or eliminate these subsidies could decrease the demand for our hearing health products. This could result in an adverse effect on our operating results. We are unable to predict the likelihood of any such legislation.

Implementation of our growth strategy may not be successful, which could affect our ability to increase revenues.

Our growth strategy includes developing new products and entering new markets, as well as identifying and integrating acquisitions. Our ability to compete in new markets will depend upon a number of factors including, among others:

• our ability to create demand for products in new markets;

• our ability to manage growth effectively;

• our ability to successfully identify, complete and integrate acquisitions;

• our ability to respond to changes in our customers’ businesses by updating existing products and introducing, in a timely fashion, new products which meet the needs of our customers;

• the quality of our new products; and

• our ability to respond rapidly to technological change.

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The failure to do any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. In addition, we may face competition in these new markets from various companies that may have substantially greater research and development resources, marketing and financial resources, manufacturing capability and customer support organizations.

We operate in Singapore and Germany, and various factors relating to our international operations could affect our results of operations.

In 2006, we operated in Singapore and Germany. Approximately 8 percent of our revenues were derived from these countries in 2006. As of December 31, 2006 approximately 8 percent of our long lived assets are located in these countries. Political or economic instability in these countries could have an adverse impact on our results of operations due to diminished revenues in these countries. Our future revenues, costs of operations and profit results could be affected by a number of factors related to our international operations, including changes in foreign currency exchange rates, changes in economic conditions from country to country, changes in a country’s political condition, trade protection measures, licensing and other legal requirements and local tax issues. Unanticipated currency fluctuations in the Euro could lead to lower reported consolidated revenues due to the translation of these currencies into U.S. dollars when we consolidate our revenues.

We may explore acquisitions that complement or expand our business. We may not be able to complete these transactions and these transactions, if executed, pose significant risks and may materially adversely affect our business, financial condition and operating results.

We intend to explore opportunities to buy other businesses or technologies that could complement, enhance or expand our current business or product lines or that might otherwise offer us growth opportunities. We may have difficulty finding these opportunities or, if we do identify these opportunities, we may not be able to complete the transactions for reasons including a failure to secure financing. Any transactions that we are able to identify and complete may involve a number of risks, including: the diversion of our management’s attention from our existing business to integrate the operations and personnel of the acquired or combined business or joint venture; possible adverse effects on our operating results during the integration process; unanticipated liabilities; and our possible inability to achieve the intended objectives of the transaction. In addition, we may not be able to successfully or profitably integrate, operate, maintain and manage our newly acquired operations or employees. In addition, future acquisitions may result in dilutive issuances of equity securities or the incurrence of additional debt.

We may experience difficulty in paying our debt when it comes due, which could limit our ability to obtain financing.

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 our amended credit facility combined with funds expected to be generated from operations, the available borrowing capacity through our revolving credit loan facilities, curtailment of the dividend payment and control of capital spending will be sufficient to meet our anticipated cash requirements for operating needs through April 1, 2008. If, however, we are unable to renew these facilities in the future, or do not generate sufficient cash or complete such financings on a timely basis, we may be required to seek additional financing or sell equity on terms which may not be as favorable as we could have otherwise obtained. No assurance can be given that any refinancing, additional borrowing or sale of equity will be possible when needed or that we will be able to negotiate acceptable terms. In addition, our access to capital is affected by prevailing conditions in the financial and equity capital markets, as well as our own financial condition.

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Our success depends on our senior management team and if we are not able to retain them, it could have a materially adverse effect on us.

We are highly dependent upon the continued services and experience of our senior management team, including Mark S. Gorder, our President, Chief Executive Officer and a director. We depend on the services of Mr. Gorder and the other members of our senior management team to, among other things, continue the development and implementation of our business strategies and maintain and develop our client relationships.

Our future success depends in part on the continued service of our engineering and technical personnel and our ability to identify, hire and retain additional personnel.

There is intense competition for qualified personnel in our markets. We may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development and growth of our business or to replace engineers or other qualified personnel who may leave our employ in the future. The failure to retain and recruit key technical personnel could cause additional expense, potentially reduce the efficiency of our operations and could harm our business.

We and/or our customers may be unable to protect our and their proprietary technology and intellectual property rights or keep up with that of competitors.

Our ability to compete effectively against other companies in our markets depends, in part, on our ability and the ability of our customers to protect our and their current and future proprietary technology under patent, copyright, trademark, trade secret and unfair competition laws. We cannot assure that our means of protecting our proprietary rights in the United States or abroad will be adequate, or that others will not develop technologies similar or superior to our technology or design around the proprietary rights we own. In addition, we may incur substantial costs in attempting to protect our proprietary rights.

Also, despite the steps taken by us to protect our proprietary rights, it may be possible for unauthorized third parties to copy or reverse-engineer aspects of our and our customers’ products, develop similar technology independently or otherwise obtain and use information that we or our customers regard as proprietary. We and our customers may be unable to successfully identify or prosecute unauthorized uses of our or our customers’ technology.

If we become subject to material intellectual property infringement claims, we could incur significant expenses and could be prevented from selling specific products.

We may become subject to material claims that we infringe the intellectual property rights of others in the future. We cannot assure that, if made, these claims will not be successful. Any claim of infringement could cause us to incur substantial costs defending against the claim even if the claim is invalid, and could distract management from other business. Any judgment against us could require substantial payment in damages and could also include an injunction or other court order that could prevent us from offering certain products.

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Environmental liability and compliance obligations may affect our operations and results.

Our manufacturing operations are subject to a variety of environmental laws and regulations as well as internal programs and policies governing:

• air emissions;

• wastewater discharges;

• the storage, use, handling, disposal and remediation of hazardous substances, wastes and chemicals; and

• employee health and safety.

If violations of environmental laws should occur, we could be held liable for damages, penalties, fines and remedial actions. Our operations and results could be adversely affected by any material obligations arising from existing laws, as well as any required material modifications arising from new regulations that may be enacted in the future. We may also be held liable for past disposal of hazardous substances generated by our business or former businesses or businesses we acquire. In addition, it is possible that we may be held liable for contamination discovered at our present or former facilities.

We are subject to numerous asbestos-related lawsuits, which could adversely affect our financial position, results of operations or liquidity.

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. These lawsuits relate to the discontinued Heat Technologies segment which was sold in March 2005 and is now classified as discontinued operations. 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. If our insurance policies do not cover the costs and any awards for the asbestos-related lawsuits, we will have to use our cash or obtain additional financing to pay the asbestos-related obligations and settlement costs. There is no assurance that we will have the cash or be able to obtain additional financings on favorable terms to pay asbestos related obligations or settlements should they occur. The ultimate outcome of any legal matter cannot be predicted with certainty. In light of the significant uncertainty associated with asbestos lawsuits, there is no guarantee that these lawsuits will not materially adversely affect our financial position, results of operations or liquidity.

The market price of our common stock has been and is likely to continue to be volatile, which may make it difficult for shareholders to resell common stock when they want to and at prices they find attractive.

The market price of our common stock has been and is likely to be highly volatile, and there has been limited trading volume in the common stock. The common stock market price could be subject to wide fluctuations in response to a variety of factors, including the following:

• announcements of fluctuations in our or our competitors’ operating results;

• the timing and announcement of sales or acquisitions of assets by us or our competitors;

• changes in estimates or recommendations by securities analysts;

• adverse or unfavorable publicity about our services or us;

• the commencement of material litigation, or an unfavorable verdict, against us;

• terrorist attacks, war and threats of attacks and war;

• additions or departures of key personnel; and

• sales of common stock.

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In addition, the stock market in recent years has experienced significant price and volume fluctuations. Such volatility and decline has affected many companies irrespective of, or disproportionately to, the operating performance of these companies. These broad fluctuations and limited trading volume may materially adversely affect the market price of the common stock, and the ability to sell said common stock.

Most of our outstanding shares are available for resale in the public market without restriction. The sale of a large number of these shares could adversely affect the share price and could impair our ability to raise capital through the sale of equity securities or make acquisitions for common stock.

Terrorist attacks, war and threats of attacks and war may negatively impact our results of operations, revenue and common stock market price.

Terrorist attacks, war and threats of attacks and war may negatively impact our results of operations, revenue and share price. Recent terrorist attacks in the United States, as well as future events occurring in response or in connection to them, including, without limitation, future terrorist attacks against United States targets and threats of war or actual conflicts involving the United States or its allies, may impact our operations, including affecting our ability to operate our subsidiaries abroad. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the economy. They could also result in the deepening of the economic recession in the United States. Any of these occurrences could have a material adverse effect on our operating results, revenue, and may result in the volatility of the market price for our common stock.

“Anti-takeover” provisions may make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to shareholders.

We are a Pennsylvania corporation. Anti-takeover provisions in Pennsylvania law and our charter and bylaws could make it more difficult for a third party to acquire control of us. These provisions could adversely affect the market price of the common stock and could reduce the amount that shareholders might receive if we are sold. For example, our charter provides that the board of directors may issue preferred stock without shareholder approval. In addition, our bylaws provide for a classified board, with each board member serving a staggered three-year term. Directors may be removed only with the approval of the holders of at least two-thirds of all of the shares outstanding and entitled to vote.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential shareholders and customers could lose confidence in our financial reporting, which could harm our business, the trading price of our stock and our ability to retain our current customers or obtain new customers.

Beginning in fiscal 2004, we began a process to document and evaluate our internal controls over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments. In this regard, management has been dedicating internal resources, has engaged outside consultants and has adopted a detailed work plan to (i) assess and document the adequacy of internal controls over financial reporting, (ii) take steps to improve control processes, where

17

appropriate, (iii) validate through testing that controls are functioning as documented and (iv) implement a continuous reporting and improvement process for internal control over financial reporting. At this time, we are not aware, and our outside auditors have not advised us, of any “material weaknesses” or “significant deficiencies” in our internal controls, as defined in the relevant literature. If we fail to identify and correct any issues in the design or operating effectiveness of internal controls over financial reporting or fail to prevent fraud, current and potential shareholders and customers could lose confidence in our financial reporting, which could harm our business, the trading price of our stock and our ability to retain our current customers and obtain new customers.

ITEM 1B. Unresolved Staff Comments.

Not Applicable.

ITEM 2. Properties

RTI leases a 47,000 sq. ft. manufacturing facility in Arden Hills, Minnesota, which also serves as the Company’s headquarters, from a partnership consisting of two former officers of RTI and Mark S. Gorder who serves as an officer of the Company and RTI and on the Company’s Board of Directors. At this facility, RTI manufactures all of its products other than plastic component parts. Annual base rent expense is approximately $368,000. The lease expires in October 2011.

In addition, RTI leases a 35,000 sq. ft. building in Vadnais Heights, Minnesota at which RTI produces plastic component parts. Annual base rent expense is approximately $209,000. The lease expires in June 2016. See notes 16 and 17 to the Company’s consolidated financial statements,which are incorporated by reference into “Item 8. Financial Statements and Supplementary Data” from the 2006 annual report to shareholders.

RTIE leases a building in Anaheim, California, which contains its manufacturing facilities and offices and consists of a total of 50,000 square feet. Annual base rent expense is approximately $399,000. The lease expires in September 2008.

RTI Technologies PTE LTD leases a 6,000 square foot building in Singapore which houses its production facilities and administrative offices. Annual base rent expense is approximately $170,000. This lease expires in June 2007.

Resistance Technology Gmbh leases a 2,000 square foot facility in Germany which houses its sales and administrative offices. Annual base rent expense is approximately $40,000. This lease expires in June 2012.

ITEM 3. Legal Proceedings

The Company is 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. These lawsuits relate to the discontinued Heat Technologies segment which was sold in March 2005 and is now classified as discontinued operations. Due to the noninformative nature of the complaints, the Company does not know whether any of the complaints state valid claims against the Company. Certain insurance carriers have informed the Company that the primary policies for the period August 1, 1970-1973, have been exhausted and that the carriers will no longer provide a defense under those policies. The Company has requested that the carriers substantiate this situation. The Company believes it has additional policies available for other years which have been ignored by the carriers. As settlement payments are applied to all

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years a litigant was deemed to have been exposed to asbestos, the Company believes when settlement payments are applied to these additional policies, the Company will have availability under the years deemed exhausted. The Company does not believe that the asserted exhaustion of the primary insurance coverage for this period will have a material adverse effect on its financial condition, liquidity, or results of operations. Management believes that the number of insurance carriers involved in the defense of the suits and the significant number of policy years and policy limits, to which these insurance carriers are insuring the Company, make the ultimate disposition of these lawsuits not material to the Company’s consolidated financial position or results of operations.

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 to this matter. As such, as of December 31, 2006 we have not recorded a reserve for this claim.

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

ITEM 4. Submission of Matters to a Vote of Security Holders

None

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ITEM 4A. Executive Officers of the Registrant

The names, ages and offices (as of March 9, 2007) of the Company’s executive officers were as follows:

Name	Age	Position
Mark S. Gorder	60	President, Chief Executive Officer and Director of the Company; President of Resistance Technology, Inc.
Scott Longval	30	Chief Financial Officer, Treasurer of the Company
Christopher D. Conger	46	Vice President, Research and Development
Michael P. Geraci	48	Vice President, Sales and Marketing
Dennis L. Gonsior	48	Vice President, Operations
Steve M. Binnix	57	Vice President, RTI Electronics, Inc.

Mr. Gorder joined the Company in October 1993 when Resistance Technology, Inc. (“RTI”) was acquired by the Company. Prior to the acquisition, Mr. Gorder was President and one of the founders of RTI, which began operations in 1977. Mr. Gorder was promoted to Vice President of the Company and elected to the Board of Directors in April 1996. In December 2000, he was elected President and Chief Operating Officer and in April 2001, Mr. Gorder assumed the role of Chief Executive Officer.

Mr. Longval has served as the Company’s Chief Financial Officer since July 2006. Prior to being appointed as CFO, Mr. Longval served as the Company’s Corporate Controller since September 2005. Prior to joining the Company, Mr. Longval was Principal Project Analyst at ADC Telecommunications, Inc., a provider of innovative network infrastructure products and services, from March 2005 until September 2005. From May 2002 until March 2005 he was employed by Accellent, Inc., formerly MedSource Technologies, a provider of outsourcing solutions to the medical device industry, most recently as Manager of Financial Planning and Analysis. From September 1998 until April 2002, he was employed by Arthur Andersen, most recently as experienced audit senior.

Mr. Conger joined the Company in September 1997. Mr. Conger received a Bachelor of Science degree in Electrical Engineering from the University of Missouri and a Master of Science degree in Electrical Engineering from the University of Minnesota. He has served as the Company’s Vice President of Research and Development since February 2005.

Mr. Geraci joined the Company in October 1983. Mr. Geraci received a Bachelor of Science degree from Bradley University. He has served as the Company’s Vice President of Sales and Marketing since January 1995.

Mr. Gonsior joined the Company in February 1982. Mr. Gonsior received a Bachelor of Science degree from Saint Cloud State University. He has served as the Company’s Vice President of Operations since January 1996.

Mr. Binnix joined the Company in January 1989. Mr. Binnix is a Certified Manufacturing Engineer and received his Bachelor of Science degree from the University of LaVerne, California. He has served as the Company’s Vice President of RTI Electronics, Inc. since April 2006 and as General Manager since 1993.

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PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Since April 4, 2005, the Company’s common shares have been listed on the American Stock Exchange under the ticker symbol “IIN”. Prior to such date its common shares were traded under the symbol “SLS”.

The high and low sale prices during each quarterly period during the past two years were as follows:

Market and Dividend Information

	2006 Market Price Range				2005 Market Price Range
Quarter
	High		Low		High		Low
First		$ 6.99		$ 4.05		$ 2.25		$ 1.86
Second		7.50		4.82		2.10		1.52
Third		5.40		4.75		6.87		2.03
Fourth		5.49		4.70		6.45		3.70

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 records 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.

See “ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters — Equity Compensation Plans” for disclosure regarding our equity compensation plans.

ITEM 6. Selected Financial Data

Certain selected financial data is incorporated by reference from “Five-Year Summary of Operations” and “Other Financial Highlights” as contained in the Company’s 2006 annual report to shareholders, which is filed as an exhibit to this Form 10-K.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated by reference from the Company’s 2006 annual report to shareholders, which is filed as an exhibit to this Form 10-K.

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ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosure about market risk is incorporated by reference from the Company’s 2006 annual report to shareholders, which is filed as an exhibit to this Form 10-K.

ITEM 8. Financial Statements and Supplementary Data

The Company’s Consolidated Financial Statements, the “Notes to the Consolidated Financial Statements”, and the “Reports of Independent Registered Public Accounting Firms” are incorporated by reference from the Company’s 2006 annual report to shareholders, which is filed as an exhibit to this Form 10-K.

ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

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. During the years ended December 31, 2004 and 2003 and through 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.

ITEM 9A. Controls and Procedures

The Company’s management, with the participation of its chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of December 31, 2006 (the “Disclosure Controls Evaluation”). Based on the Disclosure Controls Evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective to provide a reasonable level of assurance that: (i) information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the specific time periods in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed in the reports the Company files or submits under Exchange Act are accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure, all in accordance with Exchange Act Rule 13a-15(e).

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There were no changes in the Company’s internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), during the quarter ended December 31, 2006, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

ITEM 9B. Other Information

In the fourth quarter of 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 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 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.

A copy of the HIMPP Agreement and the schedules thereto are attached as Exhibit 10.32 and are incorporated herein by reference.

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PART III

ITEM 10. Directors, Executive Officers and Corporate Governance

The information called for by Item 10, except for the information concerning executive officers included in Item 4A hereof, is incorporated by reference from the Company’s definitive proxy statement relating to its 2007 annual meeting of shareholders. The information concerning executive officers contained in Item 4A hereof is incorporated by reference into this Item 10.

Code of Ethics

The Company has adopted a code of ethics that applies to its directors, officers and employees, including its chief executive officer, chief financial officer, controller and persons performing similar functions. Copies of the Company’s code of ethics are available without charge upon written request directed to Cari Sather, Director Human Resources, IntriCon Corporation, 1260 Red Fox Road, Arden Hills, MN 55112. The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any future amendments to a provision of its code of ethics by posting such information on the Company’s website: www.intricon.com.

ITEM 11. Executive Compensation

The information called for by Item 11 is incorporated by reference from the Company’s definitive proxy statement relating to its 2007 annual meeting of shareholders.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information called for by Item 12 is incorporated by reference from the Company’s definitive proxy statement relating to its 2007 annual meeting of shareholders.

Equity Compensation Plans

The following table details information regarding the Company’s existing equity compensation plans as of December 31, 2006:

Plan Category	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights		(b) Weighted- average exercise price of outstanding options, warrants and rights	(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	566,900	$	4.82	588,500
Equity compensation plans not approved by security holders(1)	230,833	$	3.75	—
Total	797,733	$	4.51	588,500

(1)  Represents shares issuable under the Non-Employee Directors Stock Option Plan, the (“Plan”), pursuant to which directors who are not employees of the Corporation or any of its subsidiaries were eligible to receive options. The exercise price of the option was the fair market value of the stock on the date of grant. Options become exercisable in equal one-third annual installments beginning one year from the date of grant, except that the vesting schedule for discretionary grants is determined by the Compensation Committee. 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 Plan. As outstanding options under the Plan expire, such shares of our common stock subject to the expired options will become available for issuance under the 2006 Equity Incentive Plan.

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ITEM 13. Certain Relationships and Related Transactions, and Director Independence

The information called for by Item 13 is incorporated by reference from the Company’s definitive proxy statement relating to its 2007 annual meeting of shareholders.

ITEM 14. Principal Accounting Fees and Services

The information called for by Item 14 is incorporated by reference from the Company’s definitive proxy statement relating to its 2007 Annual Meeting of shareholders.

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PART IV

ITEM 15. Exhibits, Financial Statement Schedules

(a)    The following documents are filed as a part of this report:

1) Financial Statements - The Company’s consolidated financial statements, as described below, are incorporated by reference as contained in the Company’s 2006 annual report to shareholders, which is filed as an exhibit to this Form 10-K.

Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004.

Consolidated Balance Sheets at December 31, 2006 and 2005.

Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004.

Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2006, 2005 and 2004.

Notes to Consolidated Financial Statements.

Reports of Independent Registered Public Accounting Firms.

2) Financial Statement Schedules

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON

SUPPLEMENTARY INFORMATION

To the Shareholders, Audit Committee and Board of Directors

IntriCon Corporation and Subsidiaries

Minneapolis, Minnesota

Under date of March 12, 2007, we reported on the 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 as contained in the annual report on Form 10-K for the year ended December 31, 2006. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Virchow Krause & Company, LLP

Minneapolis, Minnesota

March 12, 2007

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

IntriCon Corporation:

Under date of 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, we reported on the consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the year ended December 31, 2004 of IntriCon Corporation (formerly Selas Corporation of America) and subsidiaries, as contained in the 2006 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 2006. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule for the year ended December 31, 2004. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in relation to the 2004 basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

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

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Schedule II - Valuation and Qualifying Accounts

INTRICON CORPORATION AND SUBSIDIARY COMPANIES

Valuation and Qualifying Accounts

December 31, 2006, 2005 and 2004

Description	Balance at beginning of Year		“Addition” charged to costs and expense		“Other” (a) additions (deductions)			“Less” deductions			Balance at end of year
Year ended December 31,2006
Allowance for doubtful accounts	$	370,195	$	19,036	$	—		$	143,688		$	245,543
Allowance for note receivable	$	296,077	$	—	$	—		$	71,077		$	225,000
Deferred tax asset valuation allowance	$	8,593,829	$	—	$	—		$	31,380		$	8,562,449
Year ended December 31,2005
Allowance for doubtful accounts	$	176,594	$	202,697	$	(208	)	$	8,888		$	370,195
Allowance for note receivable	$	—	$	296,077	$	—		$	—		$	296,077
Deferred tax asset valuation allowance	$	8,317,505	$	276,324	$	—		$	—		$	8,593,829
Year ended December 31,2004
Allowance for doubtful accounts	$	253,840	$	88,427	$	19		$	165,692	(b)	$	176,594
Deferred tax asset valuation allowance	$	7,211,013	$	1,455,615	$	—		$	349,123	(c)	$	8,317,505

a) Represents the difference between translation rates of foreign currency at beginning and end of year and the average rate during the year.

b) Uncollectible accounts written off.

c) Continuing operations net operating loss utilized to offset tax impact of operating income from discontinued operations.

All other schedules are omitted because they are not applicable, or because the required information is included in the consolidated financial statements or notes thereto.

28

3) Exhibits –

2.1	(1)	Asset and Share Purchase Agreement dated as of October 11, 2002 among the Company, Selas S.A.S., Andritz A.C. and Andritz Acquisition S.A.S. Schedules and attachments are listed under section 1.2 of the agreement and will be provided to the Commission upon request.
2.2	(2)	Stock purchase Agreement dated July 21, 2003 between the Company and Ventra Ohio Corp, and VTA USA, INC. Schedules and attachments are listed beginning on page 38 of the agreement and will be provided to the Commission upon request.
2.3	(8)	Agreement of Sales between the Company and BET Investments, Inc. dated December 31, 2002, as amended.
2.4	(14)	Asset purchase agreement dated March 31, 2005 among the Company and Selas Heat Technology, LLP (Schedules and exhibits are omitted pursuant to Regulation S-K, Item 601(b)(2); IntriCon Corporation agrees to furnish a copy of such schedules and/or exhibits to the Securities and Exchange Commission upon request).
3.1	(14)	The Company’s Amended and Restated Articles of Incorporation as amended.
3.2	(16)	The Company’s Amended and Restated By-Laws.
+ 10.1	(17)	Amended and Restated 1994 Stock Option Plan.
+ 10.2	(3)	Form of Stock Option Agreements granted under the Amended and Restated 1994 Stock Option Plan.
+ 10.3	(9)	2001 Stock Option Plan.
+ 10.4	(3)	Supplemental Retirement Plan (amended and restated effective January 1, 1995).
10.5	(5)	Amended and Restated Office/Warehouse Lease, between Resistance Technology, Inc. and Arden Partners I. L.L.P. (of which Mark S. Gorder is one of the principal owners) dated November 1, 1996.
+ 10.6	(4)	Amended and Restated Non-Employee Directors’ Stock Option Plan.
+ 10.7	(6)	Retirement Agreement, Consulting Agreement and General Release, dated August 30, 2000, between the Company and Stephen F. Ryan.
10.8	(4)	Separation Agreement dated November 30, 2001 between the Company and Robert W. Ross.
10.9	(10)	Settlement agreement dated September 12, 2003 between the Company and Andritz AG, Andritz Acquisition S.A.A.
+ 10.10	(7)	Termination agreement following change of control or asset sale between the Company and Mark S. Gorder dated December 14, 2004.
+ 10.11	*	Summary sheet for director fees.

29

+ 10.12	*	Summary sheet for executive officer compensation.
+ 10.13	(11)	Employment agreement between the Company and Mark S. Gorder dated as of December 4, 2004.
10.14	(12)	Credit and Security Agreement dated August 31, 2005 by Resistance Technology, Inc. and RTI Electronics, Inc. and Diversified Business Credit, Inc.
10.15	(12)	Security Agreement dated August 31, 2005 between IntriCon Corporation and Diversified Business Credit, Inc.
10.16	(12)	Guaranty by Corporation dated August 31, 2005 between IntriCon Corporation and Diversified Business Credit, Inc.
10.17	(12)	Term Loan Supplement (Real Estate) to Credit Agreement dated August 31, 2005, by Resistance Technology, Inc. and RTI Electronics, Inc. for the benefit of Diversified Business Credit, Inc.
10.18	(12)	Term Loan Supplement (Equipment) to Credit Agreement dated August 31, 2005, by Resistance Technology, Inc. and RTI Electronics, Inc. for the benefit of Diversified Business Credit, Inc.
10.19	(12)	Mortgage, Security Agreement, Fixture Financing Statement and Assignment of Leases and Rents by Resistance Technology, Inc. to Diversified Business Credit, Inc.
10.20	(13)	Form of Non-employee director Option Agreement for options issued pursuant to the Amended and Restated Non-Employee Directors Stock Option Plan.
10.21	(14)	Promissory note from Selas Heat Technology, LLP dated March 31, 2005.
10.22	(15)	Employment agreement between the Company and William J. Kullback dated April 25, 2005.
10.23	(15)	Termination agreement following change of control or asset sale between the Company and William J. Kullback dated April 25, 2005.
10.24	(15)	Form of Stock Option Agreement issued to executive officers pursuant to the 2001 Stock Option Plan.
+ 10.25	(18)	2006 Equity Incentive Plan.
+ 10.26	(18)	Form of Stock Option Agreement issued to executive officers pursuant to the 2006 Equity Incentive Plan.
+ 10.27	(18)	Form of Stock Option Agreement issued to directors pursuant to the 2006 Equity Incentive Plan.
+ 10.28	(19)	Deferred Compensation Plan.
10.29	(20)	Purchase Agreement between Resistance Technology, Inc. and MDSC Partners, LLP dated May 5, 2006.
10.30	(20)	Land and Building Lease Agreement between Resistance Technology, Inc. and MDSC Partners, LLP dated June 15, 2006.
10.31	(21)	First Amendment to Credit and Security Agreement between Resistance Technology, Inc., RTI Electronics, Inc. and M&I Business Credit f/k/a Diversified Business Credit, Inc. dated June 30, 2006.

30

10.32	*	Agreement by and between K/S HIMPP and IntriCon Corporation dated December 1, 2006 and the schedules thereto.
+ 10.33	*	Non-Employee Directors Stock Fee Election Program.
13	*	“Summary of Operations”; “Other Financial Highlights”; “Stock Performance Graph”; “Market and Dividend Information”; “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and the Company’s consolidated financial statements, including the “Notes to Consolidated Financial Statements” and the “Report of Independent Registered Public Accounting Firm”, each as contained in the Company’s 2006 annual reports to shareholders.
21	*	List of significant subsidiaries of the Company.
23.1	*	Consent of Independent Registered Public Accounting Firm (Virchow, Krause & Company, LLP).
23.2	*	Consent of Independent Registered Public Accounting Firm (KPMG).
31.1	*	Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	*	Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	*	Certification of principal executive officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	*	Certification of principal financial officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith.
+	Denotes management contract, compensatory plan or arrangement.
(1)	Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 2003.
(2)	Incorporated by reference from the Company’s current report on Form 8-K/A filed with the Commission on July 23, 2003.
(3)	Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 1995.
(4)	Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 2001.
(5)	Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 1996.
(6)	Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2000.
(7)	Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on December 20, 2004.

31

(8)	Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on June 29, 2004.
(9)	Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 2000.
(10)	Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended September 30,2003.
(11)	Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 2004.
(12)	Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended September 30,2005.
(13)	Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on October 3, 2005.
(14)	Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2005.
(15)	Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on April 26, 2005.
(16)	Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 2005.
(17)	Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 1997.
(18)	Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2006.
(19)	Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on May 17, 2006.
(20)	Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on June 21, 2006.
(21)	Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2006.

32

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

INTRICON CORPORATION
(Registrant)
By:	/s/ Scott Longval
	Scott Longval Chief Financial Officer, Treasurer and Secretary

Dated:  March 16, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Mark S. Gorder

Mark S. Gorder

President and Chief Executive

Officer and Director (principal executive officer)

March 16, 2007

s/ Scott Longval

Scott Longval

Chief Financial Officer

Treasurer and Secretary

(principal accounting and financial officer)

March 16, 2007

/s/Nicholas A. Giordano

Nicholas A. Giordano

Director

March 16, 2007

/s/Robert N. Masucci

Robert N. Masucci

Director

March 16, 2007

/s/ Michael J. McKenna

Michael J. McKenna

Director

March 16, 2007

s/ Philip N. Seamon

Philip N. Seamon

Director

March 16, 2007

33

EXHIBIT INDEX

EXHIBITS:

10.12 Summary sheet for director fees.

10.13 Summary sheet for executive officer compensation.

10.32 Agreement by and between K/S HIMPP and IntriCon Corporation dated December 1, 2006 and the schedules thereto.

10.33 Non-Employee Directors Stock Fee Election Program.

13 “Summary of Operations”; “Other Financial Highlights”; “Stock Performance Graph”; “Market and Dividend Information”; “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and the Company’s consolidated financial statements, including the “Notes to Consolidated Financial Statements” and the “Report of Independent Registered Public Accounting Firm”, each as contained in the Company’s 2006 annual reports to shareholders.

23.1 Consent of Independent Registered Public Accounting Firm (Virchow, Krause and Company, LLP).

23.2 Consent of Independent Registered Public Accounting Firm (KPMG).

31.1 Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

32.2 Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

34

EX-10.12

Exhibit 10.12

Summary Sheet for Director Fees

Currently, each non-employee member of the Board receives $1,000 for each Board meeting attended in person and $500 for each telephonic meeting of the Board participated in, and $1,000 for each committee meeting attended and $500 participated in by telephone of which such non-employee member of the Board is a member. In addition, the Chairman of the Board receives an annual retainer of $49,000. The Chairman of the Audit Committee receives an annual retainer of $34,000. Each non-employee member of the Board, other than the Chairman of the Board and Audit Committee Chair, receives an annual retainer of $24,000. Each of the annual retainers are paid on a quarterly basis. Directors are eligible to receive awards pursuant to the 2006 Equity Incentive Plan. Directors who are not employees are also eligible to receive grants under the Company’s 2006 Equity Incentive Plan. A copy of the forms of stock option agreement is filed as an exhibit to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.

Directors are also eligible to participate in Non-Employee Directors Stock Fee Election Program (the “Program”) under the Company’s 2006 Equity Incentive Plan. The Program gives each non-employee director the right under the Incentive Plan to elect to have some or all of his quarterly director fees paid in shares of the Company’s common stock rather than cash. The minimum amount that can be the subject of such election by a director is 25% of his quarterly director fees. The shares to be issued will be valued based on the last reported sale price of the common stock as reported on The American Stock Exchange on the first business day of each calendar quarter when quarterly director fees are paid. The number of shares that will be issued for any such quarterly director fees with respect to which an election is in effect will be equal to the amount of the election divided by the applicable last sale price. No fractional shares will be issued and a director will receive cash in lieu of any fractional shares. That portion of the quarterly director fees for which no election is in effect will continue to be paid in cash. The shares so purchased will be deemed fully vested as of the quarterly payment date.

EX-10.13

Exhibit 10.13

Summary Sheet for Executive Officer Compensation

Base Salary

The following table sets forth the current base salaries of IntriCon Corporation’s CEO, CFO and each of the executive officers who will be named in the Summary Compensation Table incorporated by reference into IntriCon Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006 from the proxy statement that will be filed in connection with the 2007 annual shareholders’ meeting (the “Named Executive Officers”).

Name and Principal Position	2007 Annual Base Salary
Mark S. Gorder, President and Chief Executive Officer	$312,000
Scott Longval, Chief Financial Officer and Treasurer	$130,000
Steven M. Binnix, Vice President and General Manager of RTI Electronics	$156,000
Christopher D. Conger, Vice President, Research and Development	$145,600
Michael P. Geraci, Vice President, Sales and Marketing	$156,000
Dennis L. Gonsior, Vice President, Global Operations	$145,600

Bonuses

The Compensation Committee also approved the 2007 Bonus Plan (the “Bonus Plan”), which is not set forth in a written agreement. Pursuant to the Bonus Plan, each of the Named Executive Officers is eligible to receive a cash bonus based on the Corporation exceeding certain earnings per share target amounts for the fiscal year 2007 (calculated after giving effect to any bonuses accrued under the Bonus Plan). Depending upon the earnings per share target amount, Mr. Gorder is eligible to receive a bonus up to 150% of his base salary and each of the other Named Executive Officers are eligible to receive a bonus up to 75% of their respective base salary.

Plans and Other Arrangements

The Named Executive Officers are also eligible to:

• Participate in the 2007 Bonus Plan;

• Participate in the 2006 Equity Incentive Plan; and

• Participate in the Company’s broad-based benefit programs generally available to its salaried employees, including health, disability and life insurance programs, and qualified 401(k) plan.

EX-10.32

Exhibit 10.32

K/S HIMPP

HIMPP A/S

INTRICON CORPORATION

AGREEMENT

CONTENTS

1.	Preamble	4
2.	Subscription for shares in K/S HIMPP	4
3.	Rights and obligations of IntriCon Corporation regarding K/S HIMPP	4
4.	Subscription for shares in HIMPP A/S	4
5.	Rights and obligations of IntriCon Corporation regarding HIMPP A/S	4
6.	Breach of agreement	5
7.	Applicable law and arbitration	5
8.	Signatures	6

SCHEDULES

Schedule 1	Subscription Agreement in K/S HIMPP
Schedule 2	Draft Articles of Association of K/S HIMPP with amendments following IntriCon Corporation’s subscription
Schedule 3	Patent License Agreement
Schedule 4	Articles of Association of HIMPP A/S effective March 31, 2005
Schedule 5	HIMPP A/S Shareholders Agreement effective 15 April 2005

2/6

THIS AGREEMENT IS MADE ON THE 1. DECEMBER 2006 BETWEEN

1. K/S HIMPP, Reg No 19502740, Ny Vestergårdsvej 25, DK-3500 Værløse, Denmark

(“K/S HIMPP”)

AND

2. HIMPP A/S, Reg No 19319075, Ny Vestergårdsvej 25, DK-3500 Værløse, Denmark

(“HIMPP A/S”)

AND

3. IntriCon Corporation, 1260 Red Fox Road, Arden Hills, MN 55112, USA

(“INTRICON”)

(K/S HIMPP, HIMPP A/S and INTRICON each a “Party” and together the “Parties”)

3/6

1. PREAMBLE

1.1. K/S HIMPP is a Danish limited partnership established on 28 August 1996. The objects of the partnership is to acquire patent rights within the hearing aid industry with the purpose to license such patent rights to third parties.

1.2. HIMPP A/S is a Danish limited liability company established on 1 June 1996. The objects of the company is to be the general partner in K/S HIMPP.

1.3. INTRICON is an enterprise trading in the hearing aid industry with the intention to become a limited partner in K/S HIMPP and a shareholder in HIMPP A/S.

1.4. K/S HIMPP has agreed to accept INTRICON as a limited partner and HIMPP A/S has agreed to accept INTRICON as a shareholder on the terms and conditions provided for in this Agreement.

2. SUBSCRIPTION FOR SHARES IN K/S HIMPP

2.1. Simultaneously with the signing of this Agreement, INTRICON subscribes for and K/S HIMPP issues 10 A-Shares of USD 180,000 each in K/S HIMPP on the terms and conditions set forth in the attached Subscription Agreement, Schedule 1.

3. RIGHTS AND OBLIGATIONS OF INTRICON REGARDING K/S HIMPP

3.1. Draft Articles of Association of K/S HIMPP with amendments following INTRICON’s subscription for shares are attached as Schedule 2. The amended Articles of Association are to be approved at a general meeting in K/S HIMPP after the signing of this Agreement.

3.2. With respect to INTRICON’s use of patent rights owned by K/S HIMPP,

INTRICON shall enter into the Patent License Agreement attached as Schedule 3.

4. SUBSCRIPTION FOR SHARES IN HIMPP A/S

4.1. When INTRICON has paid the sixth instalment, i.e. on 1 January 2012, INTRICON shall subscribe for and HIMPP A/S shall issue 200 shares of DKK 1,000 each.

4.2. The total consideration of DKK 200,000 for the shares in HIMPP A/S shall be paid not later than 30 days after the subscription of the shares.

5. RIGHTS AND OBLIGATIONS OF INTRICON REGARDING HIMPP A/S

5.1. A copy of the current Articles of Association of HIMPP A/S are attached as Schedule4.

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5.2. A copy of the current Shareholders Agreement effective 15 April 2005 is attached as Schedule 5.

5.3. INTRICON shall have no rights or obligations regarding HIMPP A/S prior to the issuance of shares according to Article 4.1. However, INTRICON shall have the right to attend board meetings and general meetings without the right to vote.

6. BREACH OF AGREEMENT

6.1. In the event of a material breach of this Agreement which has not been remedied thirty (30) days from the date of service by a non-defaulting party of a notice in writing specifying the material breach and requiring its remedy, the non-defaulting party(ies) may terminate this Agreement forthwith.

7. APPLICABLE LAW AND ARBITRATION

7.1. Any dispute arising between the parties concerning this Agreement cannot be brought before the ordinary courts but shall be resolved by arbitration in Copenhagen in accordance with substantive Danish law.

7.2. The party intending to convene the arbitration tribunal shall notify the other party by registered letter of such intent providing a short description of the issues, which shall be brought before the arbitration tribunal. Each party shall then within four weeks appoint an arbitrator. The arbitrators shall within two weeks appoint a third arbitrator who shall be qualified as a lawyer. If the arbitrators have not agreed upon the third arbitrator within two weeks or if a party fails within the time given to appoint an arbitrator, the relevant arbitrator shall be appointed if a party shall so direct by the President of the Maritime and Commercial Court in Copenhagen.

7.3. The arbitration tribunal shall itself decide its rules of procedure and shall when handing down its ruling, order the distribution of costs involved in the matter including costs to legal counsel and, if necessary, accountants.

7.4. To the extent that they have not been varied by the contents of this Article 7 the provision of the Danish Arbitration Act shall apply. The arbitration tribunal shall conduct its proceedings in the English language.

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8. SIGNATURES

This Agreement is signed in three original copies, one for each of the Parties.

For and on behalf of K/S HIMPP:

Copenhagen, December 15, 2006

/s/ Søren Westermann

For and on behalf of HIMPP A/S:

Copenhagen, December 15, 2006:

/s/ Søren Westermann

For ¦and on behalf of IntriCon Corporation:

December 26, 2006:

/s/ Mark S. Gorder

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SCHEDULE 1

THIS SUBSCRIPTION AGREEMENT (the “Agreement”) is made on December 31, 2006 between

1. K/S HIMPP, a limited partnership under Danish law resident at Ny Vestergaardsvej 25, 3500 Værløse, Denmark (the “Partnership”); and

2. IntriCon Corporation, 1260 Red Fox Road, Arden Hills, MN 55112, USA (“INTRICON”)

for the subscription for shares in the Partnership.

1. DEFINITIONS

1.1 In this Agreement the following words and expressions shall have the following meanings unless where the context explicitly requires otherwise:

“Shares” means 10 A shares in the Partnership of a face value of US$180,000.00 each or in the aggregate of US$1,800,000.00 of the Partnership’s total authorised and issued capital of US$19,950,000 after the increase of the capital;

“General Partner” means the general partner of the Partnership; and

“Articles” means the Articles of Association of the Partnership to be adopted by the Partnership in its general meeting on April 19, 2007.

2. SUBSCRIPTION FOR SHARES

The Limited Partner hereby subscribes for the Shares and the Partnership hereby accepts to be bound by the Limited Partner’s subscription for the Shares.

3. PAYMENT FOR THE SHARES

3.1 The total consideration of US$1,800,000 for the subscription of the Shares in K/S HIMPP shall be paid in the following instalments:

US$ 260,000 Upon signing of this Agreement

US$ 260,000 Not later than December 31, 2007

US$ 260,000 Not later than December 31, 2008

US$ 260,000 Not later than December 31, 2009

US$ 260,000 Not later than December 31, 2010

US$ 260,000 Not later than December 31, 2011

US$ 240,000 Not later than December 31, 2012

3.2 The consideration mentioned in Article 3.1 is accruing interest of 4 per cent p.a. from the signing of this Agreement until the balance has been paid. Interest is calculated and paid once a year together with the instalments listed in Article 3.1, i.e. first time December 31, 2007.

3.3 The rights of the Limited Partner under the Articles are subject to the timely payment of all instalments of the consideration mentioned in Article 3.1 above. The total consideration of US$ 1.8 Million shall be considered due and payable as of the subscription date and shall be paid in full even if the Limited Partner merges with a licensee of the Partnership or if ownership interest in the Limited Partner is acquired by a licensee or another limited partner of the Partnership.

4. THE LIMITED PARTNER’S RIGHTS AND OBLIGATIONS

4.1. The Limited Partner hereby accepts and assumes all rights and obligations connected with the subscription for and holding of the Shares pursuant to the Articles or Danish law in general.

4.2. By his execution of this Agreement the Limited Partner covenants to have full knowledge of and to accept the terms and condition of the Articles.

4.3. The Limited Partner hereby in particular covenants to have full knowledge of and to accept the following provision of the Articles:

(i)The Partnership’s general partner is HIMPP A/S whose liability is joint, direct and unlimited for all the Partnership’s indebtedness and liabilities. The General Partner’s issued and outstanding share capital is Danish Kroner 2,400,000. Each Limited Partner’s liability for the Partnership’s indebtedness and liabilities is personal, direct and pro rata and limited to the unpaid part (if any) of that Limited Partner’s share in the Partnership’s authorised and issued capital together with such further contributions in cash as the Partnership acting in general meeting may resolve under Article 4.1, or as may be required to be contributed under Article 4.1;

(ii)No Limited Partner shall have any rights of recourse against the General Partner for that Limited Partner’s proportion of the Partnership’s aggregate liabilities and indebtedness (Article 6.2);

(iii)Upon the complete performance of each limited partner’s obligations under his subscription agreement with the Partnership that limited partner is entitled to receive a certificate evidencing his shares (Article 7.1);

(iv)The Shares and the certificates are non-negotiable instruments and shall be issued in the name of the owner (Article 7.2);

(v)Each Share may be held by only one natural or legal person. No Share can be divided into sub-shares (Article 8.1);

(vi)The A shares may only be transferred to a transferee who is itself in control of or controlled by the transferor limited partner (Article 8.2);

(vii)If any Limited Partner shall become insolvent or be in breach of his duties and obligations towards the Partnership under the subscription agreement, the Articles or otherwise, the Partnership shall be entitled to request any loss realised thereby reimbursed by the relevant limited partner, and further to terminate without notice any patent license agreement entered into between the Partnership and the Limited Partner (Article 10); and

(viii)The General Partner shall be charged with the administration of the Partnership and is entitled to remuneration for such work to the extent that such remuneration is reasonable when compared to the work and costs involved in the General Partner’s performance of his duties. The General Partner may delegate administrative functions and tasks to third parties (Article 11.1).

4.4. The Limited Partner and the Partnership have agreed to modify the Limited Partners rights during the period where the consideration for the Shares has not been fully paid up. The following exceptions and amendments to the Articles of Association of K/S HIMPP shall apply:

(i)INTRICON shall not have the right to vote at general meetings until INTRICON has paid an amount of US$1,560,000 of the total consideration for the shares in K/S HIMPP. However, INTRICON shall have the right to attend general meetings and other Partnership meetings from the signing of this Agreement (Article 12.11).

5. APPLICABLE LAW AND ARBITRATION

5.1 Any dispute arising between the parties concerning this Agreement cannot be brought before the ordinary courts but shall be resolved by arbitration in Copenhagen in accordance with substantive Danish law.

5.2 The party intending to convene the arbitration tribunal shall notify the other party by registered letter of such intent providing a short description of the issues, which shall be brought before the arbitration tribunal. Each party shall then within four weeks appoint an arbitrator. The arbitrators shall within two weeks appoint a third arbitrator who shall be qualified as a lawyer. If the arbitrators have not agreed upon the third arbitrator within two weeks or if a party fails within the time given to appoint an arbitrator, the relevant arbitrator shall be appointed if a party shall so direct by the President of the Maritime and Commercial Court in Copenhagen.

5.3 The arbitration tribunal shall itself decide its rules of procedure and shall when handing down its ruling, order the distribution of costs involved in the matter including costs to legal counsel and, if necessary, accountants.

5.4 To the extent that they have not been varied by the contents of this Article 7 the provision of the Danish Arbitration Act shall apply. The arbitration tribunal shall conduct its proceedings in the English language.

AS WITNESS the signatures of the parties hereto on the date first written above.

For the Partnership:

/s/ Søren Westermann

Managing Director

For and on behalf of K/S HIMPP

For the Limited Partner:

/s/ Mark S. Gorder

President & CEO

For and on behalf of IntriCon Corporation

SCHEDULE 2

DRAFT

(with amendments following IntriCon Corporation’s subscription)

ARTICLES OF ASSOCIATION

of

K/S HIMPP

Draft December 2006

1. THE LIMITED PARTNERSHIP’S NAME AND PRINCIPAL PLACE OF BUSINESS

1.1. The name of the limited partnership is K/S HIMPP (the “Partnership”). The Partnership shall also trade under the name of K/S Hearing Instruments Manufacturers Patent Partnership (K/S HIMPP).

1.2. The Partnership’s place of residence is in Værløse Kommune.

2. OBJECTS

2.1. The Partnership’s objects are to carry on a business undertaking by acquiring patent rights with an application within the hearing aid industry and licencing such patent rights to third parties.

3. THE COMPANY’S CAPITAL

3.1. The Partnership’s authorised and issued capital US$19,950,000 is divided into 110 (one hundred) A-shares of US$180,000 each and 1 (one) A-share of US$ 150,000 which are held by the following companies in the beneath proportions:

GN ReSound A/S 10 A-Shares of US$ 180,000

Phonak AG 10 A-Shares of US$ 180,000

Oticon A/S 10 A-Shares of US$ 180,000

Widex A/S 10 A-Shares of US$ 180,000

Starkey Laboratories, Inc. 10 A-Shares of US$ 180,000

GN ReSound Corporation 10 A-Shares of US$ 180,000

Beltone Electronics Corporation 10 A-Shares of US$ 180,000

Unitron Industries Ltd. 10 A-Shares of US$ 180,000

Sonic Innovations, Inc. 10 A-Shares of US$ 180,000

RION Co. Ltd. 10 A-Shares of US$ 180,000

IntriCon Corporation 10 A-Shares of US$ 180,000

HIMPP A/S 1 A-Share of US$ 150,000

3.2. The Partnership shall be deemed to be fully established on the subscription by the Partners of all Shares in the Partnership’s authorised and issued capital.

4. FINANCING

4.1. The Partnership’s activities shall be financed by the subscription proceeds derived from the Limited Partners. The Partnership acting in general meeting may by simple majority resolve to request the Limited Partners to make further contributions in cash to the Partnership in excess of the authorised and issued capital to cover running costs of the business. However, annually each Limited Partner shall be obliged to contribute by a maximum of USD 25,000 to cover his proportionate share of the yearly deficit.

5. OWNERSHIP AND APPLICATION OF ANNUAL PROFITS

5.1. The Partnership shall be owned by the Limited Partners in the same proportion as each Limited Partner’s share in the Partnership’s authorised and issued capital shall bear to the Partnership’s aggregate authorised and issued capital.

5.2. The Partnership’s net annual profits and losses as evidenced by the Partnership’s annual accounts shall be apportioned between the Limited Partners in the same proportion as each Limited Partner’s share in the Partnership’s authorised and issued capital shall bear to the Partnership’s aggregate authorised and issued capital. The Partnership acting in general meeting may with the approval of all Limited Partners resolve to apportion a net annual loss differently.

5.3. The Partnership’s authorised and issued capital may be increased by the subscription of new A-Shares on the same terms and conditions applying to the initial subscription of the Shares.

5.4. The A-Shares are irredeemable.

6. THE PARTNERS’ LIABILITY

6.1. The Partnership’s general partner is A/S HIMPP (the “General Partner”) whose liability is joint, direct and unlimited for all the Partnership’s indebtedness and liabilities. Each Limited Partner’s liability for the Partnership’s indebtedness and liabilities is personal, direct and pro rata and limited to the unpaid part (if any) of that Limited Partner’s share in the Partnership’s authorised and issued capital together with such further contributions in cash as the Partnership acting in general meeting may resolve under Article 4.1, or as may be required to be contributed under Article 4.1.

6.2. No Limited Partner shall have any rights of recourse as against the General Partner for that Limited Partner’s proportion of the Partnership’s aggregate liabilities and indebtedness.

7. SHARE CERTIFICATES

7.1. Each Limited Partner is on the complete performance of the Limited Partner’s obligations under his subscription agreement with the Partnership entitled to receive a certificate evidencing his Share.

7.2. The Shares and the certificates are non-negotiable instruments and shall be issued in the name of the owner.

7.3. The General Partner shall create and maintain a list of the names and addresses of the Limited Partners. Each certificate evidencing Shares shall be endorsed with a notification of the certificate’s entry in the list of Limited Partners.

7.4. If it can be established that a Share certificate has been lost, the General Partner may on the request of the Limited Partner registered in the list of Limited Partners as the owner of the relevant Share certificate notify such person who holds the certificate by no less than three months’ notice in the Official Gazette to appear at the Partnership’s address and there present to the Partnership such evidence of his right and title to the relevant Share certificate as he is relying on. In the event that no one shall come forward as a result of the notice the General Partner shall be entitled to deem the lost Share certificate null and void whereupon the same shall so become null and void and issue a new Share certificate to such person who reported the Share certificate lost and missing.

7.5. All costs involved in connection with the annulment and subsequent re-issue of a Share certificate shall be borne by the Limited Partner requesting the annulment.

8. ASSIGNMENT AND TRANSFER

8.1. Each Share may be held by only one natural or legal person. No Share can be divided into sub-shares.

8.2. Shares are non-transferable except where the transfer occurs from a Limited Partner to a transferee which is itself controlled by or in control of such Limited Partner.

8.3. No transfer and assignment of ownership to Shares shall be deemed valid and binding as against the Partnership unless and until such time that it has been entered on the list of the Partnership’s Limited Partners. The condition for the entry shall be the transferee’s execution of a certificate that the transferee acquires and assumes all the transferor Limited Partner’s rights and obligations as against the Partnership in a form satisfactory to the General Partner.

9. EXECUTION

9.1. The Partnership’s assets cannot be made the subject of attachment or distress orders or any other form of execution for claims unrelated to the Partnership.

10. DEFAULT

10.1. If any Limited Partner shall become insolvent or be in breach of his duties and obligations towards the Partnership under the subscription agreement, these Articles of Association or otherwise, the Partnership shall be entitled to request any loss realised thereby reimbursed by the relevant Limited Partner and further to terminate without notice any patent license agreement entered into between the Partnership and the Limited Partner.

11. ADMINISTRATION

11.1. The General Partner shall be charged with the administration of the Partnership and is entitled to remuneration for such work to the extent that such remuneration is reasonable when compared to the work and costs involved in the General Partner’s performance of his duties. The General Partner may delegate administrative functions and tasks to third parties.

11.2. The General Partner shall maintain the Partnership’s books and shall prepare the Partnership’s budgets.

12. GENERAL MEETINGS

12.1. The Partnership’s highest authority is the general meeting.

12.2. The annual general meeting shall be held each year no later than four months after the expiry of the financial year.

12.3. The general meeting shall be held in Værløse Kommune unless the General Partner shall direct otherwise.

12.4. The General Partner shall call the general meeting with at least three and no more than five weeks notice by ordinary post to the Limited Partners at the addresses indicated in the list of Limited Partners.

12.5. The General Partner may call extra-ordinary general meetings and shall so call an extra-ordinary general meeting if at least two Limited Partners shall reasonably request it. In the latter event the meeting shall be called no later than 14 days after the receipt of the Limited Partners’ request.

12.6. Any general meeting shall be chaired by a person appointed by the General Partner who shall have the final right to resolve all matters regarding the proper calling of the general meeting and the procedures applicable at the general meeting including the casting of votes.

12.7. The agenda for the annual general meeting shall as a minimum contain the following items:

1. The General Partner’s account of the Partnership’s business in the most recent financial year.

2. The presentation of the audited annual accounts for approval.

3. The application of the profits and losses pursuant to the annual accounts, including contributions from Limited Partners.

4. The approval of the following year’s budget.

5. The appointment of the Partnership’s auditor.

6. Proposals from Limited Partners if any.

7. Miscellaneous.

12.8. Proposals from Limited Partners which shall be on the agenda for the annual general meeting shall be presented to the General Partner no later than two weeks before the date of the relevant annual general meeting.

12.9. No later than two weeks before the annual general meeting the audited annual accounts shall be circulated to all Limited Partners together with the proposed application of the profits and losses.

12.10. Proposals from Limited Partners or the General Partner to amend these Articles of Association shall be circulated to all the Partnership’s participants no later than two weeks before the date of the general meeting.

12.11. At the general meeting each Limited Partner has one vote for each Share held by him or voted by him under proxy. The right to vote is conditional upon title to the relevant Shares having been registered in the list of Limited Partners no later than 14 days before the date of the general meeting. At the general meeting Limited Partners may be represented and vote by third parties acting under written proxy.

12.12. All resolutions made at the general meeting shall be made by simple majority unless otherwise provided for in these Articles of Association. The general meeting shall not pass resolutions on matters which can be decided by the General Partner.

13. SIGNATORY RULE

13.1. The Partnership is bound in all respects by the General Partner who is authorised to sign formally on behalf of the Partnership.

14. FINANCIAL YEAR

14.1. The Partnership’s financial year is the calendar year. The Partnership’s first financial year commences on the date of incorporation of the Partnership and expires on 31 December 1996.

14.2. The Partnership’s annual accounts shall be audited by a chartered accountant appointed at the general meeting as the Partnership’s auditor for a period of one year.

14.3. The Partnership’s profit and loss statement and balance sheet shall be available in audited form no later than two months after the expiry of the financial year to which they relate.

14.4. The annual accounts shall be prepared in accordance with generally accepted accounting practices and the Annual Accounts Act with such modifications as may be result from the limited partnership form. The Partnership shall advise the Limited Partners not resident in the Kingdom of Denmark of such accounting details as may be necessary for the proper preparation by them of their annual accounts.

15. AMENDMENTS TO ARTICLES OF ASSOCIATION

15.1. These Articles of Association can only be amended following a proposal to amend made by the General Partner or the Limited Partners and only if the amendment is passed by a general meeting by a majority of 4/5 of the authorized capital. If the proposal is not passed at a general meeting a new general meeting to be held no earlier than four weeks after the first general meeting may pass the resolution with a majority of 4/5 of the Shares represented at the general meeting. Notwithstanding the foregoing, any amendment which could materially and adversely affect any Limited Partner shall require the approval of such Limited Partner.

15.2. Amendments to these Articles of Association which shall be necessary in order to bring them to conform with statutory rules and regulations applying to limited partnerships, the General Partner shall be authorised to complete such amendments without calling a general meeting.

15.3. To the extent that changes in the law applying to limited partnerships shall affect the position of the General Partner or the Limited Partner as against public authorities, the General Partner or the Limited Partners shall be entitled to call an extra-ordinary general meeting to debate the necessary amendments.

15.4. The General Partner or each Limited Partner may then propose a change in the Partnership’s corporate identity and the general meeting can pass such resolution by a majority of 4/5 of the Shares represented at such general meeting. The articles of association applying to the different entity shall to the greatest extent possible be similar to these Articles of Association including the rights and obligations of the General Partner and the Limited Partners.

15.5. In the event of the restructuring of the Partnership to another corporate form the Partnership’s auditor shall immediately prepare an opening statement evidencing each Limited Partner’s capital account. No Limited Partner shall be subject to personal liability as a result of the restructuring of the Partnership without in each case having consented to such change in liability.

15.6. The Partnership shall cease on the alienation of its assets. The General Partner shall in that event be authorised to resolve to liquidate the Partnership.

16. TERM AND TERMINATION

16.1. On resolving to liquidate the Partnership the General Partner shall appoint a liquidator who shall be charged with the liquidation of the Partnership accounting at all times to the Partnership acting in general meeting, and who, on the discharge of the Partnership’s liabilities shall distribute the net assets of the Partnership to the Limited Partners in equal proportion to their share in the Partnership’s authorised and issued share capital.

16.2 The Partnership shall be liquidated at the latest 20 years after its incorporation or upon the dissolution, liquidation or other event of withdrawal of the General Partner.

16.3 At the earliest as from January 31, 1998 a Limited Partner may choose in the future not to participate in the losses or profits of the Partnership. Such decision shall be notified in writing to the General Partner and shall be effective as from a July 1 or January 1 (the Termination Date) if notified no later than three (3) months prior to the Termination Date.

After the Termination Date, any royalty-free license to use Partnership patents shall still continue in full force and effect, but the Limited Partner not participating in losses or profits of the Partnership shall not be granted any right to use partnership patents acquired by the Partnership after the Termination Date.

17. ARBITRATION

17.1. Any dispute arising between the Limited Partners and the General Partner concerning the Partnership or the interpretation of these Articles of Association cannot be brought before the ordinary courts but shall be resolved in accordance with Danish substantive law by arbitration in Copenhagen.

17.2. The party intending to convene the arbitration tribunal shall notify the other party by registered letter of such intent providing a short description of the issues which shall be before the arbitration tribunal. Each party shall then within four weeks appoint an arbitrator. These arbitrators shall within two weeks appoint a third arbitrator who shall be educated as a lawyer. If the arbitrators have not agreed the third arbitrators within two weeks or if a party fails within the time given to appoint an arbitrator, the relevant arbitrator shall be appointed if a party shall so direct by the President of the Maritime and Commercial Court in Copenhagen.

17.3. The arbitration tribunal shall itself decide its rules of procedure and shall when handing down its ruling order the taxing of costs involved in the matter including costs to legal counsel and, if necessary, accountants.

17.4. To the extent that they have not been varied by the contents of this Article 17 the provision of the Arbitration Act shall apply. The arbitration tribunal shall conduct its proceedings in the English language.

18. COSTS

18.1. All costs involved in the incorporation of the Partnership shall be borne by the Partnership.

SCHEDULE 3

PATENT LICENSE AGREEMENT

between

K/S HIMPP

and

IntriCon Corporation

December 2006

IntriCon Corporation

1260 Red Fox Road

Arden Hills, MN 55112

USA

(in the following referred to as “Licensee”)

and

K/S HIMPP

Ny Vestergaardsvej 25

DK- 3500 Vaerloese

Denmark

(in the following referred to as “Licensor”)

have today entered into the following

1. PATENT LICENSE AGREEMENT PREAMBLE

1.1. Licensor is the owner of the entire right, title and interest in certain patents and patent applications.

1.2. Licensee wishes to obtain a non-exclusive license to the patents and patent applications as defined below, and Licensor is willing to grant said license to Licensee on the terms hereinafter set forth.

2. DEFINITIONS

2.1. The term “Licensed Patents” as used in this Agreement shall be defined as all patents and patent applications owned by Licensor as of the effective date of this Agreement, or acquired during the term of this Agreement, and which Licensor has the right to license hereunder, including without limitation the patents and patent applications listed in Exhibit A to this Agreement, as well as any patents which are later issued from patent applications listed in Exhibit A.

2.2. The term “Licensed Products” as used in this Agreement shall mean hearing aids, components thereof or any apparatus, device or system which is designed by Licensee for use with a hearing aid, covered by a claim of a Licensed Patent or made by a process covered by a claim of a Licensed Patent and which does not include features covered by a Licensed Patent not incorporated by Licensee but incorporated by customers of Licensee or other unrelated third parties.

2.3. For purposes of this Agreement the term “Affiliated Company” shall include a company or entity which itself is directly or indirectly controlled by or directly or indirectly controls the Licensee, or any company or entity, which is directly or indirectly controlled by the company or entity controlling the Licensee. For purposes of this Clause 2.3 the term “control” shall mean a shareholding or similar ownership of more than 50 per cent.

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3. THE LICENSE

3.1. Subject to the terms and conditions hereinafter set forth, and subject to any prior conflicting rights that may have been granted under the Licensed Patents, Licensor hereby grants to Licensee a non-exclusive, worldwide license under the Licensed Patents to make, use, sell, have made and import Licensed Products.

3.2. Licensee is aware that license agreements substantially identical to this Agreement have already or will be made between Licensor and its present and future limited partners, and that license agreements on terms that are not identical to this Agreement may be entered into between Licensor and third party licensees granting to such licensees a non-exclusive license to the Licensed Patents.

3.3. The grant of license hereunder is for the use exclusively by Licensee and Affiliated Companies of Licensee, and Licensee shall not grant to third parties any sub-licenses or other rights under the Licensed Patents.

3.4. The above non-exclusive rights of the parties may be subject to restrictions or limitations imposed under mandatory provisions of the EU or under national law or regulations and such provisions shall apply and be considered part of this Agreement.

3.5. Licensor hereby covenants and agrees with Licensee that neither it nor any person directly or indirectly controlled by it or claiming through it will bring suit or otherwise assert a claim against Licensee, its affiliates or its customers before any court or administrative agency in the world, based on or arising out of any of the Licensed Patents and based on activities within the scope of the license rights granted herein, whether such claim arose before or after the effective date or is based on events which occurred before or after the Effective Date. This covenant not to sue shall run with title to the Licensed Patents, and shall bind any assignee or other person to whom Licensor may convey an interest in the Licensed Patents. For greater certainty, this covenant shall only extend to customers of Licensee in respect of Licensed Products or products incorporating Licensed Products.

4. THE PATENTS

4.1. During the life of this Agreement Licensor in its sole discretion shall decide what steps shall be taken to obtain patents that have been applied for and to maintain the patents already granted. All costs connected with the maintenance and issuance of patents shall be paid by Licensor.

4.2. Licensee has been informed that Licensor may at its sole discretion discontinue the maintenance of the Licensed Patents or part thereof, and Licensee agrees that it shall not have any right of compensation or any other claim against Licensor based on the fact that the Licensed Patents or some of them may lapse.

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5. ASSIGNMENT/SUB-LICENSES

5.1. Licensee shall not be entitled to assign its rights and obligations hereunder to a third party without the express permission of Licensor.

5.2. Licensee shall not be entitled to grant sub-licenses.

6. WARRANTIES OF LICENSOR

6.1. Licensor warrants,

(i) that Licensor is the owner of the entire right, title and interest in the Licensed Patents and has the right to grant the license granted herein; and

(ii) that Licensor is not aware of any prior conflicting rights granted under any of the Licensed Patents except: the Central Institute for the Deaf (CID) has been granted an option for an exclusive license under all patents listed in Exhibit A under patent families CID1 to CID5 for all fields of use except hearing aids.

6.2. Nothing in this Agreement shall be construed as a representation or warranty by Licensor as to the technical or commercial results, which can be obtained by the exploitation of the Licensed Patents.

6.3. The parties agree that should a patent not issue from any of the applications listed in Exhibit A hereto, the terms hereof inclusive of Licensee’s obligations hereunder shall be otherwise unaffected by such occurrence.

7. INFRINGEMENT

7.1. In the case of any third party infringing the Patents, Licensor shall in its sole discretion decide whether legal proceedings shall be initiated to prevent such infringement. If legal proceedings are initiated, Licensee shall, if requested, act under the instructions of Licensor in this regard to the extent that such instructions are not contrary to the interest of Licensee.

7.2. Costs incurred in connection with legal proceedings shall be borne by Licensor.

8. PRODUCT LIABILITY AND COMPLIANCE

8.1. Only Licensee shall be liable for any claim for compensation, which might be set forth by any third party as a consequence of the exploitation of the Licensed Patents.

8.2. Licensee shall observe and comply with all local laws, rules and regulations in the territory applicable to the exploitation of the Licensed Patents, and shall at its own cost obtain any necessary governmental permit or approval.

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9. SECRECY

9.1. The parties hereto acknowledge that each party has an interest in maintaining the confidentiality of the Invention and the parties’ business and trade practices. Therefore the parties shall treat as secret and confidential all information relating to the other party’s business and products, and to the Invention (collectively, the “Confidential Information”). The parties each agree to use their best efforts to prevent the unauthorized use and disclosure of the Confidential Information, which shall include requiring all third parties to whom the Confidential Information is disclosed to execute confidentiality agreements containing terms similar to those contained in this Article 9.1. Notwithstanding the foregoing, the parties may disclose any Confidential Information which has been independently acquired from a third party, that does not have an obligation of confidentiality to any of the parties, which is made public incident to the filing of patent applications or the issuance of patents, which has otherwise become generally known in the industry in which the parties operate other than as a result of wrongdoing by the party disclosing such information, or the disclosure is required pursuant to judicial order or the mandate of any governmental agency or authority.

9.2. The obligations of confidentiality hereunder shall continue after the expiration of this Agreement, irrespective of the cause and irrespective of which of the parties might terminate the Agreement.

10. FORCE MAJEURE

10.1. Neither party shall be under any liability to the other party hereunder due to circumstances that such party shows is beyond his control, such as change of legislation, government prohibition, or other kind of force majeure. The parties undertake to notify the other party if any force majeure circumstances should occur.

11. LICENSE FEES

11.1. In consideration of the license granted hereunder, Licensee has under Article 4 of the Articles of Association of Licensor in Licensee’s capacity as a limited partner of the partnership agreed to pay a proportional share of the partnership’s yearly deficit, however not exceeding USD 25,000.

11.2. Payment of the above license fees shall be effected in accordance with the terms of the Articles of Association of the limited partnership – first time for the calendar year of 2006.

12. TERM OF AGREEMENT

12.1. This Agreement shall be deemed to have come into force on January 1, 1997 and shall remain in force and be non-terminable by Licensor until the expiry of all of the Licensed Patents, however, subject to the timely payment by Licensee of all amounts due to Licensor under a subscription agreement entered into simultaneously herewith (in the following referred to as “the Subscription Agreement”).

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12.2. Once the total license fee of USD 1.8 million shall have been paid, Licensee shall be entitled to terminate its obligation to pay license fees in accordance with Article 11.1 (ii) above subject to three months’ notice to terminate at any July 1 or January 1 (the “Termination Date”). After the Termination Date any license to use the Licensed Patents shall still continue in full force and effect but Licensee shall not have any right to use patents acquired by Licensor after the Termination Date.

13. BREACH OF AGREEMENT

13.1. In the event of a material breach by Licensee of any of its material obligations under this Agreement or under the Subscription Agreement which is not remedied within thirty (30) days from the date of service by Licensor of a notice in writing specifying the material breach and requiring its remedy, Licensor may terminate this Agreement forthwith.

13.2. In the event of a material breach by Licensor of any of its material obligations under this Agreement which is not remedied within thirty (30) days from the date of service by Licensee of a notice in writing specifying the material breach and requiring its remedy, Licensee may terminate this Agreement forthwith.

14. APPLICABLE LAW AND ARBITRATION

14.1. Any dispute arising between the parties concerning this Agreement cannot be brought before the ordinary courts but shall be resolved in accordance with substantive Danish law by arbitration in Copenhagen.

14.2. The party intending to convene the arbitration tribunal shall notify the other party by registered letter of such intent providing a short description of the issues, which shall be before the arbitration tribunal. Each party shall then within four weeks appoint an arbitrator. These arbitrators shall within two weeks appoint a third arbitrator who shall be educated as a lawyer. If the arbitrators have not agreed upon the third arbitrator within two weeks or if a party fails within the time given to appoint an arbitrator, the relevant arbitrator shall be appointed if a party shall so direct by the President of the Maritime and Commercial Court in Copenhagen.

14.3. The arbitration tribunal shall itself decide its rules of procedure and shall when handing down its ruling, order the distribution of costs involved in the matter including costs to legal counsel and, if necessary, accountants.

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14.4. To the extent that they have not been varied by the contents of this Article 14 the provision of the Danish Arbitration Act shall apply. The arbitration tribunal shall conduct its proceedings in the English language.

______________________________, 2006

For the Licensee:	For the Licensor:
/s/ Mark S. Gorder	/s/ Søren Westermann
IntriCon Corporation	K/S HIMPP

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Exhibit A

008

Calibration Device and Auditory Prosthesis Having Calibration Information (Widin et al)

Country	Serial #	Patent Number
United States	192,213	4,992,966
Canada	596,199	1,321,260
Australia	32674/89	614,825
Japan	115926/89	3113661
South Korea	6179/89	127307
Denmark	1764/89	175289
EPO	89304712.6	EP 0 341995 B
Austria	EPO	123708
France	EPO	0 341 995
Germany	EPO	P68923991
Netherlands	EPO	0 341 995
Switzerland	EPO	0 341 995
United Kingdom	EPO	0 341 995

Exhibit A Page 1

009

Method and Apparatus for Determining Acoustic Parameters of an

Auditory Prosthesis Using Software Model (Widin et al)

Country	Serial #	Patent Number
United States	07/888,148	Re 34,961
United States	192,214	4,953,112
Canada	596,743	1,321,635
Australia	33033/89	619,275
South Korea	6181/89	109656
Denmark	1766/89	175521
EPO	89304711.8	EP 0 396 831 B
Austria	EPO	114103
France	EPO	0 396 831
Germany	EPO	P68919349
Netherlands	EPO	0 396 831
Switzerland	EPO	0 396 831
United Kingdom	EPO	0 396 831

010

Hearing Aid Programming Interface (Rising)

Country	Serial #	Patent Number
United States	192,242	4,961,230

Exhibit A Page 2

011

Hearing Aid Programming Interface and Method (Mangold)

Country	Serial #	Patent Number
United States	192,259	4,989,251
Canada	599069/89	1,331,651
Japan	117187/89	2965995
EPO	89304487.5	EP 0 341 903 B
Germany	EPO	P68919270
France	EPO	0 341 903
Netherlands	EPO	0 341 903
United Kingdom	EPO	0 341 903

012

Auditory Prosthesis Using Fitting Vectors (Widin)

Country	Serial #	Patent Number
United States	07/192,351	4,901,353
Canada	596414/89	1,300,732
Australia	32789/89	621,101
Japan	115928/89	3021467
South Korea	6180/89	115905
Denmark	1765/89	175586
EPO	89304714.2	EP 0 341 997 B
Austria	EPO	111289
France	EPO	0 341 997
Germany	EPO	P68917980
Italy	EPO	0 341 997
Netherlands	EPO	0 341 997
Switzerland	EPO	0 341 997
United Kingdom	EPO	0 341 997

Exhibit A Page 3

014

Auditory Prosthesis With Datalogging Capability (Mangold et al)

Country	Serial #	Patent Number
United States	353,220	4,972,487
Canada	594962/89	1,317,666
Australia	31420/89	610,705
Japan	80196/89	2664466
EPO	89302689.8	EP 0 335 542 B
France	EPO	0 335 542
Germany	EPO	P68920060
Netherlands	EPO	0 335 542
Switzerland	EPO	0 335 542
United Kingdom	EPO	0 335 542

016

Method, Apparatus, System and Interface Unit for Programming a Hearing Aid (Platt)

Country	Serial #	Patent Number
United States	525,901	5,226,086
Australia	75912/91	641,239
Japan	34867/91	2516793
Germany	G9106237.3	G91062373

Exhibit A Page 4

017

Hearing Aid and Method For Preparing same (Woodfill, Jr.)

Country	Serial #	Patent Number
United States	887,592	5,321,757
Japan	512130/91	2960544
EPO	91912842.1	EP 0 544 687 B
Germany	EPO	P69112407

019

Auditory Prosthesis, Noise Suppression Apparatus and Feedback Suppression Apparatus having Focused Adaptive Filtering

(Soli et al)

Country	Serial #	Patent Number
United States	912,886	5,402,496
Japan	5172767/93
EPO	93111138.9	EP 0 579 152 B
Germany	EPO	P69327992.

Exhibit A Page 5

021

Auditory Prosthesis For Adaptively Filtering Selected Auditory

Component By User Activation and Method For Doing Same

(Soli et al)

Country	Serial #	Patent Number
United States	07/921,508	6,563,931
Japan	188281/93	3313834
EPO	93112050.3	EP0 581 262 B
Germany	EPO	P69325211.1
France	EPO	0 581 262
United Kingdom	EPO	0 581 262

CID1

Hearing aids, signal supplying apparatus, system for compensating

hearing deficiencies and methods,(Engebretson et al.)

COUNTRY	Application	Patent #
United States	645,004	4,548,082	Expiry 28-aug-04
Canada	4488699	1240029	Expiry 14-aug-05
Japan	503667/85	8-024399	Aban 06-mar-05
Australia	47261/85	579890	Aban 14-aug-03
Australia	31102/89	623379	Aban 14-aug-03
Denmark	1880/86		Aban 24-Apr-04
Israel	76031	IL76031	Aban 07-aug-03
EP	85904203.8	EP 0 191 075
Germany	EP	P3586098	Expiry 14-aug-05
France	EP	0 191 075	Expiry 14-aug-05
Netherlands	EP	0 191 075	Aban 14-aug-03
Austria	EP	AT76549	Aban 14-aug-03
Belgium	EP	0 191 075	Aban 14-aug-03
Switzerland	EP	0 191 075	Aban 14-aug-03
GB	EP	191 075	Aban 14-aug-03
Italy	EP	191 075	Aban 14-aug-03

Exhibit A Page 6

CID2

Electronic filters, hearing aids and methods, (Engebretson et al.)

COUNTRY	Application	Patent #
United States	07/172,266	5,016,280
United States	059,800	5,475,759
Canada	594441	1,326,285
Denmark	1445/89
Australia	31421/89	611781
JP	70283/89	2921849
EP	89302762.3	EP 0 342 782 B
Germany	EP	0 342 782
France	EP	0 342 782
UK	EP	0 342 782

CID3

Electronic Filters, signal conversion apparatus, Hearingaids and

methods

COUNTRY	Application	Patent #
United States A	180,170	5,111,419
United States B	056,054	5,357,251
United States C	792,706	5,225,836
United States D	059/800	5,475,759
Canada	595860	1335674
Australia	32458/89	621100
Japan	91715/89	3307923
Japan	11-211360	3308243
EP	89303482.7	EP 0 339 819
Germany	EP	P6891974.1
France	EP	339 819

Exhibit A Page 7

CID4

Adaptive noise reduction circuit for a sound reproduction system, (Engebretson et al.)

COUNTRY	Application	Patent #
United States	842,566	5,412,735
Canada	2090297	2090297
Australia	33046	658476
Japan	40303/93	3040893
EP	93301401.1	EP 0 558 312 B
Germany	EP	P69325529.3
France	EP	0 558 312

CID5

Adaptive gain and filtering circuit for a sound reproductive system

(Engebretson et al.)

COUNTRY	Application	Patent #
United States A	044,246	5,706,352
United States B	477,621	5,724,433
Canada	2160133	2,160,133
Japan	522504/94	2931101
EPO A	94914764.9	0 693 249
Germany	EP	0 693 249
France	EP	0 693 249
UK	EP	0 693 249
EP0 B	01121068.9

Exhibit A Page 8

10. DECIBEL INSTRUMENTS PATENT LIST

Ref.	Patent number	Title
DEC01	WO US95/17113 US 5,701,348	Articulated hearing device
DEC02	US 5,785,661	Highly configurable hearing aid
DEC03	WO 98/06330 US 5,645,074 AU 729349	Intracanal prosthesis for hearing evaluation
DEC04	WO US96/13126 US 5,825,894 US 6,167,138 US 5,923,764 CA 2,235,067 AU 724786	Spatialization for hearing evaluation Virtual electroacoustic audiometry for unaided simulated aided, and aided hearing evaluation
DEC11	US Des. 405,528	Combined hearing aid and receiver
DEC17	US 6,129,174	Minimal contact replaceable acoustic coupler
DEC42	US 5,197,332	Headset hearing tester and hearing aid programmer

Exhibit A Page 9

NEC Patents List

	Country	Appl #	Patent #	Title
NEC-01	Japan	10-201758	JP 3045149	Hearing aid system using directivity microphone array
NEC-02	Japan USA Denmark	8-277918 08/955454 97/1190	JP 3165044 US 6023517	Digital hearing aid
NEC-03	Japan USA Denmark	8-329354 987617 97/1429	JP 2904272 US 5838801 DK 142997	Digital hearing aid
NEC-04	Japan USA Denmark	8-243254 08/929771 97/1043	JP 2953397 US 6094489	Digital hearing aid and its hearing sense compensation processing method
NEC-05	Japan USA	7-278648 738556	JP 2970498 US 5892836	Digital hearing aid
NEC-06	Japan USA DK	7-268188 08/732879 96/1121	JP 2763022 US 591099 DK 112196	Digitally programmable hearing aid communicable with external apparatus through acoustic signal
NEC-07	Japan	07-117424	JP 2638563	History holding type hearing aid
NEC-08	Japan USA	7-334525 774069	JP 2982672 US 583561	Hearing aid system
NEC-09	USA Denmark	773952 96/1509	US 585266 DK 150996	Hearing aid for controlling hearing sense compensation with suitable parameters internally tailored
NEC-10	USA Denmark	08/773954 96/1463	US 633033 DK 146396	Hearing aid

Exhibit A Page 10

SCHEDULE 4

HIMPP A/S

VEDTÆGTER	ARTICLES OF ASSOCIATION
1.0NAVN	1.0NAME
Selskabets navn er HIMPP A/S. Selskabets binavn er Hearing Instruments Manufacturers Patent Partnership A/S (HIMPP A/S).	The name of the Company is HIMPP A/S. The Company shall also trade under the name Hearing Instruments Manufacturers Patent Partnership A/S (HIMPP A/S).
2.0HJEMSTED	2.0REGISTERED OFFICE
Selskabets hjemsted er i Værløse kommune.	The registered office of the Company shall be in the municipality of Værløse.
3.0FORMÅL	3.0OBJECTS
Selskabets formål er at virke som komplementar i K/S HIMPP, hvis formål er at erhverve og licensiere patenter til høreapparatindustrien samt dermed beslægtet virk­somhed.	The Company’s objectives shall be to act as a general partner of K/S HIMPP, whose objective is to acquire and license patents for the hearing aid industry and business related hereto.
4.0SELSKABETS KAPITAL	4.0THE COMPANY’S SHARE CAPITAL
Selskabets aktiekapital udgør kr. 2.400.000 for­delt på aktier à kr. 1.000 eller multipla heraf.	The share capital of the Company equals DKK 2,400,000 divided into shares of DKK 1,000 each or any multiple hereof.
5.0SELSKABETS AKTIER	5.0THE COMPANY’S SHARES
5.1 Selskabets aktier skal lyde på navn og noteres i selskabets aktiebog.	5.1. The shares shall be issued to registered hol­ders and shall be recorded in the Company’s register of shareholders.

5.2 Selskabets aktier er ikke omsætningspapirer.	5.2 The shares are non-negotiable instruments.
5.3 Enhver aktieovergang kræver bestyrelsens forudgående samtykke.	5.3 Any transfer of shares requires the previous consent of the Board of Directors.
5.4 Aktier, som er bortkommet, skal kunne mortificeres af bestyrelsen uden dom i henhold til de regler, der gælder vedrørende mortifikation af aktier, som ikke er omsætningspapirer.	5.4 Share certificates which have been lost can without judgement be declared null and void by the Board of Directors according to the sta­tutory rules which are applicable to non-ne­gotiable instruments.

6.0GENERALFORSAMLINGEN, KOMPETENCE, STED OG INDKALDELSE	6.0GENERAL MEETING OF SHAREHOLDERS, AUTHO­RITY, PLACE AND NOTICE
6.1 Generalforsamlingen har den højeste myn­dighed i alle selskabets anliggender indenfor de i lovgivningen og nærværende vedtægter fastsatte grænser.	6.1 Within the limits set by law and by these Ar­ticles of Association the General Meeting of Shareholders has the supreme authority in all matters relating to the Company.
6.2 Selskabets generalforsamlinger skal afholdes på selskabets hjemsted eller i USA. Den ordinære generalforsamling skal afholdes hvert år inden 5 måneder efter regnskabsårets udløb.	6.2 The General Meetings shall be held at the re­gistered office of the Company or in the USA. The ordinary General Meeting shall be held each year not later than 5 months after the end of the accounting year.
6.3 Generalforsamlinger indkaldes af bestyrelsen med mindst 14 dages og højst 4 ugers varsel ved almindeligt brev eller telefax til hver en­kelt aktionær.	6.3 General Meetings shall be convened by the Board of Directors with not less than 14 days’ notice and not more than 4 weeks’ notice by letter or telefax to each individual share­holder.

7.0GENERALFORSAMLINGEN, DAGSORDEN	7.0GENERAL MEETING OF SHAREHOLDERS, AGENDA
Dagsordenen for den ordinære general­forsamling skal indeholde:	At the ordinary General Meeting the fol­lowing business shall be transacted:
1. Bestyrelsens beretning om selskabets virk­somhed i det forløbne år.	1. Report of the Board of Directors on the Com­pany’s activities during the past year.
2. Fremlæggelse af årsregnskab med revi­sionspåtegning til godkendelse samt års­beretning.	2. Presentation of the annual accounts endorsed by auditor for adoption and annual report.
3. Beslutning om anvendelse af overskud eller dækning af tab i henhold til det godkendte årsregnskab.	3. Decision as to the appropriation of profit or settlement of loss according to the adopted annual accounts.
4. Valg af bestyrelsesmedlemmer og evt. suppleanter.	4. Election of members to the Board of Directors and substitutes for same.
5. Valg af revisor.	5. Election of auditor.
6. Eventuelle forslag fra bestyrelsen og/eller ak­tionærerne.	6. Proposals, if any, from the Board of Directors and/or the shareholders.
8.0GENERALFORSAMLINGEN, STEMMERET OG BE­SLUTNINGER	8.0GENERAL MEETING OF SHAREHOLDERS, VOTING RIGHT AND RESOLUTIONS
8.1 Hvert aktiebeløb på kr. 1.000 giver én stemme.	8.1 Each share of DKK 1,000 entitles the share­holder to one vote.
8.2 På generalforsamlingen træffes alle beslut­ninger ved simpelt flertal, bortset fra de til­fælde, hvor Aktieselskabsloven kræver kvali­ficeret flertal.	8.2 All resolutions at the General Meeting shall be adopted by simple majority of votes unless special majority of votes is required by the Companies Act.

9.0BESTYRELSE OG DIREKTION	9.0BOARD OF DIRECTORS AND MANAGEMENT
9.1 Selskabet ledes af en bestyrelse bestående af maksimalt tolv (12) med­lemmer valgt af generalforsamlingen for tiden indtil næste ordinære generalforsamling.	9.1 The Company shall be managed by a Board of Directors of a maximum of twelve (12) members elected at the Gene­ral Meeting, the term being the period until the next ordinary General Meeting.
9.2 Bestyrelsen skal ved en forretningsorden træf­fe nærmere bestemmelser om udførelsen af sit hverv.	9.2 The Board must draw up its own rules of pro­cedure.
9.3 Bestyrelsen ansætter en direktør til at vare­tage den daglige ledelse af selskabets virk­somhed.	9.3 The Board of Directors shall appoint one re­gistered manager in charge of the day-to-day operations of the Company.

10.0TEGNINGSREGEL	10.0AUTHORITY TO BIND THE COMPANY
Selskabet tegnes af direktøren eller tre medlemmer af bestyrelsen i forening.	The Company shall be bound by the registered manager or by the joint signatures of three members of the Board of Directors.
11.0REVISION	11.0AUDITING
Selskabets regnskaber revideres af én statsautoriseret revisor, der vælges af den ordinære generalforsamling for et år ad gangen. Genvalg kan finde sted.	The auditing of the Company’s accounts shall be carried out by one chartered ac­countant elected by the General Meeting for one year at a time. Re-election may be made.
12.0REGNSKABSÅR	12.0ACCOUNTING YEAR
Selskabets regnskabsår løber fra den 1. januar til den 31. december. Første regnskabsperiode dog fra stiftelsen til 31. december 1996.	The accounting year of the Company runs from January 1 to December 31. However, the first accounting period runs from the formation of the company to December 31, 1996.
**********	**********
Ovenstående vedtægter gældende fra 15. april 2005 er blevet vedtaget på den ordinære generalforsamling den 31. marts 2005.	The above Articles of Association effective 15 April 2005 have been adopted at the Ordinary General Meeting held on 31 March 2005.

SCHEDULE 5

SHAREHOLDERS AGREEMENT

between

GN ReSound A/S,

Phonak AG,

William Demant Holding A/S,

Widex A/S,

Starkey Laboratories, Inc.,

GN ReSound North America Corporation,

Siemens Audiologische Technik GmbH,

Beltone Electronics Corporation,

Sonic Innovations, Inc.

Rion Co. Ltd.

Unitron Hearing Ltd.

and

Türk+Türk Electronic GmbH

Effective 15 April 2005

15

This Shareholders Agreement is made by and between

GN ReSound A/S

21 Mårkærvej

DK-2635 Tåstrup

Denmark

and

Phonak AG

28 Laubistrütistrasse

CH-8712 Stäfa

Switzerland

and

William Demant Holding A/S

58 Strandvejen

DK-2900 Hellerup

Denmark

and

Widex A/S

25 Ny Vestergaardsvej

DK-3500 Værløse

Denmark

and

Starkey Laboratories, Inc.

Technical Center

6600 Washington Avenue South

Eden Prairie, Minnesota 55344

USA

and

GN ReSound North America Corporation

4201 W. Victoria Street

Chicago, IL 60646

USA

and

16

Siemens Audiologische Technik GmbH

Gebbertstrasse 125

91058 Erlangen

Germany

and

Beltone Electronics Corporation

4201 W. Victoria Street

Chicago, IL. 60646

USA

and

Sonic Innovations, Inc.

5330 South 900 East

Suite 240

Salt Lake City

Utah 84117-7261

USA

and

Rion Co. Ltd.

3-20-41 Higashimotomachi

Kokubunji

Tokyo 185-8533

Japan

and

Unitron Hearing Ltd.

20, Beasley Drive

Kitchener, Ontario N2G 4X1

Canada

and

Türk+Türk Electronic GmbH

Am Dännekamp 15

51469 Bergisch Gladbach

Germany

(hereinafter collectively referred to as “the Shareholders”)

concerning their rights and obligations as shareholders in the joint venture company, HIMPP A/S, (Reg no 19319075), a corporation organised and existing under the laws of Denmark, having its registered office at 25 Ny Vestergårdsvej, DK-3500 Værløse, Denmark (hereinafter referred to as “the Company”).

17

11. DEFINITIONS

The following terms shall have the meaning set forth below

Partnership shall mean the HIMPP limited partnership established under Danish law having a partnership capital of USD 18,150,000 divided into 100 partnership shares of USD 180,000 and one share of USD 150,000.

Partners means the general partner (HIMPP A/S) and the limited partners of the Partnership.  

Limited Partners means the limited partners of the Partnership.

12. PURPOSE

12.1. The Company’s purpose is to act as the general partner of a limited partnership established under Danish law, as reflected in the Articles of Association of the Company attached as Schedule 1.

12.2. The Shareholders agree to let the Company act as a joint legal entity for conducting the activity of the Partnership, which is to own certain patents and patent applications acquired from ReSound Corporation, Inc. and from others, and to license such rights free of charge to the Limited Partners and to third parties on normal commercial terms.

12.3. The Shareholders agree that the Shareholders can be joined by any other hearing aids manufacturer that would like to join the Partnership as a limited partner and to join the Company as a shareholder and that such new shareholders should be admitted on terms equal to those offered to the Partners.

13. SCOPE

13.1. The Shareholders agree as sole shareholders of the Company and represented on the Board of Directors that they are under the obligation to exercise their rights in the Company only through their representatives on the Board of Directors, or at shareholders’ meetings, in conformity with this Agreement.

13.2. In consequence hereof, this Agreement shall have priority between the parties over the Articles of Association of the Company, so that no party can evoke the Articles of Association in support of a result that the party concerned could not have obtained through this Agreement.

18

13.3. All certificates of shares owned by each of the Shareholders shall bear a legend to the effect that the Shareholders have entered into a shareholders agreement, which affects their rights as shareholders.

14. THE SHARE CAPITAL

14.1. The share capital of the Company is DKK 2,400,000 - fully paid up and owned by the Shareholders as follows:

GN ReSound A/S DKK 200,000

Phonak AG DKK 200,000

William Demant Holding A/S DKK 200,000

Widex A/S DKK 200,000

Starkey Laboratories, Inc. DKK 200,000

GN ReSound North America Corporation DKK 200,000

Siemens Audiologische Technik GmbH DKK 200,000

Beltone Electronics Corporation DKK 200,000

Sonic Innovations, Inc. DKK 200,000

Rion Co. Ltd. DKK 200,000

Unitron Hearing Ltd. DKK 200,000

Türk+Türk Electonic GmbH DKK 200,000

14.2. The Shareholders agree that the share capital should be increased by DKK 200,000 for any new shareholder that would like to join the Company.

15. DIVIDEND POLICY

The Shareholders agree that the Company, as far as justified by the results and the future cash flow position of the Company, shall distribute any free reserves as dividends to the Shareholders.

16. BOARD OF DIRECTORS

16.1. The Board of Directors of the Company (and possibly substitutes for same) shall be elected at a general meeting of the Shareholders in accordance with the Articles of Association of the Company. The Board of Directors shall consist of a maximum of twelve (12) ) members elected by the Shareholders. One (1) prospective member may be nominated by any shareholder holding at least DKK 200,000 shares of the Company unless such shareholder has refrained from nominating a director and vested the decision making authority in another director under Article 5.1 of the Rules of Procedure of the Board of Directors. No shareholder can object to the nomination or appointment of directors or substitutes by the other Shareholders as long as the number of directors shall not have been exceeded.

16.2. The chairman of the Board shall be appointed by the directors in a directors meeting convened immediately after the shareholders meeting.

16.3. Upon election each director nominated by the Shareholders shall undertake to act in the best interest of the Company and to comply with the provisions set forth in this Agreement.

19

16.4. In case of death, resignation or other removal of a member of the Board of Directors, an extraordinary general meeting of the Company shall be convened, at which the Shareholders shall cast their votes so as to elect the replacement nominee of the shareholder whose representative on the Board has died, resigned or been otherwise removed.

16.5. The functions of the Board of directors shall include the powers provided in the Articles of Association. In all matters concerning the Company the Board of Directors and each member hereof shall refer to and act only through the general manager.

16.6. Provided this Agreement does not prescribe any other special majority of votes, the business transacted by the Board of Directors shall be decided with simple majority of votes.

16.7. Any remuneration to directors shall be paid by the share­holder nominating such director. The Company shall, how­ever, reimburse the directors for reasonable out of pock­et and travelling expenses in dealing with the Company’s business.

17. QUORUM

At Board meetings a quorum shall consist of directors nominated by at least seven shareholders.

18. BOARD DECISIONS

Important decisions to be made by the Company shall always be referred to directors’ meetings. Important decisions are any decisions whatsoever, other than strictly ministerial or administrative decisions, including without limitation the following:

a. Capital expenditure in excess of DKK 250,000, hereunder acquisition of new patents.

b. Consideration and approval of operating expenditure in excess of DKK 250,000, approval of budgets (which shall be produced by the Company annually), financial accounts, resolutions regarding dividends.

c. Unusual or major decisions, including creation of credit lines outside the daily business.

Any managing director, general manager or other administrative official that may be appointed shall not be authorized to act on behalf of and bind the Company with respect to any important decisions (as defined herein) unless the board of directors approves.

All day-to-day management decisions which are not important decisions (as defined herein) shall be made by a management group consisting of maximum twelve members of which each Shareholder may appoint one. The management group shall make its decisions in accordance with the rules provided in Article 6.

20

19. AUDITING AND FINANCIAL REPORTING

19.1. The Company and its subsidiaries shall be audited by one chartered accountant of international standing approved by all Shareholders.

19.2. The Company’s accounts will be maintained in accordance with the tax statutes and general accounting principles of Denmark, applied consistently from year to year, and the Company shall supply to the Board of Directors on a quaterly basis all information necessary to enable the Board of Directors to follow the business of the Compa­ny. The auditor shall also provide the annual ac­counts according to US generally accepted auditing stan­dards (US GAAP), and upon request submit to the Shareholders such financial information regarding the Company and the Partnership which is necessary for any local tax filing purpose.

20. TRANSFER OF SHARES

20.1. Any Shareholder (hereinafter called the “Assigning Shareholder”) may sell, assign, or otherwise dispose of all or any part of its shares only in accordance with the provisions of this clause. In respect of this Clause, a Shareholder and a company controlled by or controlling such Shareholder shall be considered one shareholder.

20.2. If the Assigning Shareholder wants to assign or transfer his shares this may only take place if approved by the Board of Directors and no such approval for the sale, transfer or disposition of any shares shall be given unless and until the rights of pre-emption contained herein shall have been exhausted.

20.3. Prior to making any sale, assignment, or other disposi­tion of its shares, the Assigning Shareholder shall give writ­ten notice of such proposed transfer to the other Shareholders. Such notice shall specify the terms the Assign­ing Shareholder will accept for such shares. For a period of three (3) weeks after receipt of such notice the other Shareholders or any of them in proportion to their present holding of shares of the Company shall have the irrevoca­ble right to acquire all of the Assigning Shareholder’s shares being transferred on the terms specified by the Assign­ing Shareholder as aforesaid. If the other Shareholders do not want to acquire all of the shares on the terms of­fered to it/them, the Assigning Shareholder shall be free to complete the transfer during the subsequent sixty (60) day period of all of its shares to a third party, and the approval of the Board of Directors pursuant to Clause 10.2 shall not be withheld, but the transfer shall be for no less consideration or at no more favour­able terms than those offered by the Assigning Shareholder and rejected by the other Shareholders.

20.4. In the event that a Shareholder (hereinafter called the “Trans­feror”) receives a “bona fide” third party offer to pur­chase all or part of its shares, which it is willing to accept, it shall promptly give written notice of such of­fer to the other Shareholders. The notice shall specify the terms of such offer and shall include copies of all proposed agreements with respect thereto. For a period of three (3) weeks after receiving such notices the oth­er Shareholders shall have the irrevocable right to elect to acquire all of the Transferor’s shares subject to such offer in proportion to their present holding of shares of the Company. If none of the other Shareholders want to acquire all of the shares on the terms offered to it/them, the Transferor shall be free to complete the transfer during the subsequent sixty (60) days period of all or part of its shares to the third party, and the approval of the Board of Directors pursuant to Clause 10.2 shall not be withheld, but the transfer shall be for the same proportion of shares as covered by the of­fer from the third party and be for no less considera­tion or at no more favourable terms than those of­fered by the Transferor and rejected by the other Shareholders.

21

20.5. The rights of pre-emption contained in this Clause 10 do not apply to transfers from a shareholder to a compa­ny/entity controlled by or controlling such shareholder or a fellow subsidiary of the shareholder (An Affiliated Company). If the control should cease after such trans­fer of shares to An Affiliated Company has been effect­ed, then the pre-emption procedure referred to above shall apply.

20.6. Any transfer, assignment or other agreement with respect to the shares of a Shareholder shall be conditioned on the rec­ognition and assumption in writing of all rights and ob­ligations under this Agreement by the transferee, assign­ee, or other successor in interest with respect to such shares. In any transfer described or permitted under Clause 10 the transferee shall give its written under­taking to be bound by all the terms, conditions, and cov­enants of this Agreement.

20.7. The Board of Directors may refuse approval under Clause 10.2 above of any transferee or assignee who is not the holder of at least ten (10) partnership shares of the Partnership.

20.8. A shareholder which under Article 16.3 of the Articles of Association of the Partnership has withdrawn from the future business of the Partnership shall be obliged to offer his shares in the Company to the other Shareholders in accordance with the procedure set forth in this Article 10.

The purchase price for the shares so offered shall be calculated by the auditor of the Company and be equal to the proportional share of the net equity based on book value as of the date of transfer.

21. SHARE CERTIFICATES

The share certificates of the Company shall bear the following legend:

“The assignment of this share certificate is restricted under the terms of a shareholders agreement.”

22. THE TERMS OF THE AGREEMENT

This Agreement is entered into for an unlimited period of time, and the contracting parties shall be bound by the Agreement as long as they are shareholders of the Company.

22

23. LAW AND JURISDICTION

23.1. This Agreement shall be construed under and governed by substantive Danish law.

23.2. All disputes arising in connection with the present Agreement shall be finally settled by arbitration with three arbitrators.

23.3. Each party shall appoint one arbitrator.

23.4. The President of the Arbitration Tribunal shall, in case the two arbitrators cannot agree upon his appointment, be appointed by the President of the Maritime and Commercial Court, Copenhagen.

23.5. The venue for the arbitration shall be Copenhagen, Den­mark.

23.6. The rules and procedure of the arbitration shall be gov­erned by the Law of Arbitration of Denmark. The language of the arbitration proceedings shall be English.

In witness whereof and effective 15 April 2005 the Shareholders have duly executed this Agreement as of the date and year stated below.

Date: 31/03/05

/s/	/s/
For and on behalf of	For and on behalf of
GN ReSound A/S	Phonak AG
/s/	/s/
For and on behalf of	For and on behalf of
William Demant Holding A/S	Widex A/S
/s/	/s/
For and on behalf of	For and on behalf of
Starkey Laboratories, Inc.	GN ReSound North America Corporation
/s/	/s/
For and on behalf of	For and on behalf of
Siemens Audiologische Technik GmbH	Beltone Electronics Corporation
/s/	/s/
For and on behalf of	For and on behalf of
Sonic Innovations, Inc.	Rion Co. Ltd.
/s/	/s/
For and on behalf of	For and on behalf of
Unitron Hearing Ltd.	Türk+Türk Electronic GmbH

23

EX-10.33

EXHIBIT 10.33

Non-Employee Directors Stock Fee Election Program

Background: The Board of Directors and shareholders of IntriCon Corporation (the “Company”) have approved the 2006 Equity Incentive Plan (the “2006 Plan”) which permits the grant of Awards (as defined in the 2006 Plan) to employees and directors of the Company, including Awards of shares of common stock, $1.00 par value per share (“Common Stock”), as payment for services rendered. The non-employee members of the Board of Directors receive fees for their service as members of the Board of Directors and committees of the Board, which fees are paid in quarterly installments on the first business day of each calendar quarter during the year. The purpose of this Non-Employee Directors Stock Fee Election Program (“Program”) is to permit the non-employee directors of the Company to elect to have some or all of the quarterly director fees (as the same may be increased or decreased from time to time hereafter, “Quarterly Director Fees”) paid in shares of Common Stock.

1.The Compensation Committee hereby grants each non-employee director the right under the 2006 Plan to elect to have some or all of his Quarterly Director Fees paid in shares of Common Stock. This Award shall constitute an Unrestricted Stock Award under the 2006 Plan.

2.The minimum amount of the Quarterly Director Fees that can be the subject of such election by a director is 25% of the Quarterly Director Fees.

3.An election to have the Quarterly Director Fees paid in Common Stock (“Election”) may only be made during the ten business period beginning on the third business day after the public release of the Company’s earnings announcement (a “Window Period”) and then only provided that the director is not in possession of material, nonpublic information concerning the Company. An Election shall be made using the form attached hereto as Exhibit A and delivered to the Company’s Chief Financial Officer prior to the end of a Window Period.An Election shall be effective with respect to the next installment of Quarterly Director Fees paid after the date of the Election and shall continue until terminated.

4.The shares to be issued shall be valued based on the last reported sale price of the Common Stock (the “Last Sale Price”) as reported on The American Stock Exchange on the first business day of each calendar quarter when Quarterly Director Fees are paid (the “Quarterly Payment Date”). The number of shares that shall be issued for any such Quarterly Director Fees with respect to which an Election is in effect shall be equal to the amount of the Election divided by the applicable Last Sale Price. No fractional shares shall be issued and a director shall receive cash in lieu of any fractional shares. That portion of the Quarterly Director Fees for which no Election is in effect shall continue to be paid in cash.

5.The shares so purchased shall be deemed fully vested as of the Quarterly Payment Date.

6.Once made, a director may not modify an Election without the prior consent of the Company and then only during a Window Period and provided that he is not otherwise in possession of material, non-public information. A director may terminate an Election at any time. After any termination, a director may not make another Election until the next Window Period unless such Window Period begins within 30 days after the termination of the last Election, in which event such new Election may not be made until the next succeeding Window Period.

7.It is the intention of the Compensation Committee that the shares of Common Stock that are issued be exempt from liability under Section 16(b) of the Securities Exchange Act of 1934 pursuant to Regulation 16b-3 adopted by the SEC.

8.It is the intention of the Compensation Committee that this Award and the Election comply with the “safe harbor” provided by Regulation 10b5-1 adopted by the SEC.

9.Nothing contained in this Award shall confer upon any director the right to continue as a director of the Company or interfere in any way with the rights of the Company to terminate him as a director.

10.The Compensation Committee may discontinue this Program and all outstanding Elections at any time.

-2-

Exhibit A

Election to Have Director Fees Paid in Stock

To: IntriCon Corporation

Attention: Chief Financial Officer

I hereby elect to have ___ % of the quarterly director fees (as the same may be increased or decreased from time to time hereafter, “Quarterly Director Fees”) payable to me in my capacity as a member of the Board of Directors and of committees of the Board of Directors of IntriCon Corporation (the “Company”) paid in Common Stock of the Company as provided in the Company’s Non-Employee Directors Stock Fee Election Program (the “Program”). This Election is subject to all of the terms and conditions of the Program and of the Company’s 2006 Equity Incentive Plan (the “2006 Plan”) pursuant to which the Program was adopted.

I agree that this Election shall remain in effect unless terminated as provided in the Program or by me by written notice to the Chief Financial Officer of the Company.

I am not in possession of any material, nonpublic information concerning the Company.

I have received a copy of the Company’s Summary of the 2006 Equity Incentive Plan, the Company’s latest Annual Report to Shareholders, the 2006 Plan and the Program.

I intend to be legally bound hereby.

Sincerely,

Dated:
	print name:

-3-

EX-13

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		$	35,183		$	36,202		$	34,975
Cost of sales		39,304			32,853			27,121			27,638			26,811
Operating expenses		10,455			10,181			11,535			11,457			10,484
Interest expense		499			409			465			533			720
Interest income		(48	)		(52	)		(2	)		(8	)		(34	)
Gain on sale of asset		—			—			3,110			—			—
Other (income) expense, net		102			(106	)		(61	)		130			(31	)
Income (loss) from continuing operations
before income taxes, discontinued
operations and change in accounting
principle		1,415			1,171			(765	)		(3,548	)		(2,975	)
Income tax expense (benefit)		174			409			1,140			484			(1,160	)
Income (loss) from continuing operations
before discontinued operations and change in
accounting principle		1,241			762			(1,905	)		(4,032	)		(1,815	)
Income (loss) from discontinued     operations, net of income taxes (Note 3)		(78	)		767			1,369			(1,013	)		(10,544	)
Extraordinary gain from discontinued      operations		—			—			684			—			—
Cumulative effect of change in     accounting principle		—			—			—			—			(9,428	)
Net income (loss)	$	1,163		$	1,529		$	148		$	(5,045	)	$	(21,787	)
Basic income (loss) per share:
Continuing operations	$	.24		$	.15		$	(.37	)	$	(.78	)	$	(.35	)
Discontinued operations		(.01	)		.15			.27			(.20	)		(2.06	)
Extraordinary gain discontinued        operations		—			—			.13			—			—
Accounting principle change		—			—			—			—			(1.84	)
Net income (loss)	$	.23		$	.30		$	.03		$	(.98	)	$	(4.25	)
Diluted income (loss) per share:
Continuing operations	$	.23		$	.14		$	(.37	)	$	(.78	)	$	(.35	)
Discontinued operations		(.01	)		.15			.27			(.20	)		(2.06	)
Extraordinary gain discontinued        operations		—			—			.13			—			—
Accounting principle change		—			—			—			—			(1.84	)
Net income (loss)	$	.22		$	.29		$	.03		$	(.98	)	$	(4.25	)
Weighted average number of   Shares outstanding during year:
Basic		5,159,216			5,135,348			5,129,214			5,124,433			5,119,214
Diluted		5,319,802			5,261,491			5,131,841			5,124,433			5,119,214

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		$	2,183		$	245		$	4,711
Total assets	$	34,281		$	29,635		$	30,939		$	34,729		$	63,936
Long-term debt	$	3,830		$	5,319		$	—		$	—		$	2,415
Shareholders’ equity:
Capital stock and additional         paid-in capital	$	18,046		$	17,719		$	17,670		$	17,670		$	17,648
Retained earnings        (accumulated deficit)		(990	)		(2,152	)		(3,680	)		(3,828	)		1,216
Accumulated other        comprehensive loss		(185	)		(213	)		(597	)		(770	)		(1,525	)
Treasury stock		(1,265	)		(1,265	)		(1,265	)		(1,265	)		(1,265	)
Total shareholders’ equity	$	15,607		$	14,089		$	12,128		$	11,807		$	16,074
Depreciation and     amortization	$	1,849		$	2,069		$	2,289		$	2,387		$	2,452

* 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
	Market				Market
	Price Range				Price Range
Quarter		High		Low		High		Low
First	$	6.99	$	4.05	$	2.25	$	1.86
Second		7.50		4.82		2.10		1.52
Third		5.40		4.75		6.87		2.03
Fourth		5.49		4.70		6.45		3.70

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
	2006		2005		Dollars		Percent
Consolidated net sales	$	51,726	$	44,455	$	7,271		16.4	%

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
	Dollars		Percent			Dollars		Percent			Dollars		Percent
Gross profit	$	12,422		24.0	%	$	11,602		26.1	%	$	820		7.1	%

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
	Dollars		Percent of Sales			Dollars		Percent of Sales			Dollars			Year-over-year Incr. (Decr.)
Selling	$	3,410		6.6	%	$	3,570		8.0	%	$	(160	)		(4.5	)%
Research and development		2,123		4.1	%		1,818		4.1	%	$	305			16.8	%
General and administrative		4,922		9.5	%		4,793		10.8	%	$	129			2.7	%

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	$	174		$	409
Percentage of pre-tax income		12.3	%		35.0	%

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	$	(78	)	$	767

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

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

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

The professional audio device product sector grew 10 percent over prior year primarily due to sales of a new microphone to a specific customer. The electronics product sector increased 11 percent over prior year. Exclusive of 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					2004 Restated						Change Restated
	Dollars		Percent			Dollars		Percent			Dollars		Percent
Gross profit	$	11,602		26.1	%	$	8,062		22.9	%	$	3,540		43.9	%

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

Selling, General and Administrative Expenses

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

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

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

Impairment of Long-term Assets

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

Net Interest Expense

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

Other

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

Income Taxes

Income taxes were as follows (dollars in thousands):

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

Discontinued Operations

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

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

Heat Technology Segment

The 2005 net income of $767,000 was mainly attributable to the reduction in the 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			2004 Restated
Cash provided (used) by:
Continuing operations	$	1,656		$	(2,533	)	$	(847	)
Discontinued operations		(78	)		3,811			939
Investing activities		(565	)		(1,165	)		2,678
Financing activities		(1,568	)		778			(2,678	)
Effect of exchange rate changes on cash		45			(28	)		(39	)
Increase (decrease) in cash	$	(510	)	$	863		$	53

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	$	8,669	$	10,239
Borrowings and commitments:
Domestic credit facility		3,569		3,754
Domestic term loans		—		1,450
Foreign overdraft and letter of credit facility		1,045		765
Capital leases		169		239
Total borrowings and commitments		4,783		6,208
Remaining availability under existing facilities	$	3,886	$	4,031

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
Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Domestic credit facility	$	3,569,349	$	—	$	3,569,349	$	—	$	—
Foreign overdraft and letter of credit facility		1,044,791		877,745		167,046		—		—
Amecon Acquisition note payments		769,080		256,360		512,720		—		—
Partnership payable		1,540,000		260,000		520,000		520,000		240,000
Pension and other post-retirement benefit obligations		1,962,969		270,656		546,312		556,312		589,689
Capital leases		169,051		74,985		83,221		10,845		—
Operating leases		5,511,558		1,284,022		1,861,410		1,327,443		1,038,683
Total contractual cash obligations	$	14,566,798	$	3,023,768	$	7,260,058	$	2,414,600	$	1,868,372

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			2004 Restated
Sales, net	$	51,725,952		$	44,455,251		$	35,182,612
Costs of sales		39,304,003			32,853,426			27,120,897
Gross profit		12,421,949			11,601,825			8,061,715
Operating expenses:
Selling expense		3,410,226			3,569,948			3,933,657
General and administrative expense		4,921,818			4,793,239			5,496,798
Impairment of long-term assets		—			—			488,214
Research and development expense		2,122,594			1,817,384			1,616,085
Total operating expenses		10,454,638			10,180,571			11,534,754
Gain on sale of asset		—			—			3,109,627
Operating income (loss)		1,967,311			1,421,254			(363,412	)
Interest expense		498,521			409,199			465,272
Interest income		(48,003	)		(52,482	)		(1,626	)
Other (income) expense, net		101,831			(106,343	)		(61,618	)
Income (loss) from continuing operations before     income taxes and discontinued operations		1,414,962			1,170,880			(765,440	)
Income tax expense		174,460			409,423			1,139,797
Income (loss) from continuing operations     before discontinued operations		1,240,502			761,457			(1,905,237	)
Income (loss) from discontinued     operations, net of income taxes (Note 3)		(77,990	)		767,230			1,369,433
Extraordinary gain from discontinued operations		—			—			683,630
Net income	$	1,162,512		$	1,528,687		$	147,826
Basic income (loss) per share:
Continuing operations	$	.24		$	.15		$	( .37	)
Discontinued operations		(.01	)		.15			.27
Extraordinary gain from discontinued operations		—			—			.13
Net income	$	.23		$	.30		$	.03
Diluted income (loss) per share:
Continuing operations	$	.23		$	.14		$	( .37	)
Discontinued operations		(.01	)		.15			.27
Extraordinary gain from discontinued operations		—			—			.13
Net income	$	.22		$	.29		$	.03

See accompanying notes to the consolidated financial statements.

Consolidated Balance Sheets

At December 31

Assets	2006		2005
Current assets
Cash	$	599,459	$	1,109,402
Restricted cash		60,158		60,158
Accounts receivable, less allowance for doubtful accounts of $246,000 at December 31, 2006 and       $370,000 at December 31, 2005		8,456,450		6,925,357
Inventories		9,030,615		6,950,243
Refundable income taxes		103,587		77,143
Other current assets		535,418		454,053
Total current assets		18,785,687		15,576,356
Property, plant and equipment
Land		—		170,500
Buildings and improvements		—		1,732,914
Machinery and equipment		28,767,904		26,423,956
		28,767,904		28,327,370
Less: accumulated depreciation and amortization		21,994,344		21,455,955
Net property, plant and equipment		6,773,560		6,871,415
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		75,000		503,923
Goodwill		5,927,181		5,754,219
Investment in partnership		1,800,000		—
Other assets, net		920,051		929,474
	$	34,281,479	$	29,635,387

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	$	661,756		$	397,999
Current maturities of long-term debt		952,730			888,531
Accounts payable		5,161,450			3,136,555
Customers' advance payments on contracts		—			59,210
Income tax payable		173,810			298,914
Deferred gain on building sale and other		110,084			—
Partnership payable		260,000			—
Other accrued liabilities		3,021,201			2,610,474
Total current liabilities		10,341,031			7,391,683
Long-term debt, less current maturities		3,830,461			5,319,181
Other post-retirement benefit obligations		1,063,744			1,516,939
Partnership payable		1,280,000			—
Note payable, net of current portion (Amecon)		515,720			646,530
Deferred income taxes		79,273			37,725
Accrued pension liability		628,569			633,818
Deferred gain on building sale and other		935,715			—
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		5,706,235			5,665,568
Additional paid-in capital		12,339,988			12,053,590
Accumulated deficit		(989,505	)		(2,152,017	)
Accumulated other comprehensive loss		(184,674	)		(212,552	)
		16,872,044			15,354,589
Less: 515,754 common shares held in treasury, at cost		(1,265,078	)		(1,265,078	)
Total shareholders’ equity		15,606,966			14,089,511
	$	34,281,479		$	29,635,387

See accompanying notes to the consolidated financial statements.

Consolidated Statements of Cash Flows

Years ended December 31,	2006			2005			2004 Restated
Cash flows from operating activities:
Net income	$	1,162,512		$	1,528,687		$	147,826
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
(Income) loss from discontinued operations		77,990			(767,230	)		(1,369,433	)
Extraordinary gain from discontinued operations		—			—			(683,630	)
Impairment of long-term assets		—			—			488,214
Depreciation and amortization		1,849,354			2,069,170			2,289,181
Stock-based compensation		213,531			—			—
Gains on sale of property and equipment		(334	)		(2,215	)		(1,541	)
Deferred taxes		41,548			(103,593	)		905,615
Change in deferred gain		(55,033	)		—			—
Allowance for doubtful accounts		(124,651	)		(193,809	)		77,246
Allowance for doubtful accounts		78,923			—			—
Gain on sale of asset held for sale		—			—			(3,109,627	)
Changes in operating assets and liabilities:
Accounts receivable		(1,379,448	)		(2,197,276	)		(430,324	)
Inventories		(2,119,322	)		(2,407,509	)		1,464,236
Other assets		210,846			(545,111	)		732,640
Accounts payable		2,024,771			1,328,757			(687,363	)
Accrued expenses		(123,553	)		78,840			(579,576	)
Customers advance payments on contracts		—			(12,764	)		(97,279	)
Other liabilities		(200,745	)		(1,309,218	)		6,822
Net cash provided (used) by continuing operations		1,656,389			(2,533,271	)		(846,993	)
Net cash provided (used) by discontinued operations		(77,990	)		3,810,723			980,428
Net cash provided by operating activities		1,578,399			1,277,452			133,435
Cash flows from investing activities:
Purchases of property, plant and equipment		(3,180,322	)		(794,192	)		(976,043	)
Cash paid for acquisition of assets of Amecon, Inc		(3,141	)		(378,365	)		—
Proceeds from sales of property, plant and equipment		2,568,363			7,600			3,800
Proceeds from note receivable		50,000			—			—
Proceeds from sale of asset held for sale		—			—			3,649,802
Net cash provided (used) by continuing operations		(565,100	)		(1,164,957	)		2,677,559
Net cash used by discontinued operations		—			—			(41,890	)
Net cash provided (used) by investing activities		(565,100	)		(1,164,957	)		2,635,669
Cash flows from financing activities:
Proceeds from short-term borrowings		425,513			164,865			716,133
Proceeds from exercise of stock options		113,534			48,400			—
Repayments of short-term borrowings		(142,382	)		(3,171,447	)		(432,806	)
Proceeds from long term borrowings		2,654,034			5,080,568			800,001
Repayments of long-term debt		(4,622,893	)		(1,458,470	)		(4,092,879	)
Payments of partnership payable		(260,000	)		—			—
Change in restricted cash		—			381,379			(2,706	)
Change in checks written in excess of cash		263,757			(267,099	)		334,399
Net cash provided (used) by financing activities		(1,568,437	)		778,196			(2,677,858	)
Effect of exchange rate changes on cash		45,195			(27,719	)		(38,627	)
Increase (decrease) in cash		(509,943	)		862,972			52,619
Cash beginning of year		1,109,402			246,430			193,811
Cash end of year	$	599,459		$	1,109,402		$	246,430

See accompanying notes to the consolidated financial statements.

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

	Common Stock Number of Shares		Common Stock $ Amount		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Comprehensive Income		Treasury Stock			Total Shareholders' Equity
Balance December 31, 2003		5,644,968	$	5,644,968	$	12,025,790	$	(3,828,530	)	$	(770,115	)			$	(1,265,078	)	$	11,807,035
Net income								147,826					$	147,826		147,826
Translation gain, net of   income taxes of $0											172,996			172,996					172,996
Comprehensive income													$	320,822
Balance December 31, 2004		5,644,968		5,644,968		12,025,790		(3,680,704	)		(597,119	)				(1,265,078	)		12,127,857
Exercise of stock options		20,600		20,600		27,800													48,400
Net income								1,528,687					$	1,528,687					1,528,687
Translation gain, net of   income taxes of $0											384,567			384,567					384,567
Comprehensive income													$	1,913,254
Balance December 31, 2005		5,665,568		5,665,568		12,053,590		(2,152,017	)		(212,552	)				(1,265,078	)		14,089,511
Exercise of stock options		40,667		40,667		72,867													113,534
Stock option expense						213,531													213,531
Net income								1,162,512					$	1,162,512					1,162,512
Translation gain, net of   income taxes of $0											27,878			27,878					27,878
Comprehensive income													$	1,190,390
Balance December 31, 2006		5,706,235	$	5,706,235	$	12,339,988		(989,505	)		(184,674	)			$	(1,265,078	)	$	15,606,966

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		$	92,317		$	60,694
Warranty expense		52,558			197,417			35,000
Closed warranty claims		(72,541	)		(165,251	)		(3,377	)
End of the year balance	$	104,500		$	124,483		$	92,317

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,
	2006			2005			2004
Total cost incurred	$	876,000		$	359,000		$	435,000
Amount funded by customers		(762,000	)		(183,000	)		(366,000	)
Net expense	$	114,000		$	176,000		$	69,000

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
	As Presented			Adjustment			Restated
Sales, net	$	35,183		$	—		$	35,183
Cost of sales		27,314			(193	)		27,121
Gross profit		7,869			193			8,062
Operating expenses:
Selling expense		3,934			—			3,934
General and administrative expense		5,482			15			5,497
Impairment of long term assets		488			—			488
Research and development expense		1,487			129			1,616
Total operating expenses		11,391			144			11,535
Gain on sale of asset		3,110			—			3,110
Operating loss		(412	)		49			(363	)
Interest expense		(465	)		—			(465	)
Interest income		2			—			2
Other (income) expense, net		(61	)		—			(61	)
Loss from continuing operations before income taxes and discontinued operations		(814	)		49			(765	)
Income tax expense		1,144			(4	)		1,140
Loss from continuing operations before discontinued operations		(1,958	)		53			(1,905	)
Income from discontinued operations, net of income taxes of $343		1,369			—			1,369
Extraordinary gain from discontinued operations		684			—			684
Net income	$	95		$	53		$	148
Basic income (loss) per share:
Continuing operations	$	(.38	)	$	.01		$	(.37	)
Discontinued operations		.27			—			.27
Extraordinary gain from discontinued operations		.13			—			.13
Net income	$	.02		$	.01		$	.03
Diluted income (loss) per share:
Continuing operations	$	(.38	)	$	.01		$	(.37	)
Discontinued operations		.27			—			.27
Extraordinary gain from discontinued operations		.13			—			.13
Net income	$	.02		$	.01		$	.03

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,
	2006			2005			2004
	(in thousands)
Sales, net	$	—		$	2,128		$	9,732
Operating costs and expenses		(78	)		1,648			8,263
Operating income (loss)		(78	)		480			1,469
Other expense, net (including loss on abandonment)		—			218			(10	)
Income (loss) from operations before income tax (benefit)		(78	)		698			1,459
Income tax expense (benefit)		—			(69	)		90
Net income (loss ) from discontinued operations before extraordinary gain		(78	)		767			1,369
Extraordinary gain, net of income taxes of $343		—			—			684
Net income (loss) from discontinued operations	$	(78	)	$	767		$	2,053

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		2004 Restated
United States	$	13,403,520	$	12,075,118	$	13,041,036
Other		1,097,221		550,516		658,072
Consolidated	$	14,500,741	$	12,625,634	$	13,699,108

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	$	30,550,130	$	23,016,596
Germany		2,293,875		3,338,149		2,299,733
China		2,232,405		1,310,064		862,314
Japan		1,919,659		1,502,430		643,628
Singapore		1,786,344		1,294,019		2,045,673
Switzerland		1,653,803		1,157,116		1,332,322
United Kingdom		736,670		793,079		886,183
Belgium		687,475		305,431		218,731
Canada		502,203		835,732		1,225,414
France		405,713		259,790		201,369
All other countries		4,078,139		3,109,311		2,450,649
Consolidated	$	51,725,952	$	44,455,251	$	35,182,612

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		Finished products and components		Total
December 31,
2006
Domestic	$	3,608,967	$	1,497,706	$	1,756,046	$	6,862,719
Foreign		1,162,716		876,277		128,903		2,167,896
Total	$	4,771,683	$	2,373,983	$	1,884,949	$	9,030,615
2005
Domestic	$	2,854,064	$	1,103,986	$	1,130,021	$	5,088,071
Foreign		1,094,266		662,167		105,739		1,862,172
Total	$	3,948,330	$	1,766,153	$	1,235,760	$	6,950,243

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	$	3,569,349		$	3,753,597
Foreign Overdraft and Letter of Credit Facility		1,044,791			764,825
Domestic Term Loans (Real Estate Based in 2005)		—			1,450,146
Domestic Capital Equipment Leases		169,051			239,144
Total Long Term Debt		4,783,191			6,207,712
Less: Current maturities		(952,730	)		(888,531	)
Total Long Term Debt	$	3,830,461		$	5,319,181

	Payments Due by Period
	2007		2008		2009		2010		2011		Thereafter		Total
Domestic credit facility	$	—	$	3,569,349	$	—	$	—	$	—	$	—	$	3,569,349
Foreign overdraft and letter of credit facility		877,745		123,505		43,541		—		—		—		1,044,791
Capital leases		74,985		41,878		41,343		10,845		—		—		169,051
Total long-term debt	$	952,730	$	3,734,732	$	84,884	$	10,845	$	—	$	—	$	4,783,191

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	$	1,583,452	$	1,414,749
Taxes, including payroll withholdings and excluding income taxes		58,011		56,066
Accrued severance benefits		—		25,000
Accrued professional fees		178,662		179,336
Current portion of note payable		253,360		215,511
Deferred revenue		152,147		159,900
Other		795,569		559,912
	$	3,021,201	$	2,610,474

10.   DOMESTIC AND FOREIGN INCOME TAXES

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

	Years ended December 31,
	2006			2005			2004 Restated
Current
Federal	$	—		$	223,028		$	45,433
State		21,654			6,396			5,500
Foreign		111,258			286,176			183,248
		132,912			515,600			234,181
Deferred
Federal		—			(106,177	)		890,230
State		—			—			—
Foreign		41,548			—			15,386
		41,548			(106,177	)		905,616
Income taxes	$	174,460		$	409,423		$	1,139,797
Income (loss) from continuing operations
before income taxes is as follows:
Foreign	$	1,492,092		$	1,166,891		$	663,685
Domestic		(77,130	)		3,989			(1,429,125	)
	$	1,414,962		$	1,170,880		$	(765,440	)

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,
	2006			2005			2004 Restated
Tax provision at statutory rate		34.0	%		34.0	%		34.0	%
Change in valuation allowance		0.5			(24.0	)		(187.0	)
Effect of foreign tax rates		(25.1	)		20.0			3.5
State taxes net of federal benefit		1.5			0.6			(0.6	)
Tax benefits related to export sales		(2.0	)		(1.0	)		3.6
Other		3.4			5.4			(2.4	)
Domestic and foreign income tax rate		12.3	%		35.0	%		(148.9	)%

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	$	5,748,385		$	6,534,206
Post-retirement benefit obligations		537,729			663,079
Goodwill amortization		399,091			—
State income taxes		605,554			605,554
Inventory reserves		843,445			770,895
Guarantee obligations and estimated future costs of service accruals		25,500			35,689
Compensated absences, principally due to accrual for financial reporting purposes		198,700			175,271
Other		204,045			180,725
Total gross deferred tax assets		8,562,449			8,965,419
Less: valuation allowance		8,562,449			8,593,829
Net deferred tax assets		—			371,590
Deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation and capitalized interest		(79,273	)		(409,315	)
Total gross deferred tax liabilities		(79,273	)		(409,315	)
Net deferred tax liabilities	$	(79,273	)	$	(37,725	)

Domestic and foreign deferred taxes were comprised as follows:

December 31, 2006	Federal		State		Foreign			Total
Current deferred asset	$	—	$	—	$	—		$	—
Non-current deferred liability		—		—		(79,273	)		(79,273	)
Net deferred tax liability	$	—	$	—	$	(79,273	)	$	(79,273	)
December 31, 2005	Federal		State		Foreign			Total
Current deferred asset	$	—	$	—	$	—		$	—
Non-current deferred liability		—		—		(37,725	)		(37,725	)
Net deferred tax liability	$	—	$	—	$	(37,725	)	$	(37,725	)

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	$	1,490,749		$	1,921,633
Service cost (excluding administrative expenses)		5,029			8,899
Interest cost		71,175			91,948
Settlement		—			(353,319	)
Actuarial (gain) loss		(108,605	)		—
Participant contributions		115,702			—
Benefits paid		(330,306	)		(178,412	)
Projected benefit obligation at December 31		1,243,744			1,490,749
Change in Fair Value of Plan Assets
Employer contributions		214,604			178,412
Participant contributions		115,702			—
Benefits paid		(330,306	)		(178,412	)
Fair value of plan assets at December 31		—			—
Funded status		1,243,744			1,490,749
Amount recognized in statement of financial position
Current Liabilities		180,000			—
Noncurrent Liabilities		1,063,744			1,490,749
Net Amount		1,243,744			1,490,749
Amount recognized in other comprehensive income
Unrecognized net actuarial gain (loss)		(128,886	)		(26,190	)
Total		(128,886	)		(26,190	)

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		$	8,899		$	25,246
Interest cost		71,175			91,948			110,231
Amortization of unrecognized prior service cost		(24,857	)		(24,857	)		(74,571	)
Amortization of unrecognized actuarial gain (loss)		(5,908	)		—			—
Curtailment		—			(1,090,746	)		—
Net periodic post-retirement medical benefit cost	$	70,296		$	(1,014,756	)	$	60,906

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	%		10.00	%		10.00	%
Discount rate used to determine year-end obligations		6.00	%		5.75	%		5.75	%
Discount rate used to determine year-end expense		6.00	%		5.75	%		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	$	90,656	$	90,656
Long term portion		628,569		633,818
Total liability at December 31	$	719,225	$	724,474

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-average Exercise Price		Aggregate Intrinsic Value
Outstanding at December 31, 2003		541,900		$	4.86
Options forfeited		(127,000	)		3.07
Options granted		246,000			2.70
Outstanding at December 31, 2004		660,900		$	4.40
Options forfeited		(107,900	)		3.53
Options expired		(30,000	)		5.35
Options granted		227,500			2.75
Options exercised		(20,600	)		2.35
Outstanding at December 31, 2005		729,900		$	3.98
Options forfeited		(51,500	)		1.96
Options granted		160,000			5.68
Options exercised		(40,667	)		2.79
Outstanding at December 31, 2006		797,733		$	4.51	$	366,957
Exercisable at December 31, 2004		380,215
Exercisable at December 31, 2005		389,400
Exercisable at December 31, 2006		465,900		$	4.70	$	125,793
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	%		0.0	%		2.0	%
Expected volatility		57.5	%		66.2	%		78.0	%
Risk-free interest rate		4.6	%		4.1	%		4.3	%
Expected life (years)		4.0			6.1			6.3

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

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
Range of Exercise Prices		Number Outstanding At 12/31/06		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable At 12/31/06		Weighted Average Exercise Price
$	0 -   3.00		368,833		7.88	$	2.45		217,000	$	2.39
$	3.01 -   4.40		115,400		4.06	$	3.25		115,400	$	3.25
$	4.41 -   5.80		147,500		9.93	$	5.34		10,000	$	5.55
$	8.60 - 20.00		166,000		4.23	$	9.23		123,500	$	10.08
			797,733		7.43	$	4.51		465,900	$	4.70

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

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
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Sales, net	$	11,836		$	13,208		$	12,488		$	14,193		$	9,786		$	11,601		$	11,896		$	11,171
Gross profit		2,766			3,519			2,874			3,262			2,382			3,411			2,907			2,901
Income (loss) from continuing operations     net of tax		(141	)		448			453			479			(254	)		673			174			167
Income (loss) from discontinued     operations net of tax (a)		—			(26	)		(15	)		(35	)		464			(356	)		(49	)		709
Net income (loss)		(141	)		422			438			443			210			317			125			876
Income (loss) per share (b):
Basic income (loss) per share
Continuing operations	$	(.03	)	$	.09		$	.09		$	.09		$	(.05	)	$	.13		$	.03		$	.03
Discontinued operations		—			(.01	)		(.01	)		(.01	)		.09			(.07	)		(.01	)		.14
Net income (loss)	$	(.03	)	$	.08		$	.08		$	.09		$	.04		$	.06		$	.02		$	.17
Diluted income (loss) per share
Continuing operations	$	(.03	)	$	.08		$	.08		$	.09		$	(.05	)	$	.13		$	.03		$	.03
Discontinued operations		—			(.00	)		(.00	)		(.01	)		.09			(.07	)		(.01	)		.13
Net income (loss)	$	(.03	)	$	.08		$	.08		$	.08		$	.04		$	.06		$	.02		$	.16

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
	Income Numerator		Shares Denominator		Per Share Amount		Loss Numerator		Shares Denominator		Per Share Amount		Loss Numerator		Shares Denominator		Per Share Amount
Basic income   per share
Income available to common shareholders	$	1,162,512		5,159,216	$	.23	$	1,528,687		5,135,348	$	.30	$	147,826		5,129,214	$	.03
Effect of dilutive
Securities
Stock options		—		160,586				—		126,143				—		2,627
Diluted income   per share	$	1,162,512		5,319,802	$	.22	$	1,528,687		5,261,491	$	.29	$	147,826		5,131,841	$	.03

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,
	2006		2005		2004
Interest received	$	33,674	$	50,832	$	3,091
Interest paid		380,159		408,133		431,148
Income taxes paid		205,565		91,403		44,070
Deferred gain recorded on sale of manufacturing facility		1,045,799		—		—
Acquisition of assets of Amecon, Inc.
Goodwill		172,962		489,634		—
Inventories		—		272,575		—
Property and equipment		53,522		478,195		—
Equipment purchased through capital lease obligation		—		313,919		—

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.

EX-23.1

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

IntriCon Corporation:

We consent to the incorporation by reference in the registration statement No. 33-33712 on Form S-3, and in the registration statements (No. 333-16377, 333-66433, 333-59694, 333-129104 and 333-134256) on Form S-8 of IntriCon Corporation (formerly Selas Corporation of America) and subsidiaries of our reports dated March 18, 2005, except as to notes 3, 4, 8 and 18, which is as of March 31, 2005 and note 2 which is as of June 24, 2005, relating to the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows and related financial statement schedule for the year ended December 31, 2004, which reports are included in the annual report on Form 10-K for the year ended December 31, 2006 of IntriCon Corporation.

Our reports refer to the Company’s restatement of the consolidated financial statements for the year ended December 31, 2004.

/s/ KPMG LLP

Minneapolis, Minnesota

March 15, 2007

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Mark S. Gorder, certify that:

1. I have reviewed this annual report on Form 10-K of IntriCon Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [Intentionally Omitted]

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	March 16, 2007	By:	/s/ Mark S. Gorder
			Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Scott Longval, certify that:

1. I have reviewed this annual report on Form 10-K of IntriCon Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [Intentionally Omitted]

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	March 16, 2007	By:	/s/Scott Longval
			Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C.SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Mark S. Gorder, Chief Executive Officer (principal executive officer) of IntriCon Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

1) the annual report on Form 10-K of the Company for the year ended December 31, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 16, 2007

/s/ Mark S. Gorder

Mark S. Gorder
President and Chief Executive
Officer (principal executive
officer)

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C.SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott Longval, Chief Financial Officer (principal financial officer) of IntriCon Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

1) the annual report on Form 10-K of the Company for the year ended December 31, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 16, 2007

/s/ Scott Longval

Scott Longval

Chief Financial Officer and
Treasurer (principal financial
officer)

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document.