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<SEC-DOCUMENT>0001003297-06-000423.txt : 20061114
<SEC-HEADER>0001003297-06-000423.hdr.sgml : 20061114
<ACCEPTANCE-DATETIME>20061114162929
ACCESSION NUMBER:		0001003297-06-000423
CONFORMED SUBMISSION TYPE:	10QSB
PUBLIC DOCUMENT COUNT:		4
CONFORMED PERIOD OF REPORT:	20060930
FILED AS OF DATE:		20061114
DATE AS OF CHANGE:		20061114

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			PRO DEX INC
		CENTRAL INDEX KEY:			0000788920
		STANDARD INDUSTRIAL CLASSIFICATION:	SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841]
		IRS NUMBER:				841261240
		STATE OF INCORPORATION:			CO
		FISCAL YEAR END:			0630

	FILING VALUES:
		FORM TYPE:		10QSB
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-14942
		FILM NUMBER:		061215655

	BUSINESS ADDRESS:	
		STREET 1:		MICRO MOTORS, INC.
		STREET 2:		151 EAST COLUMBINE
		CITY:			SANTA ANA
		STATE:			CA
		ZIP:			92707
		BUSINESS PHONE:		714-241-4411

	MAIL ADDRESS:	
		STREET 1:		MICRO MOTORS INC.
		STREET 2:		151 EAST COLUMBINE
		CITY:			SANTA ANA
		STATE:			CA
		ZIP:			92707
</SEC-HEADER>
<DOCUMENT>
<TYPE>10QSB
<SEQUENCE>1
<FILENAME>pdexq1.htm
<TEXT>
<html>

<head>


<title>Pro Dex, Inc. Form 10-QSB</title>



</head>

<body lang=EN-US link=blue vlink=purple>















<p align=center style='text-align:center;text-autospace:none'>&nbsp;</p>
  <p align="center"><b>UNITED STATES <br>
	SECURITIES AND EXCHANGE COMMISSION</b></p>
  <p align=center style='text-align:center'><b>Washington, D.C. 20549</b></p>

  <p align=center style='text-align:center'><b><font size="5">FORM
  10-QSB</font></b></p>
  <div align="center">



<table class=MsoNormalTable border=0 cellpadding=0
 style='border-collapse:collapse' width="100%">
 <tr>
  <td valign=top style='padding:0in; '>
  <p align="center"><b>[X]</b></td>
  <td width=1183 valign=top style='padding:0in; '>
  <p style='text-autospace:
  none'><b>Quarterly Report Pursuant to Section
  13 or 15(d) of the Securities Exchange Act of 1934.</b></p>
  </td>
 </tr>
 <tr>
  <td valign=top style='padding:0in; '>
  </td>
  <td width=1183 valign=top style='padding:0in; '>
  &nbsp;
  </td>
 </tr>
 <tr>
  <td valign=top style='padding:0in; '>
  </td>
  <td width=1183 valign=top style='padding:0in; '>
  <p align=center style='text-align:center;text-autospace:none'><b>For
  the quarterly period ended September 30, 2006</b></p>
  </td>
 </tr>
 <tr>
  <td valign=top style='padding:0in; '>
  </td>
  <td width=1183 valign=top style='padding:0in; '>
  &nbsp;</td>
 </tr>
 <tr>
  <td valign=top style='padding:0in; ' colspan="2" height="22">
  <p align=center style='text-align:center'><b>OR</b></p>
  </td>
 </tr>
 <tr>
  <td valign=top style='padding:0in; ' colspan="2">
  &nbsp;
  </td>
 </tr>
 <tr>
  <td valign=top style='padding:0in; '>
  <p align="center">
  <b>[ ]</b></td>
  <td width=1183 valign=top style='padding:0in; '>
  <p style='text-autospace:
  none'><b>Transition Report Pursuant to Section
  13 or 15(d) of the Securities Exchange Act of 1934.
  For the transition period from to
  <u> .</u></b></p>
  </td>
 </tr>
</table>

</div>

<p style='text-autospace:none'><b></b></p>

<div align="center">

<table class=MsoNormalTable border=0 cellpadding=0 width=721
 style='width:100%;border-collapse:collapse'>
 <tr>
  <td colspan=2 valign=top style='padding:0in; '>
  <p align=center style='text-align:center;text-autospace:none'><b>Commission
  File Number 0-14942 </b></p>
  </td>
 </tr>
 <tr>
  <td colspan=2 valign=top style='padding:0in; '>
  <p align=center style='text-align:center;text-autospace:none'><b>&nbsp;&nbsp; </b></p>
  </td>
 </tr>
 <tr>
  <td colspan=2 valign=top style='padding:0in; '>
  <p align=center style='text-align:center;text-autospace:none'><b>
	<font size="5">PRO-DEX, INC. </font> </b></p>
  </td>
 </tr>
 <tr>
  <td colspan=2 valign=top style='padding:0in; '>
  <p align=center style='text-align:center;text-autospace:none'><b>
	<font size="2">(Exact
  name of small business issuer as specified in its
  charter) </font> </b></p>
  </td>
 </tr>
 <tr>
  <td valign=top style='padding:0in; '>
  <p style='text-autospace:none'><b> </b></p>
  </td>
  <td valign=top style='padding:0in; '>
  <p style='text-autospace:none'><b> </b></p>
  </td>
 </tr>
 <tr>
  <td valign=top style='padding:0in; '>
  <p align=center style='text-align:center;text-autospace:none'><b><u>Colorado </u></b></p>
  </td>
  <td valign=top style='padding:0in; '>
  <p align=center style='text-align:center;text-autospace:none'><b><u>84-1261240
  </u></b></p>
  </td>
 </tr>
 <tr>
  <td valign=top style='padding:0in; '>
  <p align=center style='text-align:center;text-autospace:none'><b>(State
  or Other Jurisdiction of </b></p>
  </td>
  <td valign=top style='padding:0in; '>
  <p align=center style='text-align:center;text-autospace:none'><b>(IRS
  Employer Identification No.) </b></p>
  </td>
 </tr>
 <tr>
  <td valign=top style='padding:0in; '>
  <p align=center style='text-align:center;text-autospace:none'><b>Incorporation
  or Organization) </b></p>
  </td>
  <td valign=top style='padding:0in; '>
  <p style='text-autospace:none'><b> </b></p>
  </td>
 </tr>
 <tr>
  <td valign=top style='padding:0in; '>
  <p style='text-autospace:none'><b> </b></p>
  </td>
  <td valign=top style='padding:0in; '>
  <p style='text-autospace:none'><b> &nbsp;&nbsp; </b></p>
  </td>
 </tr>
 <tr>
  <td colspan=2 valign=top style='padding:0in; '>
  <p align=center style='text-align:center;text-autospace:none'><b><u>151 E. Columbine Avenue, Santa Ana, California 92707
  </u></b></p>
  </td>
 </tr>
 <tr>
  <td colspan=2 valign=top style='padding:0in; '>
  <p align=center style='text-align:center;text-autospace:none'><b>(Address
  of Principal Executive Offices) </b></p>
  </td>
 </tr>
 <tr>
  <td valign=top style='padding:0in; '>
  <p style='text-autospace:none'><b> </b></p>
  </td>
  <td valign=top style='padding:0in; '>
  <p style='text-autospace:none'><b>  &nbsp;&nbsp;  </b></p>
  </td>
 </tr>
 <tr>
  <td colspan=2 valign=top style='padding:0in; '>
  <p align=center style='text-align:center;text-autospace:none'><b>Issuer's
  telephone number: <u>714-241-4411 </u></b></p>
  </td>
 </tr>
</table>





</div>





<p style='text-align:justify;text-autospace:none'>Indicate by check mark whether the Registrant (1) has
filed all reports required by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve 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 ninety days. Yes [X] No [ ] </p>



<p style='text-autospace:none'>Indicate
the number by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).</p>

<p style='text-autospace:none'>Yes
[ ] No [X]</p>



<p style='text-autospace:none'>Indicate
the number of shares outstanding of each of the Registrant's classes of Common
Stock outstanding as of the latest practicable date: 9,548,992 shares of
Common Stock, no par value, as of November 3, 2006. </p>



<p style='text-autospace:none'>Transitional
Small Business Disclosure Format: Yes [ ] No [X]</p>
<p style='text-autospace:none'></p>
<p style='text-autospace:none'></p>
<p style='text-autospace:none' align="center">-1-</p>



<div class=MsoNormal align=center style='text-align:center'>

<hr size=2 width="100%" noshade color=navy align=center>

</div>



<br clear=all
style='page-break-before:always'>










<p><b>Item 1.  Financial
Statements<i></i></b></p>
<div align="center">

<table class=MsoNormalTable border=0 cellpadding=0 width=612
 style='width:90%;margin-left:4.65pt;border-collapse:collapse'>
 <tr style='height:15.75pt'>
  <td colspan=5 valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p align=center style='text-align:center'><b>PRO-DEX, INC.
  and SUBSIDIARIES</b></p>
  </td>
 </tr>
 <tr style='height:15.75pt'>
  <td colspan=5 valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p align=center style='text-align:center'><b>CONSOLIDATED
  BALANCE SHEETS</b></p>
  </td>
 </tr>
 <tr style='height:27.0pt'>
  <td width="54%" valign=top style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>

  </td>
  <td width="21%" valign=top style='border-left:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-right:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' colspan="2">
  <p align=center style='text-align:center'><i>September 30, 2006 <br>
	(unaudited)</i></p>
  </td>
  <td width="22%" valign=top style='border:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' colspan="2">
  <p align=center style='text-align:center'><i>June 30,2006 <br>
	(audited)</i></p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p><b>ASSETS</b></p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' colspan="2">

  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>Current assets:</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' colspan="2">

  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>
  &nbsp;&nbsp;&nbsp;Cash and cash equivalents </p>
  </td>
  <td width="9%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:medium none windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right">
  <p align="left">&nbsp;$&nbsp; </p>
  </td>
  <td width="12%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right">
  295,000&nbsp;</td>
  <td width="10%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:medium none windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right">
  <p align="left">&nbsp;$&nbsp; </p>
  </td>
  <td width="11%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right">
  358,000&nbsp;</td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>
  &nbsp;&nbsp;&nbsp;Accounts receivable, net of allowance for doubtful </p>
  </td>
  <td width="21%" valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>
  &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;accounts of $71,000 at September 30 and $40,000 at June 30</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>3,415,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  3,841,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>
  &nbsp;&nbsp;&nbsp;Inventories, net </p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>4,311,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  3,980,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>
  &nbsp;&nbsp;&nbsp;Prepaid expenses </p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>198,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p> 91,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>
  &nbsp;&nbsp;&nbsp;Income tax receivable</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>86,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  222,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>
  &nbsp;&nbsp;&nbsp;Deferred income taxes</p>
  </td>
  <td width="21%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>766,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  766,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total current
  assets </p>
  </td>
  <td width="21%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>9,071,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  9,258,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>

  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>Property, plant, equipment
  and leasehold improvements, net </p>
  </td>
  <td width="21%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>3,757,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  3,726,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>Other assets:</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;Goodwill</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>2,997,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  2,931,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;Intangibles - Patents,
  net</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  1,395,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  1,417,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;Deferred income taxes</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  378,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  378,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>
  &nbsp;&nbsp;&nbsp;Other </p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p> 63,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  44,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total other assets
  </p>
  </td>
  <td width="21%" valign=top style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  4,833,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  4,770,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>

  </td>
  <td width="21%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>Total assets</p>
  </td>
  <td width="9%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:2.25pt double windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right">
  <p align="left">&nbsp;$ </p>
  </td>
  <td width="12%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:2.25pt double windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right">
  17,661,000&nbsp;</td>
  <td width="10%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:2.25pt double windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right">
  <p align="left">&nbsp;$
  </p>
  </td>
  <td width="11%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:2.25pt double windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right">
  17,754,000&nbsp;</td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>

  </td>
  <td width="21%" valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p><b>LIABILITIES AND
  SHAREHOLDERS' EQUITY</b></p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>Current liabilities:</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;Credit Line</p>
  </td>
  <td width="9%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:medium none windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right">
  <p align="left">&nbsp;$&nbsp; </p>
  </td>
  <td width="12%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right">
  400,000&nbsp;</td>
  <td width="10%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:medium none windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right">
  <p align="left">&nbsp;$&nbsp; </p>
  </td>
  <td width="11%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right">
  900,000&nbsp;</td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;Accounts payable</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  1,259,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  952,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;Accrued expenses</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p> 871,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  971,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:.95pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;Current poriton of
  term note</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  250,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  250,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;Current poriton of
  real estate loan</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  27,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  27,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;Current poriton of
  &quot;patent&quot; deferred payable</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:1px solid #000000; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  71,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:1px solid #000000; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  71,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total current
  liabilities </p>
  </td>
  <td width="21%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:medium none windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  2,878,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:medium none windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  3,171,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>

  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>Long-term liabilities</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;Term note</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  584,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  646,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;Real estate loan</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  1,612,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  1,619,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;Patent deferred
  payable</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:1px solid #000000; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  245,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:1px solid #000000; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  245,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total long-term
  liabilities </p>
  </td>
  <td width="21%" valign=top style='border-left:medium none;border-bottom:medium none windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt; border-top-color:inherit' align="right" colspan="2">
  <p>
  2,441,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none;border-bottom:medium none windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt; border-top-color:inherit' align="right" colspan="2">
  <p>
  2,510,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>

  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>Total liabilities</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:1px solid #000000; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  5,319,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:1px solid #000000; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  5,681,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>

  </td>
  <td width="21%" valign=top style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:medium none windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=top style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:medium none windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>Commitments and
  contingencies </p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p>Shareholders' equity:</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;Common shares; no par
  value; 50,000,000 shares authorized;</p>
  </td>
  <td width="21%" valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;9,548,992 shares
  issued and outstanding September 30, 2006,</p>
  </td>
  <td width="21%" valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;9,539,792 shares
  issued and outstanding June 30, 2006,</p>
  </td>
  <td width="21%" valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  16,094,000&nbsp;</p>
  </td>
  <td width="22%" valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p> 16,066,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;Accumulated deficit </p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:1px solid #000000; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  (3,752,000)</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:1px solid #000000; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  (3,993,000)</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>

  </td>
  <td width="21%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:9.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;Total shareholders'
  equity</p>
  </td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  12,342,000&nbsp;</p>
  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">
  <p>
  12,073,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1px solid #000000;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>

  &nbsp;&nbsp;&nbsp;</td>
  <td width="21%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:1px solid #000000; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" valign=top style='border-left:medium none; border-top:medium none; border-bottom:1px solid #000000; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:9.75pt'>
  <td width="54%" valign=top style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>
  <p> &nbsp;&nbsp;&nbsp;Total liabilities and
  shareholders' equity</p>
  </td>
  <td width="9%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right">
  <p align="left">&nbsp;$&nbsp; </p>
  </td>
  <td width="12%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right">
  17,661,000&nbsp;</td>
  <td width="10%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right">
  <p align="left">&nbsp;$
  </p>
  </td>
  <td width="11%" valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right">
  17,754,000&nbsp;</td>
 </tr>
 <tr style='height:12.75pt'>
  <td width="54%" nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:2.25pt double windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt'>

  </td>
  <td width="21%" nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:2.25pt double windowtext;
  border-right:1.0pt solid windowtext;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
  <td width="22%" nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:2.25pt double windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in; height:12pt' align="right" colspan="2">

  </td>
 </tr>
 </table>

</div>

<p align=center style='text-align:center'><i>See notes to consolidated financial statements.</i></p>
<p align=center style='text-align:center'>-2-</p>



<div class=MsoNormal align=center style='text-align:center'>

<hr size=2 width="100%" noshade color=navy align=center>

</div>



<br clear=all
style='page-break-before:always'>










<div align="center" style="border-right-style: solid; border-right-width: 1px; padding-right: 4px">










<table class=MsoNormalTable border=0 cellpadding=0 width=560
 style='width:90%;margin-left:4.65pt;border-collapse:collapse'>
 <tr style='height:15.75pt'>
  <td nowrap colspan=5 valign=bottom style='height:15.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'><b>PRO-DEX, INC.
  and SUBSIDIARIES</b></p>
  </td>
 </tr>
 <tr style='height:15.75pt'>
  <td nowrap colspan=5 valign=bottom style='height:15.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'><b>CONSOLIDATED
  STATEMENTS OF OPERATIONS</b></p>
  </td>
 </tr>
 <tr style='height:15.75pt'>
  <td nowrap colspan=5 valign=bottom style='height:15.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'><b>Three months
  ended September 30 (unaudited)</b></p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">

  </td>
  <td nowrap colspan=4 valign=top style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">

  </td>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-right:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=center style='text-align:center'><i>2006</i></p>
  </td>
  <td nowrap valign=top style='border:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=center style='text-align:center'><i>2005</i></p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:1.0pt solid windowtext;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:medium none;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">

  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p>Net sales </p>
  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="2%">
  <p align="center">$</p>
  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:medium none windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="17%">
  &nbsp;5,234,000&nbsp;</td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:medium none windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="2%">
  <p align="center">$ </p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="15%">
  3,763,000&nbsp;</td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">

  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p>Cost of sales </p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  3,253,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  2,072,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p>Gross profit </p>
  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  1,981,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  1,691,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">

  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p>Operating expenses: </p>
  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p> &nbsp;&nbsp; Selling </p>
  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  338,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  255,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p> &nbsp;&nbsp; General and
  administrative expenses </p>
  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  569,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  586,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p> &nbsp;&nbsp; Research and
  development costs </p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  647,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  442,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p>Total operating expenses </p>
  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  1,554,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  1,283,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">

  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p>Income from operations </p>
  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  427,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  408,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">

  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p>Other income (expense): </p>
  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p> &nbsp;&nbsp; Royalty income </p>
  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  7,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  11,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p> &nbsp;&nbsp; Other income (expense)</p>
  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  -&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  (6,000)</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p> &nbsp;&nbsp; Interest income
  (expense)</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  (54,000)</p>
  </td>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  22,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p>Total</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  (47,000)</p>
  </td>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  27,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">

  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p>Income before provision for
  income taxes</p>
  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  380,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  435,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">

  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:13.5pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:13.5pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p>Provision for income taxes</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;height:13.5pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  138,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:13.5pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  173,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p>Net income</p>
  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="2%">
  <p>$
  </p>
  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:medium none windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="17%">
  242,000&nbsp;</td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:medium none windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="2%">
  <p align="center">$
  </p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="15%">
  262,000&nbsp;</td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p> </p>
  </td>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p>Net Income per share:</p>
  </td>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p> &nbsp;&nbsp; Basic</p>
  </td>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-right:medium none windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="2%">
  <p>$ </p>
  </td>
  <td nowrap valign=top style='border-left:medium none windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="17%">
  0.03&nbsp;</td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:medium none windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="2%">
  <p align="center">$ </p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="15%">
  &nbsp;0.03&nbsp;</td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p> &nbsp;&nbsp; Diluted</p>
  </td>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-right:medium none windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="2%">
  <p>$ </p>
  </td>
  <td nowrap valign=top style='border-left:medium none windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="17%">
  0.02&nbsp;</td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:medium none windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="2%">
  <p align="center">$&nbsp; </p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="15%">
  0.03&nbsp;</td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">

  </td>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p>Weighted average shares
  outstanding - basic</p>
  </td>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 9,540,992&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 9,452,780&nbsp;
  </p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p>Weighted average shares
  outstanding - diluted</p>
  </td>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 9,791,882&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 10,046,745&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">

  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="62%">
  <p>&nbsp;</p>
  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
</table>



</div>

<p align=center style='text-align:center'><i>See notes to consolidated financial statements.</i></p>



<p align=center style='text-align:center'>-3-</p>

<div class=MsoNormal align=center style='text-align:center'>

<hr size=2 width="100%" noshade color=navy align=center>

</div>



<br clear=all
style='page-break-before:always'>










<p>&nbsp;</p>
<div align="center">












<table class=MsoNormalTable border=0 cellpadding=0 width=663
 style='width:90%;margin-left:4.65pt;border-collapse:collapse'>
 <tr style='height:12.75pt'>
  <td nowrap colspan=5 valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'><b>PRO-DEX, INC. and SUBSIDIARIES</b></p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap colspan=5 valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'><b>CONSOLIDATED STATEMENTS OF CASH FLOWS</b></p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap colspan=5 valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'><b>Three months ended September 30 (unaudited)</b></p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">

  </td>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-right:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=center style='text-align:center'><i>2006</i></p>
  </td>
  <td nowrap valign=top style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=center style='text-align:center'><i>2005</i></p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>Cash Flows from Operating
  Activities: </p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>Net Income</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:medium none windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="11%">
  <p align="center">$&nbsp; </p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="5%">
  242,000&nbsp;</td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:medium none windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="7%">
  <p align="center">$ </p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="10%">
  &nbsp;262,000&nbsp;</td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p> &nbsp;&nbsp; Adjustments to
  reconcile net income to net cash provided by in operating activities:</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p> &nbsp;&nbsp;&nbsp;&nbsp; Depreciation and
  amortization </p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 114,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 105,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p> &nbsp;&nbsp;&nbsp;&nbsp; Bad debt expense</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 31,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 20,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p> &nbsp;&nbsp;&nbsp;&nbsp; Vested option
  expense</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 26,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> -&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p> &nbsp;&nbsp;&nbsp;&nbsp; Reserve for
  obsolete inventory</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 90,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 71,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p> &nbsp;&nbsp;&nbsp;&nbsp; Deferred taxes</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> -&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (67,000)</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Changes in:</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Decrease
  in accounts receivable</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 395,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 609,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>
  &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  (Increase) in inventories</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (421,000)</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (242,000)</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>
  &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  (Increase) in prepaid expenses</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (107,000)</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (173,000)</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (Increase)
  in other assets</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (19,000)</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (2,000)</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Increase
  (decrease) in accounts payable and accrued expenses</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 205,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (408,000)</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Decrease
  in income taxes receivable</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 135,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 183,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>Net Cash provided by
  Operating Activities </p>
  </td>
  <td nowrap valign=top style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 691,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 358,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">

  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>Cash Flows From Investing
  Activities: </p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p> &nbsp;&nbsp; Additions to Astromec
  acquisition cost</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (66,000)</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  -&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p> &nbsp;&nbsp; Additions to
  Intangible assets - Patents related to Intraflow</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (2,000)</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  -&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p> &nbsp;&nbsp; Purchases of equipment
  and leasehold improvements</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (120,000)</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (55,000)</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">

  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>Net Cash (used in)
  Investing Activities </p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (188,000)</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (55,000)</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">

  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>Cash Flows from Financing
  Activities:</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p> &nbsp;&nbsp; Net
  (payments) on line of credit </p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (500,000)</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  -&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>
  &nbsp;&nbsp;
  Principal (payments) on term note</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (63,000)</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>
  &nbsp;&nbsp;
  Principal (payments) on mortgage</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (6,000)</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>
  &nbsp;&nbsp;
  Proceeds from option exercise </p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 3,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 6,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">

  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>Net Cash (used in) provided
  by Financing Activities</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (566,000)</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 6,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">

  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>Net (Decrease) Increase in
  Cash and Cash Equivalents </p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> (63,000)</p>
  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 309,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>Cash and Cash Equivalents,
  beginning of period </p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 358,000&nbsp;</p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p> 2,584,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">

  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>Cash and Cash Equivalents,
  end of period </p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:2.25pt double windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="11%">
  <p align="center">$ </p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:2.25pt double windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="5%">
  295,000&nbsp;</td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:2.25pt double windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="7%">
  <p align="center">$&nbsp; </p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:2.25pt double windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="10%">
  2,893,000&nbsp;</td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">

  </td>
  <td nowrap valign=top style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=top style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap colspan=5 valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'><i>Supplemental Information</i></p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>Cash payments for interest</p>
  </td>
  <td nowrap valign=top style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="center" width="11%">
  <p>$ </p>
  </td>
  <td nowrap valign=top style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="5%">
  70,000&nbsp;</td>
  <td nowrap valign=top style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="center" width="7%">
  <p>$</p>
  </td>
  <td nowrap valign=top style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="10%">
  &nbsp;-&nbsp;</td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=top style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>Cash payments for income taxes
  </p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="center" width="11%">
  <p>$ </p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="5%">
  -&nbsp;</td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="center" width="7%">
  <p>$&nbsp; </p>
  </td>
  <td nowrap valign=top style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" width="10%">
  55,000&nbsp;</td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="67%">
  <p>&nbsp;</p>
  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
 </tr>
</table>

</div>

<p align=center style='text-align:center'><i>See notes to consolidated financial statements.</i></p>



<p align=center style='text-align:center'>-4-</p>

<div class=MsoNormal align=center style='text-align:center'>

<hr size=2 width="100%" noshade color=navy align=center>

</div>



<br clear=all
style='page-break-before:always'>










<p align=center style='text-align:center;text-autospace:none'><b>PRO-DEX,
INC. AND SUBSIDIARIES <br>
</b><a
name="prodex10q_htm_notes_to_consolidated_fina"></a><b>NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS </b></p>

<p style='text-autospace:none'><b>NOTE 1. BASIS OF PRESENTATION</b></p>



<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>The accompanying unaudited consolidated financial statements of Pro-Dex,
Inc. (&quot;We&quot;, &quot;us&quot;, &quot;our&quot;, &quot;Pro-Dex&quot; or the &quot;Company&quot;) have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and Regulation
S-B. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. These financial statements should be read in conjunction with the
audited financial statements presented in our Annual Report for the fiscal year
ended June 30, 2006. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. The results of operations
for such interim periods are not necessarily indicative of the results that may
be expected for the full year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended June 30, 2006. </p>

<p style='text-autospace:none'><b>NOTE 2. INVENTORIES</b></p>
<p style='text-autospace:none; text-indent:0.5in'>Inventories are stated at the lower of cost (the first-in, first-out method) or
market and consist of the following: </p>
<div align="center">

<table class=MsoNormalTable border=0 cellpadding=0 width=463
 style='width:75%;margin-left:4.65pt;border-collapse:collapse'>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="53%">

  </td>
  <td nowrap valign=bottom style='border-top:1.0pt solid windowtext;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:medium none;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=center style='text-align:center'>September 30, 2006</p>
  </td>
  <td nowrap valign=bottom style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=center style='text-align:center'>June 30, 2006</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:medium none; border-right:medium none; border-top:medium none; border-bottom:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="53%">

  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=center style='text-align:center'>(unaudited)</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="53%">
  <p>Raw
  Materials</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="3%">
  <p align=right style='text-align:right'>$</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:medium none windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="20%">
  <p align="right">1,892,000&nbsp;</td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="7%">
  <p align=right style='text-align:center'>$&nbsp;&nbsp;&nbsp; </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="15%">
  <p align="right">1,694,000&nbsp;</td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="53%">
  <p>Work in
  process</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=right style='text-align:right'> 793,000&nbsp;</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align="right">
  495,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="53%">
  <p>Development
  costs under contract</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=right style='text-align:right'> 311,000&nbsp;</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align="right">
  341,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="53%">
  <p>Finished
  goods</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=right style='text-align:right'> 2,197,000&nbsp;</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align="right">
  2,242,000&nbsp;</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="53%">
  <p> &nbsp;&nbsp;&nbsp;&nbsp; Total</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="3%">
  <p align=right style='text-align:right'>$</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:medium none windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="20%">
  <p align="right">5,193,000&nbsp;</td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="7%">
  <p align=right style='text-align:center'>$&nbsp;&nbsp;&nbsp; </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="15%">
  <p align="right">4,772,000&nbsp;</td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="53%">
  <p>Reserve
  for slow moving items</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=right style='text-align:right'> (882,000)</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=right style='text-align:right'> (792,000)</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="53%">
  <p> &nbsp;&nbsp;&nbsp;&nbsp; Total
  inventories, net</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="3%">
  <p align=right style='text-align:right'>$</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="20%">
  <p align="right">&nbsp;4,311,000&nbsp;</td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:medium none windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="7%">
  <p align=right style='text-align:center'>$&nbsp;&nbsp;&nbsp; </p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' width="15%">
  <p align="right">3,980,000&nbsp;</td>
 </tr>
</table>





</div>





<p style='text-autospace:none'><b>NOTE 3. GOODWILL</b></p>



<p style='text-align:justify;text-indent:.5in'>We account for
goodwill in accordance with SFAS No. 142 &quot;Goodwill and Other Intangible
Assets.&quot; SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No.
142. </p>



<p style='text-autospace:ideograph-numeric ideograph-other; text-indent:0.5in' align="justify">In
accordance with the requirements of SFAS No. 142, we performed impairment tests
and recorded no impairment charges in fiscal years ended June 30, 2005 or
2006. We prepare our annual impairment testing on April 1 of each year.
Management determined that there were no events or circumstances that have
occurred that would indicate an impairment of the goodwill during the
three-month period ended September 30, 2006. </p>



<p style='text-autospace:none'><b>NOTE 4. WARRANTY</b></p>
<p style='text-autospace:none; text-indent:0.5in' align="justify">The warranty reserve is based on historical
costs of warranty repairs and expected future identifiable warranty expenses.
We have had warranty expenses in this fiscal year dealing with products
introduced in the prior fiscal year. As of September 30, 2006 we carried a warranty
reserve of $321,000 which was comprised of $281,000 for future warranty
expenses related to new products introduced in the prior fiscal year, and
$40,000 for our legacy dental and industrial products. Warranty expenses are
reflected in the financial statements as Cost of Sales (&quot;COS&quot;). The total net warranty
expense reflected in the COS for the quarter ended September 30, 2006 was
$200,000. The warranty accrual and expenses for the three-months ended
September 30, 2006 and 2005 are presented below: </p>
<p style='text-autospace:none' align="center">-5-</p>



<div class=MsoNormal align=center style='text-align:center'>

<hr size=2 width="100%" noshade color=navy align=center>

</div>



<br clear=all
style='page-break-before:always'>










<div align="center">

<table class=MsoNormalTable border=0 cellpadding=0 width=512
 style='width:75%;margin-left:0pt;border-collapse:collapse'>
 <tr style='height:15.75pt'>
  <td width=526 nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap colspan=4 valign=bottom style='border-top:
  1.0pt solid windowtext;border-left:1.0pt solid windowtext;border-bottom:medium none;
  border-right:1.0pt solid black;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>Three months Ended
  Sept. 30,</p>
  </td>
 </tr>
 <tr style='height:15.75pt'>
  <td width=526 nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=center style='text-align:center'>2006</p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=center style='text-align:center'>2005</p>
  </td>
 </tr>
 <tr style='height:15.75pt'>
  <td width=525 nowrap valign=bottom style='border-top:1.0pt solid windowtext;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:medium none;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Beginning Balance</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:medium none windowtext; border-top:1.0pt solid windowtext; border-bottom:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$</p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none windowtext; border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  309,000&nbsp;</td>
  <td nowrap valign=bottom style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$ </p>
  </td>
  <td nowrap valign=bottom style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  42,000&nbsp;</td>
 </tr>
 <tr style='height:15.75pt'>
  <td width=525 nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p> &nbsp;&nbsp; Actual expenditures</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  (189,000)</td>
  <td nowrap valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:medium none windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$ </p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  (32,000)</td>
 </tr>
 <tr style='height:15.75pt'>
  <td width=525 nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p> &nbsp;&nbsp; Additional accrual</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:medium none windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$</p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  201,000&nbsp;</td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$ </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  32,000&nbsp;</td>
 </tr>
 <tr style='height:15.75pt'>
  <td width=525 nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Ending Balance</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:medium none windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$</p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  321,000&nbsp;</td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$ </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  42,000&nbsp;</td>
 </tr>
</table>

</div>

<p align=center style='text-align:center;text-autospace:none'><b></b></p>



<p style='text-autospace:none'><b>NOTE 5. NET
INCOME PER SHARE</b></p>

<p style='margin-top:6.0pt;text-align:justify; text-indent:0.5in'> The
following table reconciles the weighted average shares outstanding for basic
and diluted net income per share for the periods indicated (unaudited).</p>

<div align="center">

<table class=MsoNormalTable border=0 cellpadding=0 width=612
 style='width:75%;margin-left:4.65pt;border-collapse:collapse'>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap colspan=4 valign=bottom style='border-top:
  1.0pt solid windowtext;border-left:1.0pt solid windowtext;border-bottom:medium none;
  border-right:1.0pt solid black;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>Three Months Ended September 30,</p>
  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:medium none; border-right:medium none; border-top:medium none; border-bottom:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=center style='text-align:center'>2006</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=center style='text-align:center'>2005</p>
  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Net
  income</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:center'>$ </p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:medium none windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align="right">242,000
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:center'>$&nbsp; </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align="right">262,000</td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Basic net
  income per common share:</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>
  &nbsp;&nbsp;&nbsp;&nbsp;
  Weighted average number of common shares outstanding</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align="right">
  9,540,992 </p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  9,452,780 </p>
  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Basic net
  income per common share </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:center'>$&nbsp; </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align="right">0.03</td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:medium none windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:center'>$&nbsp; </p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  0.03</td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Diluted
  net income per share:</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>
  &nbsp;&nbsp;&nbsp;&nbsp;
  Weighted average of common shares outstanding</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  9,540,992 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  9,452,780 </p>
  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>
  &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  Effect of potentially dilutive securities (options)</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  239,592 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  548,916 </p>
  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>
  &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  Effect of potentially dilutive securities (warrants)</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  11,298 </p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  45,049 </p>
  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Weighted
  average number of common and shares - </p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Diluted </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  9,791,882 </p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  10,046,745 </p>
  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Diluted
  net income per common share</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:center'>$&nbsp; </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  0.02</td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:medium none windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:center'>$&nbsp; </p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  0.03</td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
</table>



</div>



<p style='text-autospace:none'><b>NOTE 6. </b><b>CREDIT FACILITIES</b></p>



<p style='text-align:justify;text-indent:.5in'>In October 2005,
we renewed our credit facility with Wells Fargo Bank N.A. (&quot;Wells Fargo&quot;) for
borrowings up to $2,000,000. Its terms require monthly interest payments
at the prime rate of interest (8.25% at September 30, 2006); or LIBOR plus
2.50% (7.75% (one month) to 8.0% (three months) at September 30, 2006), at our
discretion, based on outstanding borrowings with no minimum interest charge.
There is an unused line fee of .175% calculated and paid quarterly based on the
average available unused balance of the credit line. All assets of the Company
secure the outstanding borrowings. There was a $400,000 outstanding balance
under the terms of this credit facility as of September 30, 2006. The
total eligible additional borrowing capacity at September 30, 2006 was
$1,600,000. </p>



<p style='text-align:justify;text-indent:.5in'>In January 2006,
we extended the credit facility and entered into a 4-year term note with Wells
Fargo for $1,000,000. Its terms require monthly interest payments at
either the prime rate of interest (8.25% at September 30, 2006), or LIBOR plus
2.50% at various maturities ranging from one month at 7.75% to three months at
8.0% at September 30, 2006, at our discretion, based on outstanding
borrowings. The principal payments on the note are $20,833 per month.
All assets of the Company secure the outstanding borrowings. There was
$833,333 outstanding balance under the term note as of September 30,
2006. </p>
<p style='text-align:justify;text-indent:.5in'>&nbsp;</p>
<p style='text-align:justify;text-indent:.5in'>&nbsp;</p>
<p style='text-align:justify;text-indent:.5in'>&nbsp;</p>
<p style='text-align:center;'>-6-</p>



<p align=center style='text-align:center'><u></u></p>

<div class=MsoNormal align=center style='text-align:center'>

<hr size=2 width="100%" noshade color=navy align=center>

</div>



<br clear=all
style='page-break-before:always'>










<p style='text-align:justify;text-indent:.5in'>In March 2006,
we entered into a 10-year mortgage with Union Bank of California for
$1,650,000. Its terms require monthly interest payments at a fixed rate
of 6.73% based on outstanding borrowings. The principal payments on the
mortgage note are based on a 25-year amortization of the note and are $11,379
per month beginning May 1, 2006. The outstanding borrowings are secured by our
  Carson City land and building. There was $1,639,253 outstanding balance under
the terms of this mortgage as of September 30, 2006.</p>



<p style='text-autospace:ideograph-numeric ideograph-other; text-indent:0.5in' align="justify">There
are certain financial and non-financial covenants that we must meet to be in
compliance with the terms of the October 2005 Wells Fargo credit facility, as
amended, and the Union Bank mortgage. At September 30, 2006, management believes
that the Company was in compliance with all such covenants.</p>



<p style='text-autospace:none'><b>NOTE 7. INCOME TAXES</b></p>



<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>Deferred income taxes are provided on a liability method whereby deferred
tax assets and liabilities are recognized for temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment. We have tax credit carry forwards
totaling $124,000 for state tax purposes that do not expire and can be carried
forward indefinitely until fully utilized. </p>



<p style='text-align:justify; text-indent:0.5in'> Significant
management judgment is required in determining our provision for income taxes
and the recoverability of our deferred tax asset. Such determination is based
on our estimates of future taxable income by jurisdiction in which we operate
and the period over which our deferred tax assets will be recoverable. In the
event that actual results differ from these estimates or we adjust these estimates
in future periods, we may need to establish a valuation allowance, which could
result in a tax provision up to the carrying value of our deferred tax assets.</p>



<p style='text-autospace:none'><b>NOTE 8. STOCK OPTIONS</b></p>
<p class="MsoBodyText2" style="text-align:justify;text-indent:.5in;line-height:
normal">We adopted the revised requirements of the Statement of Financial
Accounting Standards (&quot;SFAS&quot;) No. 123 (R) <i>Accounting for Stock-Based
Compensation</i> as revised December 2004.&nbsp; This standard establishes the
accounting standards for equity compensation, and applied to us in the
recognition of the cost of stock options and stock based compensation awarded
based on the grant-date fair value of those awards.&nbsp; As a small business
issuer, the statement is effective for us at the beginning of the first fiscal
year that begins after December 15, 2005.&nbsp; Accordingly we began to report
the expense of vested stock options and stock based compensation in our report
for the quarter ending September 30, 2006.</p>
<p class="MsoNormal" style="text-align:justify;text-indent:.5in;text-autospace:
none">The Board of Directors and the shareholders of the Company have approved
and adopted two stock option plans, pursuant to which options to purchase an
aggregate of 2,000,000 shares of common stock may be granted to officers,
directors, and employees of the Company.&nbsp; The Employee's Plan authorizes
1,500,000 options to purchase shares and the Director's Plan authorizes 500,000
options to purchase shares.&nbsp; Option awards are generally made with an
exercise price equal to the market price of our stock at the date of the grant;
and generally fully vest after 6 months of continuous service for directors and
incrementally vest over 5 years of continuous service for employees.&nbsp; Both
plans have a 10-year term.&nbsp; The aggregate compensation cost that has been
charged &nbsp;against income for those plans was $26,000 for the quarter ended
September 30, 2006.&nbsp; </p>
<p class="MsoNormal" style="text-align:justify;text-indent:.5in;text-autospace:
none">&nbsp;There are 98,045 options to purchase shares remaining under the
Employee's Plan, and 210,000 options to purchase shares remaining under the
Director's Plan - for a total of 308,045 shares remaining under both option
plans at June 30, 2006 that are available to grant in future periods.&nbsp;
Transactions involving the Company's stock options for the years ended June 30,
2006 and 2005 are summarized as follows: </p>

<p align=center style='text-align:center'>-7-</p>

<div class=MsoNormal align=center style='text-align:center'>

<hr size=2 width="100%" noshade color=navy align=center>

</div>



<br clear=all
style='page-break-before:always'>












<div align="left">



<table class=MsoNormalTable border=0 cellpadding=0
 style='margin-left:4.65pt;border-collapse:collapse' id="table2" width="75%">
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align=center style='text-align:center'>&nbsp;</p>
  </td>
  <td valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align=center style='text-align:center'>Weighted-Average</p>
  </td>
  <td valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align=center style='text-align:center'>Aggregate</p>
  </td>
 </tr>
 <tr style='height:25.5pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align=center style='text-align:center'><u>Options</u></p>
  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align=center style='text-align:center'><u>Shares</u></p>
  </td>
  <td valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align=center style='text-align:center'><u>Weighted-Average
	<br>
	Exercise Price</u></p>
  </td>
  <td valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align=center style='text-align:center'><u>Remaining <br>
	Contractural Term</u></p>
  </td>
  <td valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align=center style='text-align:center'><u>Intrinsic <br>
	Value</u></p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal>Outstanding
  at beginning of year</p>
  </td>
  <td valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  1,204,316&nbsp;</p>
  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align="right">&nbsp;$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  1.68 </p>
  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal>&nbsp;&nbsp;&nbsp;
  Granted</p>
  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  50,000&nbsp;</p>
  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  1.60 </p>
  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal>&nbsp;&nbsp;&nbsp;
  Exercised</p>
  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  (20,000)</p>
  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  0.81 </p>
  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:15.0pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal>&nbsp;&nbsp;&nbsp;
  Forfeited</p>
  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align="right"><u>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  (30,000)</u></p>
  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align="right"><u>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  2.57 </u></p>
  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal>Outstanding
  at end of period</p>
  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  1,204,316&nbsp;</p>
  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align="right">&nbsp;$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  1.67 </p>
  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  6.26 </p>
  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal>&nbsp;$ &nbsp;&nbsp;378,000
  </p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:1px solid #000000; border-left:1.0pt solid windowtext; padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal>Exercisable
  at end of period</p>
  </td>
  <td nowrap valign=bottom style='border-bottom:1px solid #000000; padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  966,816&nbsp;</p>
  </td>
  <td nowrap valign=bottom style='border-bottom:1px solid #000000; padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal align="right">&nbsp;$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  1.50 </p>
  </td>
  <td nowrap valign=bottom style='border-bottom:1px solid #000000; padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  5.69 </p>
  </td>
  <td nowrap valign=bottom style='border-bottom:1px solid #000000; padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal>&nbsp;$&nbsp;&nbsp;
  378,000 </p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
</table>





</div>
<p align="justify" style="text-indent: 0.5in">A summary of
the status of our nonvested shares as of September 30, 2006 and changes during the
quarter ended September 30, 2006 is presented below: </p>
<div align="center">





<table class=MsoNormalTable border=0 cellpadding=0
 style='margin-left:5.15pt;border-collapse:collapse' id="table3" width="75%">
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border:none;border-left:solid windowtext 1.0pt;
  padding:0in 5.4pt 0in 5.4pt;height:12.75pt'>

  </td>
  <td nowrap valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:12.75pt' width="128">
  <p class=MsoNormal align=center style='text-align:center'>&nbsp;</p>
  </td>
  <td valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:12.75pt' width="192">
  <p class=MsoNormal align=center style='text-align:center'>Weighted-Average</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border:none;border-left:solid windowtext 1.0pt;
  padding:0in 5.4pt 0in 5.4pt;height:12.75pt'>
  <p class=MsoNormal align=center style='text-align:center'><u>Nonvested Shares</u></p>
  </td>
  <td nowrap valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:12.75pt' width="128">
  <p class=MsoNormal align=center style='text-align:center'><u>Shares</u></p>
  </td>
  <td valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:12.75pt' width="192">
  <p class=MsoNormal align=center style='text-align:center'><u>Grant -Date Vair Falue</u></p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border:none;border-left:solid windowtext 1.0pt;
  padding:0in 5.4pt 0in 5.4pt;height:12.75pt'>
  <p class=MsoNormal>Nonvested
  at June 30, 2006</p>
  </td>
  <td valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:12.75pt' width="128">
  <p class=MsoNormal align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  303,750&nbsp;</p>
  </td>
  <td nowrap valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:12.75pt' width="192">
  <p class=MsoNormal align="right">&nbsp;$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  2.43 </p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border:none;border-left:solid windowtext 1.0pt;
  padding:0in 5.4pt 0in 5.4pt;height:12.75pt'>
  <p class=MsoNormal>&nbsp;&nbsp;&nbsp;
  Granted</p>
  </td>
  <td nowrap valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:12.75pt' width="128">
  <p class=MsoNormal align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  50,000&nbsp;</p>
  </td>
  <td nowrap valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:12.75pt' width="192">
  <p class=MsoNormal align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  1.60 </p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border:none;border-left:solid windowtext 1.0pt;
  padding:0in 5.4pt 0in 5.4pt;height:12.75pt'>
  <p class=MsoNormal>&nbsp;&nbsp;&nbsp;
  Vested</p>
  </td>
  <td nowrap valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:12.75pt' width="128">
  <p class=MsoNormal align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  (88,750)</p>
  </td>
  <td nowrap valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:12.75pt' width="192">
  <p class=MsoNormal align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  2.05 </p>
  </td>
 </tr>
 <tr style='height:15.0pt'>
  <td nowrap valign=bottom style='border:none;border-left:solid windowtext 1.0pt;
  padding:0in 5.4pt 0in 5.4pt;height:15.0pt'>
  <p class=MsoNormal>&nbsp;&nbsp;&nbsp;
  Forfeited</p>
  </td>
  <td nowrap valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:15.0pt' width="128">
  <p class=MsoNormal align="right"><u>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  (27,500)</u></p>
  </td>
  <td nowrap valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:15.0pt' width="192">
  <p class=MsoNormal align="right"><u>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  2.63 </u></p>
  </td>
 </tr>
 <tr style='height:13.5pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:1px solid #000000; border-left:1.0pt solid windowtext; height:13.5pt; padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in'>
  <p class=MsoNormal>Nonvested
  at September 30, 2006</p>
  </td>
  <td nowrap valign=bottom style='border-top:1.0pt solid windowtext;border-left:
  medium none;border-bottom:1px solid windowtext;border-right:medium none;height:13.5pt; padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in' width="128">
  <p class=MsoNormal align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  237,500&nbsp;</p>
  </td>
  <td nowrap valign=bottom style='border-bottom:1px solid #000000; height:13.5pt; padding-left:5.4pt; padding-right:5.4pt; padding-top:0in; padding-bottom:0in' width="192">
  <p class=MsoNormal align="right">&nbsp;$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  2.38 </p>
  </td>
 </tr>
 <tr style='height:13.5pt'>
  <td nowrap valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:13.5pt'>

  </td>
  <td nowrap valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:13.5pt' width="128">

  </td>
  <td nowrap valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:13.5pt' width="192">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:12.75pt'>

  </td>
  <td nowrap valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:12.75pt' width="128">

  </td>
  <td nowrap valign=bottom style='padding:0in 5.4pt 0in 5.4pt;height:12.75pt' width="192">

  </td>
 </tr>
 </table>





</div>





<p class=MsoNormal style='text-align:justify;text-indent:.5in;text-autospace:
none'>During the quarter and fiscal year-to-date ended September 30, 2006, the
Company granted 30,000 Common Stock Options under the Director's Plan
exercisable at an average per share price of $1.63 (fair value $0.96 per
option) and 20,000 Common Stock Options under the Employee's Plan exercisable
at an average per share price of $1.55 (fair value $1.05 per option).&nbsp; </p>



<p class=MsoNormal style='text-align:justify;text-indent:.5in;text-autospace:
none'>The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividend rate for all years; price volatility of 54% to 63%,
risk-free interest rate of approximately 4.7% to 5.1%.&nbsp; The risk free rate is
based on the applicable U.S. Treasury yield curve in effect at the time of the
grant. &nbsp;Expected volatility is based on the changes in the historical monthly
closing prices of the shares.&nbsp; The assumed expected lives are between 5.25 to
7.5 years and based for each grant on the simplified calculation method.</p>

<p class=MsoNormal style='text-align:justify;text-indent:.5in;text-autospace:
none'>During the quarter ended September 30, 2006, the Company granted 450,000
Stock Appreciation Rights (&quot;SAR&quot;) possessing an average benchmark per share
price of $1.53 (fair value $0.67 per SAR).&nbsp; </p>



<p class=MsoNormal style='text-align:justify;text-indent:.5in;text-autospace:
none'>The fair market value of each SAR is estimated at the grant date using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividend rate for all years; price volatility of 51% to 565,
risk-free interest rate of approximately 4.7%; and expected life of 3 to 4
years.&nbsp; The compensation cost that has been charged to against income for the
SAR was $6,000 for the quarter ended September 30, 2006.&nbsp; </p>



<p class=MsoNormal style='text-align:justify;text-indent:.5in;text-autospace:
none'>As of September 30, 2006, there was $517,000 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
granted under the Plans and SARs.&nbsp; The cost is expected to be recognized over a
weighted average period of four years on a straight line basis.&nbsp; None of the
compensation cost is capitalized in the cost of the assets of the company.&nbsp; </p>

<p align="center">-8-</p>

<div class=MsoNormal align=center style='text-align:center'>

<hr size=2 width="100%" noshade color=navy align=center>

</div>



<br clear=all
style='page-break-before:always'>












<p>&nbsp;</p>












<div align="center">












<table class=MsoNormalTable border=0 cellpadding=0 width=552
 style='width:75%;margin-left:4.65pt;border-collapse:collapse'>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=center style='text-align:center'>Three Months Ended</p>
  </td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=center style='text-align:center'>30-Sep-05</p>
  </td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Net
  income as reported:</p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-right:medium none; border-bottom:medium none; border-top:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:medium none windowtext; border-top:1.0pt solid windowtext; border-bottom:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:center'>$</p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none windowtext; border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align="right">262,000&nbsp;</td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Add
  stock-based employee</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>compensation
  expense included</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>in reported
  net income, net of</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>related
  tax effects</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>(Deduct)
  total stock-based</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>employee
  and director</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>compensation
  expense </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>determined
  under fair value</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>based
  method for all awards,</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>net of
  related tax effects</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align="right">
  (8,000)</p>
  </td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
 <tr style='height:15.0pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:15.0pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Pro-forma
  net income:</p>
  </td>
  <td nowrap valign=bottom style='height:15.0pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.5pt double windowtext;
  border-right:medium none windowtext;height:15.0pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="center">
  <p>$</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none windowtext;border-bottom:1.5pt double windowtext;
  border-right:1.0pt solid windowtext;height:15.0pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align="right">254,000&nbsp;</td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:15.0pt'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Basic
  earnings per share</p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-right:medium none; border-bottom:medium none; border-top:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>As
  reported</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:medium none windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="center">
  <p>$ </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  0.03&nbsp;</td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-right:medium none; border-top:medium none; border-bottom:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Pro-forma</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:medium none windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="center">
  <p>$ </p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  0.03&nbsp;</td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Diluted
  earnings per share:</p>
  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>As
  reported </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:medium none windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="center">
  <p>$ </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  0.03&nbsp;</td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-right:medium none; border-top:medium none; border-bottom:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Pro-forma</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:medium none windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="center">
  <p>$ </p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  0.03&nbsp;</td>
  <td width=64 nowrap valign=bottom style='width:48.0pt;padding:0in .85pt 0in .85pt;
  height:12.75pt'>

  </td>
 </tr>
</table>

</div>

<p style='text-autospace:none'><b>NOTE 9. MAJOR CUSTOMERS</b></p>

<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>The Company had two major customers (defined as a customer that
represents greater than 10% of the Company's total revenues) in the three
months ended September 30, 2006 and 2005. Net sales to these customers during
the three months ended September 30, 2006 amounted to $1,258,000 and $719,000,
respectively. At September 30, 2006, the accounts receivable included balances
of $387,000 and $244,000 respectively due from these two customers.</p>



<p style='text-autospace:none'><b>NOTE 10. SUBSEQUENT EVENTS</b></p>



<p style='text-align:justify;text-indent:.5in'>On
November 1, 2006, the credit facility with Wells Fargo was renewed for
borrowings up to $2,000,000. The credit facility expires in November 1,
2007. Its terms require monthly interest payments at the prime rate of
interest (8.25% at September 30, 2006); or LIBOR plus 2.50% (7.75% (one month)
to 8.0% (three months) at September 30, 2006), at our discretion, based on
outstanding borrowings with no minimum interest charge. There is an unused
line fee of 0.175% calculated and paid quarterly based on the average available
unused balance of the credit line. All assets of the Company secure the
outstanding borrowings. </p>












<p style='text-autospace:none'><b>Item 2. Management's
Discussion and Analysis or Plan of Operation</b></p>

<p><b>COMPANY OVERVIEW</b></p>










<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>The following discussion and analysis provides information that the
Company's management believes is relevant to an assessment and understanding of
our results of operations and financial condition for each of the three month
periods ended September 30, 2005 and 2006, respectively. This discussion
should be read in conjunction with the Consolidated Financial Statements and
the Notes thereto included elsewhere in this Report. This Report contains
certain forward-looking statements and information. The cautionary statements
included herein should be read as being applicable to all related forward-looking
statements wherever they may appear. Our actual future results could differ
materially from those discussed herein. Our critical accounting policies
relate to inventory valuation for slow moving items, impairment of goodwill,
and recoverability of deferred income taxes.</p>
<p style='text-align:center;'>-9-</p>

<div class=MsoNormal align=center style='text-align:center'>

<hr size=2 width="100%" noshade color=navy align=center>

</div>



<br clear=all
style='page-break-before:always'>












<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>Except for the historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-QSB, including discussions of our
product development plans, business strategies and market factors influencing
our results, are forward-looking statements that involve certain risks and
uncertainties. Actual results may differ from those anticipated by us as a
result of various factors, both foreseen and unforeseen, including, but not
limited to, our ability to continue to develop new products and increase
systems sales in markets characterized by rapid technological evolution,
consolidation within our target marketplace and among our competitors, and
competition from larger, better capitalized competitors. Many other economic,
competitive, governmental and technological factors could impact our ability to
achieve our goals. Interested persons are urged to review the risks described
herein, as well as in our other public disclosures and filings with the
Securities and Exchange Commission. We refer you to the risk factors and
cautionary language contained in our reports filed with the Securities and
Exchange Commission from time to time, including, but not limited to, those
risks and uncertainties which may be listed in our Annual Report on Form 10-KSB
and our most recent Quarterly Reports on Form 10-QSB, each as filed with the
Securities and Exchange Commission..</p>



<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>Pro-Dex, Inc. (&quot;Company,&quot; &quot;Pro-Dex&quot;, &quot;we,&quot; &quot;our,&quot;, &quot;us&quot;), with operations in Santa Ana, California, Beaverton, Oregon
and Carson City, Nevada, specializes in bringing speed to market in the
development and manufacture of technology-based solutions that incorporate
embedded motion control, miniature rotary drive systems and fractional
horsepower DC motors, serving the medical, dental, semi-conductor, scientific
research and aerospace markets. Pro-Dex's products are found in hospitals,
dental offices, medical engineering labs, commercial and military aircraft,
scientific research facilities and high tech manufacturing operations around
the world. The company names of Micro Motors, Oregon Micro Systems, and
Astromec are used for marketing purposes as brand names.</p>



<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>Pro-Dex's principal headquarters are located at 151 E. Columbine Avenue, Santa Ana,   California 92707 and our phone number is 714-241-4411. Our Internet address
is <u><font color="#0000FF">www.pro-dex.com</font></u>. Our annual reports
on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K,
amendments to those reports and other Securities and Exchange Commission
(&quot;SEC&quot;) filings, are available free of charge through our website as soon as
reasonably practicable after such reports are electronically filed with, or
furnished to, the SEC. In addition, our Code of Ethics and other corporate
governance documents may be found on our website at the Internet address set
forth above. Our filings with the SEC may also be read
and copied at the SEC's Public Reference Room at 100 F Street, N.E., 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 SEC maintains an
Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC at <u>
<font color="#0000FF">www.sec.gov</font></u>. </p>












<p><b>Description of Business</b></p>



<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>The majority of our revenue is derived from designing, developing and
manufacturing electric, air, and battery powered rotary drive systems for the
medical device and dental industries, motion control software and hardware for
industrial and scientific applications and fractional horsepower DC motors. The
Company distributes its own line of pneumatic and electric dental hand pieces
sold under the Micro Motors name utilizing a network of independent sales
representatives across North America. A large part of the revenue growth of
the Company has been driven by developing and selling numerous private label
rotary drive systems for use in dental, cranial, spinal, arthroscopic and orthopedic
surgery. Other revenue sources include designing and manufacturing miniature
pneumatic motors in the automotive, aerospace, apparel and entertainment
industries.</p>










<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>All years relating to financial data herein shall refer to fiscal years
ending June 30, unless indicated otherwise.</p>
<p align="center">-10-</p>

<div class=MsoNormal align=center style='text-align:center'>

<hr size=2 width="100%" noshade color=navy align=center>

</div>



<br clear=all
style='page-break-before:always'>












<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>Company-funded research and development supports the development of
generic rotary drive, motion control, and electric motor technology platforms.
We seek customer-funded projects to customize these platforms to specific customer
requirements. Company-funded research and development projects are generally
expected to convert to customer-funded projects within six to eighteen months.
Company funded project costs not associated with contracts or purchase orders
are expensed as incurred. In the three months ended September 30, 2006, $647,000
was expensed; an increase of $205,000 from the $442,000 expensed in the three
months ended September 30, 2005. </p>



<p align="justify" style="text-indent: 0.5in">For customer-funded development projects, costs are
capitalized and recognized as a cost of sales when specific deliverables within
the development contracts are produced, matching the costs to the revenue. In
the three months ended September 30, 2006, $18,000 was recognized as cost of
sales, compared to $4,000 recognized as cost of sales in the three months ended
September 30, 2005, consistent with the increase in development fees billable
during the quarter.</p>



<p align="justify" style="text-indent: 0.5in">Customer-funded research and development provided $37,000
in revenue in the three months ended September 30, 2006, and $19,000 in revenue
in the three months ended September 30, 2005, reflecting an increase in
development fees billable during the quarter. The results of customer-funded
development work are intended to provide long-term exclusive manufacturing
agreements and provide the customer with the retention of the intellectual
property developed. The identity of the customer is generally protected by a
non-disclosure agreement.</p>



<p style='text-autospace:ideograph-numeric ideograph-other; text-indent:0.5in' align="justify">The
Company's revenue is derived from five main customer types. The proportion of
sales compared to Pro-Dex total sales, sales to each customer type and sales by
location is noted in the table below (unaudited):</p>



<div align="center">



<table class=MsoNormalTable border=0 cellpadding=0 width=402
 style='width:75%;margin-left:4.65pt;border-collapse:collapse'>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>Sales by customer type ($'000)</p>
  </td>
  <td nowrap colspan=3 valign=bottom style='border-left:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-right:1.0pt solid black; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>FY 2007 Q1</p>
  </td>
  <td nowrap colspan=3 valign=bottom style='border-top:
  1.0pt solid windowtext;border-left:medium none;border-bottom:1.0pt solid windowtext;
  border-right:1.0pt solid black;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>FY 2006 Q1</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Dental</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:right'>$ </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align="right">1,078
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>21%</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:right'>$&nbsp; </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align="right">1,086</td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>29%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Medical* </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  2,170 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>41%</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align="right"> 1,652
  </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>44%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Industrial</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  882 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>17%</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align="right">
  718 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>19%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Aerospace*</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  590 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>11%</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=right>-- </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>-- </p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Government
  research and other</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right" colspan="2">
  <p>
  514 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>10%</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align="right">
  307 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>8%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Total
  Sales</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>$&nbsp; </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  5,234</td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:right'>100%</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:right'>$</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align="right">&nbsp;3,763
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:right'>100%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
</table>



</div>



<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>*Pro-Dex Astromec's sales are primarily to the aerospace and medical
markets and became a part of Pro-Dex with the acquisition of substantially all
of Astromec's assets in January 2006. Pro-Dex Astromec's sales were $590,000
to aerospace customers and $326,000 to medical customers in the quarter ended
September 30, 2006. </p>












<div align="center">



<table class=MsoNormalTable border=0 cellpadding=0 width=352
 style='width:50%;margin-left:4.65pt;border-collapse:collapse'>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>Sales by location ($'000)</p>
  </td>
  <td nowrap valign=bottom style='border:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=center style='text-align:center'>FY 2007 Q1</p>
  </td>
  <td nowrap valign=bottom style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align=center style='text-align:center'>FY 2006 Q1</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Santa Ana</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:right'>$&nbsp; </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align="right">3,261</td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:right'>$&nbsp; </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align="right">3,131</td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Beaverton</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align="right">
  1,057 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align="right">
  632 </p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Carson
  City</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align="right">
  916 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' colspan="2">
  <p align="right">
  - </p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Total
  Sales</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:right'>$&nbsp; </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align="right">5,234</td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:medium none windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:right'>$&nbsp; </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align="right">3,763</td>
 </tr>
</table>





</div>










<p style='text-align:justify;text-indent:.5in'>On October 30, 2006, one of our major customers advised us that it plans to
internally manufacture two
of the products that we developed for
them and have manufactured of the past four years.
This decision is consistent with this customer's general strategy of vertical
integration and their targeted time frame for the transition is January 1,
2008. During the fiscal years ended June 30, 2005 and 2006, the products being transitioned accounted for sales of $1,352,000 and$1,238,000, respectively (constituting
9.7% and 7.2%, respectively, of revenues during such periods). At this point, the customer has expressed its
intention to purchase some of the major components for these products from
Pro-Dex, although they are under no obligation to do so. Such major
components could account for as much as 50% of the price of the manufactured
product. No existing purchase orders have been cancelled for these two
products as no backlog existed for them beyond January 1, 2008 and we have been
informed by the customer that they intend to place a blanket purchase order for
delivery of the product during the calendar year 2007. The customer also
expressed an interest in working with us on the development of a new generation
of product to replace the product they intend to manufacture. </p>
<p style='text-align:center;text-autospace:
none'>-11-</p>

<div class=MsoNormal align=center style='text-align:center'>

<hr size=2 width="100%" noshade color=navy align=center>

</div>



<br clear=all
style='page-break-before:always'>












<p style='text-align:justify; text-indent:0.5in'>
On November 9, 2006, we refunded the development fee on a separate
project to the same major customer due to our determination that we could not
achieve the performance required of the product being developed. In
addition to the refunded fee of $83,600, we wrote off $66,000 worth of
capitalized engineering costs and inventory associated with the project, and
eliminated $386,000 worth of orders for this product from our backlog. We
continue to manufacture the product that was to be replaced by the results of
this development project and currently have orders of $487,000 of this product
deliverable over the next eight months. </p>



<p style='text-align:justify;text-indent:.5in'>It is our intention to replace such lost business
with orders from other customers as well as orders for different product types,
but there is no assurance that we will be
successful in our efforts to do so. Accordingly, the loss of these manufacturing orders may, in the future, have a
material adverse effect upon our revenue and earnings until such time as we are
able to replace the lost business.</p>



<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>Medical product sales represent the manufacture of products that utilize
proprietary designs developed by the Company under exclusive design and supply
agreements. Our dental products are sold to original equipment manufacturers
and dental product distributors. An independent dealer network markets our own
branded line of dental products, including Intraflow. We also design and
manufacture embedded multi-axis motion controllers used to regulate the motion
of servo and stepper motors, predominantly for the factory automation and
medical analysis equipment industries. The controllers support the platforms
for PCI, VME, ISA, and cPCI busses as well as stand-alone requirements. In
addition, we make and sell pneumatic motors for industrial applications that
are marketed directly to end-users and through industrial supply distributors.
We added significant sales to the aerospace market with the purchase of the
Astromec assets and establishing Pro-Dex Astromec in January 2006. These
products include highly reliable fractional horsepower DC motors designed for
harsh environments. </p>



<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>We hold the following three independently verified certifications: ISO
9001:2000, ISO 13485 revised 1998, and Medical Device Directive 93\42\EEC Annex
II company.</p>



<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>At the present time, we are generally able to fill orders within sixty
(60) days. At September 30, 2006, we had a backlog, including orders for
delivery beyond 60 days, of $9.1 million compared with a backlog of $7.6 million
at September 30, 2005 and $11.7 million at June 30, 2006. We expect to ship
most of our backlog in fiscal year 2007 and the remainder in fiscal year 2008.
The increased backlog compared to September 30, 2005 is due to the addition of
$1.4 million in Astromec backlog and follow on orders from current customers. The
decrease in backlog from June 30, 2006 is due to the high level of shipments in
this quarter compared to new orders received. We do not typically experience
seasonal fluctuations in our new order bookings, but may experience variability
in our new order bookings due to the timing of major new product launches.
Similarly, we do not typically experience seasonal fluctuations in our
shipments and revenues. </p>










<p style='text-align:justify;text-indent:.5in'>We sell our
products using several methods; selling directly to the customer: selling
directly to original equipment manufacturers and selling through a network of
high technology and dental product distributors within North America.
Internationally, the Company has sales agreements with foreign distributors or
sells through the domestic subsidiaries of foreign customers.</p>



<p><b>CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS</b></p>



<p style='text-align:justify;text-indent:.5in'>Our consolidated
financial statements are prepared in accordance with accounting principles
generally accepted in the United States (GAAP). The preparation of our
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues, expenses and
related disclosures. We base our estimates on historical experience and
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates.
The significant accounting policies that are believed to be the most critical
to fully understanding and evaluating the reported financial results include
revenue recognition, warranty reserve, inventory valuations for slow moving
items, impairment of goodwill, and the recovery of deferred income tax assets.</p>



<p align=center style='text-align:center'>-12-</p>

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<hr size=2 width="100%" noshade color=navy align=center>

</div>



<br clear=all
style='page-break-before:always'>










<p style='text-align:justify; text-indent:0.5in'> We recognize sales
and associated cost of sales, upon shipment, FOB origin. There have been
minimal returns for credit, so no reserve for product returns has been
established. </p>



<p style='text-align:justify; text-indent:0.5in'> We determine our
inventory value at the lower of cost (first-in, first-out method) or market
value and calculate a reserve for slow moving items to reflect a reduced
marketability for the item. The reserve is calculated by comparing the
quantity of the item on hand with our prior 12-month sales history. If
inventory on hand for a specific part exceeds an estimated 24 months of usage,
between 20% and 100% of its value may be included in the inventory reserve.
The actual percentage reserved depends on the total quantity on hand, its sales
history, and expected near term sales prospects.</p>



<p style='text-align:justify;text-indent:.5in'>The majority of
our products have a twelve-month warranty. We determine our warranty reserve
based on considering the historical costs to repair warranty eligible products
and by estimating the number and type of products that may be eligible for
warranty return and repair. We calculate our reserve by calculating a cost
estimate based on what products are known to be warranty-eligible, have been
returned and are in process of being repaired and combining it with an expected
cost for units in the field that have a potential to be returned for
warranty-eligible repair. The potential return amount is based on historical
return and repair cost data. At September 30, 2006 we had $321,000 in accrued
warranty reserve. Of this amount, $119,000 was for known repairs in products
returned and in house and $202,000 was for future anticipated costs. </p>



<p style='text-indent:.5in' align="justify">The Company accounts for goodwill
under SFAS No. 142 &quot;Goodwill and Other Intangible Assets.&quot; SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. We have recorded no impairment
charge in 2005 or 2006. We prepare our annual impairment testing on April 1 of
each year. </p>










<p style='text-align:justify; text-indent:0.5in'>
As part of the process of preparing our consolidated financial statements, we
are required to estimate our income taxes in each of the jurisdictions in which
we operate. This process involves estimating the actual current tax
liabilities together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within the consolidated balance sheet. The most significant tax assets
are future deductions from the amortization of intangibles over the next ten
years. Tax assets also result from net operating losses and research and
development tax credits. We must then assess the likelihood that the
deferred tax assets will be recovered from future taxable income and, to the
extent we believe that recovery is not likely, a valuation allowance must be
established. To the extent we establish a valuation allowance or increase
or decrease this allowance in a period, the impact will be included in the tax
provision in the statement of operations.</p>



<p style='text-align:justify; text-indent:0.5in'>
Significant management judgment is required to determine our provision for
income taxes and the recoverability of the deferred tax asset. It is
based on estimates of future taxable income by jurisdiction in which the
Company operates and the period over which the deferred tax assets will be recoverable.
In the event that actual results differ from these estimates or we adjust these
estimates in future periods, a valuation allowance may need to be established
which could result in a tax provision equal to the carrying value of the
deferred tax assets.</p>
<p style='text-align:justify'>
&nbsp;</p>
<p style='text-align:justify'>
&nbsp;</p>



<p align=center style='text-align:center'>-13-</p>

<div class=MsoNormal align=center style='text-align:center'>

<hr size=2 width="100%" noshade color=navy align=center>

</div>



<br clear=all
style='page-break-before:always'>










<b>RESULTS OF OPERATIONS</b><p style='text-autospace:none'><b>For the Three-Month periods
ended September 30, 2006 and 2005</b></p>

<p style="text-indent: 0.5in" align="justify">The following table sets forth for the
periods indicated the percentage of net revenues represented by each item in
our Consolidated Statements of Income. </p>



<div align="center">



<table class=MsoNormalTable border=0 cellpadding=0 width=608
 style='width:75%;margin-left:4.65pt;border-collapse:collapse'>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>(In
  Thousands)</p>
  </td>
  <td nowrap colspan=4 valign=bottom style='border-top:
  1.0pt solid windowtext;border-left:1.0pt solid windowtext;border-bottom:medium none;
  border-right:1.0pt solid black;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>Three Months Ended September 30, </p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap colspan=2 valign=bottom style='border-top:medium none;border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>2006</p>
  </td>
  <td nowrap colspan=2 valign=bottom style='border-top:medium none;border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:1.0pt solid black;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>2005</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-top:1.0pt solid windowtext;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:medium none;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Net
  sales:</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>$&nbsp;&nbsp;&nbsp;
  5,234 </p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>100.0%</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>$&nbsp;&nbsp;&nbsp;
  3,763 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>100.0%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Cost of
  sales</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>
  3,253 </p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-right:medium none; border-top:medium none; border-bottom:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>62.2%</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>
  2,072 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>55.1%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Gross
  Profit</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>
  1,981 </p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>37.8%</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>
  1,691 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>44.9%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">

  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">

  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">

  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Selling,
  general and administrative expenses</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>
  907 </p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>17.3%</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>
  841 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>22.3%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Research
  and development costs</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>
  647 </p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-right:medium none; border-top:medium none; border-bottom:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>12.4%</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>
  442 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>11.7%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Income
  from Operations</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>
  427 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>8.2%</p>
  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>
  408 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>10.8%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">

  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">

  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Net
  interest, royalties and other expense (income)</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>
  47 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>0.9%</p>
  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>
  (27)</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>(0.7%)</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">

  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">

  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Provision
  for Income Taxes</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>
  138 </p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>2.6%</p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-right:medium none; border-top:medium none; border-bottom:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>
  173 </p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>4.6%</p>
  </td>
 </tr>
 <tr style='height:13.5pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Net
  Income</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:2.25pt double windowtext;
  border-right:1.0pt solid windowtext;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  242 </p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-right:medium none; border-top:medium none; border-bottom:2.25pt double windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>4.6%</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:2.25pt double windowtext;
  border-right:1.0pt solid windowtext;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p>$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  262 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:2.25pt double windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in' align="right">
  <p align=right style='text-align:right'>7.0%</p>
  </td>
 </tr>
 <tr style='height:13.5pt'>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
</table>





</div>





<p style='text-align:justify;text-indent:.5in'><b>Net Sales.</b>
Consolidated sales increased from $3,763,000 to $5,234,000 ($1,471,000 or 39%)
for the quarter ended September 30, 2006, compared to the quarter ended
September 30, 2005. Approximately 60% or $916,000 of the increase was due
to the addition of Pro-Dex Astromec. The remainder of the growth was split
between an increase in medical products and other upgrade and repair revenue.
Shipments to dental customers were unchanged at approximately $1.1 million
shipped in the current and comparative quarter last year. Sales to industrial
customers increased $164,000 or 22% from the same quarter in the prior year as
shipments of legacy motion control devices and lab test equipment controls
increased. </p>



<p style='text-align:justify;text-indent:.5in'>Although
selective price increases and decreases were implemented in response to market
conditions, the majority of the sales changes for each product line is due
primarily to changes in sales volume, not the effect of price changes. </p>



<p style='text-align:justify;text-indent:.5in;text-autospace:
none'><b>Gross Profit and Gross Profit Percentage of Sales</b>. Our
consolidated gross profit for the quarter ended September 30, 2006 increased $290,000
or 17% over the same quarter in the previous year due to the increased sales
levels of medical and industrial products and the addition of the Astromec gross
profit. Gross profit as a percentage of sales decreased to 38% for the quarter
ended September 30, 2006 compared to 45% for the quarter ended September 30,
2005. Approximately 5% of the difference is due to lower margins associated
with the Astromec products that have margins in the 20% to 30% range. The
remaining 2% of the reduction was due to the higher warranty costs and
associated manufacturing inefficiencies incurred in our first quarter. Gross
profit and gross profit as a percentage of sales were as follows: </p>



<div align="center">



<table class=MsoNormalTable border=0 cellpadding=0 width=452
 style='width:75%;margin-left:4.65pt;border-collapse:collapse'>
 <tr style='height:12.75pt'>
  <td width=369 nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap colspan=2 valign=bottom style='border-top:
  1.0pt solid windowtext;border-left:1.0pt solid windowtext;border-bottom:medium none;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>Three Months Ended September 30,</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>Increase</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width=369 nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>2006</p>
  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>2005</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>(Decrease)</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width=368 nowrap valign=bottom style='border:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Gross
  Profit</p>
  </td>
  <td nowrap valign=bottom style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$1,981,000</p>
  </td>
  <td nowrap valign=bottom style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$1,691,000</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>17%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td width=368 nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Gross
  Profit Percentage</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>38%</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>45%</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>-16%</p>
  </td>
 </tr>
</table>

</div>

<p align=center style='text-align:center;text-indent:.5in;
text-autospace:none'><b></b></p>

<p align=center style='text-align:center'>-14-</p>

<div class=MsoNormal align=center style='text-align:center'>

<hr size=2 width="100%" noshade color=navy align=center>

</div>



<br clear=all
style='page-break-before:always'>










<p style='text-align:justify;text-indent:.5in;text-autospace:
none'><b>Selling, General and Administrative Costs (S, G&amp;A)</b>. S, G
&amp; A expenses increased to $907,000 for the quarter ended September 30, 2006
from $841,000 for the quarter ended September 30, 2005. The increase in
selling expense is mainly due to expenses increased trade show and advertising
spending of $36,000 and consulting fees of $32,000. The remaining increase of
$15,000 is due to higher commissions and increased bad debt expense. General
and administrative costs were reduced due to $71,000 in lower personnel costs
and professional fees offset by a $32,000 charge as a result of the adoption of
FAS 123 (R). As a percentage of sales, however, the expenses decreased from
22% of sales to 17% of sales. S, G &amp; A costs were as follows:</p>



<div align="center">



<table class=MsoNormalTable border=0 cellpadding=0 width=473
 style='width:75%;margin-left:4.65pt;border-collapse:collapse'>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap colspan=2 valign=bottom style='border-top:
  1.0pt solid windowtext;border-left:1.0pt solid windowtext;border-bottom:medium none;
  border-right:1.0pt solid black;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>Three Months Ended September 30,</p>
  </td>
  <td nowrap valign=bottom style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>Increase</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>2006</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:1.0pt solid windowtext;
  border-right:medium none;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>2005</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>(Decrease)</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Selling</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:right'>$&nbsp;&nbsp; 338,000 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:right'>$&nbsp;&nbsp; 255,000 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>33%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>General
  and administrative</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align="right">$&nbsp;&nbsp;
  569,000 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align="right">$&nbsp;&nbsp;
  586,000 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>-3%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Total S,
  G&amp;A</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$&nbsp;&nbsp; 907,000 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$&nbsp;&nbsp; 841,000 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>8%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>S,
  G&amp;A Percentage of Sales</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>17%</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>22%</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>-22%</p>
  </td>
 </tr>
</table>





</div>





<p style='text-align:justify;text-indent:.5in'><b>Research and
Development Costs</b>. Company-funded research and development expenses
increased $205,000 to $647,000 for the quarter ended September 30, 2006 from $442,000
for the quarter ended September 30, 2005, an increase of 46%. The addition of
Pro-Dex Astromec added $79,000 to the total consolidated research and
development costs, the remainder due to approximately $46,000 in higher
personnel costs and $76,000 for increased independent research, training and
tooling costs in response to the warranty issues and well as enhancement to our
ongoing business. Company-funded research and development costs were as
follows:</p>

<div align="center">

<table class=MsoNormalTable border=0 cellpadding=0 width=521
 style='width:75%;margin-left:4.65pt;border-collapse:collapse'>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap colspan=2 valign=bottom style='border-top:
  1.0pt solid windowtext;border-left:1.0pt solid windowtext;border-bottom:medium none;
  border-right:1.0pt solid black;height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>Three Months Ended September 30,</p>
  </td>
  <td nowrap valign=bottom style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>2006</p>
  </td>
  <td nowrap valign=bottom style='height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>2005</p>
  </td>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>Increase</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Research
  and Development costs</p>
  </td>
  <td nowrap valign=bottom style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$ 647,000 </p>
  </td>
  <td nowrap valign=bottom style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$ 442,000 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>46%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>R &amp; D
  Percentage of Sales</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>12.4%</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>11.7%</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  height:12.75pt; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>5.2%</p>
  </td>
 </tr>
</table>





</div>





<p style='text-align:justify;text-indent:.5in'><b>Operating
Profit and Operating Profit </b><b>Percentage of Sales</b>. Our
consolidated operating profit for the quarter ended September 30, 2006 increased
to $451,000 compared to operating profit of $408,000 for the same quarter in
the previous year. The increase in operating profit was due to the higher
level of sales and lower S, G&amp;A expenses offset by the lower gross margin and
higher engineering expenses. Consequently, operating profit as a percentage of
sales decreased to 9% for the quarter ended September 30, 2006 compared to 11%
for the quarter ended September 30, 2005. Operating profit and margin were as
follows: </p>

<div align="center">

<table class=MsoNormalTable border=0 cellpadding=0 width=468
 style='width:75%;margin-left:4.65pt;border-collapse:collapse'>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap colspan=2 valign=bottom style='border-top:
  1.0pt solid windowtext;border-left:1.0pt solid windowtext;border-bottom:medium none;
  border-right:1.0pt solid black;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>Three Months Ended September 30, </p>
  </td>
  <td nowrap valign=bottom style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>Increase</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>2006</p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>2005</p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>(Decrease)</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Operating
  Profit</p>
  </td>
  <td nowrap valign=bottom style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$451,000</p>
  </td>
  <td nowrap valign=bottom style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$408,000</p>
  </td>
  <td nowrap valign=bottom style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>11%</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Operating
  Profit Percentage</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>9%</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>11%</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>-21%</p>
  </td>
 </tr>
</table>

</div>

<p style='text-align:justify;text-indent:.5in;text-autospace:
none'><b>Royalties and Other Income. </b>The Company recognized $7,000 in
royalty income in the three months ended September 30, 2006, compared to $11,000
in the prior year's quarter. </p>

<p style='text-align:justify;text-indent:.5in;text-autospace:
none'><b>Net Interest Income/Expense. </b>Net interest expense for the quarter
ending September 30, 2006 was $54,000 compared to interest income of $22,000 in
the quarter ended September 30, 2005, due to the reduction in cash and
assumption of debt related to the asset acquisitions completed in fiscal year
2006.</p>










<p style='text-align:justify;text-indent:.5in;text-autospace:
none'><b>Income Tax Provision</b>. Our estimated effective combined federal and
state tax rate on income from operations for the quarter ended September 30,
2006 was 36% and was 40% for the quarter ended September 30, 2005. The
difference is due to the use of state tax credits in 2006.</p>



<p style='text-align:justify;text-indent:.5in;text-autospace:
none'><b>Net Income.</b> Our net income for the three months ended September
30, 2006 was $242,000 or $0.03 per share on a basic and $0.02 per share on a diluted
basis, as compared to a net income of $262,000 or $0.03 per share on a basic
and diluted basis for the three months ended September 30, 2005.</p>







<p align=center style='text-align:center'>&nbsp;</p>
<p align=center style='text-align:center'>-15-</p>

<div class=MsoNormal align=center style='text-align:center'>

<hr size=2 width="100%" noshade color=navy align=center>

</div>



<br clear=all
style='page-break-before:always'>










<p style='text-autospace:none'><b>Liquidity and Capital
Resources</b></p>

<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>The following table presents selected financial information for the
comparative period last year and the year ended June 30, 2006:</p>

<div align="center">

<table class=MsoNormalTable border=0 cellpadding=0 width=598
 style='width:85%;margin-left:4.65pt;border-collapse:collapse'>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap colspan=2 valign=bottom style='border-top:
  1.0pt solid windowtext;border-left:1.0pt solid windowtext;border-bottom:medium none;
  border-right:1.0pt solid black;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>As of September 30,</p>
  </td>
  <td nowrap valign=bottom style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>Year Ending</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>2006</p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>2005</p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>June 30, 2006</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Cash and
  cash equivalents</p>
  </td>
  <td nowrap valign=bottom style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$295,000 </p>
  </td>
  <td nowrap valign=bottom style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$2,893,000 </p>
  </td>
  <td nowrap valign=bottom style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$358,000 </p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Working
  Capital&#185;</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$6,193,000 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$8,604,000 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$6,087,000 </p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Credit
  Line outstanding balance</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$400,000 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$0 </p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$900,000 </p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Tangible
  book value/common share&#178;</p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$0.83 </p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$1.09 </p>
  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$0.81 </p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Number of
  days of sales outstanding (DSO) in</p>
  </td>
  <td nowrap valign=bottom style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-left:1.0pt solid windowtext; border-right:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-top:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>accounts receivable at end of quarter&#179;</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>59</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>70</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:medium none;border-bottom:1.0pt solid windowtext;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>66</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-left:medium none; border-top:medium none; border-bottom:medium none; border-right:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap colspan=2 valign=bottom style='border-top:
  1.0pt solid windowtext;border-left:1.0pt solid windowtext;border-bottom:medium none;
  border-right:1.0pt solid black;padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>Three Months Ended September 30, </p>
  </td>
  <td nowrap valign=bottom style='border-top:1.0pt solid windowtext;
  border-left:medium none;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>Year Ending</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>

  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>2006</p>
  </td>
  <td nowrap valign=bottom style='border-right:medium none; border-top:medium none; border-bottom:medium none; border-left:1.0pt solid windowtext; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>2005</p>
  </td>
  <td nowrap valign=bottom style='border-top:medium none;
  border-left:1.0pt solid windowtext;border-bottom:medium none;border-right:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=center style='text-align:center'>June 30, 2006</p>
  </td>
 </tr>
 <tr style='height:12.75pt'>
  <td nowrap valign=bottom style='border:1.0pt solid windowtext;
  padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p>Net cash
  provided by operations</p>
  </td>
  <td nowrap valign=bottom style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$691,000 </p>
  </td>
  <td nowrap valign=bottom style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$358,000 </p>
  </td>
  <td nowrap valign=bottom style='border-right:1.0pt solid windowtext; border-top:1.0pt solid windowtext; border-bottom:1.0pt solid windowtext; border-left:medium none; padding-left:.85pt; padding-right:.85pt; padding-top:0in; padding-bottom:0in'>
  <p align=right style='text-align:right'>$55,000 </p>
  </td>
 </tr>
</table>





</div>





<p style='margin-left:.5in;text-align:justify;text-autospace:
none'><sup>1</sup> Working Capital = Ending Current Assets balance less Ending Current
Liabilities balance.</p>



<p style='margin-left:.5in;text-align:justify;text-autospace:
none'><sup>2</sup> Tangible book value/common share<sup> </sup>= (Total
shareholders' equity - Net intangible asset (patents) - Goodwill) / (basic
outstanding shares).</p>

<p style='margin-left:.5in;text-align:justify;text-autospace:
none'><sup>3</sup> DSO = Ending Net Accounts Receivable balance / (Previous
Quarter Sales / 91).</p>



<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>Our working capital at September 30, 2006 decreased to $6.2 million
compared to $8.6 million at September 30, 2005 and increased from $6.1 million
at June 30, 2006. Cash flow provided by operations was $691,000 in the
quarter ended September 30, 2006 compared to $358,000 for the quarter ended
September 30, 2005. Cash was provided through continued profitability and
improvements in accounts receivable levels offset by increases in inventory.
Management believes that our working capital needs over the next twelve months
can be adequately supported by current operations.</p>



<p style='text-align:justify;text-indent:.5in'>In October 2005,
we renewed our credit facility with Wells Fargo Bank N.A. (&quot;Wells Fargo&quot;) for
borrowings up to $2,000,000. Its terms require monthly interest payments
at either the prime rate of interest (8.25% at September 30, 2006), or LIBOR
plus 2.50% (7.875% (one month) to 8.0% (three months) at September 30, 2006),
at our discretion, based on outstanding borrowings with no minimum interest
charge. The outstanding borrowings are secured by all assets of the
Company. There was $400,000 outstanding balance under the terms of this credit
facility as of September 30, 2006. The total remaining eligible additional
borrowing capacity at September 30, 2006 was $1,600,000.</p>



<p align=center style='text-align:center'>-16-</p>

<div class=MsoNormal align=center style='text-align:center'>

<hr size=2 width="100%" noshade color=navy align=center>

</div>



<br clear=all
style='page-break-before:always'>










<p style='text-align:justify;text-indent:.5in'>In January 2006,
we extended the credit facility and entered into a four year term note with
Wells Fargo for $1,000,000. Its terms require monthly interest payments
at either the prime rate of interest (8.25% at June 30, 2006), or LIBOR plus
2.50% (7.875% (one month) to 8.0% (three months) at June 30, 2006), at our
discretion, based on outstanding borrowings. The principal payments on
the note are $20,833 per month. The outstanding borrowings are secured by all
assets of the Company. There was an outstanding balance of $834,000 under the
terms of this term note as of September 30, 2006. </p>



<p style='text-align:justify;text-indent:.5in'>In March 2006,
we entered into a ten year mortgage with Union Bank of California for
$1,650,000. The terms of the mortgage require monthly interest payments
at a fixed rate of 6.73% based on outstanding borrowings. The principal
payments on the mortgage note are based on a 25 year amortization of the note
and are $11,379 per month beginning May 1, 2006. The outstanding borrowings
are secured by our Carson City land and building. There was $1,639,000
outstanding balance under the terms of this mortgage as of September 30,
2006.</p>



<p style='margin-top:6.0pt;text-align:justify;text-indent:.5in'>There
are certain financial and non-financial covenants that we must meet to be in
compliance with the terms of the October 2005 Wells Fargo credit facility, as
amended, and the Union Bank mortgage. At September 30, 2006, we were in
compliance with all such covenants.</p>



<p style='text-align:justify;text-indent:.5in'>At September 30,
2006, we had cash and cash equivalents of $295,000. We believe that our
cash and cash equivalents on hand, together with cash flows from operations, if
any, and amounts available under the credit facility will be sufficient to meet
our working capital and capital expenditure requirements for the next year. </p>



<p style='text-align:justify;text-indent:.5in'>In September
2002, our Board of Directors authorized the repurchase on the open market of up
to 500,000 shares at a share price no greater than $1.25 of our outstanding
Common Stock, subject to compliance with applicable laws and regulations.
There is no requirement that we repurchase all or any portion of such shares.
The maximum total value of the repurchase is not to exceed $500,000. This
repurchase is to be financed with cash generated by operations. From the
inception of the repurchase authorization through the year-end date of June 30,
2003, we repurchased 75,700 shares of Common Stock for $43,741, at an average
price of $0.58 per share. No additional shares were repurchased in fiscal year
2004, 2005, and 2006 or to date during fiscal year 2007.</p>

<p style='text-autospace:none'><b>SUBSEQUENT EVENTS</b></p>



<p style='text-align:justify;text-indent:.5in'>On
November 1, 2006, the credit facility with Wells Fargo was renewed again for
borrowings up to $2,000,000. The credit facility expires in October 2007
and its terms require monthly interest payments at the prime rate of interest
(8.25% at September 30, 2005); or LIBOR plus 2.50% (6.36% (one month) to 6.57%
(three months) at September 30, 2005), based on outstanding borrowings with no
minimum interest charge. The outstanding borrowings are secured by all
assets of and guaranteed by the Company. </p>



<p style='text-align:justify;text-indent:.5in'>There are
certain financial and non-financial covenants that we must meet to be in
compliance with the terms of the credit facility. At November 14, 2006, we
were in compliance with all such covenants.</p>

<p style='text-align:justify;line-height:normal'><b>RISK FACTORS</b></p>

<p style='text-align:justify;line-height:normal; text-indent:0.5in'> In
addition to the Risk Factor set forth below, we refer you to the risk factors
and cautionary language contained in our reports filed with the Securities and
Exchange Commission from time to time, including, but not limited to, those
risks and uncertainties which may be listed in our Annual Report on Form 10-KSB
and our most recent Quarterly Reports on Form 10-QSB, each as filed with the
Securities and Exchange Commission.</p>

<p style='text-align:justify;line-height:normal'><b>The loss
of a major customer may negatively impact our revenue and earnings.</b></p>
<p style='text-align:justify;line-height:normal; text-indent:0.5in'>On October 30, 2006, one of our major customers advised us that it plans to
internally manufacture two
of the products that we developed for
them and have manufactured of the past four years.
This decision is consistent with this customer's general strategy of vertical
integration and their targeted time frame for the transition is January 1,
2008. During the fiscal years ended June 30, 2005 and 2006, the products being transitioned accounted for sales of $1,352,000 and$1,238,000, respectively
(constituting 9.7% and 7.2%, respectively, of revenues during such periods). At this point, the customer has expressed its
intention to purchase some of the major components for these products from
Pro-Dex, although they are under no obligation to do so. Such major
components could account for as much as 50% of the price of the manufactured
product. No existing purchase orders have been cancelled for these two
products as no backlog existed for them beyond January 1, 2008 and we have been
informed by the customer that they intend to place a blanket purchase order for
delivery of the product during the calendar year 2007. The customer also
expressed an interest in working with us on the development of a new generation
of product to replace the product they intend to manufacture. </p>

<p align=center style='text-align:center'>-17-</p>

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style='page-break-before:always'>










<p style='text-align:justify; text-indent:0.5in'>
On November 9, 2006, we refunded the development fee on a separate
project to the same major customer due to our determination that we could not
achieve the performance required of the product being developed. In
addition to the refunded fee of $83,600, we wrote off $66,000 worth of
capitalized engineering costs and inventory associated with the project, and
eliminated $386,000 worth of orders for this product from our backlog. We
continue to manufacture the product that was to be replaced by the results of
this development project and currently have orders of $487,000 of this product
deliverable over the next eight months. </p>



<p style='text-align:justify;text-indent:.5in'>It is our intention to replace such lost business
with orders from other customers as well as orders for different product types,
but there is no assurance that we will be
successful in our efforts to do so. Accordingly, the loss of these manufacturing orders may, in the future, have a
material adverse effect upon our revenue and earnings until such time as we are
able to replace the lost business.</p>



<p style='text-align:justify;line-height:normal'><b>SIGNIFICANT ACCOUNTING POLICIES</b></p>

<p style='text-align:justify;text-indent:.5in;line-height:
normal'>We are subject to the revised requirements of the Statement of
Financial Accounting Standards (&quot;SFAS&quot;) No. 123 (R) <i>Accounting for
Stock-Based Compensation</i> as revised December 2004. This standard
establishes the accounting standards for equity compensation, and will apply to
us in the recognition of the cost of stock options awarded based on the
grant-date fair value of those awards. As a small business issuer, the
statement is effective for us at the beginning of the first fiscal year that
begins after December 15, 2005. Accordingly we began to report the expense of
vested stock options in our report for the quarter ending September 30, 2006.</p>

<p style='text-align:justify;text-indent:.5in;line-height:
normal'>We are subject to the revised requirements of the SFAS No. 151 <i>Inventory
Costs - an amendment of ARB No. 43, Chapter 4</i> as revised November 2004.
This standard amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing,&quot;
to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling cost, and wasted material (spoilage). This standard is
effective for us at the beginning of the first fiscal year that begins after
June 15, 2005, which was our fiscal year ending June 30, 2006. This statement
has not had a material effect on our operations or reporting.</p>










<p style='text-align:justify;text-indent:.5in;line-height:
normal'>In March2005, the FASB issued
Interpretation No.47, <em>Accounting for Conditional Asset Retirement
Obligations-an interpretation of FASB Statement No.143 </em>(&quot;FIN 47&quot;).
FIN 47 clarifies the term conditional asset retirement obligation and requires
a liability to be recorded if the fair value of the obligation can be
reasonably estimated. The types of asset retirement obligations that are covered
by FIN 47 are those for which an entity has a legal obligation to perform an
asset retirement activity; however the timing and/or method of settling the
obligation are conditional on a future event that may or may not be within the
control of the entity. FIN 47 also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 is effective for fiscal years ending after
December15, 2005. The Company adopted the provisions of FIN 47 during
fiscal 2006. No conditional asset retirement obligations were recognized and,
accordingly, the adoption of FIN 47 had no effect on the Company's consolidated
financial statements. </p>

<p style='text-align:justify;text-indent:.5in;line-height:
normal'>In May2005, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
No.154, <i>Accounting Changes and Error Corrections, a replacement of APB
Opinion No.20, Accounting Changes, and Statement No.3, Reporting
Accounting Changes in Interim Financial Statements </i>(SFAS 154). SFAS 154
provides guidance on the accounting for and reporting of accounting changes and
error corrections. It establishes, unless impracticable, retrospective
application as the required method for reporting a change in accounting
principle in the absence of explicit transition requirements specific to the
newly adopted accounting principle. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The Company does not expect the adoption of SFAS 154 will have a
material effect on its consolidated financial position, consolidated results of
operations, or liquidity.</p>
<p style='text-align:center;line-height:
normal'>-18-</p>

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<p style='text-align:justify;text-indent:.5in;line-height:
normal'>In June 2006, the FASB issued FIN No.48, <i>Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No.109,
</i>which clarifies the accounting for uncertainty in income taxes recognized
in an enterprise's financial statements in accordance with FASB Statement
No.109, <i>Accounting for Income Taxes. </i>The interpretation prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in
a tax return. FIN No.48 requires recognition of tax benefits that satisfy
a greater than 50% probability threshold. FIN No.48 also provides
guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. FIN No.48 is effective
for us beginning July1, 2007. The Company does not expect the adoption of
FIN No.48 will have a material effect on its consolidated financial
position, consolidated results of operations, or liquidity.</p>



<p style='text-autospace:none'><b>MAJOR CUSTOMERS</b></p>

<p style='text-align:justify;text-indent:.5in;text-autospace:
none'>The Company had two major customers (defined as a customer that
represents greater than 10% of the Company's total revenues) in the three
months ended September 30, 2006 and 2005. Net sales to these customers during
the three months ended September 30, 2006 amounted to $1,258,000 and $719,000,
respectively. At September 30, 2006, the accounts receivable included balances
of $387,000 and $244,000 respectively due from these two customers. Only one of
the major customers was considered major in the quarter ending September 30,
2005, and had sales of $1,374,000 and an accounts receivable balance of
$1,255,000 at September 30, 2005.</p>

<p style='text-align:justify;text-autospace:none'><b>Item 3. Controls
and Procedures</b></p>

<p style='text-align:justify;text-indent:.5in'> The Chief
Executive Officer and Chief Financial Officer (the principal executive officer
and principal financial officer, respectively) conducted an evaluation of the
design and operation of our &quot;disclosure controls and procedures&quot; (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (&quot;Exchange Act&quot;)). Based on that evaluation for the quarter ended
September 30, 2006, the Chief Executive Officer and Chief Financial Officer
concluded that as a result of the position of Chief Executive Officer and Chief
Financial Officer being held by the same individual the disclosure controls and
procedures are not effective to ensure that information required to be
disclosed by use in the reports filed or submitted by us under the Exchange Act
is accumulated, recorded, processed, summarized and reported to management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, and to allow timely decisions regarding whether or not disclosure
is required.</p>










<p style='text-align:justify;text-indent:.5in'>During the
quarter ended September 30, 2006, there was a change in our internal controls
over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the
Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting. From
April 2006 to August 2006 the positions of Chief Executive Officer and Chief
Financial Officer were held by the same individual. As a result, our internal
controls over financial information were deemed not to be effective. In
September 2006, the new Chief Executive Officer assumed his position on a
permanent basis and the Chief Financial Officer resigned the Chief
Executive Officer position. On September 30, 2006, the positions of Chief
Executive Officer and Chief Financial Officer are being held by two separate
individuals, our internal controls over financial reporting are effective once
again. </p>



<p style='text-align:justify'>&nbsp;</p>
<p style='text-align:justify'>&nbsp;</p>
<p style='text-align:center'>-19-</p>

<p align=center style='text-align:center'><u></u></p>

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<p style='text-align:justify'><b>PART II</b></p>

<p align=center style='text-align:center;text-autospace:none'><b>OTHER
INFORMATION</b></p>



<table border="0" width="100%" id="table1" cellspacing="0" cellpadding="0">
	<tr>
		<td valign="top" width="10%"><b>Item 1.</b></td>
		<td colspan="3" valign="top">



<p style='text-autospace:none'><b>Legal Proceedings </b></p>



		</td>
	</tr>
	<tr>
		<td valign="top" width="10%">&nbsp;</td>
		<td colspan="3" valign="top">&nbsp;&nbsp; </td>
	</tr>
	<tr>
		<td valign="top" width="10%">&nbsp;</td>
		<td colspan="3" valign="top">



<p style='text-align:justify;text-autospace:
none'>The Company is a party to various legal
proceedings incidental to its business, none of which are considered by the
Company to be material at this time.</p>

		</td>
	</tr>
	<tr>
		<td valign="top" width="10%">&nbsp;</td>
		<td colspan="3" valign="top">



&nbsp;

		</td>
	</tr>
	<tr>
		<td valign="top" width="10%"> <b>Item 2.</b></td>
		<td colspan="3" valign="top">

<p style='margin-top:0in;text-align:justify'> <b>Unregistered Sales of
Equity Securities and Use of Proceeds. <br>
</b>None.</p></td>
	</tr>
	<tr>
		<td valign="top" width="10%">&nbsp;</td>
		<td colspan="3" valign="top">&nbsp;</td>
	</tr>
	<tr>
		<td valign="top" width="10%"> <b>Item 3.</b></td>
		<td colspan="3" valign="top">

<p style='margin-top:0in;text-align:justify'> <b>Defaults Upon Senior
Securities. <br>
</b>None.</p></td>
	</tr>
	<tr>
		<td valign="top" width="10%">&nbsp;</td>
		<td colspan="3" valign="top">&nbsp;</td>
	</tr>
	<tr>
		<td valign="top" width="10%"> <b>Item 4.</b></td>
		<td colspan="3" valign="top">

<p style='margin-top:0in;text-align:justify'> <b>Submissions of Matters
to a Vote of Securities Holders. <br>
</b>None.</p></td>
	</tr>
	<tr>
		<td valign="top" width="10%">&nbsp;</td>
		<td colspan="3" valign="top">&nbsp;</td>
	</tr>
	<tr>
		<td valign="top" width="10%"> <b>Item 5.</b></td>
		<td colspan="3" valign="top">

<p style='margin-top:0in;text-align:justify'> <b>Other Information. <br>
</b>None.</p></td>
	</tr>
	<tr>
		<td valign="top" width="10%">&nbsp;</td>
		<td colspan="3" valign="top">&nbsp;</td>
	</tr>
	<tr>
		<td valign="top" width="10%"><b> Item 6.</b></td>
		<td colspan="3" valign="top">

<p style='margin-top:0in;text-align:justify'><b> Exhibits. </b></p>

		</td>
	</tr>
	<tr>
		<td valign="top" width="10%">&nbsp;</td>
		<td colspan="3" valign="top">&nbsp;</td>
	</tr>
	<tr>
		<td valign="top" width="10%">&nbsp;</td>
		<td colspan="3" valign="top"><u>Exhibits</u>:</td>
	</tr>
	<tr>
		<td valign="top" width="10%">&nbsp;</td>
		<td colspan="3" valign="top">&nbsp;</td>
	</tr>
	<tr>
		<td valign="top" width="10%">&nbsp;</td>
		<td valign="top" width="1%">&nbsp;</td>
		<td width="5%" valign="top">31.1 </td>
		<td width="83%" valign="top">
		<p align="justify">Certifications of Chief Executive Officer Required by
		Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as
		Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002</td>
	</tr>
	<tr>
		<td valign="top" width="10%">&nbsp;</td>
		<td colspan="3" valign="top">&nbsp;</td>
	</tr>
	<tr>
		<td valign="top" width="10%">&nbsp;</td>
		<td valign="top" width="1%">&nbsp;</td>
		<td width="5%" valign="top">31.2</td>
		<td width="83%" valign="top">
		<p align="justify">Certifications of Chief Financial Officer Required by
		Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as
		Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002</td>
	</tr>
	<tr>
		<td valign="top" width="10%">&nbsp;</td>
		<td colspan="3" valign="top">&nbsp;</td>
	</tr>
	<tr>
		<td valign="top" width="10%">&nbsp;</td>
		<td valign="top" width="1%">&nbsp;</td>
		<td width="5%" valign="top">32 </td>
		<td width="83%" valign="top">
		<p align="justify">Certification of the Chief Executive Officer and
		Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002</td>
	</tr>
</table>

<p>SIGNATURES </p>

<p style='text-indent:.5in'>In
accordance with 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.</p>



<table class=MsoNormalTable border=0 cellspacing=0 cellpadding=0 width=684
 style='width:513.0pt;border-collapse:collapse'>
 <tr>
  <td width=306 valign=top style='width:229.5pt;padding:0in 0in 0in 0in'>
  <p>Date: November 14, 2006</p>

  <p>PRO-DEX INC. </p>
  </td>
  <td width=378 valign=top style='width:283.5pt;padding:0in 0in 0in 0in'>
  <p>Date: November 14, 2006</p>

  <p>PRO-DEX INC. </p>
  </td>
 </tr>
 <tr>
  <td width=306 valign=top style='width:229.5pt;padding:0in 0in 0in 0in'>
  <p>By: / s / Mark Murphy </p>
  </td>
  <td width=378 valign=top style='width:283.5pt;padding:0in 0in 0in 0in'>
  <p>By: / s / Jeffrey J.
  Ritchey </p>
  </td>
 </tr>
 <tr>
  <td width=306 valign=top style='width:229.5pt;padding:0in 0in 0in 0in'>

  </td>
  <td width=378 valign=top style='width:283.5pt;padding:0in 0in 0in 0in'>

  &nbsp;

  </td>
 </tr>
 <tr>
  <td width=306 valign=top style='width:229.5pt;padding:0in 0in 0in 0in'>
  <p>Mark Murphy</p>
  </td>
  <td width=378 valign=top style='width:283.5pt;padding:0in 0in 0in 0in'>
  <p>Jeffrey J. Ritchey </p>
  </td>
 </tr>
 <tr>
  <td width=306 valign=top style='width:229.5pt;padding:0in 0in 0in 0in'>
  <p>Chief Executive Officer</p>
  </td>
  <td width=378 valign=top style='width:283.5pt;padding:0in 0in 0in 0in'>
  <p>Secretary and Chief
  Financial Officer<br>
	(Principal Financial and
  Accounting Officer)</p>
  </td>
 </tr>
</table>



<p align=center style='text-align:center'>&nbsp;</p>
<p align=center style='text-align:center'><b>End of Filing</b></p>
<p align=center style='text-align:center'>-20-</p>

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<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>2
<FILENAME>ex31-1.htm
<TEXT>
<html>

<head>
<title>EXHIBIT 31.1</title>
</head>

<body>












<p>&nbsp;</p>
<p><b>EXHIBIT 31.1 </b></p>

<p align=center style='text-align:center'><b><u>CERTIFICATIONS</u></b></p>



<p><font size="2">I, Mark Murphy, certify that:</font></p>



<table border="0" width="100%" id="table1" cellspacing="3" cellpadding="5">
	<tr>
		<td width="4%" valign="top"><font size="2">1.</font></td>
		<td colspan="2" valign="top">



<p style='text-align:justify;'><font size="2">I have reviewed this Form 10-QSB of
Pro-Dex, Inc.;</font></p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top"><font size="2">2.</font></td>
		<td colspan="2" valign="top">



<p style='text-align:justify;'><font size="2">Based on my knowledge, this quarterly
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 quarterly report; </font> </p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top"><font size="2">3.</font></td>
		<td width="94%" colspan="2" valign="top">



<p style='text-align:justify;'><font size="2">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; </font> </p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top"><font size="2">4.</font></td>
		<td width="94%" colspan="2" valign="top">



<p style='text-align:justify;'><font size="2">The registrant's other certifying officer(s) 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)) [language omitted pursuant to SEC release 34-47986] for the
registrant and have:</font></p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top">&nbsp;</td>
		<td width="2%" valign="top">
		<p align="justify"><font size="2">a)</font></td>
		<td width="92%" valign="top">



<p style='text-align:justify;'><font size="2">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;</font></p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top">&nbsp;</td>
		<td width="2%" valign="top">
		<p align="justify"><font size="2">b)</font></td>
		<td width="92%" valign="top">



<p style='text-align:justify;'><font size="2">[Omitted pursuant to SEC
Release 34-47986];</font></p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top">&nbsp;</td>
		<td width="2%" valign="top">
		<p align="justify"><font size="2">c)</font></td>
		<td width="92%" valign="top">



<p style='text-align:justify;'><font size="2">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</font></p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top">&nbsp;</td>
		<td width="2%" valign="top">
		<p align="justify"><font size="2">d)</font></td>
		<td width="92%" valign="top">



<p style='text-align:justify;'><font size="2">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</font></p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top"><font size="2">5.</font></td>
		<td width="94%" colspan="2" valign="top">



<p style='text-align:justify;'><font size="2">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 registrant's board of directors (or persons performing the
equivalent functions):</font></p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top">&nbsp;</td>
		<td width="2%" valign="top">
		<p align="justify"><font size="2">a)</font></td>
		<td width="92%" valign="top">



<p style='text-align:justify;'><font size="2">all significant
deficiencies and material weaknesses in the design or operation of internal
controls over financial reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and report financial
information; and </font> </p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top">&nbsp;</td>
		<td width="2%" valign="top">
		<p align="justify"><font size="2">b)</font></td>
		<td width="92%" valign="top">



<p style='text-align:justify;'><font size="2">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.</font></p>





		</td>
	</tr>
</table>





<p>Date: November 14, 2006</p>

<p style="margin-left: 3.75in"> <u>/s/
 MARK MURPHY&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<br>
</u>Mark Murphy<br>
Chief
Executive Officer</p>

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</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>3
<FILENAME>ex31-2.htm
<TEXT>
<html>

<head>
<title>EXHIBIT 31.2</title>
</head>

<body>










<p>&nbsp;</p>
<p><b>EXHIBIT
31.2 </b></p>

<p align=center style='text-align:center'><b><u>CERTIFICATIONS</u></b></p>

<p>I, Jeffrey J. Ritchey,
certify that: </p>



<table border="0" width="100%" id="table1" cellspacing="3" cellpadding="5">
	<tr>
		<td width="4%" valign="top"><font size="2">1.</font></td>
		<td colspan="2" valign="top">



<p style='text-align:justify;'><font size="2">I have reviewed this Form 10-QSB of
Pro-Dex, Inc.;</font></p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top"><font size="2">2.</font></td>
		<td colspan="2" valign="top">



<p style='text-align:justify;'><font size="2">Based on my knowledge, this quarterly
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 quarterly report; </font> </p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top"><font size="2">3.</font></td>
		<td width="94%" colspan="2" valign="top">



<p style='text-align:justify;'><font size="2">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; </font> </p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top"><font size="2">4.</font></td>
		<td width="94%" colspan="2" valign="top">



<p style='text-align:justify;'><font size="2">The registrant's other certifying officer(s) 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)) [language omitted pursuant to SEC release 34-47986] for the
registrant and have:</font></p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top">&nbsp;</td>
		<td width="2%" valign="top">
		<p align="justify"><font size="2">a)</font></td>
		<td width="92%" valign="top">



<p style='text-align:justify;'><font size="2">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;</font></p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top">&nbsp;</td>
		<td width="2%" valign="top">
		<p align="justify"><font size="2">b)</font></td>
		<td width="92%" valign="top">



<p style='text-align:justify;'><font size="2">[Omitted pursuant to SEC
Release 34-47986];</font></p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top">&nbsp;</td>
		<td width="2%" valign="top">
		<p align="justify"><font size="2">c)</font></td>
		<td width="92%" valign="top">



<p style='text-align:justify;'><font size="2">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</font></p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top">&nbsp;</td>
		<td width="2%" valign="top">
		<p align="justify"><font size="2">d)</font></td>
		<td width="92%" valign="top">



<p style='text-align:justify;'><font size="2">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</font></p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top"><font size="2">5.</font></td>
		<td width="94%" colspan="2" valign="top">



<p style='text-align:justify;'><font size="2">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 registrant's board of directors (or persons performing the
equivalent functions):</font></p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top">&nbsp;</td>
		<td width="2%" valign="top">
		<p align="justify"><font size="2">a)</font></td>
		<td width="92%" valign="top">



<p style='text-align:justify;'><font size="2">all significant
deficiencies and material weaknesses in the design or operation of internal
controls over financial reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and report financial
information; and </font> </p>



		</td>
	</tr>
	<tr>
		<td width="4%" valign="top">&nbsp;</td>
		<td width="2%" valign="top">
		<p align="justify"><font size="2">b)</font></td>
		<td width="92%" valign="top">



<p style='text-align:justify;'><font size="2">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.</font></p>





		</td>
	</tr>
</table>





<p>Date: November 14, 2006</p>
<p style="margin-left: 3.75in">&nbsp;<u>/s/
 JEFFREY J. RITCHEY&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<br>
</u>Jeffrey
J. Ritchey<br>
Chief
Financial Officer</p>



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<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>4
<FILENAME>ex32.htm
<TEXT>
<html>

<head>
<title>EXHIBIT 32</title>
</head>

<body>












<p>&nbsp;</p>
<p><b>EXHIBIT 32</b></p>





<p align=center style='margin-top:0in;text-align:center'><b>CERTIFICATIONS
OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER<br>
PURSUANT
TO 18 U.S.C. SECTION 1350, <br>
AS ADOPTED PURSUANT TO <br>
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002</b></p>

<p align=center style='margin-top:0in;text-align:center'><b>Certifications
of Chief Executive Officer and Chief Financial Officer</b></p>



<p style='margin-top:0in;text-align:justify; text-indent:0.5in'>In connection with the
quarterly report on Form 10-QSB of Pro-Dex Inc. (the &quot;Company&quot;) for the
quarterly period ended September 30, 2006 (the &quot;Report&quot;), the undersigned
hereby certify in their capacities as Chief Executive Officer and Chief
Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:</p>

<p style='text-align:justify; text-indent:0.5in'>1. The Report fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and</p>

<p style='text-align:justify; text-indent:0.5in'>2. The information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.</p>



<table border="0" width="100%" id="table1" cellspacing="0" cellpadding="0">
	<tr>
		<td width="335" nowrap>Dated: November 14, 2006 </td>
		<td nowrap>By:<u>
/s/  MARK MURPHY  </u></td>
	</tr>
	<tr>
		<td width="335" nowrap>&nbsp;</td>
		<td nowrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Mark Murphy</td>
	</tr>
	<tr>
		<td width="335" nowrap>&nbsp;</td>
		<td nowrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Chief
Executive Officer and President</td>
	</tr>
	<tr>
		<td width="335" nowrap>&nbsp;</td>
		<td nowrap>&nbsp; </td>
	</tr>
	<tr>
		<td width="335" nowrap>&nbsp;</td>
		<td nowrap>&nbsp; </td>
	</tr>
	<tr>
		<td width="335" nowrap>Dated: November 14, 2006 </td>
		<td nowrap>By:<u>
/s/  JEFFREY J. RITCHEY </u></td>
	</tr>
	<tr>
		<td width="335" nowrap>&nbsp;</td>
		<td nowrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Jeffrey
J. Ritchey</td>
	</tr>
	<tr>
		<td width="335" nowrap>&nbsp;</td>
		<td nowrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Chief Financial Officer</td>
	</tr>
</table>
<p> &nbsp;</p>



<p>A signed
original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signatures that appear
in typed form within the electronic version of this written statement required
by Section 906, has been provided to the Company and will be retained by the
Company and Furnished to the Securities and Exchange Commission or its staff
upon request.<u><br>
<br>
</u></p>





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