Cautionary Statement

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Information in this Item 2, "Management's Discussion of Financial Condition and Results of Operations," and elsewhere in this 10-Q that does not consist of historical facts, are "forward-looking statements." Statements accompanied or qualified by, or containing, words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements and, as such, are not a guarantee of future performance. The statements involve factors, risks and uncertainties, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements. Risks and uncertainties can include, among others, fluctuations in general business cycles and changing economic conditions; changing product demand and industry capacity; increased competition and pricing pressures; advances in technology that can reduce the demand for the Company's products, as well as other factors, many or all of which may be beyond the Company's control. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results. The Company disclaims any obligation to release publicly any updates or revisions to the forward-looking statements herein to reflect any change in the Company's expectations with regard thereto, or any changes in events, conditions or circumstances on which any such statement is based.

Results of Operations

A summary of the period to period changes in the principal items included in the
condensed consolidated statements of income is shown below:

Summary comparison of the three months ended August 31, 2008 and August 31, 2007
                                                                                      Increase /
                                                                                      (Decrease)
                                                                        Sales, net  $   395,000
                                                                Cost of goods sold  $   805,000
                                      Selling, general and administrative expenses  $    (26,000)
                                                                Other expense, net  $    (45,000)
                    Income before provision for income taxes, equity in net income
                                  of affiliate and minority stockholder's interest  $   (338,000)
                                                        Provision for income taxes  $   (134,000)
                                                                        Net income  $   (200,000)


Sales under certain fixed-price contracts, requiring substantial performance
over several periods prior to commencement of deliveries, are accounted for
under the percentage-of-completion method of accounting whereby revenues are
recognized based on estimates of completion prepared on a ratio of cost to total
estimated cost basis.  Costs include all material and direct and indirect
charges related to specific contracts.

Adjustments to cost estimates are made periodically and any losses expected to
be incurred on contracts in progress are charged to operations in the period
such losses are determined.  However, any profits expected on contracts in
progress are recognized over the life of the contract.

For financial statement presentation purposes, the Company nets progress
billings against the total costs incurred on uncompleted contracts.  The asset,
"costs and estimated earnings in excess of billings," represents revenues
recognized in excess of amounts billed.  The liability, "billings in excess of
costs and estimated earnings," represents billings in excess of revenues
recognized.

31, 2007.)

                                  Three months ended                   Change
                              August 31,     August 31,      Increase /       Percent
                                2008            2007        (Decrease)        Change
               Net Revenue   $  4,803,000    $ 4,408,000    $   395,000         9%
             Cost of sales     3,524,000      2,719,000         805,000        30%
              Gross profit   $  1,279,000    $ 1,689,000    $  (410,000)          -24%
 †††as a percentage of net      27%             38%
                  revenues

The Company's consolidated results of operations showed a 9% increase in net revenues and a decrease in net income of 57%. Revenues recorded in the current period for long-term construction projects were 19% less than the level recorded in the prior year. Revenues recorded in the current period for other-than long-term construction projects (non-projects) were up approximately $839,000 or 41% over the level recorded in the prior year. This increase is primarily in sales of products to customers in aerospace and defense related fields and industrial customers. Gross profit decreased by 24%. The gross profit as a percentage of net revenues for the current and prior year periods was 27% and 38%. This fluctuation is attributable to a.) one large, domestic project that has a very low margin and b.) a few of the bigger non-project shipments in the quarter that helped increase sales for the quarter had low margins.

The Company's revenues and net income fluctuate from period to period. The fluctuations in comparing the current period to the prior period are not necessarily representative of future results.

Selling, General and Administrative Expenses


   Three months ended   Change


                             August 31,     August 31,     Increase /       Percent
                                2008           2007       (Decrease)        Change
       Outside Commissions   $  202,000     $   250,000    $  (48,000)       -19%
                Other SG&A      841,000        819,000         22,000          3%
                Total SG&A   $1,043,000     $ 1,069,000    $  (26,000)           -2%
 †††as a percentage of net      22%            24%
                  revenues

Selling, general and administrative expenses decreased by 2% from the prior year. Outside commission expense decreased by 19% from last year's level. As a percentage of sales, outside commissions were 4.2% compared with 5.7% last year. This fluctuation was primarily in the non-projects where there was a higher than normal commission on an Asian order last year. This year's commissions are slightly lower than historical averages. Other selling, general and administrative expenses increased by only 3% from last year to this.

The above factors resulted in operating income of $237,000 for the three months ended August 31, 2008, down 62% from the $621,000 in the same period of the prior year.

Other expense, net, of less than $1,000 is primarily interest expense and is $45,000 less than in the prior year. The average level of use of the Company's operating line of credit during the period remained fairly constant as compared to the prior year period. The line of credit is used primarily to fund the production of larger projects that do not allow for advance payments or progress payments. Long-term debt is just under half of what it was as of August 31, 2007. Interest rates on the line of credit and most of the long-term debt is 3.25 percentage points lower than the rates in effect at August 31, 2007. These two factors combined to lower our interest expense for the quarter.

The Company has a stock option plan which provides for the granting of nonqualified or incentive stock options to officers, key employees and non-employee directors. Options granted under the plan are exercisable over a ten year term. Options not exercised at the end of the term expire.

The Company applies the stock option expensing rules of Statement of Financial Accounting Standards (SFAS) No. 123R, "Share Based Payment," using the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company recognized $28,000 and $38,000 of compensation cost for the three month periods ended August 31, 2008 and August 31, 2007.

The fair value of each stock option grant has been determined using the Black-Scholes model. The model considers assumptions related to exercise price, expected volatility, risk-free interest rate, and the weighted average expected term of the stock option grants. Expected volatility assumptions utilized in the model were based on volatility of the Company's stock price for the thirty month period ending on the date of grant. The risk-free interest rate is derived from the U.S. treasury yield. The Company used a weighted average expected term. The following assumptions were used in the Black-Scholes model in estimating the fair market value of the Company's stock option grants:

                                                    August 31, 2008    August
31, 2007
                             Risk-free interest rate:        5.000%
3.625%
                        Expected life of the options:       2.5 years
2.5 years
                      Expected share price volatility:        44.62%
61.47%
                               Expected dividends:         zero
zero

These assumptions resulted in:

The ultimate value of the options will depend on the future price of the Company's common stock, which cannot be forecast with reasonable accuracy.

A summary of changes in the stock options outstanding during the three month period ended August 31, 2008 is presented below:

Weighted-
                                                                Number of
Average
                                                                 Options
Exercise Price
             Options outstanding and exercisable at May 31, 2008:
120,500            $ 5.30
                                               Options granted:
14,500            $ 6.04
                                            Options exercised:
none                -
                                              Options expired:
none                -

Capital Resources, Line of Credit and Long-Term Debt

The Company's primary liquidity is dependent upon the working capital needs. These are primarily inventory, accounts receivable, costs and estimated earnings in excess of billings, accounts payable, accrued commissions, billings in excess of costs and estimated earnings, and debt service. The Company's primary sources of liquidity have been operations and bank financing.

Capital expenditures for the three months ended August 31, 2008 were $123,000 compared to $208,000 in the same period of the prior year. As of August 31, 2008, the Company has commitments for capital expenditures totaling $250,000 during the next twelve months.

The Company has a $5,000,000 line of credit with a bank. There is a $2,818,000 principal balance outstanding as of August 31, 2008, compared to the $879,000 balance outstanding as of May 31, 2008. The outstanding balance on the line of credit will fluctuate as the Company's various long-term projects progress. The Company is in compliance with restrictive covenants under the line of credit and other financing arrangements, including Niagara County Industrial Development Agency Bond financing.

Inventory and Maintenance Inventory


    August 31, 2008   May 31, 2008 Increase / (Decrease)


            Raw Materials   $  447,000          $  436,000         $    11,000      3%
          Work in process    5,955,000           5,811,000            144,000       2%
           Finished goods     320,000              378,000            (58,000)     -15%
                Inventory    6,722,000   89%     6,625,000   88%      97,000        1%
    Maintenance and other     861,000    11%       888,000   12%      (27,000)     -3%
                inventory
                    Total   $7,583,000 100%     $7,513,000 100%    $   70,000      1%

       Inventory turnover     1.9                 1.9

NOTE: Inventory turnover is annualized for the three month period ended August 31, 2008.

Inventory, at $6,722,000 as of August 31, 2008, is 1% higher than the prior year-end. Of this, approximately 89% is work in process, 5% is finished goods, and 6% is raw materials.

Maintenance and other inventory represent stock that is estimated to have a product life cycle in excess of twelve months. This stock represents certain items the Company is required to maintain for service of products sold and items that are generally subject to spontaneous ordering. This inventory is particularly sensitive to technological obsolescence in the near term due to its use in industries characterized by the continuous introduction of new product lines, rapid technological advances and product obsolescence. The maintenance inventory decreased slightly since May 31, 2008. Management of the Company has recorded an allowance for potential inventory obsolescence. The provision for potential inventory obsolescence was $45,000 for each of the three month periods ended August 31, 2008 and 2007. The Company continues to rework slow-moving inventory, where applicable, to convert it to product to be used on customer orders.

Accounts Receivable, Costs and Estimated Earnings in Excess of Billings,

                                  August 31, 2008 May 31, 2008    Increase /(Decrease)
            Accounts receivable      $  3,413,000    $  2,109,000   $  1,304,000       62%
Costs and estimated earnings in
                         excess         2,760,000       1,756,000      1,004,000       57%
                    of billings
    Less: Billings in excess of
                      costs and                 -               -                 -
             estimated earnings
                            Net      $  6,173,000    $  3,865,000   $  2,308,000       60%

The Company combines the totals of accounts receivable, the asset "costs and estimated earnings in excess of billings", and the liability, "billings in excess of costs and estimated earnings", to determine how much cash the Company will eventually realize from revenue recorded to date. As the accounts receivable figure rises in relation to the other two figures, the Company can anticipate increased cash receipts within the ensuing 30-60 days.

Accounts receivable of $3,413,000 as of August 31, 2008 includes approximately $348,000 of amounts retained by customers on long-term construction projects ("Project(s)"). The Company expects to collect all of these amounts, including the retainage, during the next twelve months.

The balances in this account are comprised of the following components:

                                                   August 31, 2008  May 31, 2008
                                             Costs     $ 3,000,000   $ 1,711,000
                                Estimated earnings         773,000       372,000
                       Less: Billings to customers       1,013,000       327,000
Costs and estimated earnings in excess of billings     $ 2,760,000   $ 1,756,000
                    Number of Projects in progress       10              7

Summary of factors affecting the year-end balances in the asset "costs and estimated earnings in excess of billings", and the liability, "billings in excess of costs and estimated earnings":

                                                  August 31, 2008 May 31, 2008
                   Number of Projects in progress       10             7
                       Aggregate percent complete       66%           45%
Average total sales value of Projects in progress    $567,000       $667,000
   Percentage of total value invoiced to customer       18%            7%

Other Balance Sheet Items

The Company's backlog of sales orders at August 31, 2008 is $9.5 million, down from the $11.4 million backlog value at the end of the prior year. $1.9 million of the current backlog is on long-term construction projects already in progress.

Other current assets, which is primarily comprised of deferred taxes and prepaid expenses, decreased by 21% to $1,074,000. This change is mostly due to a reduction in the prepaid expenses as they are expensed in the normal course of business. Accounts payable, at $1,126,000 as of August 31, 2008, is approximately 5% less than the prior year-end. This balance will fluctuate as the requirement to purchase goods and services fluctuates, which is driven in part by the level of long-term construction project activity.

Commission expense on applicable sales orders is recognized at the time revenue is recognized. The commission is paid following receipt of payment from the customers. Accrued commissions as of August 31, 2008 are $527,000, up 34% from the $393,000 accrued at the prior year-end. The Company expects the current accrued amount to be paid during the next twelve months. Other current liabilities increased by $32,000 from the prior year-end, to $967,000. Payments on these liabilities will take place as scheduled within the next twelve months.

Management believes the Company's cash flows from operations and borrowing capacity under the bank line of credit is sufficient to fund ongoing operations, capital improvements and share repurchases for the next twelve months.