Critical Accounting Policies and Estimates:
Management's Discussion and Analysis of Financial Condition and Results of Operations discuss our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.
We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the result of which forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. The estimates and judgments utilized are reviewed by management on an ongoing basis and by the audit committee of our board of directors at the end of each quarter prior to the public release of our financial results. We made no changes to our critical accounting policies during fiscal 2008.
Application of Critical Accounting Policies:
Excess and Obsolete Inventory:
Inventories, which are composed of raw materials, work in process and finished goods, are valued at the lower of cost or market by comparing the cost of each item in inventory to its most recent sales price or sales order price. Inventory cost is adjusted down for any excess cost over net realizable value of inventory components.
In addition, the Company determines whether its inventory is excess and obsolete by analyzing the sales history of its inventory, sales orders on hand and indications from the Company's customers as to the future of various parts or programs. If, in the Company's determination, the inventory value has become impaired, the Company adjusts the inventory value to the amount the Company estimates as the ultimate net realizable value for that inventory. Actual customer requirements in any future periods are inherently uncertain and thus may differ from our estimates. The Company performs its lower of cost or market testing, as well as its excess or obsolete inventory analyses, quarterly. The Company has no specific timeline to dispose of its remaining obsolete inventory and intends to sell this obsolete inventory from time to time, as market conditions allow.
Goodwill Impairment:
The Company evaluates the valuation of its goodwill according to the provisions of SFAS 142 to determine if the current value of goodwill has been impaired. The Company believes that its stock price is not necessarily an indicator of the Company's value given its limited trading volume and its wide price fluctuations. The Company follows the guidance provided by SFAS 142 and utilizes a present value technique to measure fair value by estimating future cash flows. The major assumptions in this analysis include: (a) sales estimates for the Company in part provided with guidance from the Company's customers; and
(b) material and labor costs of the Company's major programs. The Company constructs a discounted cash flow analysis based on these assumptions to estimate the fair value of the Company (which is the only reporting unit). The result of the analysis performed in the fiscal 2008 fourth quarter did not indicate an impairment of goodwill. If the Company has changes in events or circumstances, including reductions in anticipated cash flows generated by our operations, goodwill could become impaired which would result in a charge to earnings.

Deferred Taxes:
The Company accounts for income taxes using the liability method. Deferred income taxes are provided for temporary difference between the financial reporting and tax bases of assets and liabilities. A deferred tax valuation allowance is set up should the realization of any deferred taxes become less likely than not to occur. The valuation allowance is analyzed periodically by the Company and may result in income tax expense different than statutory rates. The Company has not established a valuation allowance as it believes it is more likely than not that it will fully realize the benefit of its tax assets. Currently, the Company's deferred tax assets have two major components which relate to the Company's NOL and the Company's AMT tax credit carryforwards. The Company's AMT tax credit carryforward does not expire. The Company's NOL carryforward has $2.6 million expiring in 2021 - 2025. The Company believes that its current rate of growth will be sufficient to fully utilize its NOL carryforwards before they expire. However, a significant loss of a customer or a change in the Company's business could affect the realization of the deferred tax assets. If a major program were discontinued, the Company would immediately assess the impact of the loss of the program on the realization of the deferred tax assets.
Revenue Recognition:
The Company considers its revenue recognition policy to fall under the guidance of FASB's conceptual framework for revenue recognition. The Company recognizes revenue only after: (a) The Company has received a purchase order identifying price and delivery terms or services to be rendered; (b) shipment has occurred, or in the case of services, after the service has been completed; (c) the Company's price is fixed as evidenced by the purchase order; and (d) collectibility is reasonably assured. The Company continually monitors its accounts receivable for any delinquent or slow paying accounts. The Company believes that based upon its past history with minimal bad debt write-offs, that all accounts are collectible upon shipment or delivery of services. Credit losses from customers have been minimal and within management's expectations. Based on management's evaluation of uncollected accounts receivable, bad debts are provided for on the allowance method. Accounts are considered delinquent if they are 120 days past due. If an uncollectible account should arise during the year, it would be written-off at the point it was determined to be uncollectible. The Company mitigates its credit risk by performing periodic credit checks and actively pursuing past due accounts. The Company refers to "net sales" in its consolidated statements of operations as the Company's sales are sometimes reduced by product returned by its customers. Liquidity and Capital Resources:
The Company's net working capital at the end of fiscal 2008 was $4,188,000 as compared to $3,373,000 at the end of fiscal 2007. The increase was derived primarily from comparable increases in the three major components of current assets - cash, accounts receivable and inventory - partially offset by increases in accounts payable and the current portion of long-term debt. The ratio of current assets to current liabilities increased slightly to 1.97 to 1.0 from 1.96 to 1.0 in the prior year. The Company generated $1,598,000, 1,383,000 and 1,117,000 in cash from operations in fiscal 2008, 2007 and 2006, respectively. Additions to property, plant and equipment were $3,556,000 in fiscal 2008 compared to $1,433,000 in 2007 and $469,000 in 2006. These amounts included $2,537,000, $1,201,000 and $382,000 of machinery acquired through capital leases in fiscal 2008, 2007 and 2006, respectively. In fiscal 2008, the Company added 4 horizontal machining centers and 1 vertical lathe. The equipment additions in fiscal 2008 were primarily for the increase in sales from the Company's energy business. Also included in total additions for fiscal 2008, the Company capitalized $786,000 in connection with a building addition to its manufacturing facility. In fiscal 2007, the Company added 3 vertical and 2 horizontal machining centers. The vertical equipment was primarily for technological upgrades and replacement of older machinery, while the horizontal machines were put in place due to the addition of the Company's energy business in the spring of 2007. Major additions in 2006 were two vertical and one horizontal machining center.

On January 31, 2008 the Company renewed its revolving line credit agreement with its bank. Under the agreement, the Company can borrow up to $1 million. The agreement expires on February 1, 2009. No balances were owed at August 31, 2008 and August 26, 2007, and no advances were made on the credit line during either fiscal 2008 or 2007.
In August 2008, the Company entered into an agreement with its bank to finance a building addition to its existing manufacturing facility. The Company can draw upon the loan on a non-revolving basis through May 31, 2009 in an aggregate amount not to exceed $1.2 million. The loan requires monthly payments of interest only at the bank's prime rate plus .50% with the loan due in full on June 30, 2010. The loan is secured by all assets of the Company.
Proceeds from the sale of equipment amounted to $131,000, $22,000 and $29,000 in fiscal 2008, 2007 and 2006, respectively.
The Company's total debt was $6,263,000 at August 31, 2008 which consisted of mortgages and loans on its building of $2,114,000 and capital lease obligations secured by production equipment of $4,149,000. Current maturities of long-term debt consist of $691,000 due on capital leases and $334,000 on its mortgages. It is management's belief that internally generated funds, its loan with its bank in connection with the building addition as well as its revolving line of credit will be sufficient to enable the Company to meet its financial requirements during fiscal 2009.
Results of Operations:
Net sales in fiscal 2008 were $25.9 million as compared to $18.8 million in the prior year, or an increase of $7.1 million or 38%. The increase in fiscal 2008 sales came primarily from its energy business. Net sales in fiscal 2007 increased $2.7 million or 17% over fiscal 2006. The increase in fiscal 2007 sales came from the addition of its energy business which contributed $1.4 million in sales, as well as an increase in sales from its recreational vehicle market of $1.2 million.
The following is a reconciliation of sales by major market:

                                  Fiscal 2008      Fiscal 2007      Fiscal 2006
          Recreational vehicle    $ 14,050,000     $ 14,330,000     $ 13,130,000
          Aerospace and defense      2,219,000        1,944,000        1,972,000
          Energy                     8,856,000        1,449,000                -
          Biosciences                  504,000          819,000          593,000
          Other                        253,000          266,000          397,000

                                  $ 25,882,000     $ 18,808,000     $ 16,092,000

Sales in fiscal 2008 in the recreational vehicle market were affected by two primary offsetting factors. The first factor was the increase in sales in the Company's ATV market which increased in fiscal 2008 by approximately $2.3 million. The second offsetting factor was a decrease in one of the other programs for the Company which resulted in a sales decrease in fiscal 2008 of $1.6 million. In addition to this, the sales to the Company's motorcycle market experienced a general softening in fiscal 2008.
The increase in fiscal 2007 sales versus fiscal 2006 in the recreational vehicle was driven by increases in both the all terrain vehicle (ATV) and the motorcycle markets. The increase in units shipped more than offset a decrease in one of the Company's programs which commenced in its fiscal fourth quarter and negatively affected sales by $380,000 versus fiscal 2006.

Sales in the recreational vehicle market in fiscal 2008 and fiscal 2007 were also positively impacted by the addition of two new customers which contributed sales of $232,000 and $231,000 in those two years, respectively.
Sales in fiscal 2008 in the Company's aerospace and defense business increased 14% over the prior year due primarily to increased sales from a new customer added in fiscal 2007 and also to increase sales from a long-time customer. Sales in fiscal 2007 in the Company's aerospace and defense business were mostly flat versus the prior year. The core of the Company's aerospace and defense business which represented 94% of the total aerospace and defense sales in fiscal 2007 was marginally lower as compared to fiscal 2006.
Sales to the Company's energy industry continued to accelerate in fiscal 2008 as sales increased to $8.9 million from $1.4 million in fiscal 2007. The increase was due to the ramp up of parts and programs throughout fiscal 2008. The Company fell short of its sales projections of $10 million - $11 million due to delays in product start-ups. The Company entered the energy field in the spring of 2007 and achieved $1.4 million in sales in fiscal 2007.
As noted in the Company's annual report for fiscal year 2007, the expected decrease in sales from the Company's bioscience industry occurred in fiscal 2008 by an amount of $315,000 or 38% versus fiscal 2007 as the Company pared unprofitable programs. The Company had a $226,000 increase in sales in fiscal 2007 versus fiscal 2006. The Company scaled back its involvement in this market during fiscal 2007 as gross margins were not acceptable.
The Company's sales from its "other" market are primarily derived from sales in the small engine and computer components fields. The decrease in sales from fiscal 2006 through fiscal 2008 is primarily due to product life cycle issues. Gross margins in fiscal 2008 were 18.9%, an increase of .4% over fiscal 2007's margin of 18.5% and an increase of 1.7% over fiscal 2006's margin of 17.2%. The increase in 2008 and 2007 margins is attributable primarily to higher volumes of business due to the addition of the Company's new energy business offset by additional start-up costs related to certain energy programs. Fiscal 2006 margins were also negatively affected by start-up costs in the Company's biosciences market.
No significant sales of obsolete items occurred in fiscal 2006 to 2008 and, correspondingly, no significant gross margin was recognized. Selling and administrative expense of $2.5 million in fiscal 2008 was an increase of $336,000 from fiscal 2007 and an increase of $751,000 from fiscal 2006. The increases in each of fiscal 2008 and fiscal 2007 were from higher payroll, professional service costs and stock option compensation expense. The Company adopted FAS 123R in fiscal 2007 and recorded stock option compensation expense of $163,000 and $62,000 in fiscal 2008 and fiscal 2007, respectively. In addition, the Company incurred professional service expense in fiscal 2008 in connection with its analysis of internal controls over financial reporting as required by Sarbanes-Oxley.
Interest expense of $307,000 in fiscal 2008 was higher than the fiscal 2007 amount of $197,000 and the 2006 amount of $172,000 due to the addition of capitalized leases related to the acquisition of machinery and equipment. The Company recorded income taxes at an effective tax rate of 35 % for fiscal 2008 and 38%, for fiscal 2007 and fiscal 2006, respectively. The Company maintained its valuation allowance at zero during 2008 and 2007.

Caution Regarding Forward-Looking Statements Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, in the letter to shareholders, elsewhere in the Annual Report, in the Company's Form 10-K and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer which are not historical or current facts are "forward-looking statements." These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made and are not predictions of actual future results. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The following risks and uncertainties, as well as others not now anticipated, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual financial performance to differ materially from that expressed in any forward-looking statement: (i) the Company's ability to obtain additional manufacturing programs and retain current programs; (ii) the Company's ability to timely and cost effectively ramp up new programs; (iii) the loss of significant business from any one of its current customers could have a material adverse effect on the Company; (iv) the Company was dependent upon two customers for 87% of its revenues in fiscal year 2008 and expects that a significant portion of its future revenue will be derived from these customers;
(v) a significant downturn in the industries in which the Company participates could have an adverse effect on the demand for Company services; (vi) our sales are concentrated in a limited number of highly competitive industries, each with a limited number of customers; (vii) the prices of our products are subject to a downward pressure from customers and market pressure from competitors;
(viii) the Company's ability to curtail its costs and expenses for new manufacturing programs, commensurate with expected revenues; (ix) the Company's ability to comply with covenants of its credit facility; (x) fluctuations in operating results due to, among other things, changes in customer demand for our product in our manufacturing costs and efficiencies of our operations; and
(xi) a trend among our customers toward outsourcing manufacturing to foreign operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable.