The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. In the opinion of management, the interim financial statements reflect all adjustments necessary in order to make the financial statements not misleading. The consolidated balance sheet as of September 30, 2008 was derived from the Company's most recent audited financial statements. Operating results for the three and six month period are not necessarily indicative of the results that may be expected for the year. The interim financial statements and notes thereto should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended September 30, 2008 included in the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission ("SEC") on December 4, 2008.

The Company recorded net income of $878,811 in the three months ended March 31, 2009 and in the six months ended March 31, 2009, recorded a net increase in cash and cash equivalents of $65,034. For the six months ended March 31, 2009 and 2008, the Company incurred net losses of $2,218 and $3,857,368, respectively. Management believes the Company has adequate financial resources to execute its fiscal 2009 operating plan and to sustain operations for the next twelve months. Management's operating plan includes (a) growing revenues by focusing on the U.S. military and direct sales to larger commercial and defense related companies, (b) improving product margins by reducing unit product costs and monitoring manufacturing overhead, and (c) controlling research and development and selling, general and administrative costs. Nevertheless, the Company's operating results will depend on future product sales levels and other factors, some of which are beyond the Company's control. There can be no assurance the Company can continue to achieve positive cash flow or profitability. The Company operates in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. If required, management has some flexibility to take remedial actions to adjust the level of research and development and selling, general and administrative expenses based on the availability of resources. However, there can be no assurance that the Company may not be required to raise additional funds through the sale of equity or debt securities or from credit facilities. Additional capital, if needed, may not be available on satisfactory terms, or at all.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS No. 157"). This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. According to the original pronouncement, SFAS No. 157 was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued FSP FAS 157-2 which defers the effective date of SFAS No. 157 for all non-financial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequent recurring basis, until years beginning after November 15, 2008. The Company's adoption of SFAS No. 157 for its financial assets and liabilities on October 1, 2008 did not have a material impact on the Company's consolidated financial statements. The Company is currently reviewing the adoption requirements related to its non-financial assets and liabilities and has not yet determined the impact, if any, this will have on its consolidated financial statements.

In October 2008, the FASB issued FASB Staff Position ("FSP") SFAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active" ("FSP SFAS 157-3"). FSP SFAS 157-3 clarifies the application of SFAS No. 157, "Fair Value Measurements", in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP SFAS 157-3 is effective upon issuance, including for prior periods for which financial statements have not been issued.

Revisions resulting from a change in the valuation technique or its application should be accounted for as a change in accounting estimate following the guidance in SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS No. 154"). However, the disclosure provisions in SFAS No. 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. The adoption of this pronouncement by the Company did not have a material effect on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115" ("SFAS No. 159"), which will permit the option of choosing to measure certain eligible items at fair value at specified election dates and report unrealized gains and losses in earnings. SFAS No. 159 became effective for the Company on October 1, 2008. The adoption of SFAS No. 159 did not have a material impact on the Company's consolidated financial statements.

In April 2008, the FASB issued FSP FAS 142-3, "Determination of Useful Life of Intangible Assets" ("FSP FAS 142-3"). FSP FAS 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, "Goodwill and Other Intangible Assets." FSP FAS 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier adoption is not permitted. The Company does not expect FSP FAS 142-3 to have a material impact on its consolidated financial statements.

In June 2008, the FASB ratified EITF Issue No. 07-5, "Determining whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock "("EITF 07-5"). EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer's own stock and thus able to qualify for the SFAS No. 133 paragraph 11(a) scope exception. The Company has not completed an analysis of this pronouncement nor determined the effects of pending adoption, if any, on its consolidated financial statements.

4. INVENTORIES

Inventories are stated at the lower of cost, which approximates actual costs on
a first in, first out cost basis, or market. Inventories consisted of the
following:



                                         March 31,        September 30,
                                            2009              2008
             Finished goods             $  1,074,882     $       998,609
             Work in process                  57,292              29,959
             Raw materials                 3,379,356           3,416,802

                                           4,511,530           4,445,370
             Reserve for obsolescence     (1,582,177 )        (1,555,151 )

             Total, net                 $  2,929,353     $     2,890,219

5. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:



                                            March 31,        September 30,
                                               2009              2008
          Machinery and equipment          $    620,126     $       511,464
          Office furniture and equipment        828,839             821,121
          Leasehold improvements                262,258             260,591

                                              1,711,223           1,593,176
          Accumulated depreciation           (1,398,168 )        (1,301,082 )

          Property and equipment, net      $    313,055     $       292,094

Included in office furniture and equipment at March 31, 2009 and September 30, 2008 was $417,937 and $411,963, respectively, for purchased software, which is being amortized over three years. The unamortized portion of software at March 31, 2009 and September 30, 2008 was $13,629 and $13,755, respectively.

Depreciation expense, excluding amortization of software, was $90,986 and $118,717 for the six months ended March 31, 2009 and 2008, respectively. Amortization of purchased software was $6,101 and $16,868 for the six months ended March 31, 2009 and 2008, respectively.

6. PATENTS

Patents consisted of the following:



                                          March 31,       September 30,
                                            2009              2008
              Cost                       $ 1,588,001     $     1,662,787
              Accumulated amortization      (639,090 )          (604,601 )

              Patents, net               $   948,911     $     1,058,186

Amortization expense for the Company's patents was $54,661 and $62,420 for the six months ended March 31, 2009 and 2008, respectively.

Each quarter, the Company reviews the ongoing value of its capitalized patent costs. In the first six months of fiscal 2009, some of these assets were identified as being associated with patents that are no longer consistent with its business strategy. As a result of this review, the Company reduced the value of previously capitalized patents by $75,744 during the six months ended March 31, 2009, compared to a reduction of $205,521 from the impairment of patents in the six months ended March 31, 2008.

7. SHARE-BASED COMPENSATION

Stock Option Plans

At March 31, 2009, the Company had two equity incentive plans. The 2002 Stock Option Plan ("2002 Plan") was terminated with respect to new grants in April 2005 but remains in effect for grants issued prior to that time. The 2005 Equity Incentive Plan ("2005 Plan"), as amended, authorizes for issuance as stock options, stock appreciation rights, or stock awards an aggregate of 3,250,000 new shares of common stock to employees, directors or consultants, plus the 1,749,564 shares remaining eligible for issuance under the 2002 Plan for a total plan reserve of 4,999,564. The current plan reserve at March 31, 2009, net of exercises, allows for the issuance of up to 4,644,663 shares. At March 31, 2009, there were options outstanding covering 98,000 and 3,958,262 shares of common stock under the 2002 Plan and 2005 Plan, respectively.

At March 31, 2009, there were also options outstanding covering 32,000 shares of common stock from grants outside the stock option plans. See Note 8 for summary stock option activity during the six months ended March 31, 2009.

Share-Based Payments

The Company accounts for share-based payments under the provisions of SFAS No. 123(R) "Share-based payments" ("SFAS 123(R)"). Options or stock awards issued to non-employees who are not directors of the Company are recorded at their estimated fair value at the measurement date in accordance with SFAS No. 123(R) and EITF Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services," and are periodically revalued as the options vest and are recognized as expense over the related service period. The Company recorded $1,082,568 and $1,144,404 of share-based compensation expense for the six months ended March 31, 2009 and 2008, respectively. The amounts of share-based compensation expense are classified in the consolidated statements of operations as follows:

                                          Three Months Ended         Six Months Ended
                                              March 31,                  March 31,
                                           2009        2008         2009          2008
  Cost of revenue                       $   20,067   $  22,068   $    38,628   $    39,743
  Selling, general and administrative      461,325     511,396       964,952       984,355
  Research and development                  32,920      63,585        78,988       120,306

  Total                                 $  514,312   $ 597,049   $ 1,082,568   $ 1,144,404

The weighted-average estimated fair value of employee stock options granted during the six months ended March 31, 2009 and 2008 was $0.24 and $0.96, per share, respectively, using the Black-Scholes option pricing model with the following weighted-average assumptions (annualized percentages):

                                         Six months ended March 31,
                                            2009            2008
              Volatility                        71.0%           71.0%
              Risk-free interest rate   1.30% - 1.52%   2.79% - 3.49%
              Forfeiture rate                   20.0%           20.0%
              Dividend yield                     0.0%            0.0%
              Expected life in years      3.4 - 4.9       3.4 - 4.9

The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical volatility of the Company's common stock over the period commensurate with the expected life of the options. The risk-free interest rate is based on rates published by the Federal Reserve Board. The expected life is based on observed and expected time to post-vesting exercise. The expected forfeiture rate is based on past experience and employee retention data. Forfeitures are estimated at the time of the grant and revised in subsequent periods if actual forfeitures differ from those estimates or if the Company updates its estimated forfeiture rate. Such amounts will be recorded as a cumulative adjustment in the period in which the estimate is changed.

Since the Company has a net operating loss carryforward as of March 31, 2009, no excess tax benefit for the tax deductions related to share-based awards was recognized for the six months ended March 31, 2009 and 2008. Additionally, as there were no options exercised in the six months ended March 31, 2009 or 2008, there were no incremental tax benefits recognized. Such recognition would have resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase in net cash provided by financing activities.

As of March 31, 2009, there was $900,000 of total unrecognized compensation cost related to non-vested share-based employee compensation arrangements. The cost is expected to be recognized over a weighted-average period of 1.4 years.