We engineer, manufacture and market air-conditioning and heating equipment consisting of standardized and custom rooftop units, chillers, air-handling units, make-up units, heat recovery units, condensing units, coils and boilers. Custom units are marketed and sold to retail, manufacturing, educational, medical and other commercial industries. We market units to all 50 states in the United States and certain provinces in Canada. International sales are less than five percent as the majority of all sales are domestic.

We sell our products to property owners and contractors through a network of manufacturers' representatives and our internal sales force. Demand for our products is influenced by national and regional economic and demographic factors. The commercial and industrial new construction market is subject to cyclical fluctuations in that it is generally tied to housing starts, but has a lag factor of 6-18 months. Housing starts, in turn, are affected by such factors as interest rates, the state of the economy, population growth and the relative age of the population. When new construction is down, we emphasize the replacement market.

The principal components of cost of goods sold are labor, raw materials, component costs, factory overhead, freight out and engineering expense. The principal high volume raw materials used in our manufacturing processes are steel, copper and aluminum, which are obtained from domestic suppliers. The raw materials market was volatile during 2008 and 2009 due to the economic environment. Raw materials pricing had steadily increased from the beginning of 2007 until the second half of 2008 when pricing sharply decreased. We experienced raw materials price increases of approximately 41% for steel, 123% for aluminum and 22% for copper from the beginning of 2007 through the second quarter of 2008. Prices decreased by approximately 39% for steel, 76% for aluminum and 53% for copper from June 30, 2008 to March 31, 2009. We attempt to limit the impact of price increases on these materials by entering cancelable and noncancelable fixed price contracts with our major suppliers for periods of 6 -12 months.

Selling, general, and administrative ("SG&A") costs include our internal sales force, warranty costs, profit sharing and administrative expense. Warranty expense is estimated based on historical trends and other factors. Our product warranty is: the earlier of one year from the date of first use or 18 months from date of shipment for parts; an additional four years on compressors; 15 years on gas-fired heat exchangers; and 25 years on stainless steel heat exchangers. Warranty charges on heat exchangers occur infrequently.

Our office facilities consist of a 337,000 square foot building (322,000 sq. ft. of manufacturing/ warehouse space and 15,000 sq. ft. of office space) located at 2425 S. Yukon Avenue, Tulsa, Oklahoma ("the original facility"), and a 563,000 square foot manufacturing/warehouse building and a 22,000 square foot office building ("the expansion facility") located across the street from the original facility at 2440 S. Yukon Avenue. The expansion facility is 39% (228,000 sq. ft.) utilized by us and 61% leased to a third party through May 31, 2009 at which time the facility will be remodeled to give us increased manufacturing capacity. The 2009 capital expenditures budget reflects the projected outlay to remodel the facility.

Other operations are conducted in a plant/office building at 203-207 Gum Springs Road in Longview, Texas, containing 258,000 square feet (251,000 sq. ft. of manufacturing/ warehouse and 7,000 sq. ft. of office space). An additional 15 acres of land was purchased for future expansion in 2004 and 2005 in Longview, Texas.

Our operations in Burlington, Ontario, Canada, are located at 279 Sumach Drive, consisting of an 82,000 sq. ft. office/manufacturing facility on a 5.6 acre tract of land.

Set forth below is unaudited income statement information for the periods ended March 31, 2009 and 2008:

                                                                 Three Months Ended
                                                     March 31, 2009               March 31, 2008
                                                  -------------------------------------------------

Net sales                                           $  63,965    100%            $  65,456    100%

Cost of sales                                          47,031   73.5%               49,804   76.1%
                                                  --------------------         --------------------
    Gross profit                                       16,934   26.5%               15,652   23.9%

Selling, general and administrative
expenses                                                6,535   10.2%                5,902    9.0%
                                                  --------------------         --------------------
     Income from operations                            10,399   16.3%                9,750   14.9%

Interest expense                                           (9)   0.0%                   (3)   0.0%
Interest income                                             -    0.0%                   21    0.0%
Other income, net                                         245    0.3%                  130    0.2%
                                                  --------------------         --------------------
Income before income taxes                             10,635   16.6%                9,898   15.1%
Income tax provision                                    3,907    6.1%                3,464    5.3%
                                                  --------------------         --------------------

      Net income                                    $   6,728   10.5%            $   6,434    9.8%
                                                  ====================         ====================

Results of Operations

Key events impacting our cash balance, financial condition, and results of operations for the three months ended March 31, 2009, include the following:

o We remained the leader in the industry for environmentally-friendly, energy efficient and quality innovations, utilizing R410A refrigerant and phasing out pollutant causing R22 refrigerant. The phase out of R22 began in early 2004. We also utilize a high performance composite foam panel to eliminate over half of the heat transfer from typical fiberglass insulated panels. We continue to utilize sloped condenser coils, and access compartments to filters, motor, and fans. All of these innovations increase the demand for our products thus increasing market share.

o In February 2006, the Board of Director's initiated a program of semi-annual cash dividend payments. Cash dividend payments of $5.8 million were made in 2008 and $2.8 million in 2009.

o Stock repurchases from employee's 401(k) savings and investments plan were authorized in 2005. Stock repurchases from directors were authorized in 2006. Stock repurchases from the open market were authorized in 2007. Total purchases resulted in cash payments of $0.7 million for the first three months of 2009, and $24.8 million in 2008.

o Purchases of equipment and expansion of facilities to create efficiencies remained a priority. Our capital expenditures were $3.5 million. Equipment purchases create significant efficiencies, lower production costs and allow continued growth in production. We currently expect to spend approximately $7.0 million to $8.0 million on capital expenditures during 2009 for continued growth. A portion of our budgeted capital expenditures will be spent expanding our manufacturing facilities in Tulsa. Such expansion provides manufacturing capacity to increase production of our products traditionally manufactured in Tulsa. The expansion also provides operational flexibility for us to potentially establish production lines in Tulsa to manufacture custom products which are currently being manufactured at our Canadian facilities.

Net Sales

Net sales decreased $1.5 million or 2.3% to $64.0 million from $65.5 million for the three months ended March 31, 2009, compared to the same period in 2008. The favorable response by our customers to our new and redesigned products continued to be relatively strong in the first quarter of 2009, however a decrease in net sales from our Canadian operations contributed to lower net sales.

Gross Profit

Gross profit increased $1.2 million or 7.6% to $16.9 million from $15.7 million for the three months ended March 31, 2009, compared to the same period in 2008. As a percentage of sales, gross margins were 26.5% compared to 23.9% for the three months ended March 31, 2009 and 2008, respectively. The increase in gross margins for the three months was primarily a result of lower material costs and production and labor efficiencies.

The principal components of cost of goods sold are labor, raw materials, component costs, factory overhead, freight out and engineering expense. The principal high volume raw materials used in our manufacturing processes are steel, copper and aluminum, which are obtained from domestic suppliers. The raw materials market was volatile during 2008 and 2009 due to the economic environment. Raw materials pricing had steadily increased from the beginning of 2007 until the second half of 2008 when pricing sharply decreased. We experienced raw materials price increases of approximately 41% for steel, 123% for aluminum and 22% for copper from the beginning of 2007 through the second quarter of 2008. Prices decreased by approximately 39% for steel, 76% for aluminum and 53% for copper from June 30, 2008 to March 31, 2009. We attempt to limit the impact of price increases on these materials by entering cancelable and noncancelable fixed price contracts with our major suppliers for periods of 6 -12 months.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $0.6 million or 10.2% to $6.5 million from $5.9 million for the three months ended March 31, 2009, compared to the same period in 2008. The change was primarily due to an increase in warranty expense related to higher trade sales, bad debt expense to increase the bad debt reserve to accommodate economic uncertainties and profit sharing due to increased net income.

Other Income

Other income increased approximately $115,000 to approximately $245,000 from $130,000 for the three months ended March 31, 2009, compared to the same period in 2008. The increase in other income was primarily related to lower foreign currency losses that resulted from operations in Canada in 2009 and 2008. Other income is attributable primarily to rental income from our expansion facility. All expenses associated with the facility that are allocated to the rental portion of the building are included in other income. We plan to continue to rent the expansion facility until the lease term expires on May 31, 2009.

Analysis of Liquidity and Capital Resources

Our working capital and capital expenditure requirements are generally met through net cash provided by operations and occasionally, based on current liquidity at the time, the revolving bank line of credit.

Management believes our projected cash flows from operations and bank revolving credit facility, or comparable financing, will provide the necessary liquidity and capital resources for fiscal year 2009 and the foreseeable future. Our belief that we will have the necessary liquidity and capital resources is based upon our knowledge of the heating, ventilation, and air conditioning ("HVAC") industry and our place in that industry, our ability to limit the growth of our business if necessary, our ability to adjust dividend cash payments, and our relationship with the existing bank lender. For information concerning our revolving credit facility at March 31, 2009, see Note 6 to our Consolidated Financial Statements, Revolving Credit Facility.

Cash Flows Provided by Operating Activities. Net cash provided by operating activities increased in the three months ended March 31, 2009 by $3.2 million from the three months ended March 31, 2008. The increase was due primarily to changes in accrued liabilities, accounts receivable and inventories.

Cash Flows Used in Investing Activities. Cash flows used in investing activities were $3.5 million and $1.0 million for the three months ended March 31, 2009 and 2008, respectively. The increase in cash flows used in investing activities in 2009 was primarily related to higher capital expenditures of $3.5 million for additions to machinery and equipment and manufacturing facilities, compared to $1.0 million for the same period in 2008. Capital expenditures in 2008 related to a building expansion and additions of machinery and equipment to further automate production. Management utilizes cash flows provided from operating activities to fund capital expenditures that are expected to increase growth and create efficiencies. We have budgeted capital expenditures of approximately $7.0 million to $8.0 million in 2009 to complete the building expansion that started in 2008, for a building renovation of the previously leased facility, and for machinery and equipment purchases. We expect our cash requirements to be provided from cash flows from operations.

Cash Flows Used in Financing Activities. Cash flows used in financing activities were $6.4 million and $4.6 million for the three months ended March 31, 2009 and 2008, respectively. The increase of cash used in financing activities is primarily due to repayments of previous borrowings under the revolving credit facility related to cash required for capital expenditures.

We repurchased shares of stock from employees' 401(k) savings and investment plan and other incentive plans for the three months ended March 31, 2009 in the amount of $0.7 million for 39,419 shares of stock. There were shares of stock repurchased for a total of $1.8 million for the same period in 2008.

We received cash from stock options exercised of approximately $10,000 and classified the excess tax benefit of stock options exercised and restricted stock awards vested of approximately $2,000 in financing activities for the three months ended March 31, 2009. The cash received for options exercised and income tax effect partially offset the stock repurchase and dividend payments for the three months ended March 31, 2009. The cash received from stock options exercised for the same period in 2008 was approximately $79,000 and the excess tax benefit of stock options exercised was approximately $119,000.

Our revolving credit facility provides for maximum borrowings of $15.2 million which is provided by the Bank of Oklahoma, National Association. Under the line of credit, there is one standby letter of credit totaling $1.0 million. The letter of credit was a requirement of our workers compensation insurance which has been renewed and will expire December 31, 2009. Interest on borrowings is payable monthly at the Wall Street Journal prime rate less 0.5% or LIBOR plus 1.6%, at our election (2.10% at March 31, 2009). No fees are associated with the unused portion of the committed amount.

At March 31, 2009, we did not have an outstanding balance under the revolving credit facility. At December 31, 2008, we had $2.9 million borrowed under the revolving credit facility. Borrowings available under the revolving credit facility at March 31, 2009 were $14.2 million. At March 31, 2009 and 2008, we were in compliance with our financial ratio covenants. The covenants are related to our tangible net worth, total liabilities to tangible net worth ratio and working capital. At March 31, 2009 our tangible net worth was $102.6 million. Our total liabilities to tangible net worth ratio was 2:5. Our working capital was $45.3 million. On July 30, 2008, we renewed the line of credit with a maturity date of July 30, 2009. We expect to renew our revolving credit agreement in July 2009. We do not anticipate the current situation in the credit market to impact our renewal.

Cash dividends were declared in December 2008 and were paid in January 2009 in the amount of $2.8 million. Board of Director approval is required to determine the date of declaration for each semi-annual payment.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because these estimates and assumptions require significant judgment, future actual results could differ from those estimates and could have a significant impact on our results of operations, financial position and cash flows. We reevaluate our estimates and assumptions on a monthly basis.

There have been no significant changes in critical accounting policies or management estimates since the year ended December 31, 2008. A comprehensive discussion of our critical accounting policies and management estimates is included in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.

New Accounting Pronouncements

In December 2007, the FASB issued SFAS 141(R), Business Combinations ("SFAS 141R"), which replaced FASB Statement 141, Business Combinations. This statement significantly changed the accounting for business combinations and noncontrolling interests. Among other things, when compared to the predecessor guidance SFAS 141R will require (i) more assets acquired and liabilities assumed to be measured at fair value as of the acquisition date, (ii) liabilities related to contingent consideration to be remeasured to fair value each subsequent reporting period, and (iii) an acquirer in preacquisition periods to expense all acquisition-related costs. SFAS 141R must be applied prospectively for fiscal years beginning after December 15, 2008. Adoption of SFAS 141R did not have a material impact on our Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an Amendment of ARB No. 51 ("SFAS 160"), which changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 must be adopted no later than January 1, 2009. Adoption of SFAS 160 did not have a material impact on our Consolidated Financial Statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities--an Amendment of FASB Statement No. 133 ("SFAS 161"), which requires enhanced disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended ("SFAS 133") and its related interpretations and (iii) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Adoption of SFAS 161 did not have a material impact on our Consolidated Financial Statements.

In June 2008, the Emerging Issues Task Force ("EITF") issued No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities ("EITF 03-6-1"), which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share ("EPS") under the two-class method. EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Adoption of EITF 03-6-1 did not have a material impact on our Consolidated Financial Statements.

In December 2008, the FASB issued FSP No. FAS 132 R-1, Employers' Disclosures about Postretirement Benefit Plan Assets ("FAS 132R-1"), which provides guidance on an employer's disclosures about plan assets of a defined benefit pension or other postretirement plan and requires employers to provide more transparency about the assets held by retirement plan and the concentrations of risk in those plans. FAS 132 R-1 will be effective for fiscal years beginning after December 15, 2009. We do not expect the adoption of FAS 132 R-1 to have a material impact on our Consolidated Financial Statements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "will", and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made.

While the recent adverse economic climate has not yet resulted in a significant decline in our operations, there can be no assurances that economic conditions will not adversely affect our business in the future. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that could cause results to differ materially from those in the forward-looking statements include (1) the timing and extent of changes in raw material and component prices, (2) the effects of fluctuations in the commercial/industrial new construction market, (3) the timing and extent of changes in interest rates, as well as other competitive factors during the year, and (4) general economic, market or business conditions.