Overview

Pinnacle Data Systems, Inc. (“PDSi” or the “Company”) is a corporation incorporated under the laws of the State of Ohio in March 1989. PDSi is headquartered at 6600 Port Road, Groveport, Ohio 43125, telephone (614) 748-1150. The common shares of PDSi are traded on the American Stock Exchange under the symbol of PNS.

The Company provides professional services around the development, deployment, and support of sophisticated computer systems that are, or are in, the products of its world-leading Original Equipment Manufacturer (“OEM”) and Independent Software Vendor (“ISV”) customer base in the computer and network, medical, telecommunications, defense, imaging and aerospace equipment industries, among others. We offer a full range of engineering, product development, project and program management, integration, manufacturing and lifecycle support services designed to increase our customers’ product speed to market and engineered product life while decreasing overall costs to develop, deploy, and service their products, with depot repair, advanced exchange, contact center support and end-of-life control.

Our business model has a foundation of technical service and support programs (“Services”), such as the depot repair and logistics programs we provide the field service organizations of OEMs like Sun Microsystems, Inc. (“Sun”). Over the Company’s history, our Service business and orientation have afforded us opportunities to build strong engineering talent that is leveraged for the development and sale of high-potential engineered computer solutions for specific customers and niche-industry applications (“Product”). For the 2006 year, we reported revenues of $75.9 million, net loss of $1.9 million and total assets of $33.9 million. Approximately 86% of our 2006 revenues were generated from Product while 14% of our revenues were generated from Services.

We offer complete service and support for several OEMs’ products, as well as our own, including testing, repair, inventory and logistics services. Depot repair and testing services are provided for advanced technology systems, printed circuit board assemblies, and other computer peripherals and components, where the suspect non-functioning equipment is sent to our designated depot location for testing and repair, if required. We also manage “advanced-exchange” repair programs. Our highest volume testing and repair is performed on complex printed circuit boards, systems and data storage devices for Sun, Silicon Graphics, Inc. (“SGI”) and Hewlett-Packard Company (“HP”). For our largest OEM customers, we maintain and share online information management systems that seamlessly connect our companies.

Our products are custom-engineered to meet specific customer or niche-industry requirements that generally cannot be met by an off-the-shelf solution. They are sold to OEMs and then typically resold to end-users as components of the OEMs’ final products. Our products are usually developed as a result of helping OEMs design, engineer, manufacture, assemble, modify, and/or integrate computer systems or components to fit their specific application needs. Many of our products are based on the high performance computer processing technologies of Sun Microsystems, Inc. (“Sun”), Intel

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Corporation (“Intel”) and Advanced Micro Devices, Inc. (“AMD”), three of the world’s leading producers of computer components and systems. We combine their products and other vendor off-the-shelf computer components or peripherals with technologies that we engineer and develop, such as customized circuit boards, enclosures, power supplies and other engineered components and software. By leveraging our expertise and experience in engineering and integrating our internally developed products with Sun, Intel, AMD and other vendors’ technologies, we are able to offer product solutions with minimal product design and engineering costs to our customers.

Our end-of-life product management service allows our customers to maximize their investment in technology by providing continued support for products no longer in production or supported by the original manufacturer. This allows our customers to eliminate or delay the engineering, software development and re-certification charges required to integrate new technology into their products. For example, when a computer board manufacturer stops manufacturing a particular board, its customer OEMs are left with few alternative sources for the boards they need to continue building or repairing their products. We can provide the boards, purchased from a number of available sources, either new or refurbished, or we can redesign a new board with the same form, fit and function with components that are readily available at the time.

We are a SunSoft Master Distributor authorized to provide our customers with the right to use Solaris, Suns UNIX operating system and we are a member of the Sun Partner Advantage Program. We are an authorized Intel Product Dealer and have earned Intel Channel Partner Premier Member status for our distinct level of competency with Intel technologies. We are an authorized AMD Gold Solution Provider. We are an authorized HP Business Development Partner. We are also licensed by Microsoft to distribute embedded Microsoft operating systems.

We consider our Services and Product segments to be complementary. Our Services provide a competitive advantage in selling our products since the entire infrastructure is already in place to provide high quality service and support before and after the sale. New product development keeps our engineers and service technicians on the forefront of technologies being sold that generate new service opportunities.

On August 12, 2005, the Company entered into an asset purchase agreement with GNP Computers, Inc. (GNP) and GNP’s principal shareholder, in which the Company acquired all of the assets and certain liabilities of GNP. The market value of the assets acquired was essentially equal to the total of the assumed liabilities and capitalized transaction expenses. As a result, no goodwill was recorded on the transaction and no long term debt was assumed or incurred. The results of the operations of GNP subsequent to August 12, 2005 are included in Company’s statement of operations.

See Note 11 of the Financial Statements and Supplementary Data included in Item 8 herein, for further information regarding revenues, operating earnings (losses) and total assets attributable to the Company’s segments.

Suppliers

During 2006, approximately 13% of all inventory purchased was manufactured by or for Sun and was purchased directly from Sun or through Sun’s distribution channel. We believe all critical production components and service parts, or suitable substitutes, are readily available in the marketplace from multiple manufacturers and/or suppliers, new or refurbished, as required by our current customers’ demands.

Working Capital

The Company is required to carry significant amounts of inventory to meet the production schedules and maintain the repair service obligations of its customers. As the demands on working capital have grown significantly with the increase in production and revenues, the Company continues to evaluate financing alternatives to fund the future growth of the Company and its working capital needs.

Patents and Trademarks

We own two patents we obtained in the acquisition of GNP Computers. One patent was granted for a telecommunication computer chassis. The other patent was granted for a distributed computing system clustering model that provides soft real-time responsiveness and continuous availability. However, we deemed that the value of the patents is insignificant to the generation of future revenues.

In 2003, we received notice of the successful registration of the federal trade and service marks for the logo “PDSi” under Class 9 products and under Class 42 services.

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The applications filed in 2001 for a federal trademark and service mark for “Pinnacle Data Systems” were published for opposition on December 5, 2006, but are not registered pending the execution of a Co-Existence Agreement between the Company and Pinnacle Systems, Inc. regarding the use of the trademark “PINNACLE”. If the Co-Existence Agreement is executed, the trademark and service mark will be registered by the U.S. Patent and Trademark Office. If the agreement is not executed, Pinnacle Systems, Inc. may file an opposition to the registration of such marks.

Competition

The primary competitive factors in the electronic equipment service industry are price, quality and scope of services (based on in-house technical expertise). We compete with the in-house repair centers of OEMs, Third Party Maintenance providers (“TPMs”), other electronic contract manufacturing companies (“CMs”) and other independent depot repair organizations similar to ours. We believe we differentiate ourselves by offering complete packaged solutions supported by a broad scope of repair and logistics service offerings, including our experience with a wide variety of technologies and very large, well-known and demanding OEM customers, flexibility in tailoring our operating procedures to fulfill stringent quality, documentation and reporting requirements, and offering the most cost-effective solutions to fulfill our customers’ service needs. However, a number of our competitors are more established and have substantially greater technical, manufacturing, marketing and financial resources to develop and market similar services.

Competition for our custom-engineered products comes from three primary sources: (1) other CMs that provide similar engineering and manufacturing services, (2) other value-added computer resellers (“VARs”) and (3) less expensive off-the-shelf products.

We market our customized services and products to specific customers and niche-industries. This reduces competition from larger CMs (Flextronics, Solectron, Plexus and others) because of the costs involved for them to both assist in product development and run the smaller manufacturing volumes typical of these orders. Our broad service offerings and global service and distribution capabilities reduce competition from similar size or smaller CMs or narrower service companies. We also believe we differentiate ourselves from these competitors through the strength of our close relationships with our large OEM partners (Sun, Intel, AMD and others). The level of engineering complexity and after-the-sale service and support on some products reduces competition from VARs of all levels of size and geographic coverage and from off-the-shelf product offerings. However, a number of our competitors are more established and have substantially greater technical, manufacturing, marketing and financial resources to develop and market their engineering and manufacturing services or their off-the-shelf products.

Customers

A significant amount of our sales come from a relatively small number of large customers. A major strategic focus continues to be further growth and diversification of our customer base. In 2006, we provided services and/or products to thirteen Fortune 500 companies compared to nine in 2005.

Our three largest customers generated approximately 50%, 35%, and 44% of sales, respectively, for the years 2006, 2005 and 2004. Citrix Systems, Inc. (“Citrix”) represented 23%, 10%, and 0%, while Sun represented 20%, 9%, and 8% of our sales, respectively, for the years 2006, 2005 and 2004.

Three customers generated approximately 56%, 44%, and 52% of our product sales for the years 2006, 2005 and 2004, respectively. Four customers generated 63%, 80% and 87% of our service sales in 2006, 2005 and 2004, respectively.

We have made good progress in diversifying our customer base. However, the Company’s relatively small number of customers can create significant sales volatility. If the sales generated by either of our top four service customers declined significantly, or if product sales of our three largest product customers declined significantly without additional service or product business to replace it, the results of our operations could be materially and adversely affected.

Backlog

Our backlog includes orders confirmed with a purchase order for products scheduled to be shipped to customers with approved credit status. As of December 31, 2006 the Company’s backlog was approximately $13.0 million. Certain of our customers place large orders with us to be delivered over time. Also, certain of our customers, including our largest customers, have certain rights under our agreements with them to change the delivery timing of future shipments to them. In

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addition, our agreements with our customers often include provisions that allow the customer to cancel orders within certain contractual time periods. As a result of these factors, we do not consider our backlog to be firm nor do we believe that our backlog, as of any particular date, is necessarily indicative of actual net revenues for any future period.

License and Royalty Agreements

In November 2003, by re-application, we renewed an OEM Customer License Agreement for Embedded Systems with Microsoft Licensing, Inc. (“Microsoft”) originally issued in 2002, pursuant to which we are licensed to embed binary copies of Microsoft operating systems (as delivered from Microsoft) in our products. The license agreement was for an original term of one year expiring in November 2004. The license is renewable by re-application. The license has been renewed for a term expiring in October 2007. The license can also be terminated earlier by Microsoft upon default by us as defined in the Agreement. These operating systems were required in product sales of approximately $1.7 million, $5.8 million, and $0.9 million, or 3%, 17% and 3% of total product sales in 2006, 2005 and 2004, respectively.

In April 2003, we entered into a Regional Reseller Agreement with Agilent Technologies to buy and resell Agilent Remote Management Products in the United States and Canada. The agreement includes a license to use, execute, reproduce, display and distribute Agilent software in object code for the purpose of integrating Agilent’s products with ours, or our customers’, products. The agreement was for an original term of one year expiring in March 2004. The agreement automatically renews for one-year periods unless written notice of non-renewal is given by either party before the current term ends. The agreement may also be terminated earlier upon default by either party as defined in the agreement. The agreement was renewed for a term expiring in March 2005. The agreement expired March 2005. These products were required in product sales of approximately $0.4 million and $2.3 million, or 1% and 8% of total product sales in 2005 and 2004, respectively. This agreement was entered into to increase product offerings to our current and prospective customers.

In August 2002, we were authorized by Sun to act as an OEM Technology Partner (“OTP”), pursuant to which we are authorized and licensed to buy Sun products at specific discount levels for the purpose of modifying them and/or integrating them into our products for resale to our OEM customers. This authorization can be terminated without cause or upon default by either party as defined in the terms and conditions of the General Terms and iForce Business Terms exhibits attached to the OTP Letter of Authorization. This designation or its predecessor Master Value-Added Integrator (MVAI) designation was required in product sales of $21.8 million, $18.0 million, and $11.9 million, or 33%, 52%, and 42% of total product sales in 2006, 2005 and 2004, respectively.

In July 2001, we entered into a Reference Design License Agreement with Sun, pursuant to which we are licensed to develop, manufacture and sell products based upon and using the Sun ULTRASPARC IIe technology. The license agreement was for an original term of three years expiring in July 2004. The license automatically renews for up to two one-year periods unless written notice of non-renewal is given by either party before the current term ends. The license can also be terminated earlier upon default by either party as defined in the Agreement. The license agreement automatically renewed through July 2006. This technology was required in product sales of $1.0 million, $2.8 million, and $5.1 million, or 2%, 8%, and 18% of total product sales in 2006, 2005 and 2004, respectively.

In May 1999, we entered into a Reference Design License Agreement with Sun Micro Electronics (“SME”), pursuant to which we were licensed to develop, manufacture and sell products based upon and using the Sun AXmp technology. Training and support fees amounting to $40,000 were paid in connection with the license. The license agreement is for an original term of seven years expiring in May 2006. The license automatically renews for one-year periods unless written notice of non-renewal is given by either party before the current term ends. The license can also be terminated earlier upon default by either party as defined in the Agreement. This technology was required in product sales of $0.2 million and $5.4 million in 2005 and 2004, respectively, or 1% of product sales in 2005 and 19% of total product sales in 2004. The Company had no revenues under this agreement in 2006.

In October 1997, we entered into a Development and Manufacturing License Agreement with SME pursuant to which we are licensed to develop, manufacture and sell products based upon and using the Sun PCI card and Open Boot PROM technology. We do not anticipate that we will develop any new products based on the technology licensed under this agreement, although we will continue to sell products that we have developed under this license. The license agreement was for an original term of three years expiring in October 2000. However, the license automatically renews for one-year periods unless written notice of non-renewal is given by either party before the current term ends. The license can also be terminated earlier upon default by either party as defined in the Agreement. The license had been automatically renewed for an additional one-year term through October 2006. This technology was required in product sales of $3.7 million, $2.0 million, and $1.2 million, or 6%, 6%, and 4% of total product sales in 2006, 2005 and 2004, respectively.

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Research and Development

Research and development costs are generally customer-sponsored, and were not material for the years 2006, 2005 and 2004. Any costs not sponsored by a customer are expensed as incurred and were not material for the years 2006, 2005 and 2004.

Environmental Compliance Costs

Certain facets of our operations involve the use of substances regulated under various federal, state and local laws governing the environment. The liability for environmental remediation and related costs can be significant, although the Company has not incurred any to date. During the fiscal year 2006, the Company incurred an inventory write-down of approximately $130,000 due to the implementation of Restriction of Hazardous Substances (RoHS) standards in the European Union effective July 1, 2006. This directive bans the placing on the European Union market of certain hazardous substances used in electrical and electronic equipment. Outside of this directive, environmental costs and environmental regulations are not presently material to our operations or financial position. Similarly, no other federal, state or local laws or regulations are expected to materially impact our operations or financial position.

Employees

As of December 31, 2006, we had a total of 180 full-time employees. We depend on key employees and face competition in hiring and retaining qualified employees. None of our employees are subject to collective bargaining agreements. We consider our relationship with our employees to be very good.

Financial Information About Geographical Areas

Revenues from outside of the United States (U.S.) were approximately 14%, 8%, and 14% of our total revenues in fiscal years 2006, 2005 and 2004, respectively. Direct sales the Company makes outside of the U.S. are priced in U.S. dollars. All of our export transactions are subject to U.S. Export control laws and certain transactions could require prior approval of the U.S. Department of Commerce. Protectionist trade legislation in either the U.S. or other countries, such as a change in the current tariff structures, export compliance laws or other trade policies, could adversely affect our ability to sell, service or manufacture in international markets or to secure adequate supplies of component parts. In addition, revenues from outside the U.S. are subject to inherent risks, including the general economic and political conditions in each country.

Availability of Information

The Company makes available through it internet website (www.pinnacle.com) its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after electronically filing such material with the Securities and Exchange Commission. The Company has posted on their website a copy of the code of business conduct and ethics and conflict of interest policy. The reference to the Company’s website address does not constitute incorporation by reference of the information contained on the website and should not be considered part of this document.

The public may read and copy any materials the Company has filed with the Securities and Exchange Commission at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D. C. 20549. Information on the operations of the Public Reference Room can be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. Since the Company is an electronic filer, the Securities and Exchange Commission also maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information filed the Company.

Future results and the market price for the Company’s common shares are subject to numerous risks, many of which are driven by factors that cannot be controlled or predicted. The following discussion, as well as other sections of this Annual Report on Form 10-K, including “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations,” describe certain business risks. Consideration should be given to the risk factors described below as well as those in the Safe Harbor Statement at the beginning of this Form 10-K, in conjunction with reviewing the forward-looking statements and other information contained in this Form 10-K.

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A significant portion of our revenues from product sales and services are dependent on significant customers and specific industries.

Sales to Sun and Citrix combined accounted for approximately 43% and 19% of our fiscal 2006 and 2005 revenues. For the fiscal years ended December 31, 2006, 2005 and 2004, sales directly to Sun accounted for 20%, 9% and 8% of our total net revenues, respectively. Sales to Citrix accounted for 23%, 10% and 0% of our fiscal 2006, 2005 and 2004 total net revenues, respectively. A significant reduction in sales to either customer, or significant pricing and additional margin pressures exerted on us by either customer, would have a material adverse effect on our results of operations. In addition, if either customer delays or cancels purchases of our products, our operating results would be harmed and our ability to accurately predict revenues, profitability and cash flows would decrease.

In addition, we are dependent on the computer and networks, telecommunications, medical and imaging industries for a significant portion of our revenues. Our revenues are directly dependent on the level of capital spending for technology in the U.S. and international economies. If spending for technology declines in any of these industries over an extended period of time, it would have a material adverse effect on our business.

Our future success in business strategy is dependent upon our ability to generate significant revenues from world-leading OEMs and ISVs development relationships.

We believe we must continue to diversify our revenues, and a major component of our business strategy is to form product and services development relationships with world-leading OEMs and ISVs. We market our customized services and products to specific customers and niche-industries. This reduces competition from larger CMs because of the costs involved for them to run the smaller manufacturing volumes typical of these orders. The level of engineering complexity and after-the-sale service and support on some products reduce competition for VARs of all levels of size and geographic coverage. We believe we differentiate ourselves from other competitors through the strength of our close relationships with our very large OEM partners (Sun, Intel, AMD, HP and others), our ability to offer and deliver complete turnkey solutions in relatively short development cycles, our unique product set and our full service-after-the-sale offering.

Our future success will depend on our ability to establish relationships with new customers, as well as expanding sales to our existing customers. If we are unable to expand our sales to existing customers and develop relationships with new customers, our revenues and operating results could suffer.

If we are unable to grow our international revenues and successfully overcome the risks inherent in international business activities, the growth of our business may be limited.

The Company’s ability to grow will depend in part on the growth of its international revenues. If our professional services around the development, deployment and support of sophisticated computer systems are not accepted across international regions, our ability to increase our revenues in this region would be limited. In addition, our international sales are subject to the risks inherent in international business activities, including:

The majority of our international sales currently are U.S. dollar-denominated. As a result, any increase in the value of the U.S. dollar relative to foreign currencies makes our products less competitive in international markets. Because of this our revenues may be adversely affected, or we may be required to denominate more of our sales in foreign currencies at some point in the future to remain competitive. In addition, because certain of our operating expenses related to our international sales are denominated in foreign currency, we may have difficulty controlling expenses in the event of significant currency fluctuations.

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If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below expectations of investors, resulting in a decline in our stock price.

Our discussion and analysis of financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate significant estimates used in preparing our financial statements, including those related to:

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in our discussion and analysis of financial condition and results of operations, 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 and other estimates if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price.

Our quarterly revenues and operating results may fluctuate which could cause our results from operations to fall below expectations and thus impact the market price of our common stock.

Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. None of our customers are obligated to purchase any quantity of our products in the future nor are they obligated to meet forecasts of their product needs. Our operating expense levels are based in part on expectations of future revenues and gross profits, which are partially dependent on our customers’ ability to accurately forecast and communicate their future product needs. If revenues or gross profits in a particular quarter do not meet expectations, operating results could suffer and the market price of our common stock could decline. Factors affecting quarterly operating results include:

Competition in professional services around the development, deployment and support of sophisticated computer systems market is significant and if we fail to compete effectively, our financial results will suffer.

In the market of custom-engineered computer system products, we face significant competition from a number of different types of sources. Our competition includes: (1) other CMs that provide similar engineering and manufacturing services, (2) other VARs and (3) less expensive off-the-shelf products. Many of these companies are larger than we are and have greater financial resources and name recognition than we do, as well as significant distribution capabilities and larger, more established service organizations to support their products. Our larger competitors may be able to leverage their existing resources, including their extensive distribution capabilities and service organizations, to provide a wider offering of products and services and higher levels of support on a more cost-effective basis than we can. If we fail to compete successfully in this market, the demand for our product and services would decrease.

Customers make buying decisions based on many factors, including among other things, product performance and quality; availability and quality of support and other services; price; interoperability; ease of doing business; a vendor’s ability to adapt to customers’ changing requirements; responsiveness; contractual terms and conditions; vendor reputation and vendor viability. As competition increases, each factor on which we compete becomes more important and the lack of competitive advantage with respect to one or more of these factors could lead to a loss of competitive position, resulting in fewer customer orders, reduced revenues, reduced margins, reduced levels of profitability and loss of market share. These competitive pressures could materially and adversely affect our business and operating results.

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Reliance on a single source supplier could delay product shipments and increase our costs.

We depend on many suppliers for the necessary parts and components to manufacture and repair products. There are a number of vendors producing the parts and component that we need. However during fiscal year 2006, we purchased approximately 13% of all inventory directly from Sun or through Sun’s distribution channel. We believe all critical production components and service parts, or suitable substitutes, are readily available in the marketplace from multiple manufacturers and/or suppliers, new or refurbished, as required by our current customers’ demands. If we were unable to purchase on acceptable terms or experienced significant delays or quality issues in the delivery of necessary parts and/or components from a particular vendor and we had to find a new supplier for these parts and components, our new and existing product or repair shipments could be delayed which could have a material adverse effect on our business, results of operations and financial condition.

Our products may have quality issues that could adversely affect our sales and reputation.

In the course of conducting our business, we experience and address quality issues. Some of our products and repairs contain defects, including defects in our engineering, design and manufacturing processes, as well as defects in third-party components included in repair or product builds, which may be beyond our control. Often defects are identified during our design, development and manufacturing processes and we are able to correct many of these.

When a quality issue is identified, we work extensively with our customers to remedy such issues. We may test the affected product to determine the root cause of the problem and to determine appropriate solutions. If we are unable to determine the root cause or find an appropriate solution, we may delay shipment to customers. Defects in our repair or product builds can harm our reputation, delay or prevent sales, result in significant expense and could materially and adversely affect our business.

If we fail to attract and retain appropriate levels of qualified employees and members of senior management, we may not be able to successfully execute our business strategy.

Our success depends in large part on our ability to attract and retain highly skilled engineering, sales, customer service, and managerial personnel. If we are unable to attract a sufficient number of qualified personnel, particularly personnel knowledgeable in software engineering and product management, we may not be able to meet key objectives such as developing, upgrading, or producing our repair and product builds in a timely manner, which could negatively impact our business and could hinder any future growth.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which could have a negative market reaction.

Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting starting in 2008 with management’s report on internal controls required for the 2007 fiscal year. We are in the process of establishing a program to perform the system and process evaluation and testing necessary to comply with these requirements. As a result, we will incur increased expense and will devote additional management resources to Section 404 compliance. Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our business and operating results could be harmed.

If the site of our production and service operations were to experience a significant disruption in its operations, it would have a material adverse effect on our financial condition and results of operations.

Our production and service facilities and headquarters are located in two buildings within two miles of each other. If the operations in either facility were disrupted as a result of a natural disaster, fire, power or other utility outage, work stoppage or other similar event, our business could be seriously harmed as a result of interruptions or delays in our manufacturing, engineering, services or other post-sales support operations.

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Not applicable.