COMPENSATION COMMITTEE REPORT 2005

Compensation Committee Report on Executive Compensation

The Compensation Committee is responsible for establishing the Company’s compensation philosophy and policies, setting the terms of and administering its option plans, reviewing and approving employment contracts and salary recommendations for the Company’s executive officers and setting the compensation for the chief executive officer. The Company’s overall compensation philosophy is to align the financial interests of management with those of the Company’s stockholders, taking into account the Company’s expectations for growth and profitability, the necessity to attract and retain the best possible executive talent and to reward its executives commensurate with their ability to enhance stockholder value. Accordingly, the Smith Employment Agreement provides for compensation consisting of base salary, stock options and a bonus based upon achieving certain earnings goals. The Compensation Committee believes that providing executives with opportunities to acquire significant stakes in the Company’s growth and prosperity through grants of stock options and other incentive awards will enable the Company to attract and retain executives with the outstanding managerial abilities essential to the Company’s success, motivate these executives to perform to their full potential and enhance stockholder value.

Mr. Smith’s compensation as the Company’s President and Chief Executive Officer during the 2004 fiscal year was based on the compensation structure set forth in the Smith Employment Agreement, which provides for a base salary of $125,000 and incentive bonuses based on the Company’s financial performance. In July 2004, the Board authorized a base annual salary for Mr. Smith of $140,000 payable retroactively from October 1, 2003. Consequently, Mr. Smith’s salary for the 2004 fiscal year was $140,000. In addition, as a further incentive, on June 8, 2000, Mr. Smith was granted an option under the 1992 Plan to purchase 75,000 shares of Common Stock at an exercise price of $0.33 per share, which was the per share closing price of the Common Stock on June 8, 2000. The option vested over a three-year period in order to align Mr. Smith’s interest with improving the Company’s performance and improving the trading price of the Common Stock. The terms of Mr. Smith’s employment were determined after consideration and analysis of, among other things, the Company’s performance history and the relationship of that performance to internal projections and targets, average cash and other compensation and equity positions of chief executive officers of selected companies deemed by the Compensation Committee to be comparable and Mr. Smith’s central role in the Company’s operating results.

The Compensation Committee believes that its current policies have been and will continue to be successful in aligning the financial interests of the executive officers with those of the Company’s stockholders and the Company’s performance. Nevertheless, the Compensation Committee intends to continue to review whether and how to modify its policies to further link executive compensation with both individual and the Company’s performance.

-- Proxy Statement July 2005