Memry (MRY)

Note K. INCOME TAXES

A reconciliation of the income tax provision computed by applying the statutory U.S. Federal income tax rate of 34% to income (loss) before income taxes as reported in the condensed consolidated statements of operations follows. The nondeductible expense (benefit) for stock-based compensation on ISOs for the three months ended March 31, 2007 and 2006 was $(40,000) and $40,000, respectively. The nondeductible expense for stock-based compensation on ISOs for the nine months ended March 31, 2007 and 2006 was $202,000 and $351,000, respectively. In addition, an extraterritorial income exclusion tax benefit was recognized in the three months ended March 31, 2007 as a result of the fiscal 2006 return to provision adjustment of $93,000 as well as a benefit for the current year to date of $64,000. The extraterritorial income exclusion is due to the Company’s foreign sales and the benefit is no longer available as of December 31, 2006, as a result of a change in U.S. tax law.

As of June 30, 2006, the Company had federal net operating loss carryforwards of approximately $6,200,000 available to reduce future federal taxable income, which expire in 2009 through 2011.

The recognition of tax benefits of $25,000 and $70,000 during the three months and nine months ended March 31, 2007, respectively, related to the exercise of warrants and stock options and subsequent sale of the underlying stock is being deferred per SFAS No. 123(R) and will be recognized when net operating loss carryforwards are fully utilized.

Note J. INCOME TAXES

A reconciliation of the income tax provision computed by applying the statutory U.S. Federal income tax rate of 34% to income (loss) before income taxes as reported in the condensed consolidated statements of operations follows. The nondeductible expense for stock-based compensation on ISOs for the three months ended December 31, 2006 and 2005 was $125,000 and $157,000, respectively. The nondeductible expense for stock-based compensation on ISOs for the six months ended December 31, 2006 and 2005 was $242,000 and $310,000, respectively.

As of June 30, 2006, the Company had federal net operating loss carryforwards of approximately $6,200,000 available to reduce future federal taxable income, which expire in 2009 through 2011.

The recognition of tax benefits of $25,000 and $45,000 during the three months and six months ended December 31, 2006, respectively, related to the exercise of warrants and stock options and subsequent sale of the underlying stock is being deferred per SFAS No. 123(R) and will be recognized when net operating loss carryforwards are fully utilized.

Note I. INCOME TAXES

A reconciliation of the income tax provision computed by applying the statutory U.S. Federal income tax rate of 34% to income before income taxes as reported in the condensed consolidated statements of income follows. The nondeductible expense for stock-based compensation on ISOs for the three months ended September 30, 2006 and 2005 was $117,000 and $152,000, respectively.

- 10 -

Table of Contents

As of June 30, 2006, the Company had federal net operating loss carryforwards of approximately $6,200,000 available to reduce future federal taxable income, which expire in 2009 through 2011.

The recognition of a $20,000 tax benefit during the three months ended September 30, 2006 related to the exercise of warrants and stock options and subsequent sale of the underlying stock is being deferred per SFAS No. 123(R) and will be recognized when net operating loss carryforwards are fully utilized.

Income taxes

Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their income tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws on the date of enactment.

Note F. INCOME TAXES

A reconciliation of the income tax provision computed by applying the statutory federal income tax rate of 34% to income before income taxes as reported in the condensed consolidated statements of income follows. The nondeductible expense for stock-based compensation on ISOs for the three months and nine months ended March 31, 2006 was $40,000 and $351,000, respectively. In addition, an extraterritorial income exclusion tax benefit was recognized in the third quarter of fiscal 2006 as a result of the fiscal 2005 return to provision adjustment of $86,000 as well as a benefit for the current year to date of $52,000. The extraterritorial income exclusion is due to the Company’s foreign sales.

As of June 30, 2005, the Company had net operating loss carryforwards of approximately $10,000,000 available to reduce future federal taxable income, which expire in 2008 through 2011.

Note F. INCOME TAXES

A reconciliation of the income tax provision (benefit) computed by applying the statutory federal income tax rate of 34% to income (loss) before income taxes as reported in the condensed consolidated statements of operations follows. The nondeductible expense for stock-based compensation on ISOs in the three months and six months ended December 31, 2005 was $157,000 and $310,000, respectively.

As of June 30, 2005, the Company had net operating loss carryforwards of approximately $9,500,000 available to reduce future federal taxable income, which expire in 2008 through 2011.

Note F. INCOME TAXES

A reconciliation of the income tax provision computed by applying the statutory Federal income tax rate of 34% to income before income taxes as reported in the condensed consolidated statements of income follows. The nondeductible expense for stock-based compensation on ISOs in the first quarter of fiscal 2006 was $152,000.

As of June 30, 2005, the Company had net operating loss carryforwards of approximately $9,500,000 available to reduce future Federal taxable income, which expire in 2008 through 2011.

Income taxes

Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their income tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws on the date of enactment.

Income taxes

Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their income tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws on the date of enactment.

Note F. INCOME TAXES

A reconciliation of the income tax provision computed by applying the statutory Federal income tax rate of 34% to income before income taxes to the income tax provision as reported in the condensed consolidated statements of income is as follows:

As of June 30, 2004, the Company had net operating loss carryforwards of approximately $14,000,000 available to reduce future Federal taxable income, which expire in 2006 through 2011.

Note F. INCOME TAXES

A reconciliation of the income tax provision computed by applying the statutory Federal income tax rate of 34% to income before income taxes to the income tax provision as reported in the condensed consolidated statements of income is as follows:

As of June 30, 2004, the Company had net operating loss carryforwards of approximately $14,000,000 available to reduce future Federal taxable income, which expire in 2006 through 2011.

Income taxes

The Company, with consent of its stockholder, has elected under the Internal Revenue Code to be an S Corporation. In lieu of federal and state corporate income taxes, the stockholder of an S Corporation is taxed on his proportionate share of the Company’s taxable income. Therefore, no provision or liability for federal or state income taxes has been included in the accompanying financial statements.