This excerpt taken from the OPTC 10-K filed Mar 25, 2005.
Revenue RecognitionRevenue from commercial sales is recognized when product is shipped and accepted. Revenues from fixed-price contracts, such as contracts from the government, are recognized on the percentage-of-completion method, which relies on estimates of total expected contract revenue and
costs. Optelecom follows this method since reasonably dependable estimates of the revenue and costs applicable to various stages of a contract can be made. Recognized revenues and profit are subject to revisions as the contract progresses to completion. Revenues from time-and-materials contracts are recorded at the contract rates times the labor hours plus other direct costs as incurred. In the ordinary course of business, the Company warrants its products against defect in design, materials, and workmanship over various time periods. Warranty reserve and allowance for product returns is established based upon managements best estimates of amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Beginning December 2002, the Company established a warranty reserve for expenses associated with future warranty claims. This reserve is updated on a quarterly basis.