The primary reason for the reduced earnings was an increased investment in research and development and marketing plus non-recurring legal expenses.

For the year ended July 31, 1999, the company earned $637,913 on sales of $24,622,322, or 49 cents per share vs. earnings of $1,317,886 on sales of $24,856,975 or 89 cents per share the previous year. Gross profit was $8,459,968 or 38.9 percent of net sales for the year vs. $8,841,623 or 40.5 percent of net sales for the previous year. The primary difference in gross margin was product mix.

Expenses for fiscal 1999 were $7,309,350 vs. $6,413,160 for the previous year. This increase of $896,190 was primarily in three areas, research and development, marketing, and non-recurring legal expenses.

Marketing expenses were part of an effort to increase penetration in the woodworking industry and increase the market size. During the year, the company demonstrated Furniture Fabrication at several trade shows. Furniture Fabrication is where a production cell, based on Thermwood technology, is used to build entire pieces of furniture. Both advertising and trade show expenses increased.

Management believes that these efforts were successful as the level of sales to the woodworking industry increased; however, a lower level of manufacturing activity resulted in lower sales levels to the plastics industry, more than offsetting the increase in woodworking.

Management intends to continue promoting Furniture Fabrication since, if accepted by the industry, it has the potential to increase the market size and demand for Thermwood products.

During the year Thermwood established a Software Technology group to search out and offer software products that enhance the efficiency and operation of its CNC router systems. The company signed distribution agreements with several software companies including a cabinet design software company called Cabinet Vision. Based on that agreement, Thermwood and Cabinet Vision jointly developed an integrated system with which a customer can design and efficiently manufacture custom kitchen cabinets.

Trial versions of this system were shipped after the end of the fiscal year and management believes that, if this effort is successful, it may begin impacting sales and earnings within the first or second quarter of fiscal 2000. Management believes that this product offers a substantial growth opportunity since there are approximately 100,000 custom cabinet manufacturers in the U.S. alone.

In addition to developing the integrated cabinet package, research and development efforts also enhanced the current product line by increasing operating speed, improving cut quality, reducing tool change time, improving spindle life and reducing noise. The company also developed other additions to its product offering, including a new high-speed tool changer, a multi-function machine table, a tool management system and a five-axis chip collection system.

The company's European operations began operating above a break-even for the last half of the fiscal year, however they showed a loss for the year as a whole. Management believes that future prospects for this operation are dependent on economic and manufacturing activity in the European community.

Despite a soft manufacturing market, Thermwood has invested heavily in marketing and product development and believes this investment has positioned the company for improved sales and earnings in the fiscal 2000 and beyond.

Forward-looking statements in this document are made pursuant to the "Safe Harbor" provision of the Private Securities Litigation Act of 1995. Investors are cautioned that actual results may differ substantially from such forward-looking statements. Forward-looking statements involve risks and uncertainties, including but not limited to, continued acceptance of the company's products in the marketplace, acceptance of new products in the marketplace, competitive factors, new products and technological changes, the company's dependence on third party suppliers, overall economic activity and other risks detailed from time to time in certain of the company's filings with the Securities and Exchange Commission.