NOTE 5 – WARRANTY

We provide reserves for the estimated cost of product warranties at the time revenue is recognized.  We estimate the costs of our warranty obligations based on our warranty policy or applicable contractual warranty, historical experience of known product failure rates, and use of materials and service delivery costs incurred in correcting product failures.  Management reviews the estimated warranty liability on a quarterly basis to determine its adequacy.  The actual warranty expense could differ from the estimates made by the Company based on product performance.

The following table presents the changes in the Company's warranty liability for the six month periods ended June 30, 2011 and 2010, respectively, the majority of which relates to a five-year obligation to provide for potential future liabilities for network equipment sales.

                                                                                               2011                            2010    

            Beginning Balance                                          $         616,000          $           648,000                

            Actual warranty costs paid                                       (124,000)                       (18,000)

            Amounts charged to expense                                       93,000                       (50,000)

            Ending balance                                               $         585,000           $           580,000