SAMPLE COMPANY                                       Page 1 of 4
SOP # 15-2  Revision: 0               Prepared by:             _
Effective Date:                       Approved by:             _



Title:         PHYSICAL INVENTORY PROCEDURES

Purpose:  This procedure is intended to outline the actions to
          be taken to enable an accurate physical count of
          inventory items.

Scope:    This procedure applies to all inventory items
          including raw materials/parts, work in process and
          finished goods contained in the areas of
          Manufacturing, Storage/warehouse, Engineering,
          Showrooms or consigned out for demonstrations or
          service.

Procedures:

1.0  Timing

1.1  The physical inventory will be taken at year-end or during
     the immediately following business days.  The starting time
     will be determined by the production management and
     controller and communicated to all employees involved with
     the Physical Inventory.

2.0  Cleaning and Organization of Inventory Areas

2.1  Prior to beginning the physical counting process all areas
     containing inventory are to be cleaned and organized to
     their optimal standard.

2.2  All loose inventory items should be removed from work
     stations or machines and neatly placed or stored into bins,
     shelves, racks, etc.  Identical parts that are used in
     multiple locations should (if practical) be combined into
     one storage area to facilitate ease of record keeping.

     After grouping and organizing identical parts (i.e., on
     shelves or bins), then all inventory items should be
     reasonably separated and identified/labeled to avoid any
     confusion between similar looking or types of parts.

2.3  All non-inventory, defective or obsolete parts should be
     clearly segregated from inventory items to be counted.
     These items should also be visibly marked or indicated to
     their nature (i.e., "Non-Inventory - Do Not Count"
     "Defective", etc.).
PHYSICAL INVENTORY PROCEDURES                        Page 2 of 4


2.4  All count areas (shelves, benches, storage, etc.) should be
     labeled by an Alphanumeric code for ease in identification
     of location.  For example the first shelf unit would be
     labeled A with individual rows numbered from top to bottom
     A1, A2, A3, etc.  Alphabetical characters should be used
     from A to Z and then proceed to double or Triple Alpha
     characters (i.e. AA, AB, AC or AAA, AAB) until all areas
     have been uniquely assigned a location code.

3.0  Year End Cut-Off

3.1  To adequately control cut-off of inventory transactions for
     purchases (receiving) and sales (shipments) operations will
     be completely shut down.  Any goods received after year-end
     but prior to completion of Physical Inventory will be kept
     in the receiving area and will not be unpacked or received
     in any way.  All finished goods should be kept in the
     finished Goods Staging area and should not be packed or
     shipped until after completion of the physical inventory.

3.2  To document year-end cut-off, the last five (5) sequential
     shipping documents and receiving reports will be copied and
     provided to the company's external auditors.

4.0  Counting Procedures and Instructions

4.1  To facilitate an efficient counting and verification
     process,  count teams consisting of two individuals should
     be formed by the Inventory Control Manager.  At least one
     individual from each team should be knowledgeable about the
     inventory items to be counted.

     A master floor plan of areas containing inventory items
     should be prepared with areas color coded by count team.
     Individual Team counting assignments with the date and
     approximate starting time for the Physical count should be
     prepared and distributed to the teams along with these
     counting procedures prior to year-end.

4.2  A pre-count meeting should be held by the Inventory Control
     Manager and the company's Controller with all count team
     members to review counting procedures/instructions and
     answer any questions.  Each count team should be started by
     the Inventory Control Manger and should be periodically
     observed by the Inventory Control Manager  to assure that
     instructions are being complied with in the counting and
     listing process.

4.3  A package of sequential pre-numbered inventory sheets will
     be prepared by the I.C. Manager and distributed to the
     Count Teams according to their assignment.  Upon
     completion, count sheets are to be returned to the
     Inventory Control Manager and should all be accounted for
     (i.e., used, unused, voided).
PHYSICAL INVENTORY PROCEDURES                        Page 3 of 4


     The inventory sheets will be pre-printed for current part
     #'s maintained by the company.  Blank inventory sheets will
     also be provided to list any inventory items not found on
     the pre-printed sheets.

     The format of the count sheets should contain a Heading
     with the name of the Company, Date of Physical count,
     Sequential Page number and Description of Page (i.e.,
     Physical Inventory Count Sheet).  Individual Column
     Headings should be prepared with Part #, Description,
     Location, Quantity and Initials of person recording the
     count.

4.4  Count teams should count items in their assigned area in a
     logical, sequential (non-random) fashion to avoid any
     chance of missing or duplicating counting of items.
     General rules of procession should be followed (i.e., Left
     to Right, Top to Bottom and Front to Back)

     After counting a distinguishable area (i.e., shelf unit,
     wall, box, etc.) a yellow tag label should be attached to
     indicate that the area has been counted.

     Inventory comprised of small, numerous components that
     would involve tedious counting and also have a very low
     dollar value (i.e., screws, nuts, fasteners, etc.) will be
     reviewed with the Inventory Control Manager and if deemed
     appropriate will be estimated as to volume in round numbers
     (i.e., 250, 500, etc.).  The estimated # will be recorded
     on the Count Sheet but must be notated by the symbol "Est."
     before the number to indicate that the value was not
     obtained by a true physical count.  As an alternate, these
     items can be weighed using a scale and counting a
     representative sample (i.e., 25 screws) to determine a
     weight/count ratio for this item and using this ratio
     against the total weight of the items to determine a count.
     If this method is utilized a "W" symbol should be noted
     before the number on the Count Sheet to indicate that the
     value was obtained through a weighed estimate and not by a
     true physical count.

4.5  Finished Goods and work in process will be counted and
     recorded on individual sheets.  Finished Goods will be
     noted by Model # and multiplied by the respective Bill of
     Materials to determine the value of individual part #'s.
     Work in process will be noted by Model # and Estimate of
     completion level in Percentage terms (i.e., 75%).  This
     percentage will then be used with the respective Bill of
     Materials to determine the value of the inventory contained
     in the item.

4.6  Inventory that is out of the Company including Sales
     Demonstration units, Service loaners or consigned should be
     recorded on the Company's Request from Inventory Forms.
     These forms should be copied as backup and for confirmation
     purposes and the inventory items counted and included with
     the physical count.
PHYSICAL INVENTORY PROCEDURES                        Page 4 of 4


5.0  Master Inventory and Pricing Report

5.1  Upon completion of the Physical Count and receipt of Count
     Sheets, the Inventory Control Manager will prepare a Master
     Inventory Record for all inventory items with the total
     count for each item obtained from all locations.

     The report will be divided into three sections, 1; Raw
     Materials, 2; Work in Process, 3; Finished Goods.

5.2  The report will also contain the standard cost for each
     item and the extended value (Qty. X Std. Cost) for each
     item with column totals by the above three categories and a
     grand total of all inventory value.

5.3  Upon completion of the report by the Inventory Control
     Manager, the report along with all backup documents will be
     forwarded to the Controller for review and verification and
     subsequent testing and analysis by the company's
     independent auditors.