Forward Looking Statements

The following discussion includes "forward-looking statements" within the meaning of Section 21E of the Securities and Exchange Act of 1934, and is subject to the safe harbor created by that section. Forward-looking statements give our current expectations or forecasts of future events. All statements, other than statements of historical facts, included or incorporated in this report regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Factors that could cause results to differ materially from those projected in the forward-looking statements are set forth in this section and in Part I - Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. The following discussion should also be read in conjunction with the Consolidated Financial Statements and accompanying Notes thereto.

Readers are cautioned not to place undue reliance on these prospective statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, debt restructurings, capital raising efforts or investments we may make. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission.

Executive Summary

We are a leading provider of innovative, automated traffic enforcement systems and services to state and local governments throughout the United States and Canada. We are the only provider of both a fully video-based automated red light enforcement system and a multi-lane, bi-directional scanning light detection and ranging, or LiDAR, speed enforcement system. We also offer a newly developed ViDAR™ speed detection and imaging system as complement to our other products or as a stand-alone speed enforcement system. CrossingGuard®, our red light enforcement product, uses our patented image processing technology to predict and record the occurrence of a red light violation and manages the process of issuing and processing a citation. Collision Avoidance™ is a patented enhancement to CrossingGuard® that predicts red light violations and extends the all red signal phase of a traffic light to prevent deadly intersection collisions. PoliScanSpeed™ uses LiDAR, a technology developed by Vitronic GmbH. The Company is a North American distributor of Vitronic PoliScanSpeed™, and the Company continues to market and support this highly effective speed system. ViDAR™ uses non-detectable, passive video detection and average speed over distance calculations to detect and record evidence of speeding vehicles.

In addition to our automated traffic enforcement systems, we provide back office citation processing services for CrossingGuard®, PoliScanSpeed™ and ViDAR™ systems using our proprietary software solution called Citation Composer. These processing services include obtaining data from the roadside systems, reviewing the data, preparing the citations and evidence packages and tracking final resolution of the citations. One of Citation Composer's many unique features is its ability to simultaneously replay synchronized videos of a red light violation, allowing for a more complete evidence package. In addition, our new i-Citation software application assists customers with all event tasks. i-Citation provides customers with the ability to review the complete evidence package online. i-Citation provides police and other officials with convenient and quick access to all event information. i-Citation also provides ready access over the web to violation information such as location, date and time stamp information and disposition status of an event.

By combining CrossingGuard®, Collision Avoidance™, Poliscanspeed and ViDAR™ with Citation Composer and i-Citation, our proprietary citation preparation and processing software, we are able to provide fully integrated, turnkey red light and speed enforcement solutions.

We generate recurring revenue through contracts that provide for equipment leasing and services on a fixed and/or per citation fee basis. These revenues are tied to the number of operating systems in the field and the number of violations processed by such systems. Customer pricing entails fixed monthly fees, variable per ticket fee pricing structures, or a combination of both. Because fixed fees are based upon the expected level of violations over the contract term, the shift to monthly fixed fee contracts may result in a more stable revenue stream for those installations. Many of our initial red light and speed contracts, however, compensate us on a per ticket paid or issued basis in return for both equipment lease and maintenance and citation processing and customer support services. Depending on the terms of each contract, we realize from $11 to $99 per citation issued or paid and/or fixed monthly fees ranging from $1,425 to $7,000 per approach for system delivery and processing services.

State statutes providing for automated enforcement may impose liability on either the driver or the registered owner of a vehicle for a violation. Driver liability statutes require that the driver be identified, from the photographic evidence, and that the citation be issued and sent to the driver. Registered owner statutes require that the vehicle's owner be identified, through registration records, and that the citation be issued and sent to the registered owner. Because only the license plate is required for identification under a registered owner statute, program operating efficiencies are much higher, resulting in lower per citation costs and monthly fees for CrossingGuard® systems installed in these jurisdictions. Of the twenty-five jurisdictions that currently allow for automated red light enforcement programs, five require that a driver be identified; the other states limit identification to the vehicle license plate and impose liability on the registered owner. Driver identification states include California, Arizona, Oregon, Utah, and Colorado.

Almost all of our contracts provide for the lease of equipment and the services as a bundled, turnkey program over three to five years. The equipment leases are generally classified as operating leases under SFAS 13, "Accounting for Leases," and the revenues are realized along with service revenues as services are delivered to a customer over the life of the contract. One contract with Delaware DOT provided for a monthly lease of the roadside equipment, and we transferred this lease to GE Municipal Services for the face value of the roadside equipment, or $80,000 per approach. In accordance with SFAS 13, this lease qualified as a sales-type financing lease, and we recognized the value received from the leased equipment and expensed the associated costs of the system in the same period.

Our existing CrossingGuard® contracts with government entities typically authorize the installation of systems at a specified number of approaches. As of September 30, 2008, our existing active contracts authorized the installation of our CrossingGuard® product at up to an additional 175 approaches. Management believes a significant number of the authorized approaches under existing active contracts will be installed, but no assurances can be given that all approaches under contract will ultimately be installed due to factors such as locating qualifying intersections, budget or personnel considerations, etc.

The following table provides summary information regarding our active contracts.

                                                     Quarter Ended September 30,
 Number of Approaches and Units:                     2008                  2007

 Installed, operational and revenue-generating
 CrossingGuard red light approaches                        338                   280
 Poliscanspeed Units                                         7                     7
 Additional Authorized Approaches:
 CrossingGuard red light approaches                        175                   195
 Poliscanspeed Units                                        12                    12
 Total                                                     532                   494

We added 8 CrossingGuard® red light approaches during the third quarter of 2008, and we entered into agreements with several key customers to extend and expand their respective CrossingGuard® contracts.

The management team's focus is to expand our market share in the emerging traffic safety market. We plan to expand that market share by:

· Continuing to aggressively market CrossingGuard® video-based red light enforcement systems and services to states and municipalities for red light enforcement and safety;

· Implementing a marketing program for speed enforcement systems and services to states and municipalities for speed enforcement and safety;

· Participating in efforts to increase the public's acceptance of, and state's authorization of, automated traffic safety systems;

· Participating in industry standards-setting bodies;

· Enhancing and seeking patents for our traffic safety technology to maintain or improve our position and competitive advantages in the industry; and

· Vigorously defending our patented technology from competitors' infringement

Our quarterly operating results have fluctuated in the past and may fluctuate significantly in the future. We may incur significant expenses in anticipation of revenue, which may not materialize and we may not be able to reduce spending quickly if our revenue is lower than expected. In addition, our ability to forecast revenue, particularly with respect to our new speed products, is limited. As a result, our operating results are volatile and difficult to predict, and you should not rely on the results of one quarter as an indication of future performance. Factors that may cause our operating results to fluctuate include costs related to customization of our products and services; announcements or introductions of new products and services by our competitors; the failure of additional states to adopt or maintain legislation enabling the use of automated traffic enforcement systems; determinations by state and local government bodies to utilize our equipment without the additional processing services we provide; equipment defects and other product quality problems; a shift towards fixed rate, as opposed to per ticket, compensation arrangements for our speed products, which could adversely affect revenues; the discretionary nature of our customers' internal evaluation, approval and order processes; the varying size, timing and contractual terms of orders for our products and services; and the mix of revenue from our products and services.

During our first 25 years of operations, we developed a number of patented intelligent software solutions for decision and data-mining applications, including financial services, fraud detection and intelligent traffic-management systems. In 2000, we made the strategic decision to concentrate on our traffic management technologies and began to dispose of our other product lines. By 2003, we had exited our financial services, fraud detection and Rail CrossingGuard and TrafficVision business lines, and had refocused our resources on our traffic safety and enforcement systems such as CrossingGuard®, our current primary source of revenue. This transition involved a series of licensing arrangements and transfers of our rights. In early 2001, we also entered into two separate source-code licensing agreements for our fraud detection product line appointing Applied Communications, Inc., ("ACI") and Retail Decisions, Inc., ("ReD") as co-exclusive resellers in the transaction processing industry. Royalty revenues from ACI continued through June 2002, when the royalty stream was assigned to Churchill Lane Associates, or CLA. In April 2008, we amended our license agreement with ACI to transfer the remaining rights we held related to our fraud detection software product line to ACI for a one-time payment of $500,000. We do not expect to receive future revenues from this license. Additionally, we transferred to ReD certain of our assets that supported the technology licensed under our license to ReD. No ongoing revenues are expected to be realized from ReD. The licensing, royalty and other payments we received under these licensing arrangements and other transfers of our property and technology financed our operations during 2001 and 2002 and enabled us to develop our traffic enforcement business.

The following is a summary of key financial measurements monitored by management:

                                     Quarter Ended                    Nine Months Ended
                                     September 30,                      September 30,
                                 2008              2007             2008             2007
 Financial
 Revenue                     $   3,826,000     $  3,349,000     $ 10,357,000     $  8,791,000
 Loss from operations             (916,000 )       (612,000 )     (2,728,000 )     (2,786,000 )
 Net income (loss)              (3,003,000 )     (1,967,000 )     (7,252,000 )     (5,436,000 )
 Modified EBITDA                   261,000          432,000          634,000          111,000
 Investment in capitalized
 systems                         1,094,000        1,257,000        2,625,000        4,118,000
 Cash and marketable
 securities                        327,000        5,216,000
 Working capital (1)           (20,720,000 )      4,653,000

(1) The working capital deficit as of September 30, 2008 is primarily due to the reclassification of our Senior Convertible Notes, Senior Secured Convertible Notes and Variable Rate Senior Notes from noncurrent liabilities to current liabilities in 2008.

We are a capital-intensive business, so in addition to focusing on GAAP measures, we focus on modified EBITDA to measure our results. We calculate this number by first calculating EBITDA, which we define as net income before interest expense, debt restructuring or debt extinguishment costs (if any during the relevant measurement period), provision for income taxes, and depreciation and amortization. Then we exclude derivative instrument income or expense, debt discount expense, share-based compensation expense and asset impairment charges. These measures eliminate the effect of financing transactions that we enter into on an irregular basis based on capital needs and market opportunities, and these measures provide us with a means to track internally generated cash from which we can fund our interest expense and our growth. In comparing modified EBITDA from year to year, we also ignore the effect of what we consider non-recurring events not related to our core business operations to arrive at what we define as modified EBITDA. Because modified EBITDA is a non-GAAP financial measure, we include in the tables below reconciliations of modified EBITDA to the most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States.

We present modified EBITDA because we believe it provides useful information regarding our ability to meet our future debt payment requirements, capital expenditures and working capital requirements, and that it provides an overall evaluation of our financial condition. In addition, modified EBITDA is defined in certain financial covenants under our Senior Secured Convertible Notes, was used to adjust the interest rate on those notes at July 1, 2007 and will be used at January 1, 2009 to determine whether the holders of those notes have a redemption right at May 25, 2009.

Modified EBITDA has certain limitations as an analytical tool and should not be used as a substitute for net income, cash flows or other consolidated income or cash flow data prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") or as a measure of our profitability or our liquidity.

When evaluating modified EBITDA as a performance measure, and excluding the above-noted items, all of which have material limitations, investors should consider, among other factors, the following:

• increasing or decreasing trends in modified EBITDA;

• how modified EBITDA compares to levels of debt and interest expense.

Because modified EBITDA, as defined, excludes some but not all items that affect our net income, modified EBITDA may not be comparable to a similarly titled performance measure presented by other companies.

The table below is a reconciliation of net loss to modified EBITDA for the quarter ended September 30:

                              Three Months Ended Sept. 30,          Nine Months Ended Sept. 30,
                                 2008                2007              2008               2007
GAAP net income (loss)      $    (3,003,000 )    $ (1,967,000 )   $    (7,252,000 )   $ (5,436,000 )
Interest expense, net of
interest income                   1,309,000           685,000           2,939,000        1,830,000
Income tax expense                      ---               ---                 ---              ---
Depreciation and
amortization                      1,055,000           914,000           3,056,000        2,458,000
EBITDA                      $      (639,000 )    $   (368,000 )   $    (1,257,000 )   $ (1,148,000 )
Derivative instrument
(income) expense                   (230,000 )        (338,000 )        (1,438,000 )     (2,204,000 )
Debt discount expense             1,008,000         1,008,000           3,023,000        3,024,000
Stock-based compensation
expense                             122,000           130,000             306,000          439,000
Modified EBITDA             $       261,000      $    432,000     $       634,000     $    111,000

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions. For more information, see Note 2 to the condensed consolidated financial statements included elsewhere in this report. We believe that of our significant accounting policies, the following may involve a higher degree of judgment and complexity.

Revenue Recognition

In accordance with Staff Accounting Bulletin 104, "Revenue Recognition in Financial Statements," ("SAB 104") revenue is generally recognized and earned when all of the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists, (b) delivery of products and/or services has occurred,
(c) the sales price is fixed or determinable, and (d) collectibility is reasonably assured. In those cases where all four criteria are not met, we defer recognition of revenue until the period these criteria are satisfied.

The majority of our revenue is derived from three types of customer arrangements:

a) We provide hardware and equipment and related third party embedded software ("roadside systems"). The third party embedded software is considered incidental to the system as a whole. In these arrangements, we typically sell or lease the system as a stand-alone roadside system. For direct sales of roadside systems, we recognize revenue upon shipment. We account for one of our leasing arrangements as a sales-type lease, as it meets the criteria in accordance with Statement of Financial Accounting Standards (SFAS) No. 13, "Accounting for Leases." In this instance, we recognized revenue upon inception of the transaction; interest income related to payments against the lease is recognized ratably over the term of the lease. All other leasing arrangements are operating leases. We recognize revenue on these leases on a monthly basis over the life of the contract with the customer.

b) We provide services, which typically include citation processing, back office and hosting services. Software is more than incidental to the services as a whole, but 1) is used by us to capture and internally process the violations, and 2) customers do not have the right to and do not take possession of our detection and tracking, citation processing and back office software. For these services, we typically recognize revenue on a fixed monthly fee or a per citation fee basis. Revenue recognition usually commences for these service arrangements upon the first month after inception of operations.

c) For two current customers who process their own citations, we lease our detection and tracking and citation processing and back office software and provide monthly customer support on the software. For these arrangements, we recognize revenue in accordance with AICPA Statement of Position 97-2, "Software Revenue Recognition." Although all software deliverables are complete in the initial month of operations, and the monthly customer support is the only undelivered element, we recognize revenue on a monthly basis as the citations are issued.

Some contracts include penalty provisions relating to timely performance and delivery of systems and services by us. Penalties are charged to operations in the period the penalty is determinable.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is evaluated on a regular basis and adjusted based on management's best estimate of probable losses inherent in receivables, based on historical experience. Receivables are considered to be past due if they have not been paid by the payment due dates. Debts are written off against the allowance when deemed to be uncollectible. Subsequent recoveries, if any, are credited to the allowance when received.

Inventory Obsolescence

We evaluate our inventory for excess and obsolescence on a quarterly basis. In preparing our evaluation, we look at the expected demand for our products for the next three to twelve months to determine whether or not such equipment to be installed requires a change in the inventory reserve to record the inventory at net realizable value. After discussions with the senior management team, a reserve is established so that inventory is appropriately stated at the lower of cost or net realizable value.

Capitalization of Internal Buildout Costs

Our CrossingGuard® red light enforcement business requires us to install our technology in the communities that we serve. To do this, the Company deploys internal resources to design, install and configure its software and equipment in those communities (i.e., buildout). Buildout costs are defined as directly related payroll, fringe, and travel and entertainment expense. Those buildout costs are capitalizable as part of the cost of the system deployed under contract in a community we serve and depreciated over the life of the contract. The Company accumulates the amount of those internal buildout costs incurred on a quarterly basis and capitalizes them. Internal buildout costs capitalized in the third quarter of 2008 and 2007 were approximately $106,000 and $107,000, respectively, and $306,000 and $349,000 for the nine months ended September 30, 2008 and 2007, respectively.

Share-Based Compensation

We account for share-based compensation under the provisions of Statement of Financial Accounting Standards No. 123(R), "Share-Based Payments" ("SFAS
123(R)"), which requires all share-based payments to employees to be recognized in our financial statements at their fair value. We continue to use the Black-Scholes option pricing model to determine fair value of options under SFAS 123(R).

The calculation of stock-based compensation requires the use of a valuation model and related assumptions. The use of the Black-Scholes option pricing model requires the use of subjective assumptions including an estimate of the volatility of our stock, the expected life of our share-based instruments, the expected forfeitures of share-based instruments, the expected dividend rate on our common stock, and the risk free interest rates that can materially affect our fair value estimate of our share-based instruments. Changes in these estimates and assumptions could materially impact the calculation of stock-based compensation.

Derivative Instruments

In connection with the sale of debt or equity instruments, the Company may sell options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative assets or liabilities rather than equity. Additionally, the debt or equity instruments may contain embedded derivative instruments such as variable conversion options, which in certain circumstances may be required to be bifurcated from the host instrument and accounted for separately as a derivative instrument liability.

Derivative instrument liabilities are re-valued at the end of each reporting period, with changes in fair value of the derivative liability recorded as charges or credits to income in the period in which the changes occur. For options, warrants and bifurcated conversion options that are accounted for as derivative instrument liabilities, we determine the fair value of these instruments using the Black-Scholes option pricing model, binomial stock price probability trees, or other valuation techniques, sometimes with the assistance of a certified valuation expert. These models require assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price based on not only the history of our stock price but also the experience of other entities considered comparable to us. The identification of, and accounting for, derivative instruments and the assumptions used to value them can significantly affect our financial statements.

Long-Term Asset Impairment

In assessing the recoverability of our long-term assets, management must make assumptions regarding estimated future cash flows, contract renewal options and other factors to determine its fair value. If these estimates change in the future, we may be required to record impairment charges that were not previously recorded.

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