RESULTS OF OPERATIONS

Fiscal Year 2008 Compared with 2007

Net sales for 2008 decreased 3% to $66.9 million compared with $69.1 million in 2007. Domestic sales decreased 6% to $34.9 million compared with $37.0 million in 2007 while international sales decreased slightly to $32.0 million compared with $32.1 million in 2007. The sales decreases in these segments were due in part to weakening economic conditions in certain of the Company's markets during 2008. However, order intake for 2008 increased to $67.0 million compared with $65.7 million in 2007. The backlog of unfilled orders was $3.9 million at September 30, 2008 compared with $3.8 million at September 30, 2007.

Gross profit margins for 2008 increased to 45.5% compared with 42.5% in 2007 as the Company experienced higher margins on certain project business. The margin increase also included the benefit of favorable exchange rate changes in Europe and reduced product component costs.

Operating expenses for 2008 increased to $26.0 million or 38.9% of net sales compared with $24.7 million or 35.8% of net sales in 2007. Selling, general and administrative expenses increased to $20.4 million for 2008 compared with $19.5 million in 2007 as the Company made certain investments in sales organization infrastructure. In addition, the Company continued to invest in new product development, incurring $5.6 million of engineering and development expenses in 2008 compared with $5.2 million in 2007. Increased expenses were incurred by the Company's Israeli based engineering and development operation as a result of a weaker U.S. dollar in 2008.

The Company generated operating income of $4.4 million for fiscal 2008 compared with $4.7 million for 2007.

Interest expense decreased to $45,000 for 2008 compared with $142,000 in 2007 principally as a result of the paydown of bank borrowings. Interest and other income decreased to $244,000 for 2008 compared with $380,000 in 2007. The prior year included $168,000 of gains from life insurance proceeds and policies on the death of a retired executive. Excluding the effect of these gains, interest and other income increased $32,000 principally as a result of increased cash balances during the current year period.

The Company recorded income tax expense of $1.8 million for 2008 compared with a benefit of $3.0 million for 2007. The current year tax expense includes a $1.2 million provision for U.S. income taxes as compared with a $3.4 million tax benefit for 2007. The Company did not recognize income tax expense on its U.S. pre-tax income of $3.9 million for 2007 as it utilized available net operating loss carryforwards in the amount of $1.5 million (tax effected). In the fourth quarter of 2007, the Company recorded a $3.4 million tax benefit relating to the recognition of remaining unrecognized U.S. net deferred income tax assets. The deferred income tax asset recognition was made as a result of an updated assessment of their realization. The 2008 income tax expense also included a $525,000 provision for foreign taxes compared with $399,000 for 2007 relating primarily to profits recorded by the Company's U.K. subsidiary.

As a result of the foregoing, the Company generated net income of $2.8 million in 2008 compared with $7.9 million in 2007. Net income for 2007 would have been $3.1 million had income tax expense been provided at an assumed effective tax rate.

RESULTS OF OPERATIONS

Fiscal Year 2007 Compared with 2006

Net sales for 2007 increased 23% to $69.1 million compared with $56.3 million in 2006. Domestic sales increased 22% to $37.0 million compared with $30.3 million in 2006. International sales increased 23% to $32.1 million compared with $26.0 million in 2006. The sales increases in these segments resulted from an increased win rate on projects bid during 2007. The backlog of unfilled orders was $3.8 million at September 30, 2007 compared with $7.2 million at September 30, 2006.

Gross profit margins for 2007 increased to 42.5% compared with 39.3% in 2006. The margin increase included the benefit of favorable exchange rate changes in Europe, the effects of fixed indirect production costs relative to increased sales in 2007 and reduced product component costs within the Company's digital video product line. The Company's European based operations experienced reduced costs on U.S. sourced product and translation benefit relating to the strengthening of European currencies in relation to the U.S. dollar in 2007.

Operating expenses for 2007 increased to $24.7 million or 35.8% of net sales compared with $22.5 million or 39.9% of net sales in 2006 as a result of increases in sales related costs, engineering and development expense and profit related bonus provisions. In addition, the Company continued to invest in new product development, incurring $5.2 million of engineering and development expenses in 2007 compared with $4.5 million in 2006.

The Company generated operating income of $4.7 million for 2007 compared with an operating loss of $367,000 for 2006.

Interest expense decreased to $142,000 for 2007 compared with $165,000 in 2006 principally as a result of the paydown of bank borrowings offset, in part, by the effect of increased interest rates during 2007. Interest and other income increased to $380,000 for 2007 compared with $136,000 in 2006. The current year includes $168,000 of gains from life insurance proceeds and policies on the death of a retired executive. In addition, interest income increased due to increased cash balances and interest rate yields in the current year.

The Company recorded an income tax benefit of $3.0 million for 2007 compared with income tax expense of $150,000 for 2006. The Company did not recognize income tax expense on its U.S. pre-tax income of $3.9 million for 2007 as it utilized available net operating loss carryforwards in the amount of $1.5 million (tax effected). In the fourth quarter of 2007, the Company recorded a $3.4 million tax benefit relating to the recognition of remaining unrecognized U.S. net deferred income tax assets. The deferred income tax asset recognition was made as a result of an updated assessment of their realization. The 2007 income tax benefit also included a $399,000 provision for foreign taxes as compared to $150,000 for 2006 relating to profits recorded by the Company's U.K. subsidiary.

As a result of the foregoing, the Company generated net income of $7.9 million in 2007 compared with a net loss of $547,000 in 2006.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $3.4 million for 2008, which included $2.8 million of net income and $2.1 million of non-cash charges for the period. The remaining net cash was reduced by an increase in accounts receivable of $2.6 million relating to increased fourth quarter sales, which was offset in part by an increase in accounts payable of $1.2 million. Net cash used in investing activities was $499,000 in 2008 due principally to $503,000 of general capital expenditures. Net cash used in financing activities was $2.1 million in 2008, which included a $1.7 million scheduled repayment of bank mortgage loans and $628,000 of common stock repurchases, offset in part by $220,000 of proceeds received from the exercise of stock options. As a result of the foregoing, cash increased by $753,000 in 2008 after the effect of exchange rate changes on the cash position of the Company.

The Company's U.K. based subsidiary maintains a bank overdraft facility that provides for maximum borrowings of one million Pounds Sterling (approximately $1,780,000) to support its local working capital requirements. At September 30, 2008 and 2007, there were no outstanding borrowings under this facility.

The following is a summary of the Company's long-term debt and material operating lease obligations as of September 30, 2008:

                Payments Due        Debt             Lease
                 By Period       Repayments       Commitments        Total

              Less than 1 year   $         -     $     490,000     $ 490,000
                 1-3 years                 -           335,000       335,000
                   Totals        $         -     $     825,000     $ 825,000

The Company believes that it has sufficient cash to meet its anticipated operating costs, capital expenditures and debt service requirements for at least the next twelve months. The Company used its cash reserves to repay its $1.7 million mortgage obligation in January 2008.

The Company does not have any off-balance sheet transactions, arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have, a material effect on the Company's financial condition, results of operations, liquidity, capital expenditures or capital resources.

The Company is one of several defendants in a patent infringement suit commenced by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District Court for the Western District of Tennessee. The alleged infringement by the Company relates to its camera dome systems and other products that represent significant sales to the Company. Among other things, the suit seeks past and enhanced damages, injunctive relief and attorney's fees. In January 2006, the Company received the plaintiff's claim for past damages through December 31, 2005 that approximated $11.7 million plus pre-judgment interest. The Company and its outside patent counsel believe that the complaint against the Company is without merit. The Company is vigorously defending itself and is a party to a joint defense with certain other named defendants.

In January 2005, the Company petitioned the U.S. Patent and Trademark Office (USPTO) to reexamine the plaintiff's patent, believing it to be invalid. In April 2006, the USPTO issued a non-final office action rejecting all of the plaintiff's patent claims asserted against the Company citing the existence of prior art of the Company and another defendant. On June 30, 2006, the Federal District Court granted the defendants' motion for continuance (delay) of the trial, pending the outcome of the USPTO's reexamination proceedings. In February 2007, the USPTO issued a Final Rejection of the six claims in the plaintiff's patent asserted against the Company, which was reaffirmed in June 2007 after the plaintiff filed a response with the USPTO requesting reconsideration of its Final Rejection. The plaintiff has appealed the examiner's decision to the USPTO Board of Patent Appeals and Interferences and has an additional appeal available to it thereafter in the Court of Appeals for the Federal Circuit.

Critical Accounting Policies

The Company's significant accounting policies are fully described in Note 1 to the consolidated financial statements included in Part IV. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectibility of the resulting receivable is reasonably assured. As it relates to product sales, revenue is generally recognized when products are sold and title is passed to the customer. Shipping and handling costs are included in cost of sales. Advance service billings under a national supply contract with one customer are deferred and recognized as revenues on a pro rata basis over the term of the service agreement. Pursuant to the adoption of EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables", the Company evaluates multiple-element revenue arrangements for separate units of accounting, and follows appropriate revenue recognition policies for each separate unit. Elements are considered separate units of accounting provided that (i) the delivered item has stand-alone value to the customer, (ii) there is objective and reliable evidence of the fair value of the undelivered item, and (iii) if a general right of return exists relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially within the control of the Company. As applied to the Company, under arrangements involving the sale of product and the provision of services, product sales are recognized as revenue when the products are sold and title is passed to the customer, and service revenue is recognized as services are performed. For products that include more than incidental software, and for separate licenses of the Company's software products, the Company recognizes revenue in accordance with the provisions of Statement of Position 97-2, "Software Revenue Recognition", as amended.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in product quality programs and processes, including monitoring and evaluating the quality of its component suppliers, its warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from its estimates, revisions to the estimated warranty liability may be required.

The Company writes down its inventory for estimated obsolescence and slow moving inventory equal to the difference between the carrying cost of inventory and the estimated net realizable market value based upon assumptions about future demand and market conditions. Technology changes and market conditions may render some of the Company's products obsolete and additional inventory write-downs may be required. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

The Company's ability to recover the reported amounts of deferred income tax assets is dependent upon its ability to generate sufficient taxable income during the periods over which net temporary tax differences become deductible.

The Company is subject to proceedings, lawsuits and other claims related to labor, product and other matters. The Company assesses the likelihood of an adverse judgment or outcomes for these matters, as well as the range of potential losses. A determination of the reserves required, if any, is made after careful analysis. The required reserves may change in the future due to new developments.

Recent Accounting Pronouncements

In September 2006, the FASB issued Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurement," which defines fair value, establishes a framework for measuring fair value and expands disclosures regarding assets and liabilities measured at fair value. In February 2008, the FASB issued FASB Staff Position (FSP) 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13" (FSP 157-1) and FSP 157-2, "Effective Date of FASB Statement No. 157" (FSP 157-2). FSP 157-1 amends SFAS 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the Company's first quarter of fiscal 2010. The measurement and disclosure requirements related to financial assets and financial liabilities are effective for the Company's first quarter of fiscal 2009. The Company does not expect that the adoption of SFAS 157 will have a material impact on its consolidated financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which gives companies the option to measure eligible financial assets, financial liabilities and firm commitments at fair value (i.e., the fair value option), on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a firm commitment. Subsequent changes in fair value must be recorded in earnings. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not expect that the adoption of SFAS 159 will have a material impact on its consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS 141 (revised 2007), "Business Combinations ("SFAS 141R"). SFAS 141R will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, IPR&D and restructuring costs. In addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. SFAS 141R is effective for fiscal years beginning after December 15, 2008. The Company has not yet evaluated the impact, if any, of adopting this pronouncement.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an Amendment of FASB Statement 133" ("SFAS 161"). SFAS 161 will change the disclosure requirements for derivative instruments and hedging activities. Entities will be required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company has not yet evaluated the impact, if any, of adopting this pronouncement.

Foreign Currency Activity

The Company's foreign exchange exposure is principally limited to the relationship of the U.S. dollar to the British pound sterling, the Euro and the Israeli shekel.

Sales by the Company's U.K. and German based subsidiaries to customers in Europe are made in British pounds sterling (pounds) or Eurodollars (Euros). In fiscal 2008, approximately $5.9 million of products were sold by the Company to its U.K. based subsidiary for resale. The Company has also entered into certain engineering cost sharing agreements with its U.K. based subsidiary that are denominated in U.S. dollars. The Company attempts to minimize its currency exposure on these intercompany transactions through the purchase of forward exchange contracts.

The Company's Israeli based subsidiary incurs shekel based operating expenses which are funded by the Company in U.S. dollars. In past years, the Company purchased forward exchange contracts to hedge its currency exposure on these expenses during periods of favorable fluctuating exchange rates.

As of September 30, 2008, the Company had forward exchange contracts outstanding with notional amounts aggregating $1.0 million. The Company also attempts to reduce the impact of an unfavorable exchange rate condition through cost reductions from its suppliers and shifting product sourcing to suppliers transacting in more stable and favorable currencies.

In general, the Company seeks lower costs from suppliers and enters into forward exchange contracts to mitigate short-term exchange rate exposures. However, there can be no assurance that such steps will be effective in limiting long-term foreign currency exposure.