The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report. Management's discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties, including but not limited to:
quarterly fluctuations in results; customer demand for our products; the development of new technology for alternate means of motion picture presentation; domestic and international economic conditions; the achievement of lower costs and expenses; the continued availability of financing in the amounts and on the terms required to support our future business; credit concerns in the theatre exhibition industry; vendor and customer concentrations; and other risks detailed from time to time in our other Securities and Exchange Commission filings. Actual results may differ materially from management's expectations. The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Overview

We are a manufacturer, distributor and service provider for the theatre exhibition industry on a worldwide basis. We also design, develop, manufacture and distribute lighting systems to the worldwide entertainment lighting industry through our Strong Entertainment lighting segment.

We have two primary reportable core operating segments: theatre and lighting. Approximately 96% of sales for the quarter ended March 31, 2009 were from theatre products and approximately 4% were lighting products.

Results of Operations:

Three Months Ended March 31, 2009 Compared to the Three Months Ended March 31, 2008

Revenues



Net revenues during the three months ended March 31, 2009 increased to
$17.1 million from $14.2 million in 2008.



                             Three Months Ended
                                  March 31,
                             2009           2008
Theatre
Products                 $ 15,712,161   $ 12,212,937
Services                      796,525        766,761
Total theatre revenues     16,508,686     12,979,698
Lighting                      622,670      1,075,217
Other                          12,097        142,257
Total net revenues       $ 17,143,453   $ 14,197,172

Theatre Segment

Sales of theatre products and services increased to $16.5 million in 2009 from $13.0 million in 2008.

Digital Product Sales

Sales of digital products rose to $5.9 million from $4.4 million in 2008 as the change to digital projection equipment continued during 2009. We believe that much of this demand is resulting from our customers wanting to show movies in 3D digital format as they believe that 3D movies result in higher attendance and ticket sales. The Hollywood studios have also increased the number of movies that can be shown in 3D. The full-scale rollout of digital cinema, however, has been slowed by the global credit environment as the purchase of digital equipment requires a significant amount of capital.

Film Product Sales

Sales of film projection equipment increased to $3.2 million in 2009 from $2.7 million a year-ago due to higher demand outside of the United States. These higher export sales were offset by a slowdown in new theatre construction in the United States due to the current economic and credit market conditions coupled with the expected transition to digital cinema projectors.

Sales of replacement parts rose slightly to $1.9 million from $1.7 million during 2008. We expect sales of film replacement parts to decrease over time but the decline is expected to be at a slower pace compared to the film projectors themselves as the equipment will require maintenance up to the point they are replaced by a digital unit. However, we are unsure how the used equipment market will impact our replacement part sales when film equipment is being replaced during the digital cinema roll-out. We believe the higher sales during the quarter resulted from increased usage of film projectors due to higher box office receipts during the quarter.

Sales of film lenses decreased to $41,000 from $0.5 million a year-ago as more than any other film product, used lenses have overtaken the market. Sales of xenon lamps declined to $1.5 million compared to $1.9 million a year-ago.

Screen Product Sales

We generated sales of projector screens and related equipment of $3.2 million in 2009 compared to $1.0 million a year-ago due to higher demand for the special "silver" screens needed for certain 3D applications. As discussed earlier, this demand is resulting from our customers wanting to show certain movies in digital 3D and also more 3D movies being available from the Hollywood studios.

We sell screens for both digital cinema and film applications. In some instances, a screen can be used interchangeably with either a digital projector or a film projector. However, there are certain digital 3D applications such as the technology by Real D that require a special "silver" screen that we manufacture and which, as discussed earlier, are driving the growth of our screen manufacturing company in Canada.

Service Revenues

Service revenues were flat in 2009 at $0.8 million compared to a year-ago. Revenues generated from servicing film equipment amounted to $0.5 million in both periods while revenues generated from servicing digital equipment were $0.3 million in both periods.

Lighting Segment

Sales of lighting products fell to $0.6 million during 2009 from $1.1 million in 2008 due to in large part to lower demand for follow spotlights where sales fell to $0.4 million from $0.7 million a year-ago. Spotlight sales were impacted by the effects of the troubled credit markets as these sales are in many instances dependent on the construction of stadiums and auditoriums around the world. It is unclear if other projects will be delayed or canceled during 2009 and beyond. We also experienced a reduction in demand for replacement parts which decreased to $0.1 million from $0.2 million in 2008. Sales of all other lighting products, including but not limited to, xenon lamps, skytrackers, britelights and nocturns amounted to $0.1 million in 2009 compared to $0.2 million in 2008.

Export Revenues

Sales outside the United States (mainly theatre sales) rose to $7.2 million in 2009 from $4.0 million a year-ago due to increased sales into Latin America where sales rose to $3.9 million from $1.3 million a year-ago. Export sales are sensitive to worldwide economic and political conditions that can lead to volatility. Additionally, certain areas of the world are more cost conscious than the U.S. market and there are instances where our products are priced higher than local manufacturers making it more difficult to generate sufficient profit to justify selling into these regions. Additionally, foreign exchange rates and excise taxes sometimes make it difficult to market our products overseas at reasonable selling prices.

Gross Profit

Consolidated gross profit increased to $3.4 million in 2009 from $2.3 million a year-ago and as a percent of total revenue increased to 19.7% from 16.3% in 2008. Gross profit in the theatre segment increased to $3.2 million in 2009 from $1.9 million in 2008 and as a percentage of theatre sales increased to 19.5% from 15.0% a year-ago. Our theatre margins were impacted primarily by profits from our screen manufacturing subsidiary, Strong / MDI Screen Systems, Inc., coupled with higher gross profit recognized within our theatre service subsidiary.

The gross profit in the lighting segment amounted to $0.2 million or 24.5% as a percentage of lighting revenues in 2009 compared to $0.3 million or 27.9% as a percentage of lighting revenues in 2008 as profit was impacted by lower production resulting in higher manufacturing costs per unit.

Selling Expenses

Selling expenses declined to $0.7 million in 2009 compared to $0.8 million in 2008, and as a percent of total revenue declined to 3.9% from 5.5% a year-ago due to lower tradeshow, advertising, travel and commission costs.

Administrative Expenses

Administrative costs rose to $2.1 million in 2009 from $2.0 million in 2008 but as a percent of total revenue decreased to 12.1% in 2009 from 14.3% in 2008 as the higher revenues during the quarter covered more fixed costs. Expenses during the quarter were impacted by the costs of certain termination benefits amounting to $0.2 million during the quarter.

Other Financial Items

Our results for 2009 reflect a loss of $0.2 million pertaining to our 44.4% share of the equity in the loss from our joint venture with Real D, Digital Link II, LLC. This loss compares to $0.1 million a year-ago and was higher due to more depreciation and interest costs resulting from additional deployments.

We recorded net interest income of approximately $33,000 during 2009 compared to approximately $138,000 a year-ago as our investment balances are lower coupled with significantly lower interest rates due to the current economic environment.

Other income amounted to $0.2 million in 2009 compared to approximately $27,000 in 2008. The results reflect the impact of transaction gains arising from foreign exchange fluctuations during 2009 due to the U.S. dollar increasing versus the Canadian dollar.

We recorded income tax expense of approximately $0.1 million in 2009 compared to an income tax benefit of $0.2 million in 2008. The effective tax rate (calculated as a ratio of income tax benefit (expense) to pretax income (loss), inclusive of equity method investment earnings (losses)) was approximately 18.4% for 2009, which reflects a combination of taxable income recorded for foreign purposes and a taxable loss recorded for U.S. purposes in addition to the benefit from the impact of tax-free interest income.

For the reasons outlined herein, we experienced net income of $0.5 million and basic and diluted earnings per share of $0.04 in 2009 compared to a net loss of $0.3 million and basic and diluted loss per share of $0.02 a year-ago.

Liquidity and Capital Resources

During the past several years, we have met our working capital and capital resource needs from either our operating or investing cash flows or a combination of both. We ended the first quarter with total cash and cash equivalents of $11.3 million. Additionally, we have approximately $8.8 million of long-term investments in auction-rate securities (net of a $0.8 million unrealized loss) which are classified as available-for-sale securities. The ARS investments are held within closed-end funds which are AAA rated and fully collateralized at a minimum 200% net asset to fund ratio. These investments are intended to provide liquidity via an auction process that resets the applicable interest rate every seven days allowing investors to either roll over their holdings or gain immediate liquidity by selling such investments at par.

During 2008, the market for the Company's investments in auction-rate securities began experiencing a liquidity issue when the securities came up for auction due to an imbalance of buyers and sellers for the securities. These conditions continue to persist in 2009. The Company cannot predict how long the current imbalance in the auction market will continue. As a result, for a period of time, the Company may be unable to liquidate the auction rate securities held until a successful auction occurs or the securities are redeemed by the issuer of the investments. Based on the continued unsuccessful auctions of these investments, the investment securities have been reclassified to noncurrent assets within the Condensed Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008. As of March 31, 2009, the Company has liquidated, at par, $3,425,000 of its auction rate securities of which $50,000 were sold through the normal auction process with the remaining amounts redeemed by the fund itself since the beginning of the liquidity issue. Of these amounts $450,000 were received during the three months ended March 31, 2009.

Effective January 1, 2008, we adopted the provisions of SFAS No. 157, "Fair Value Measurements" ("SFAS 157") which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements with respect to financial assets and liabilities. Under SFAS 157, fair value is the price to sell an asset or transfer a liability between market participants as of the measurement date. Fair value measurements assume the asset or liability is exchanged in an orderly manner; the exchange is in the principal market for that asset or liability (or in the most advantageous market when no principal market exists); and the market participants are independent, knowledgeable, able and willing to transact an exchange.

SFAS 157 establishes a hierarchy for fair value measurements based upon observable independent market inputs and unobservable market assumptions. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Considerable judgment is required in interpreting market data used to develop the estimates of fair value. The following represents the three categories of inputs used in determining the fair value of financial assets and liabilities:

Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are used in the measurement of assets and liabilities. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in pricing the asset or liability.

Due to the inability to trade all of our investments in auction-rate securities in the current market, we continue to earn interest on our investments at the maximum contractual default rate. The weighted average maximum contractual default rate being earned as of March 31, 2009 was 1.08%. Because of the inability to trade these investments, a readily determinable fair value using market observables (Level 1) does not exist. Therefore, in accordance with SFAS 157, "Fair Value Measurement," the Company, via the retention of the valuation firm Gifford Fong Associates, used a cash flow model to determine the estimated fair value of our auction-rate securities (Level 3). The assumptions used in preparing this model included, among other items, estimates for interest rates, default and recovery rates, illiquidity risk and an estimate for the timing of full redemption of the securities and are summarized below:

† Interest rate indices-LIBOR curve and commercial paper rates obtained.

† Rating transition matrix-the rating transition matrix gives transition probabilities for the underlying collateral migrating from one rating level to another in one year, particularly the transition probability to default status. The rating transition matrix is constructed from rating migration and default data published by the rating agencies.

†††† Default and recovery rates-the default rate is estimated using a credit spread (discount margin) over the risk free rate curve obtained.

†††† Illiquidity risk-in a distressed market, investors may not be able to find willing buyers, hence reduced liquidity.

†††† Estimate for the timing of full redemption of the securities-the estimate for full redemption is based on a weighted average of redemption periods for short term, medium term and perpetual term securities.

†††† Estimated weighted average coupon-the yield, considered to be the weighted average cost of capital (WACC), is related to the financial strength and outlook of each fund.

Based on the valuations obtained, an impairment of approximately $0.8 million was recorded.

In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, impairment in the fair value of the investment securities should be classified as "temporary" or "other than temporary." The differentiating factors between a temporary and an other-than temporary impairment are primarily the length of the time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. Based on this guidance and the guidance in SEC Staff Accounting Bulletin Topic 5M we determined the impairment should be classified as "temporary" and will be recorded as an unrealized loss which is excluded from earnings and recorded in the other comprehensive income (loss) component of stockholders' equity for the following reasons:

† The investments are in closed-end funds that are AAA rated and fully collateralized. Further, we are a preferred shareholder in all the funds. The ratings and collateralization is confirmed every seven days at each auction regardless of whether the auction fails or succeeds. Therefore, the financial condition of the issuer is strong and management believes the impairment is more a result of the illiquidity in the market and not the creditworthiness of the issuers.

† The amount of the temporary impairment recorded to accumulated other comprehensive income (loss) was only 7.9% of the carrying value compared to 11.4% as of December 31, 2008. We view this evidence as corroborative that the underlying credit worthiness of the securities were not impaired.

† We believe that as of March 31, 2009, there is sufficient capital to run our business with our cash position and our ability to draw on our credit facilities such that the current lack of liquidity in the auction rate market will not have a material impact on our ability to fund our operations or interfere with our external growth plans. We continue to receive interest at a maximum default rate on the auction-rate securities and believe, due to our ability to fund our operations while a current lack of liquidity exists in the auction-rate market securities and the attributes of the auction-rate securities held, the full value of the auction-rate securities held will be realized upon settlement in the future. Therefore, it is management's intent to hold these securities for a sufficient amount of time to allow for recovery in the market value to occur.

Additionally, all of the Company's ARS investments were purchased, via an intermediary brokerage firm, with a brokerage firm that has reached settlement with the Securities and Exchange Commission.

However, if market conditions would deteriorate further and the anticipated recovery in market values does not occur or the settlement agreement with the SEC is modified we may be required to record additional unrealized losses in other comprehensive income (loss) or an other-than-temporary impairment charge which could also impact our results of operations or liquidity and capital resources in future periods.

We are a party to a revolving credit facility (the "Original Credit Facility") with First National Bank of Omaha expiring August 30, 2009. The credit facility provides for borrowings up to the lesser of $4.0 million or amounts determined by an asset-based lending formula, as defined. Borrowings available under the credit facility amounted to $4.0 million at March 31, 2009. We pay interest on outstanding amounts equal to the Prime Rate plus 0.25% (3.50% at March 31, 2009) and pay a fee of 0.125% on the unused portion.

During 2008, the Company amended its Original Credit Facility to allow an interim extension of credit (the "Interim Credit Facility") in the amount of $10.4 million in addition to the $4.0 million allowed under the Original Credit Facility. Effective September 26, 2008, the Company entered into a Ninth Amendment to its Original Credit Facility to extend the maturity date of its interim extension of credit (the "Interim Credit Facility") to August 30, 2009 and to reduce the available borrowings to the lesser of $9.4 million or 80% of the par value of the investments held in the pledged account ($7.7 million as of March 31, 2009). The Interim Credit Facility is evidenced by a Promissory Note with an interest rate set at a floating rate set to after-tax interest income received on certain investment securities. The credit facilities contain certain restrictions primarily related to restrictions on acquisitions and dividends. All of our personal property and certain stock in our subsidiaries secure the credit facilities. Total borrowing available under the Original and Interim Credit facilities amounted to $11.7 million. No amounts are currently outstanding under either of the credit facilities. The Company intends to renew the credit facilities prior to their expiration.

Net cash used in operating activities amounted to $0.2 million in 2009 compared to net cash provided by operating activities of $0.7 million in 2008. The results for 2009 reflect an increase in accounts receivable balances of $5.1 million during the first quarter due to the timing of cash receipts. Accounts receivable balances are expected to decrease in subsequent quarters. The $0.7 million of cash flow from operating activities for the three months ended March 31, 2008 resulted primarily from turning a significant amount of our consignment inventory into cash resulting in a net inflow of cash of $1.8 million from this inventory.

Net cash provided by investing activities amounted to $0.2 million in 2009 compared to $0.4 million used in 2008. During 2009 we purchased $0.3 million of capital equipment and liquidated at par, approximately $0.5 million of our auction-rate securities. Investing activities during 2008 primarily consisted of capital expenditures.

We did not engage in any financing activities during the three months ended March 31, 2009 and 2008.

Transactions with Related and Certain Other Parties

The Company sold digital theatre projection equipment, in the normal course of business, to its joint venture, Digital Link II, LLC ("DL II") for approximately $1.9 million for the three months ended March 31, 2009. DL II in turn provides the digital theatre projection equipment to third party customers under operating lease agreements. Revenue recognized by the Company on the sale transaction to DL II is limited by its 44.4% in the joint venture which will be recognized upon sale of the equipment to the third parties. There were no sales during the three months ended March 31, 2008.

Financial Instruments and Credit Risk Concentrations

The Company's top ten customers accounted for approximately 61% of 2009 consolidated net revenues. The top ten customers were primarily from the theatre segment. Trade accounts receivable from these customers represented approximately 60% of net consolidated receivables at March 31, 2009. Sales to Vari International and Regal Cinemas represented approximately 19% and 18% respectively, of consolidated sales. Additionally, receivables from Vari International represented approximately 23% of net consolidated receivables at March 31, 2009. While the Company believes its relationships with such customers are stable, most arrangements are made by purchase order and are terminable at will by either party. A significant decrease or interruption in business from the Company's significant customers could have a material adverse effect on the Company's business, financial condition and results of operations. The Company could also be adversely affected by such factors as changes in foreign currency rates and weak economic and political conditions in each of the countries in which the Company sells its products.

Financial instruments that potentially expose the Company to a concentration of credit risk principally consist of accounts receivable. The Company sells product to a large number of customers in many different geographic regions. To minimize credit concentration risk, the Company performs ongoing credit evaluations of its customers' financial condition.

Through master reseller agreements with NEC, the Company distributes Starus DLP Cinema projectors to North and South America, Hong Kong, China and certain other areas of Asia. These agreements are non-exclusive distributorship agreements that are not perpetual and could be terminated with 90 day advance notice. NEC is the primary supplier of the digital products the Company distributes to the Theatre Industry. If the Company is unable to maintain its relationship with NEC, the results would have a material adverse impact on its business, financial condition and operating results until the Company could find an alternative source of digital equipment to distribute. The principal raw materials and components used in the Company's manufacturing processes include aluminum, reflectors, electronic subassemblies and sheet metal. The Company uses a single manufacturer for each of its intermittent movement components, reflectors, aluminum castings, lenses and xenon lamps. Although the Company has not to-date experienced a significant difficulty in obtaining these components, no assurance can be given that shortages will not arise in the future. The loss of any one or more of such contract manufacturers could have a short-term adverse effect on the Company until alternative manufacturing arrangements are secured.

Financial instruments that potentially expose us to a concentration of credit risk principally consist of investments in auction-rate securities and accounts receivable. We sell product to a large number of customers in many different geographic regions. To minimize credit concentration risk, we perform ongoing credit evaluations of our customers' financial condition or use letters of credit.

Hedging and Trading Activities

The Company's primary exposure to foreign currency fluctuations pertains to its subsidiary in Canada. In certain instances, the Company may enter into a foreign exchange contract to manage a portion of this risk. For the period ended March 31, 2009, the Company had recorded an immaterial amount of unrealized loss associated with these open contracts in its consolidated statement of operations.

We do not have any trading activities that include non-exchange traded contracts at fair value.