---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
20549FORM 10-K

(Mark One)

xANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007

OR

o TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934

Commission File No. 005-62411

---

|                                                      
|------------------------------------------------------
|HENRY BROS. ELECTRONICS, INC.                         
|(EXACT NAME OF
REGISTRANT AS SPECIFIED IN ITS CHARTER)

---

|                                                                |                                     
|--------------------------------------------------------------- | ------------------------------------
|Delaware                                                        | 22-3690168                          
|(State or other jurisdiction of incorporation or
 organization) | (I.R.S. Employer Identification No.)
|17-01 Pollitt Drive, Fair Lawn, NJ                              | 07410                               
|(address of principal executive offices)                        | (Zip Code)                          

|                                                                 
|-----------------------------------------------------------------
|(201) 794-6500                                                   
|(Registrants
 telephone number, including area code)            
|                                                                 
|                                                                 
|                                                                 
|Securities
 registered pursuant to Section 12(b) of the Act: None
|                                                                 
|                                                                 
|                                                                 
|Securities
 registered pursuant to Section 12(g) of the Act:     
|                                                                 
|                                                                 

|                              |                                            
|----------------------------- | -------------------------------------------
|Title of each class:          | Name of each exchange on
 which registered:
|Common Stock, $.01 par
 value | American Stock Exchange                    

---

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x.


Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x.

Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Securities Exchange Act
of 1934. (Check one): Large accelerated filer o    Accelerated filer o   Non-accelerated filer o    Smaller
Reporting Company x

---



Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). Yes o No x.

At
June 30, 2007, the last business day of the Registrants most recently
completed second fiscal quarter, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the Registrant was
$22,185,244 (based on the closing price of the registrants common stock on the
American Stock Exchange on such date).

Indicate
the number of shares outstanding of each of the registrants classes of common
stock, as of the latest practicable date:

|                                        |           |  |                               | 
|--------------------------------------- | --------- |  | ----------------------------- | 
|                                        | Classes:  |  | Outstanding at March 17, 2008 | 
|                                        |           |  |                               | 
|Common
 Stock, par value $.01 per share | 5,932,865 | 

Documents Incorporated by
Reference:     None

---

---



HENRY BROS. ELECTRONICS, INC.
Table of Contents

|                                                                                                                         |  |            
|------------------------------------------------------------------------------------------------------------------------ |  | -----------
|PART I                                                                                                                   |  | 2          
|                                                                                                                         |  |            
|Item 1. Business                                                                                                         |  | 2          
|                                                                                                                         |  |            
|Item 1A. Risk Factors                                                                                                    |  | 8          
|                                                                                                                         |  |            
|Item 1B. Unresolved Staff Comments                                                                                       |  | 10         
|                                                                                                                         |  |            
|Item 2. Properties                                                                                                       |  | 10         
|                                                                                                                         |  |            
|Item 3. Legal Proceedings                                                                                                |  | 11         
|                                                                                                                         |  |            
|Item 4. Submission of Matters to a Vote of Security Holders                                                              |  | 11         
|                                                                                                                         |  |            
|PART II                                                                                                                  |  | 12         
|                                                                                                                         |  |            
|Item 5. Market for Registrants Common Equity and Related Stockholder
 Matters and Issuer Purchases of Equity Securities |  | 12         
|                                                                                                                         |  |            
|Item 6. Selected Financial Data                                                                                          |  | 14         
|                                                                                                                         |  |            
|Item 7. Managements Discussion and Analysis of Financial Condition
 and Results of Operations                           |  | 14         
|                                                                                                                         |  |            
|Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 25         
|                                                                                                                         |  |            
|Item 8. Financial Statements and Supplementary Data                                                                      |  | 25         
|                                                                                                                         |  |            
|Item 9. Changes in and Disagreements with Accountants on Accounting
 and Financial Disclosure                            |  | 25         
|                                                                                                                         |  |            
|Item 9A. Controls and Procedures                                                                                         |  | 26         
|                                                                                                                         |  |            
|Item 9B. Other Information                                                                                               |  | 27         
|                                                                                                                         |  |            
|PART III                                                                                                                 |  | 28         
|                                                                                                                         |  |            
|Item 10. Directors, Executive Officers and Corporate Governance                                                          |  | 28         
|                                                                                                                         |  |            
|Item 11. Executive Compensation                                                                                          |  | 32         
|                                                                                                                         |  |            
|Item 12. Security Ownership of Certain Beneficial Owners and
 Management and Related Stockholders Matters                |  | 40         
|                                                                                                                         |  |            
|Item 13. Certain Relationships and Related Transactions and Director
 Independence                                       |  | 43         
|                                                                                                                         |  |            
|Item 14. Principal Accountant Fees and Services                                                                          |  | 43         
|                                                                                                                         |  |            
|PART IV                                                                                                                  |  | 44         
|                                                                                                                         |  |            
|Item 15. Exhibits, Financial Statement Schedules                                                                         |  | 44         
|                                                                                                                         |  |            
|Signatures                                                                                                               |  | 45         
|                                                                                                                         |  |            
|Financial Statements and Accompanying Notes                                                                              |  | F-1 to F-35
|                                                                                                                         |  |            
|Schedule II                                                                                                              |  | S-1        
|                                                                                                                         |  |            
|Exhibit Index and Exhibits                                                                                               |  | 46 to 56   

1

---



PART I

Item 1. Business

Business
Development.

In 1950, John,
Ray, and Hartford Henry founded Henry Bros. Electronics. They sold Henry Bros.
Electronics to Communication Group, Inc. (CGI) in 1985. In 1989, Jim Henry,
our Chairman and Chief Executive Officer, and Irvin Witcosky, our former
President and Chief Operating Officer reacquired certain assets, including the
name Henry Bros. Electronics from CGI. In 1991 we acquired the assets of the
former Motorola CCTV division and formed Viscom Products, Inc. (Viscom). In
1999 we formed a company named Integcom Corp., incorporated in Delaware, into
which we transferred both HBE and Viscom. In 2001, we changed our name to
Diversified Security Solutions, Inc. and in 2005 we changed our name to Henry
Bros. Electronics, Inc. (HBE). Following is a listing of key business
developments since the inception of HBE:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In November
  2001, we completed our initial public offering, including the underwriters
  over-allotment option of an aggregate of 1,725,000 shares of common stock.
  Our shares are traded on the American Stock Exchange under the ticker symbol
  HBE.                                                                                                                                                       
|  |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | In May 2002,
  we purchased Photo Scan Systems, Inc. (Photo Scan) a security integrator
  located in southern California and changed its name to Henry Bros. Electronics,
  Inc. in December 2002.                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | In August
  2002, Photo Scan acquired National Safe of California, Inc. which sells and
  services alarm security equipment, lock and timing mechanisms, vault
  security, control and backup systems and high resolution security equipment
  used by commercial banks.                                                                                                                                           
|  |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | In September
  2002, Photo Scan acquired Corporate Security Integration, LLC (CSI) a
  security integrator located in Phoenix, Arizona, and subsequently changed its
  name to Henry Bros. Electronics, LLC.                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | In April
  2004, we acquired Airorlite Communications, Inc. (Airorlite), a company
  located in New Jersey that specializes in the design, manufacture and
  maintenance of wireless communications equipment used to enhance emergency
  radio frequency services and cellular communication for both fixed and mobile
  applications.                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | In October
  2005, we acquired Securus, Inc. a security integrator with offices in Denver
  and Colorado Springs, Colorado.                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | In
  October 2006, we acquired CIS Security Systems Corp. (CIS), a
  privately-held security systems integrator with offices in Baltimore,
  Maryland and Newington, Virginia and acquired certain assets of Southwest
  Securityscan, Inc. (SSI), a privately-held company headquartered in
  Duncanville, Texas that provides installation, service and monitoring of
  access, surveillance and alarm systems.

Our principal
executive offices are located at 17-01 Pollitt Drive, Fair Lawn, New Jersey
07410, and our telephone number is (201) 794-6500.

2

---



Business of
Issuer

We are an established
leader in the electronic physical security industry providing technology-based
integrated electronic security systems, services and emergency preparedness
consultation to commercial enterprises and government agencies.

Security
Distributing and Marketing magazine (SDM) ranks by each of their 2006 revenue
the top 100 largest firms selling closed circuit TV (CCTV), access control
and integrated security systems. We were ranked No. 15 in SDMs Top Systems
Integrators Report published in July 2007. As a single-source/turn-key provider
of diversified technology-based integrated security solutions, we can expedite
project completion and optimize system manpower performance. The continually
evolving security requirements of commercial and government entities, together
with rapidly advancing technology, provides numerous opportunities for us to
assist our clients with their security needs.

We believe
that the following key attributes provide us with a sustainable competitive
advantage:

| |   |                                      
| | - | -------------------------------------
| |  | Experience
  and expertise;          
| |   |                                      
| |  | Technological
  know-how;            
| |   |                                      
| |  | Commitment
  to customer service; and
| |   |                                      
| |  | Strong list
  of references.         

Our Vision and Strategy

Our
vision is to maintain our leadership position in security technology. We
intend to do this in part by:

| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | Providing
  advice on product selection and system design;                                                                
| |   |                                                                                                                           
| |  | Examining
  and thoroughly testing each security product as it would be set up for use in
  our customers facilities; and
| |   |                                                                                                                           
| |  | Using only
  systems and components that are reliable and efficient to use.                                               

In addition to
growing the business organically, we have been actively pursuing the strategic
acquisition of synergistic integrators and specialty products and service
companies to further fuel steady growth. Consistent with our expansion
strategy, we have acquired seven companies since May of 2002.

Business Segments

Our operations
are divided into two business segments  Security System Integration
(Integration) and Specialty Products and Services (Specialty). The
Integration segment provides a cradle to grave services for a wide variety of
security, communications and control systems. The Company specializes in
turn-key systems that integrate many different technologies. Systems are
customized to meet the specific needs of its customers. Through the Specialty
segment we provide emergency preparedness programs, and specialized radio
frequency communication equipment and integration. Each of the Companys
segments markets its products and services nationwide with an emphasis in Arizona,
California, Colorado, Maryland, New Jersey, New York, Texas and Virginia.
Customers are primarily medium and large businesses and governmental agencies.
The Company derives a majority of its revenues from project installations and
to a smaller extent, maintenance service revenue.

Integration Segment

At the
beginning of each new client relationship, we designate one member of our
professional staff as the client service contact. This individual is the point
person for communications

3

---



between the
client and us and often serves as the clients project manager for all of its
security needs. Our engagement may include:

| |   |                                       
| | - | --------------------------------------
| |  | Consulting
  and planning;            
| |   |                                       
| |  | Engineering
  and design;             
| |   |                                       
| |  | Systems
  installation and management;
| |   |                                       
| |  | Systems
  training; and               
| |   |                                       
| |  | Maintenance
  and technical support.  

Consulting and Planning

Security
consulting and planning are the initial phases of determining a security
solution for a project. We have developed a planning process that identifies
all systems, policies and procedures that are required for the successful
operation of a security system that will both meet a clients current needs and
accommodate its projected future requirements. Our consulting and planning
process includes the following steps:

| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Identify the
  clients objectives and security system requirements;                                                                                   
| |   |                                                                                                                                                        
| |  | Survey the
  site(s), including inventory of physical components and software and
  evaluation of clients existing infrastructure and security system;
| |   |                                                                                                                                                        
| |  | Assess and
  prioritize the clients vulnerabilities;                                                                                                  
| |   |                                                                                                                                                        
| |  | Develop and
  evaluate system alternatives;                                                                                                            
| |   |                                                                                                                                                        
| |  | Recommend a
  conceptual security plan design;                                                                                                         
| |   |                                                                                                                                                        
| |  | Estimate the
  cost of implementing the conceptual plan; and                                                                                           
| |   |                                                                                                                                                        
| |  | Develop a
  preliminary implementation schedule.                                                                                                       

As a result of
this process, we provide the client with a master plan for an effective
security solution that addresses routine operating needs as well as emergency
situations.

We believe
that our comprehensive planning process enables our clients to budget for their
security requirements on a long-term basis, identify opportunities for cost
reduction and prepare for future risks.

Engineering and Design

The
engineering and design process involves preparation of detailed project
specifications and working drawings by a team of our engineers, systems
designers and computer-aided design system operators. These specifications and
drawings detail the camera sensitivity requirements, layout of the control
center, placement of cameras, card readers and other equipment and electrical
requirements. Throughout our engineering and design process, our goal is to
understand our clients operational preferences in order to design a system
that is functional, cost-effective and accommodates our clients present and
future requirements. In addition, we attempt to incorporate our clients
existing personnel, equipment and other physical resources into the system
design.

When retained
as a single-source provider for turn-key security solutions, we select system
components required under the specifications and drawings. We recommend that
our customers buy proven off-the-shelf devices and software and resort to
custom equipment only when absolutely necessary.

We have made a
strategic decision not to represent any equipment manufacturer exclusively,
thereby maintaining objectivity and flexibility in equipment selection. We
believe that our

4

---



technical
proficiency with the products available from a wide range of manufacturers
enables us to select components that will best meet a projects requirements.

Systems Installation and Management

Under the
supervision of the manager of the project, our technicians install hardware,
integrate hardware and software, and validate and test the system.
Subcontractors typically perform the aspects of systems integration that do not
require a high level of technical expertise, such as wire installation and
basic construction. Components that may be integrated in a security system
include the following:

| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Access
  control systems, which are designed to exclude unauthorized personnel from
  specified areas;                                                                      
| |   |                                                                                                                                                                             
| |  | Intrusion
  detection systems, which detect unauthorized door and window openings, glass
  breakage, vibration, motion, noise and alarms and other peripheral equipment;    
| |   |                                                                                                                                                                             
| |  | Closed
  circuit television systems, which monitor and record entry and exit activity
  or provide surveillance of designated areas;                                        
| |   |                                                                                                                                                                             
| |  | Critical
  condition monitoring systems, which provide alarm monitoring and supervision
  of various systems and facilities; and                                            
| |   |                                                                                                                                                                             
| |  | Intercoms,
  public address systems, fire detection signals and network connectivity that
  can expand a local security system into a closely controlled worldwide
  system.

Systems Training

Upon
completion of a systems integration project, we typically will provide the customer
with system documentation and training in the operation and maintenance of the
system.

Maintenance and Technical Support

We provide
maintenance and technical support services on a scheduled, on-call, or
emergency basis. These services include developing and implementing maintenance
programs both for security systems designed, engineered, or integrated by us
and for existing systems.

Specialty Segment

Airorlite
specializes in designing, manufacturing and maintaining wireless communications
equipment used to enhance and extend emergency radio frequency services and
cellular communication for both fixed and mobile applications. Our Diversified
Securities Solutions, Inc. division (formerly our EPP division) works with
high-rise office building management to analyze their specific facilities needs
relating to emergency response plans and the communication and training of such
plans to the building community.

Marketing

Our marketing
activities are conducted on both national and regional levels. We obtain engagements
through direct negotiation with clients, competitive bid processes and
referrals. At the national level, we conduct analyses of various industries and
target those with significant demand for security solutions.

We have
developed expertise in the security regulations applicable to airports and
seaports, high-rise buildings, public transportation systems, healthcare,
financial, educational and other vertical markets. We have identified several
key industries or facility types that we believe have

5

---



substantial
and increasing requirements for security services, including corporate campuses
and federal facilities.

Customers

We provide our
products and services to customers in the public and private sectors through
direct sales to end-users and through subcontracting agreements and have
provided services to customers representing each of the vertical markets
described under Marketing.

Suppliers

We procure
components and finished products from a variety of suppliers as needed through
purchase orders. We actively manage this process to ensure component quality,
steady supply and best costs. While there could be a short-term disruption in
qualifying vendors, we believe that the components we utilize could be obtained
from alternative sources, or that our products could be redesigned to use
alternative suppliers components, if necessary.

Competition

The security
industry is highly fragmented and competitive. We compete on a local, regional
and national basis with systems integrators, consulting firms and engineering
and design firms. Our competitors include equipment manufacturers and vendors
that also provide security services. Many of our competitors have greater name
recognition and financial resources. We believe that we compete primarily on
our ability to deliver solutions that effectively meet a clients requirements
and, to a lesser extent and primarily in competitive bid situations, on price.
Many of the larger public sector projects require performance bonds, which may
limit our ability to compete with larger competitors as the prime contractor,
depending upon the specifications of the project.

Employees

As of March
17, 2008, we had 205 full time employees, including officers, of whom: 134 were
engaged in engineering, systems installation and maintenance services, ­40 in
administration and accounting, and 31 in marketing and sales. None of our
employees are covered by a collective bargaining agreement or are represented
by a labor union. We consider our relationship with our employees to be
satisfactory.

Our business
requires substantial technical capabilities in many disciplines, from mechanics
and computer science to electronics and advanced software. We emphasize
continued training for new and existing technical personnel. Accordingly, we
conduct training classes and seminars in-house, send select employees to
technical schools and avail ourselves of training opportunities offered by
equipment manufacturers and other specialists on a regular basis.

Seasonality

Revenue
generated by our services have typically been seasonal in nature and there
could be periods of fluctuations in revenue volume due to the timing of project
installations or factors that are beyond the Companys control, such as weather
and construction delays.

Backlog

At December
31, 2007, the dollar amount of backlog believed to be firm was $26,567,167. At
December 31, 2006, our backlog was $27,802,404.

All orders are
subject to modification or cancellation by the customer with limited changes.
We believe that backlog may not be indicative of actual sales for the current
fiscal year or any succeeding period.

6

---



Pricing

We employ a
variety of pricing strategies for our services. Systems integration project
pricing is based upon the estimated cost of the equipment for the project
including a profit margin, plus the estimated hours for each skill set,
required to complete the project multiplied by the fully burdened hourly rate,
plus a profit margin. Pricing for engineering and maintenance services are
determined based on the scope of the specific project and the length of our
engagement. Proposals for consulting and threat assessment services are priced
based on an estimate of hours, multiplied by standard selling rates or on a
project basis.

AVAILABLE INFORMATION

We maintain an
Internet website at the following address: www.hbe-inc.com. The information on
our website is not incorporated by reference into this Annual Report on Form
10-K. We make available on or through our website certain reports and
amendments to those reports that we file with or furnish to the Securities and
Exchange Commission (the SEC) in accordance with the Securities Exchange Act
of 1934. These include our annual reports on Form 10-K, our quarterly reports
on Form 10-Q and our current reports on Form 8-K. We make this information
available on our website free of charge, as soon as reasonably practicable,
after we electronically file the information with, or furnish it to, the SEC.

FORWARD-LOOKING STATEMENTS

This report
includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended. Forward looking statements may be identified
by such words or phrases as believe, expect, intend, estimate, anticipate,
project, will, may and similar expressions. All statements that address
operating performance, events or developments that we expect or anticipate will
occur in the future are forward-looking statements. The forward-looking
statements used herein are not guarantees of future performance and involve a
number of risks and uncertainties. Factors that might cause actual results to
differ materially from the expected results described in or underlying our
forward-looking statements include:

| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | Conditions
  in the general economy and in the markets served by us;                                                  
| |   |                                                                                                                       
| |  | Competitive
  factors, such as price pressures;                                                                       
| |   |                                                                                                                       
| |  | Interruptions
  of suppliers operations or the refusal of our suppliers to provide us with
  component materials; and
| |   |                                                                                                                       
| |  | The risk
  factors listed from time to time in our SEC reports.                                                       

This list is
not exhaustive. Except as required under federal securities laws and the rules
and regulations promulgated by the SEC, we do not have any intention or
obligation to update publicly any forward-looking statements after the filing
of this Annual Report on Form 10-K, whether as a result of new information,
future events, changes in assumptions or otherwise.

7

---



Item 1A.
Risk Factors

Our business,
operations and financial conditions are subject to various risks. Some of these
are described below. This section does not describe all risks that may be
applied to our Company, our industry or our business and is intended only as a
summary of certain material risk factors.

We are dependent upon a small number of customers for a large portion of our
revenues.

We have a
small number of customers from which we receive a large portion of our
revenues. Our work with the Triborough Bridge & Tunnel Authority accounted
for 12.0% of total revenue during 2007, with our five largest customers
represented approximately 36.2% of our 2007 revenue. Revenues from governmental
agencies accounted for 39.8% in 2007 versus 22.6% and 39.0% in 2006 and 2005,
respectively. Consequently, we are often required to replace one customer with
one or more other customers in order to generate the same amount of revenues.
There can be no assurance that we will continue to be able to do so.

Some of our
orders and contracts may be cancelled or modified so there is a risk that our
backlog may not be fulfilled.

Some of our orders and contract backlog are
subject to cancellation or modification by our customers at any time so we
cannot be certain that we will fully recognize revenue from them.
At December 31, 2007, our backlog was $26,567,167.

We are dependent on a few vendors and rely on
timely delivery of equipment from outside sources.

There are a
few vendors from whom we obtain devices and software for specific access
control, imaging, remote transmission, smart key and mobile applications. The
loss of any one of these companies as suppliers could have a materially adverse
impact on our business, financial condition and results of operations if we are
unable to develop or acquire new technologies from other sources. We believe there
are alternative vendors to source such products.

Timely vendor
deliveries of equipment meeting our quality control standards from all
suppliers are also important to our business because each installed system
requires the integration of a variety of elements to be fully functional. The
failure to deliver any component when required, in operating condition, can
delay the project, triggering contract penalties, delay in progress payments
and may result in cancellation of the project.

We have not been consistently profitable and
may not be profitable in the future.

For the years
ended December 31, 2007 and 2006 our revenues were $57,852,216 and $42,132,852.
Our net loss was $304,228 for the year ended December 31, 2007 and our net loss
was $2,260,138 million for the year ended December 31, 2006. We can make no
assurances that we will be profitable in the future.

We experience intense competition for
business from a variety of sources.

In systems
integration, we compete for new business with large construction firms,
electrical contractors and consultants in the security business and other
systems integrators. Many of our competitors are much larger and have greater
resources. In order to effectively compete in the future, we may have to charge
less for our services, which may result in lower profit margins.

8

---



We rely on a key executive.

James E. Henry
is vital to our business. Losing him could have a materially adverse impact on
our business, financial condition or results of operations.

Our business
and growth will suffer if we are unable to hire and retain highly skilled
personnel.

Competition
for highly skilled employees is intense in our industry. The design and
manufacture of equipment, and the installation of our systems, requires
substantial technical capabilities in many disparate disciplines from mechanics
and computer science to electronics and advanced software. Our future success
depends on our ability to attract, train, motivate and retain highly skilled
employees. If we are unable to hire and retain skilled personnel, our growth
may be restricted, the quality of our products and services diminished and our
revenues and the value of your investment reduced. There is no assurance that
we will be able to retain our skilled employees or attract, assimilate and
retain other highly skilled employees in the future.

Lengthy revenue cycles.

Revenue from
our services and products frequently involves a substantial commitment of
resources to evaluate a potential project and prepare a proposal. In addition,
approval of proposals often involves a lengthy process due to clients internal
procedures and capital expenditure approval processes. We may not be awarded a
project that we have prepared a proposal for and, even if we are, a substantial
period of time may elapse from when we make a proposal to when we can recognize
revenues from the project.

Seasonality.

Revenues of
our services have typically been seasonal in nature and there could be periods
of fluctuations in revenue volume due to the timing of project installations or
factors that are beyond the Companys control, such as weather and construction
delays.

We may make
acquisitions or form joint ventures that are unsuccessful.

Part of our
growth strategy involves acquisitions or joint ventures with other system
integrators. This strategy is subject to the following risks, the occurrence of
which could have a materially adverse impact on our business, financial
condition or results of operations:

| |   |                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We may not
  be able to identify suitable acquisition and joint venture candidates.                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                      
| |  | If the
  purchase price of an acquisition includes cash, we may need to use a
  significant portion of our available cash or credit facility with our bank.                                                                                          
| |   |                                                                                                                                                                                                                                                      
| |  | We could
  have difficulty assimilating the acquired companys operations and personnel
  or working with the joint venture. These difficulties could disrupt our
  ongoing business, distract our management and employees and increase our
  costs.
| |   |                                                                                                                                                                                                                                                      
| |  | We may not
  be able to retain key employees of the acquired companies or maintain good
  relations with its customers or suppliers.                                                                                                                 
| |   |                                                                                                                                                                                                                                                      
| |  | We may be
  required to incur additional debt.                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                      
| |  | We may be
  required to issue equity securities to pay for such acquisition, which will
  dilute existing shareholders.                                                                                                                              
| |   |                                                                                                                                                                                                                                                      
| |  | We may have
  to incur significant accounting charges, such as for an impairment of
  intangible assets, which may adversely affect our results of operations.                                                                                       

9

---



The trading volume in our common stock
fluctuates and as a result you may find it difficult to sell your shares of our
common stock.

Our common stock is listed on the American
Stock Exchange. Trading in our common stock fluctuates and on some days is
minimal. Failure to maintain an active trading market in our common stock could
negatively affect the price of our common stock and your ability to sell our
common stock.

Item 1B. Unresolved Staff
Comments

None.

Item 2. Properties

A description
of the facilities we lease follows:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 31,801
  square foot sales, office, training and warehouse facility that also serves
  as our corporate office in Fair Lawn, New Jersey. This facility is a portion
  of a single-story, cinder block building in a commercial and industrial park.
  The lease on this space terminates on October 31, 2016, and provides for an
  annual rent of $214,657 (escalates yearly) until that date, payable in equal monthly
  installments of $17,888, plus taxes of approximately $5,414 per month. We are
  also responsible for the cost of property tax increases, utilities, repairs,
  maintenance, alterations, cleaning and insurance.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | 8,890 square
  foot sales, office and warehouse facility in Fullerton, California. A
  two-story, concrete building in an office complex, this space is leased until
  November 15, 2011 at an average annual rent of $136,196 and has an annual
  escalation clause, payable in equal monthly installments of $11,350, with
  additional costs for maintenance, insurance, repairs and alterations,
  utilities, property tax increases and cleaning.                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | 4,749 square
  foot sales, office and warehouse facility in Irving, Texas near the
  Dallas-Fort Worth Airport. A single-story, cinder block building in an office
  complex, this space is leased until August 1, 2015 at an annual average
  rental of $39,600, payable in equal monthly installments of $3,300, with
  additional costs for insurance, repairs and alterations, utilities, property
  taxes and cleaning.                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | 7,628 square
  foot sales, office and warehouse facility in Phoenix, Arizona near the
  Phoenix Airport. A single-story, concrete building in an office complex, this
  space is leased until August 2012 at an average annual rental of $107,388,
  payable in average monthly installments of $8,949, with additional costs for
  insurance, repairs and alterations, utilities, taxes increases and cleaning.                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | 2,711 square
  foot office space in New York City for sales and project management
  personnel. This lease commenced on December 29, 2006, with an annual rental
  of $68,962, payable in monthly installments of $5,747, not including
  utilities. The lease escalates yearly and expires February 29, 2012.                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | 16,045
  square foot sales, office and warehouse facility in Denver, Colorado. This
  facility is in a single-story, cinder block building in a commercial and
  industrial park. The lease on this space terminates April 2010 and provides
  for an annual rent of $88,248 until that                                                                                                                                                                                                                                                                                                                                                    

10

---



| |   |                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | date,
  payable in equal monthly installments of $7,354, with additional costs for
  property taxes, utilities, repairs, maintenance, alterations, cleaning and
  insurance.                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                            
| |  | 3,500 square
  foot sales, office and warehouse space in Colorado Springs, Colorado which
  terminates December 2010 and provides for an annual rent of $25,760 and has
  an annual escalation clause, payable in equal monthly installments of $2,147,
  with additional costs for property taxes, utilities, repairs, maintenance,
  alterations, cleaning and insurance.
| |   |                                                                                                                                                                                                                                                                                                                                                                            
| |  | 4,800 square
  foot sales, office and warehouse facility in Newington, Virginia. The annual
  rent is $78,930 and has an annual escalation clause. The lease expires on
  July 31, 2010. The lease includes utilities.                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                            
| |  | 2,400 square
  foot sales office facility in Baltimore, Maryland. The annual rent is $28,218
  and has an annual escalation clause. The lease expires on August 31, 2008.
  There are additional charges for trash removal, gas and common area
  maintenance.                                                                                                             

These
facilities or similar facilities should meet our operational needs for the
foreseeable future.

Item 3. Legal Proceedings

In July 2007 an accident occurred in Corona, California involving one of the Company's vehicles. The operator of a motorcycle was killed in the
accident. His family has commenced litigation against the Company employee who was driving the vehicle, as well as the Company. The litigation is still in
an early stage. While the Company believes any recovery would be fully covered by its insurance, there can be no assurance to that effect.

We know of no other material litigation or proceeding, pending or threatened, to which we are or
may become a party.

Item 4. Submission of
Matters to a Vote of Security Holders

At our 2007
Annual Meeting of Stockholders, held on November 1, 2007, the following
individuals, constituting all of the members of the Board of Directors, were
elected. For each elected director the results of the voting were:

|                       |  |                        |           |                             |  |         | 
|---------------------- |  | ---------------------- | --------- | --------------------------- |  | ------- | 
|Name                   |  | Number of 
  votes for |           | Number of 
  votes withheld | 
|                       |  |                        |           |                             | 
|                      
|James E.
  Henry       |  |                        | 5,454,128 |                             |  | 104,676 | 
|Brian Reach            |  |                        | 5,345,192 |                             |  | 213,612 | 
|Robert L. De
  Lia Sr. |  |                        | 4,792,245 |                             |  | 766,559 | 
|James W.
  Power       |  |                        | 5,446,528 |                             |  | 112,276 | 
|Joseph P.
  Ritorto    |  |                        | 4,788,945 |                             |  | 769,859 | 
|David Sands            |  |                        | 5,455,645 |                             |  | 103,159 | 
|Richard D.
  Rockwell  |  |                        | 5,456,228 |                             |  | 102,576 | 

Stockholders
also approved the Companys 2007 Stock Option Plan. The results of the voting
for this proposal were 3,792,594 in favor, 55,393 against, 165,521 abstentions
and 1,454,296 not voted.

The
stockholders also voted to ratify the selection of Amper, Politziner &
Mattia, P.C. as our independent auditors for 2007. The results of the voting
for this proposal were 5,437,389 in favor, 98,852 against and 22,563
abstentions.

11

---



PART II

Item 5. Market for
Registrants Common Equity and Related Stockholder Matters and Issuer Purchases
of Equity Securities

Our Common
Stock is traded on the American Stock Exchange under the Symbol HBE.

| |     |                                                                           
| | --- | --------------------------------------------------------------------------
| | (a) | The
  following table indicates high and low stock prices for each period.

|                 |  |      |      |     |   |      | 
|---------------- |  | ---- | ---- | --- | - | ---- | 
|2007             |  | High |      | Low |  
|                 |  |      |      |     |  
|First
  Quarter  |  | $    | 6.25 |     | $ | 4.07 | 
|Second
  Quarter |  | $    | 4.80 |     | $ | 3.66 | 
|Third
  Quarter  |  | $    | 5.94 |     | $ | 3.60 | 
|Fourth
  Quarter |  | $    | 5.45 |     | $ | 3.85 | 

|                 |  |   |      |  |   |      | 
|---------------- |  | - | ---- |  | - | ---- | 
|2006             |  |   |      |  |   |      | 
|                 |  |   |      |  |   |      | 
|First
  Quarter  |  | $ | 6.98 |  | $ | 4.55 | 
|Second
  Quarter |  | $ | 6.65 |  | $ | 4.94 | 
|Third
  Quarter  |  | $ | 5.05 |  | $ | 3.29 | 
|Fourth
  Quarter |  | $ | 3.79 |  | $ | 3.29 | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) | Number of
  Holders of Common Stock. The number of holders of record of our Common Stock
  on December 31, 2007 was 33. Since a portion of the shares of the common
  stock are held in street or nominee name, it is believed that there are
  significant number of additional beneficial owners of common stock.                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (c) | Dividends.
  There were no cash dividends or other cash distributions made by us during
  the year ended December 31, 2007. Future dividend policy will be determined
  by our Board of Directors based on our earnings, financial condition, capital
  requirements and other existing conditions. It is anticipated that cash dividends
  will not be paid to the holders of our common stock in the foreseeable
  future.                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (d) | In connection with the acquisition of Securus Inc. on
  October 10, 2005, the
  Company issued an aggregate of 150,001 shares of its common stock of which
  150,001 are being held in escrow pursuant to the stock purchase escrow
  agreement between the Company and the selling shareholders of Securus, Inc.
  The issuance of the shares of restricted stock in connection with the
  aforementioned transaction was made in reliance upon the exemption provided
  in section 4(2) of the Securities Act of 1933, as amended.                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (e) | In connection with the acquisition of all
  the capital stock of CIS on October 2, 2006, the Company issued an aggregate of 20,000
shares of its common stock.
  The Company issued an additional 10,000 shares of its restricted common stock
  in 2007 to CISs selling shareholder after CIS met certain performance
  targets. The
  issuances of the shares of restricted stock in connection with the
  aforementioned transactions was made in reliance upon the exemption provided
  in section 4(2) of the Securities Act of 1933, as amended. The
  selling shareholder may earn an additional 60,000 shares of the Companys
  common stock if CIS achieves certain performance targets through December
  2011.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (f) | Securities
  authorized for issuance under equity compensation plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

12

---



See Item 12 of this
  Annual Report on Form 10-K for information about our equity compensation
  plans.

13

---



|                                          |  |                            |            |      |   |                     |   |                     |            |                     |   |            |  |   |            |  
|----------------------------------------- |  | -------------------------- | ---------- | ---- | - | ------------------- | - | ------------------- | ---------- | ------------------- | - | ---------- |  | - | ---------- | -
|                                          |  | Years
  ended December 31, |           
|                                          |  |                            |           
|                                          |  | 2007                       |            | 2006 |   | 2005 
  (Corrected) |   | 2004 
  (Corrected) |            | 2003 
  (Corrected) |  
|                                          |  |                            |            |      |   |                     |   |                     |            |                     |  
|Results of
  operations:                  |  |                            |            |      |   |                     |   |                     |            |                     |   |            |  |   |            |  
|Net revenues                              |  | $                          | 57,852,216 |      | $ | 42,132,852          |   | $                   | 42,156,188 |                     | $ | 29,725,718 |  | $ | 18,261,065 |  
|Cost of revenue                           |  |                            | 45,575,305 |      |   | 31,586,736          |   |                     | 31,581,187 |                     |   | 22,305,632 |  |   | 14,908,700 |  
|Selling, general and administrative       |  |                            | 12,196,330 |      |   | 11,952,477          |   |                     | 8,422,193  |                     |   | 6,943,885  |  |   | 8,339,337  |  
|Net (loss) income                         |  |                            | (303,304   | )    |   | (2,260,138          | ) |                     | 1,137,974  |                     |   | 169,639    |  |   | (3,068,182 | )
|                                          |  |                            |            |      |   |                     |   |                     |            |                     |   |            |  |   |            |  
|Per common
  share:                       |  |                            |            |      |   |                     |   |                     |            |                     |   |            |  |   |            |  
|Net (loss) income                         |  |                            |            |      |   |                     |   |                     |            |                     |   |            |  |   |            |  
|Basic                                     |  | $                          | (0.05      | )    | $ | (0.39               | ) | $                   | 0.20       |                     | $ | 0.03       |  | $ | (0.60      | )
|Diluted                                   |  |                            | (0.05      | )    |   | (0.39               | ) |                     | 0.20       |                     |   | 0.03       |  |   | (0.60      | )
|Cash dividends declared                   |  |                            |           |      |   |                    |   |                     |           |                     |   |           |  |   |           |  
|                                          |  |                            |            |      |   |                     |   |                     |            |                     |   |            |  |   |            |  
|Financial
  position at year-end:         |  |                            |            |      |   |                     |   |                     |            |                     |   |            |  |   |            |  
|Total assets                              |  | $                          | 32,331,570 |      | $ | 31,371,609          |   | $                   | 25,161,530 |                     | $ | 23,372,371 |  | $ | 17,700,408 |  
|Long term debt, net of current maturities |  |                            | 465,539    |      |   | 3,463,236           |   |                     | 727,961    |                     |   | 168,989    |  |   | 1,922,597  |  
|Total Liabilities                         |  |                            | 18,397,478 |      |   | 17,360,991          |   |                     | 9,178,564  |                     |   | 8,349,395  |  |   | 6,284,743  |  
|Shareholders equity                      |  |                            | 13,934,092 |      |   | 14,010,618          |   |                     | 15,982,966 |                     |   | 14,653,786 |  |   | 11,068,285 |  

Item 7.
Managements Discussion and Analysis of Financial Condition and
  Results of Operations



Overview

We are an
established leader in the electronic physical security industry, specializing
in integrated security systems and emergency preparedness. Our operations are
divided into two business segments  Security System Integration (Integration)
and Specialty Products and Services (Specialty). The Integration segment
provides cradle to grave services for a wide variety of security,
communications and control systems. The Company specializes in turn-key systems
that integrate many different technologies. Systems are customized to meet the
specific needs of its customers. Through the Specialty segment we provide
emergency preparedness programs, and specialized radio frequency communication
equipment and integration. Each of

14

---



the Companys
segments markets nationwide with an emphasis in the Arizona, California,
Colorado, Maryland, New Jersey, New York, Texas and Virginia. Customers are
primarily medium and large businesses and governmental agencies. The Company
derives a majority of its revenues from project installations and, to a smaller
extent, maintenance service revenue.

Our Vision and
Strategy

Our vision is
to maintain our leadership position in security technology. We intend to do
this in part by:

|  |                                                                                                                           
|- | --------------------------------------------------------------------------------------------------------------------------
| | Providing
  advice on product selection and system design;                                                                
|  |                                                                                                                           
| | Examining
  and thoroughly testing each security product as it would be set up for use in
  our customers facilities; and
|  |                                                                                                                           
| | Using only
  systems and components that are reliable and efficient to use.                                               

In addition to
growing the business organically, we have been actively pursuing the strategic
acquisition of synergistic integrators and specialty products and service
companies to further fuel steady growth. Consistent with our expansion
strategy, we acquired seven companies since May of 2002, which include the two
acquisitions made in October 2006 (See Note 17 to the Consolidated Financial
Statements included in this Annual Report on Form 10-K).

To finance our
acquisitions, we have used a combination of internally generated cash, the sale
of company common stock and bank debt. We currently have a $5 million credit
facility with TD Banknorth, which includes a $1 million term loan of which
$324,520 was outstanding at December 31, 2007. As part of our credit facility
we also have a $4 million revolving credit facility. Borrowings under the
revolving credit facility were $3,635,897, at December 31, 2007. It is our
expectation and intent to use cash and to incur additional debt as appropriate
to finance future working capital and acquisitions. Additionally, to fund
future acquisitions we would consider the issuance of subordinated debt, or the
sale of equity securities, or the sale of existing Company assets.

Trends

We anticipate
that the overall average operating margins for our business to be approximately
4% for 2008, as compared to operating margins of essentially breakeven, (6.2)%,
and 5.0% for years 2007, 2006 and 2005, respectively.

There are
several factors impacting operating margins, including levels of competition
for a particular project and the size of the project. As a significant amount
of our costs are relatively fixed, such as labor costs, increases or decreases
in revenues can have a significant impact on operating margins. The Company
continually monitors costs and pursues cost control measures and sales
initiatives to improve operating margins.

RECENT ACCOUNTING
PRONOUNCEMENTS:

Recently
Adopted Accounting Pronouncements

In June 2006,
FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
 an interpretation of FASB Statement No. 109(FIN 48). FIN 48 clarifies the accounting for uncertainties in
income taxes recognized in an enterprises financial statements in accordance
with SFAS 109, Accounting for Income Taxes. This interpretation prescribes a
comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. Under

15

---



FIN 48, the
tax effects of a position should be recognized only if it is
more-likely-than-not to be sustained on examination by the taxing
authorities, based on its technical merits as of the reporting date. The tax
benefits recognized in the financial statements from such a position should be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. The interpretation also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The Company has
adopted the provisions of FIN 48 as of January 1, 2007, but this did not have a
material impact on the financial statements.

On September
13, 2006, the Securities Exchange Commission (SEC) staff issued Staff
Accounting Bulletin (SAB) Topic No. 108, Financial Statements  Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (SAB 108). SAB 108 addresses how a
registrant should evaluate whether an error in its financial statements is
material. The SEC staff concludes in SAB 108 that materiality should be
evaluated using both the rollover and iron curtain methods. Registrants are
required to comply with the guidance in SAB 108 in financial statements for
fiscal years ending after November 15, 2006. After analyzing the materiality of
the impact arising from the deficiencies related to the accounting for income
taxes in accordance with the provisions of SAB 108, management concluded that
the financial statements for the years ended December 31, 2005 and 2004
included as part of this Annual Report on Form 10-K, and the Selected Financial
Data included as Item 6 of this Annual Report on Form 10-K should be corrected
to reflect the proper accounting. The impact resulting from these corrections
for income tax accounting that had an income statement impact was to increase
(decrease) tax expense by $(29,696), $(125,618), $111,080, and $99,776, for the
years ended December 31, 2005, 2004, 2003 and 2002, respectively, with a
corresponding increase or decrease to net tax liabilities. The impact resulting
from these corrections for income tax accounting that only had a balance sheet
impact was to increase net deferred tax liabilities by $549,262, $580,032,
$533,648, and $533,648 for the years ended December 31, 2005, 2004, 2003 and
2002, respectively, with a corresponding net increase to goodwill. Unadjusted
differences were not material to 2006 or individually to the prior years.

Recently
Issued Accounting Pronouncements

In September
2006, the FASB issued No. 157, Fair Value
Measurements. This new standard provides guidance for using fair
value to measure assets and liabilities. The FASB believes the standard also
responds to investors requests for expanded information about the extent to
which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on
earnings. Statement 157 applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value but does not expand the use
of fair value in any new circumstances.

Under
Statement 157, fair value refers to the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. In this
standard, the FASB clarifies the principle that fair value should be based on
the assumptions market participants would use when pricing the asset or
liability. In support of this principle, Statement 157 establishes a fair value
hierarchy that prioritizes the information used to develop those assumptions.
The fair value hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data, for example, the
reporting entitys own data. Under the standard, fair value measurements would
be separately disclosed by level within the fair value hierarchy.

16

---



The provisions
of Statement 157 are effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged, provided that the reporting entity
has not yet issued financial statements for that fiscal year, including any
financial statements for an interim period within that fiscal year. On February
12, 2008 the FASB issued Financial Staff Position (FSP) No. 157-2 which
deferred the effective date of FAS No. 157 to fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years for item within
the scope of the FSP. The Company is currently quantifying the impact of SFAS
No. 157.

In February
2007, FASB issued FAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115 (FAS
159). FAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value. FAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
impact of adopting FAS 159 on its financial statements.

FASB is
currently working on amendments to the existing accounting standards governing
asset transfers and fair value measurements in business combinations and
impairment tests, among other issues. Upon completion of these standards, the
Company will need to re-evaluate its accounting and disclosures. Due to the
ongoing deliberations of the standard setters, the Company is unable to accurately
determine the effect of future amendments or proposals at this time.

Critical
Accounting Policies

The Companys
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles in the United States of America, which
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities, at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Management uses its best judgment in valuing these
estimates and may, as warranted, solicit external professional advice. The
following critical accounting policies, some of which are impacted
significantly by judgments, assumptions and estimates, affect the Companys
consolidated financial statements.

Revenue Recognition

Revenue
from a project in either the Integration or Specialty segments are recognized
on the percentage of completion method, whereby revenue and the related gross
profit are determined based upon the actual costs incurred to date for the
project to the total estimated project costs at completion. Project costs
generally include all material and shipping costs, the Companys direct labor,
subcontractor costs and an allocation of indirect costs related to the direct
labor. Changes in the project scope, site conditions, staff performance and
delays or problems with the equipment used on the project can result in
increased costs that may not be billable or accepted by the customer and
results in a loss or lower profit than was originally anticipated at the time
of the proposal.

Estimates for the costs to complete the project are continuously updated by management
during the performance of the project. Provisions for changes in estimated
costs and losses, if any, on

17

---



uncompleted
projects are made in the period in which such changes are determined. In
general, we determine a project to be substantially completed after:

| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | 1. The scope
  of work is completed, which includes installing the equipment as required in
  the contract.
| |                                                                                                            
| | 2. System is
  functional and has been tested.                                                             
| |                                                                                                            
| | 3. Training
  has been provided.                                                                           

The majority of
the Companys projects are completed within a year. Revenue from product sales
are recognized when title and risk of loss passes to the customer.

Service
contracts, which are generally separate and distinct agreements from project
agreements, are billed either monthly or quarterly on the last day of the month
covered by the contract. Accordingly, revenue from service contracts are
recognized ratably over the length of the agreement. In 2006 and 2007, the
Company did not bundle any significant service contracts with our systems
installation work.

Trade Receivables
and Allowance for Doubtful Accounts

Trade
receivables are stated at net realizable value. This value includes an
appropriate allowance for estimated uncollectible accounts. The allowance is
evaluated on a regular basis by management and is based upon historical
experience with the customer, the aging of the past due amounts and the
relationship with and economic status of our customers. The evaluation is based
upon estimates taking into account the facts and circumstances at the time of
the evaluation. Actual uncollectible accounts could exceed our estimates and
changes to its estimates will be accounted for in the period of change. Account
balances are charged against the allowance after all means of collection have
been exhausted and the potential for recovery is considered remote. Our trade
receivables are not collateralized.

Inventory Valuation

Inventory is
stated at the lower of cost or market value. Cost has been determined using the
first-in, first-out method. Inventory quantities on-hand are regularly
reviewed, and where necessary, reserves for excess and obsolete inventories are
recorded

Warranty

The Company
offers warranties on all products, including parts and labor that range from one
year to three years depending upon the type of product concerned. For products
made by others, the Company passes along the manufacturers warranty to the end
user.

Intangible Assets

The Companys
intangible assets include goodwill and other intangibles that consist of the
fair value of acquired customer lists, service contracts acquired, trade names,
and covenants not to compete. Goodwill represents the excess of purchase price
over fair value of net assets acquired at the date of acquisition.

Effective
January 1, 2002, the Company adopted the provisions of Statement of Financial
and Accounting Standards (SFAS) 142 Goodwill and Other Intangible Assets. In
accordance with that statement, goodwill and intangible assets with indefinite
lives are not amortized, but are tested at least annually for impairment. Prior
to January 1, 2002, the Company had not recorded goodwill or other intangible
assets of indefinite lives. Intangible assets with estimable useful lives,
consisting primarily of acquired customer lists, service contracts and
covenants not to

18

---



compete are
amortized on a straight-line basis over their estimated useful lives of three
to fifteen years and are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset or asset group may
not be recoverable. If the intangible assets remaining useful life is changed,
the intangible asset will be amortized over the remaining useful life. If the
asset being amortized is determined to have an indefinite useful life, the
asset will be tested for impairment. The impairment test will consist of
measuring its fair value with its carrying amount. If the carrying amount of
the intangible assets exceeds its fair value, an impairment loss is recognized
for an amount equal to the excess and the adjusted carrying amount is
recognized as its new accounting basis.

The Companys
goodwill impairment test is based on a two part procedure consistent with the
requirements of SFAS 142. The first test consists of determining the fair value
of the reporting unit and comparing it to the carrying value of the reporting
unit. If the carrying value of the reporting unit exceeds the fair value of the
reporting unit, a second test is performed. In step two, the implied fair value
of the goodwill (which is the excess of the fair value of the reporting unit
over the fair value of the net assets) is compared to the carrying value of the
goodwill. An impairment loss is recognized for any excess value of goodwill
over the implied value. We determined the reporting unit by analyzing
geographic regions, as management evaluates the Companys performance in this
manner. We have identified five separate and distinct operating units for the
testing requirements of SFAS 142, and evaluate each reporting unit for
impairment.

Income Taxes

Deferred taxes
are provided on an asset and liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss carry
forwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax basis. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.

19

---



Comparison of the year
ended December 31, 2007 to the year ended December 31, 2006

Analysis of
consolidated statement of operations

|                                                 |  |                                  |            |   |   |            |   |  |          |  
|------------------------------------------------ |  | -------------------------------- | ---------- | - | - | ---------- | - |  | -------- | -
|                                                 |  | For the years ended December 31, |            |   |   |           
|                                                 |  |                                  |            |   |   |           
|                                                 |  |                                  | 2007       |   |   | 2006       |   |  | % change |  
|                                                 |  |                                  |            |   |   |            |  
|Revenue                                          |  | $                                | 57,852,216 |   | $ | 42,132,852 |   |  | 37.3     | %
|Cost of revenue                                  |  |                                  | 45,575,305 |   |   | 31,586,736 |   |  | 44.3     | %
|                                                 |  |                                  |            |   |   |            |   |  |          |  
|Gross profit                                     |  |                                  | 12,276,911 |   |   | 10,546,116 |   |  | 16.4     | %
|                                                 |  |                                  |            |   |   |            |   |  |          |  
|Operating expenses:                              |  |                                  |            |   |   |            |   |  |          |  
|Selling, general &
  administrative expenses     |  |                                  | 12,196,330 |   |   | 11,952,477 |   |  | 2.0      | %
|Goodwill & intangible
  asset impairment charges |  |                                  | 43,999     |   |   | 1,191,000  |   |  | -96.3    | %
|                                                 |  |                                  |            |   |   |            |   |  |          |  
|Operating (loss) profit                          |  |                                  | 36,582     |   |   | (2,597,361 | ) |  | -101.4   | %
|                                                 |  |                                  |            |   |   |            |   |  |          |  
|Interest income                                  |  |                                  | 73,493     |   |   | 19,515     |   |  | 276.6    | %
|Other expense                                    |  |                                  | (191       | ) |   | (674       | ) |  | -71.7    | %
|Interest expense                                 |  |                                  | (349,907   | ) |   | (103,923   | ) |  | 236.7    | %
|                                                 |  |                                  |            |   |   |            |   |  |          |  
|(Loss) income before tax
  expense               |  |                                  | (240,023   | ) |   | (2,682,443 | ) |  | -91.1    | %
|                                                 |  |                                  |            |   |   |            |   |  |          |  
|Tax expense (benefit)                            |  |                                  | 63,281     |   |   | (422,305   | ) |  | -115.0   | %
|                                                 |  |                                  |            |   |   |            |   |  |          |  
|Net (loss) income after
  taxes                  |  | $                                | (303,304   | ) | $ | (2,260,138 | ) |  | -86.6    | %
|                                                 |  |                                  |            |   |   |            |   |  |          |  

Revenue-Revenue for the year ended December 31,
2007 was $57,852,216 as compared to $42,132,852 for the year ended December 31,
2006. This represents an increase of 37.3% over the prior year. CIS Security
Systems Corp. (CIS) (Virginia and Maryland operations) acquired in October
2006 accounted for $3,088,238 of the increase in revenues. New Jerseys
revenues increased significantly as a result of the contracts awarded by large
public agencies in the New York Metropolitan area at the end of 2006 and early
2007. For the year ended December 31, 2007, the Company experienced continued
revenue improvement from our Arizona Division, as well as improvements in our
Colorado, Texas and California Divisions. Revenues from governmental agencies
represented 39.8% and 22.6% of total revenues, for the years ended December 31,
2007 and 2006, respectively.

Booked orders
increased to $56.6 million in the year ended December 31, 2007 as compared to
$26.6 million in the corresponding period of 2006.

Cost of Revenue - Cost of revenue for the year ended
December 31, 2007 was $45,575,305 as compared to $31,586,736 for the year ended
December 31, 2006. The gross profit margin for the year ended December 31, 2007
was 21.2% as compared to 25.0% for the year ended December 31, 2006. The
decline in the gross profit margin was driven principally from the California
and New Jersey operations. Californias margin decline was the result of cost
overruns on a number of projects that were quoted late in 2006 and early 2007.

The decline in
New Jersey in the first quarter of 2007 was the result of cost overruns on a
number of installations. In addition, as discussed above in Revenue, several
large projects were booked in New Jersey at the end of 2006 and early in
2007. These projects carry gross profit margins that are below the Companys
historical average. Therefore, while gross margin percentages declined in New
Jersey for the year ended December 31, 2007 compared to the same period in the
prior year, because of the significant increase in revenue from these larger
projects, gross profit dollars actually increased by 35.6% year over year.

Selling, General and
Administrative Expenses - Selling, general and administrative expense was
$12,196,330 for the year ended December 31, 2007, as compared to $11,952,477
for the year ended December 31, 2006. This increase of 2.0% or $243,853 was
primarily attributed to

20

---



increased
costs associated with the CIS acquisition in our 2006 fourth quarter, as well
as higher corporate costs, due mainly to organizational changes, and costs
incurred in addressing the internal control weaknesses identified in Item 9A of
the Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as
well as costs incurred in preparation for Sarbanes Oxley implementation,
partially offset by lower bad debt expense and improved labor utilization.

Goodwill and Intangible Asset Impairment
ChargesBased
upon our goodwill evaluation under the requirements of SFAS 142, the Company
took a charge to operations of $1,191,000 (or $.21 per diluted share)
associated with goodwill impairment associated with our California banking
vertical market for the year ended December 31, 2006. For the year ended
December 31, 2007 the Company recorded a $43,999 impairment charge for the
write-down of a trade name.Interest IncomeInterest income for the year ended
December 31, 2007 was $73,493, as compared to $19,515 for the year ended
December 31, 2006.

Interest Expense- Interest expense for the year ended
December 31, 2007 was $349,907, as compared to $103,923 for the year ended
December 31, 2006. Average outstanding debt balance was considerably higher in
the twelve month period ended December 31, 2007 versus for the year ended
December 31, 2006, accounting for the higher interest expense in 2007.Tax Expense  Tax expense for the year ended
December 31, 2007 was
$63,281. This provision is driven primarily by profitability in states with
higher income tax rates. For the year ended December 31, 2006, principally as a result of the loss before tax incurred
by the Company, there was an overall tax benefit of $422,305. This benefit was
partially offset by state income taxes for those jurisdictions that were
profitable during the period. The write-off of the goodwill discussed above is
a permanent difference under FASB 109, Accounting for Income Taxes.
Accordingly, there was no tax benefit taken for this write-off.Net Income - As a result of the above
noted factors our net loss was $303,304 for the year ended December 31, 2007 as
compared to a net loss of $2,260,138 for the year ended December 31, 2006. This
resulted in diluted loss per share of $0.05 on weighted average common shares
outstanding of 5,768,864 for the year ended December 31, 2007, as compared to
diluted loss per share of $0.39 on weighted average common shares outstanding
of 5,749,964 for the year ended December 31, 2006.

21

---



Comparison of the year ended December 31,
2006 to the year ended December 31, 2005

Analysis of consolidated statement of
operations

|                                                |  |                                  |            |             |   |            |   |  |        |  
|----------------------------------------------- |  | -------------------------------- | ---------- | ----------- | - | ---------- | - |  | ------ | -
|                                                |  | For the years ended December 31, |            |             |   |           
|                                                |  |                                  |            |             |   |           
|                                                |  | 2006                             |            | 2005        |   |            |   | 
|                                                |  |                                  |            | (Corrected) |   | % change   |  
|                                                |  |                                  |            |             |   |            |  
|Revenue                                         |  | $                                | 42,132,852 |             | $ | 42,156,188 |   |  | -0.1   | %
|Cost of revenue                                 |  |                                  | 31,586,736 |             |   | 31,581,187 |   |  | 0.0    | %
|                                                |  |                                  |            |             |   |            |   |  |        |  
|Gross profit                                    |  |                                  | 10,546,116 |             |   | 10,575,001 |   |  | -0.3   | %
|                                                |  |                                  |            |             |   |            |   |  |        |  
|Operating expenses:                             |  |                                  |            |             |   |            |   |  |        |  
|Selling, general &
 administrative expenses     |  |                                  | 11,952,477 |             |   | 8,422,193  |   |  | 41.9   | %
|Goodwill & intangible
 asset impairment charges |  |                                  | 1,191,000  |             |   | 44,999     |   |  | 2546.7 | %
|                                                |  |                                  |            |             |   |            |   |  |        |  
|Operating (loss) profit                         |  |                                  | (2,597,361 | )           |   | 2,107,809  |   |  | -223.2 | %
|                                                |  |                                  |            |             |   |            |   |  |        |  
|Interest income                                 |  |                                  | 19,515     |             |   | 12,507     |   |  | 56.0   | %
|Other expense                                   |  |                                  | (674       | )           |   | (3,780     | ) |  | -82.2  | %
|Interest expense                                |  |                                  | (103,923   | )           |   | (84,985    | ) |  | 22.3   | %
|                                                |  |                                  |            |             |   |            |   |  |        |  
|(Loss) income before tax
 expense               |  |                                  | (2,682,443 | )           |   | 2,031,551  |   |  | -232.0 | %
|                                                |  |                                  |            |             |   |            |   |  |        |  
|Tax expense (benefit)                           |  |                                  | (422,305   | )           |   | 893,577    |   |  | -147.3 | %
|                                                |  |                                  |            |             |   |            |   |  |        |  
|Net (loss) income after
 taxes                  |  | $                                | (2,260,138 | )           | $ | 1,137,974  |   |  | -298.6 | %
|                                                |  |                                  |            |             |   |            |   |  |        |  

Revenue-Revenue for the year ended December 31,
2006 was $42,132,852 representing a slight decrease as compared to $42,156,188
for the year ended December 31, 2005. In 2006, the New Jersey, Viscom and Texas
Divisions experienced declines in revenues. The decline in New Jersey resulted
from the wind down of two large projects in the New York metro area. Lower
revenue from our Viscom group was attributable to a large project with the
Santa Clara Valley Transportation Authority in 2005 that was not replaced in
2006. In response to the decline in revenues in our Texas Division, changes in
management were made to more effectively take advantage of the opportunities
that exist in this market. These declines in revenues were offset by revenue
from Securus (Colorado operations) acquired in October 2005 and CIS Security
Systems Corp. (CIS) (Virginia and Maryland operations) acquired in October
2006 and higher revenue from our California and Arizona regions. Revenues from
CIS were $1,774,493 for the year ended December 31, 2006. Revenues from
governmental agencies represented 22.6% and 39% of total revenues, for the
years ended December 31, 2006 and 2005, respectively.

Booked orders
doubled to $26.6 million in the year ended December 31, 2006 as compared to
$13.3 million in the corresponding period of 2005.

Cost of Revenue- Cost of revenue for the year ended
December 31, 2006 was $31,586,736 as compared to $31,581,187 for the year ended
December 31, 2005. The gross profit margin for the year ended December 31, 2006
was 25.0% as compared to 25.1% for the year ended December 31, 2005. Higher
gross profit dollars arising from the Securus and CIS acquisitions, as well as
higher gross margins and dollars in our Diversified Security Solutions, Inc.
division and the Arizona region for the year ended December 31, 2006 were
offset by the decline in gross profit at our Viscom and Airorlite Divisions.
The decline in Viscom gross profit margins was a direct result of wind down of
the Santa Clara VTA project discussed in the Revenue section above and the
$0.3 million write-down of slow moving inventory associated with the Viscom
product line. Poor performance from the Texas Division contributed to the
decline in gross profit margin.

22

---



The decline at
Airorlite largely resulted from the investment that was made by this division
to support a project for a large legacy customer. This investment resulted in a
solution for Time Delay Interference (TDI) in In-Building wireless systems.
This solution for TDI is expected to have wider commercial application
potential.

Selling, General and Administrative Expenses-Selling, general and administrative
expense was $11,952,477 for the year ended December 31, 2006, as compared to
$8,422,193 for the year ended December 31, 2005. This increase of 41.9% or
$3,530,284 was primarily attributed to costs associated with the Securus
acquisition made in October 2005, the CIS acquisition made in October 2006,
lower utilization rates due in part to the move to our new offices in Fair
Lawn, NJ, additional accruals related to our paid time off liability and higher
commissions.

Goodwill and Intangible Asset Impairment
ChargesBased
upon our goodwill evaluation under the requirements of SFAS 142, the Company
took a charge to operations of $1,191,000 (or $.21 per diluted share)
associated with goodwill impairment associated with our California banking
vertical market for the year ended December 31, 2006. For the year ended
December 31, 2005, the Company recorded a $44,999 impairment charge for the
write-down of customer lists and service contract rights.

Interest IncomeInterest income for the year ended
December 31, 2006 was $19,515, as compared to $12,507 for the year ended
December 31, 2005.

Interest Expense- Interest expense for the year ended
December 31, 2006 was $103,923, as compared to $84,985 for the year ended
December 31, 2005. Average outstanding debt balance was considerably higher in
the twelve month period ended December 31, 2006 versus for the year ended
December 31, 2005, accounting for the higher interest expense in 2006.

Tax Expense  Principally as a result of the loss before tax incurred by the Company for
the year ended December 31, 2006, there was an overall tax benefit of $422,305.
This benefit was partially offset by state income taxes for those jurisdictions
that were profitable during the period. The write-off of the goodwill discussed
above is a permanent difference under FASB 109, Accounting for Income Taxes.
Accordingly, there was no tax benefit taken for this write-off. For the year
ended December 31, 2005, the company recorded a tax provision of $893,577,
which is an effective tax rate of 44%.

Net Income - As a
result of the above noted factors our net loss was $2,260,138 for the year
ended December 31, 2006 and our net income was $1,137,974 for the year ended
December 31, 2005. This resulted in diluted loss per share of $0.39 on weighted
average common shares outstanding of 5,749,964 for the year ended December 31,
2006, as compared to diluted earnings per share of $0.20 on weighted average
common shares outstanding of 5,773,097 for the year ended December 31, 2005.

Liquidity and Capital Resources
 As of December 31, 2007, we had cash and cash equivalents of $3,277,450. Our
net current assets were $6,971,732 at December 31, 2007 versus $10,001,110 at
December 31, 2006. Total debt at December 31, 2007 was $4,736,384 compared to
the December 31, 2006 balance of $3,968,264.

Cash provided
by operating activities was $3,015,594 during the year ended December 31, 2007.
The most significant source of cash resulted from a net increase in accounts
payable of $2,184,728 and a decrease in accounts receivable of $280,677. A
decrease in cost in excess of

23

---



billings and
estimated profits contributed $1,448,430. This was partially offset by a
decrease in accrued expenses of $1,576,749.

Cash from
investing activities used $677,704. The most significant expenditures were for
vehicle purchases.

Cash from
financing activities provided $739,706, representing $788,000 in net proceeds
from the revolving bank line, partially offset by term loan and capital lease
payments.

Borrowings
under the revolving credit facility at December 31, 2007 were $3,635,897. The
Company is required to maintain certain financial and reporting covenants and
restrictions on dividend payments under the terms of the Loan Agreement with TB
Banknorth, N.A. (See Note 8 to the Consolidated Financial Statements included
in this Annual Report on Form 10-K). The Company was not in compliance with
certain of these bank covenants at December 31, 2007. TD Banknorth, N.A.
provided the Company with a waiver associated with the bank covenants in
default on March 28, 2008. As a condition of the waiver, the Company agreed to
grant TD Banknorth a first security interest on its accounts receivable.

DIVIDENDS

We have not
declared cash dividends on our common equity. The payment of dividends is
prohibited under the existing credit agreement with TD Banknorth. We may, in
the future, declare dividends under certain circumstances.

SEASONALITY

Revenues
generated by our services have typically been seasonal in nature and there
could be periods of fluctuations in revenue volume due to the timing of project
installations or factors that are beyond the Companys control, such as weather
and construction delays.

INFLATION

Our revenues
generally have kept pace with inflation.

OFF BALANCE SHEET ARRANGEMENTS

We do not have
any financial partnerships with unconsolidated entities, such as entities often
referred to as structured finance, special purpose entities or variable
interest entities which are often established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. Accordingly, we are not exposed to any financing, liquidity, market
or credit risk that could arise if we had such relationships.

AGGREGATE CONTRACTUAL OBLIGATIONS

As of December
31, 2007, the Companys contractual obligations, including payments due by
period, are as follows:

24

---



|                                        |  |                       |           |      |   |         |  |      |         |      |   |            |  |       |   |  |   |   |  |   |           | 
|--------------------------------------- |  | --------------------- | --------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ---------- |  | ----- | - |  | - | - |  | - | --------- | 
|                                        |  | Payment due by period |          
|                                        |  |                       |          
|                                        |  | 2008                  |           | 2009 |   | 2010    |  | 2011 |         | 2012 |   | Thereafter |  | Total |  
|                                        |  |                       |           |      |   |         |  |      |         |      |   |            |  |       |  
|                                        |  |                       |           |      |   |         |  |      |         |      |   |            |  |       |   |  |   |   |  |   |           | 
|Long -Term
  Debt Obligations           |  | $                     | 4,270,845 |      | $ | 267,811 |  | $    |        |      | $ |           |  | $     |  |  | $ |  |  | $ | 4,538,656 | 
|Interest
  Obligation on Long-term debt |  |                       | 14,580    |      |   | 229,260 |  |      |        |      |   |           |  |       |   |  |   |   |  |   | 243,840   | 
|Capital
  Lease Obligations             |  |                       | 238,568   |      |   | 159,291 |  |      | 123,995 |      |   | 73,733     |  |       |  |  |   |  |  |   | 595,587   | 
|Short-term
  debt                       |  |                       | 180,380   |      |   |        |  |      |        |      |   |           |  |       |  |  |   |  |  |   | 180,380   | 
|                                        |  |                       |           |      |   |         |  |      |         |      |   |            |  |       |   |  |   |   |  |   |           | 
|                                        |  |                       |           |      |   |         |  |      |         |      |   |            |  |       |   |  |   |   |  |   |           | 
|Total                                   |  | $                     | 4,704,373 |      | $ | 656,362 |  | $    | 123,995 |      | $ | 73,733     |  | $     |  |  | $ |  |  | $ | 5,558,463 | 
|                                        |  |                       |           |      |   |         |  |      |         |      |   |            |  |       |   |  |   |   |  |   |           | 

Item 7A. Quantitative and Qualitative
Disclosures about Market Risk

We have one
revolving loan for which the interest rate on outstanding borrowings
is variable and is based upon the prime rate of interest. At December 31, 2007
and 2006, there was $3,635,897, and $2,847,897, respectively, outstanding under
this revolving credit facility.

Item 8. Financial Statements and
Supplementary Data

Refer to pages
F-1 through F-38.

Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure

On November 5,
2007, the Company notified Demetrius & Company, L.L.C. of its decision to
dismiss Demetrius & Company, L.L.C. as the Companys independent auditors.

Concurrently,
the Audit Committee and the Board of Directors approved the engagement of
Amper, Politziner and Mattia, P.C. as the Companys independent auditors,
effective upon notification to Demetrius & Company, L.L.C. of dismissal,
and execution of an engagement letter. Amper, Politziner and Mattia, P.C.
served as the Companys independent auditors beginning with the quarter ended
September 30, 2007.

During the
period beginning January 1, 2005 through November 5, 2007 (the date Amper,
Politziner and Mattia, P.C. was appointed), neither the Company nor anyone
acting on the Companys behalf consulted with Amper, Politziner and Mattia,
P.C.. regarding (1) the application of accounting principles to a specified
transaction or the type of audit opinion that might be rendered on the
Companys financial statements or (2) any of the matters or events set forth in
Item 304(a)(2)(ii) of Regulation S-K.

The reports of
Demetrius & Company, L.L.C. on the Companys financial statements for the
past two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles. During the Companys two most recent fiscal years and
the period from the end of the most fiscal year and through November 5, 2007,
the date of appointment of Amper, Politziner & Mattia, P.C., the period
January 1, 2007 through November 7, 2007, there were no disagreements with
Demetrius & Company, L.L.C. on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of Demetrius & Company, L.L.C.,
would have caused Demetrius & Company, L.L.C. to make reference to the
matter in its report.

25

---



During the
year ended December 31, 2007, there were no disagreements with the Companys
principal independent accountant on accounting or financial disclosure.

ITEM 9A (T). CONTROLS AND PROCEDURES

(a) EFFECTIVENESS OF DISCLOSURE CONTROLS AND
PROCEDURES

The Companys
management, with the participation of our Chief Executive Officer, Chief
Operating Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures as of December 31, 2007. The term
disclosure controls and procedures, as defined in Rules 13(a)-15(e) and
15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act), means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by the company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SECs rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the companys
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of December 31, 2007,
our Chief Executive Officer and Chief Financial Officer concluded that, as of
such date, our disclosure controls and procedures were effective.

(b) MANAGEMENTS ANNUAL REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING

The management
of the Company is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the
Exchange Act as a process designed by, or under the supervision of, the
companys principal executive and principal financial officers and effected by
the companys board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:

|  |                                                                                                                                                                                                                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pertain to
  the maintenance of records that, in reasonable detail, accurately and fairly
  reflect the transactions and dispositions of the assets of the company;                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                      
| | Provide
  reasonable assurance that transactions are recorded as necessary to permit
  preparation of financial statements in accordance with generally accepted
  accounting principles, and that receipts and expenditures of the company are
  being made only in accordance with authorizations of management and directors
  of the Company; and

26

---



|  |                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provide
  reasonable assurance regarding prevention or timely detection of unauthorized
  acquisition, use or disposition of the companys assets that could have a
  material effect on the financial statements.

Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

Our management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2007. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal
Control-Integrated Framework.Based on our
assessment, management believes that, as of December 31, 2007, the Companys
internal controls over financial reporting is effective based on those
criteria.

This annual
report does not include an attestation report of the Companys registered
public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the Companys registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only managements report
in this annual report.

Changes in Internal Control over Financial
Reporting

There were no
significant changes in our internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
identified in managements evaluation during the fourth quarter of fiscal year
2007 that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting.

Item 9B. Other Information

There
were no events requiring disclosure that had not been made under Form 8-K in
the fourth quarter of our fiscal year.

27

---



PART III

Item 10. Directors, Executive Officers and Corporate

Identification
of Directors (ages are as of March 17, 2008)

|                    |  |     |  |                              |                                                              |                |      | 
|------------------- |  | --- |  | ---------------------------- | ------------------------------------------------------------ | -------------- | ---- | 
|Name                |  | Age |  | Position(s) with the Company |                                                              | Director
Since
|                    |  |     |  |                              |                                                              |               
|James E. Henry      |  | 53  |  |                              | Chairman, Chief Executive
  Officer, Treasurer and Director  |                | 1999 | 
|Brian Reach.        |  | 52  |  |                              | President, Chief Operating
  Officer, Secretary and Director |                | 2004 | 
|Joseph P. Ritorto   |  | 75  |  |                              | Director                                                     |                | 2002 | 
|Robert L. De Lia Sr |  | 59  |  |                              | Director                                                     |                | 2004 | 
|David Sands         |  | 50  |  |                              | Director                                                     |                | 2005 | 
|James W. Power      |  | 77  |  |                              | Director                                                     |                | 2005 | 
|Richard D. Rockwell |  | 53  |  |                              | Director                                                     |                | 2007 | 

Identification
of Executive Officers (ages are as of March 17, 2008)

|                |  |     |  |                              |                                         |               |      | 
|--------------- |  | --- |  | ---------------------------- | --------------------------------------- | ------------- | ---- | 
|Name            |  | Age |  | Position(s) with the Company |                                         | Officer
Since
|                |  |     |  |                              |                                         |              
|James E. Henry  |  | 53  |  |                              | Chief Executive Officer
  and Treasurer |               | 1999 | 
|Brian Reach     |  | 52  |  |                              | President                               |               | 2007 | 
|                |  |     |  |                              | Chief Operating Officer                 |               | 2006 | 
|                |  |     |  |                              | Vice-Chairman, Secretary                |               | 2004 | 
|John P. Hopkins |  | 47  |  |                              | Chief Financial Officer                 |               | 2006 | 
|Brian J. Smith  |  | 52  |  |                              | Corporate Controller                    |               | 2007 | 
|                |  |     |  |                              |                                         |               |      | 

James E. Henry
co-founded the Companys predecessor company in 1989 and served as President
and Chief Executive Officer until December 2001 when he was elected Chairman of
the Board. Mr. Henry continues to serve as Chief Executive Officer and is also
the Companys Treasurer. Mr. Henry graduated from the University of New
Hampshire with a Bachelor of Science degree in electrical engineering. In
addition to his other responsibilities, Mr. Henry has continued to design,
install, integrate and market security and communications systems as well as
manage the Companys research and development.

Brian Reach,
in addition to his prior duties, was named Chief Operating Officer in August
2006 and President in March 2007. Mr. Reach has been a member of the Companys
Board of Directors since February 2004 and has served as the Companys
Vice-Chairman since June 2004 and as its Secretary since November 2004. From
September 1999 until April 2002, Mr. Reach was the Chief Financial Officer of
Globix Corporation, a provider of application, media and infrastructure
management services. From May 1997 to August 1999, Mr. Reach was the Chief
Financial Officer of IPC Communications, a provider of integrated
telecommunications equipment and services to the financial industry. During his
tenure at IPC, Mr. Reach successfully guided IPC through its leveraged
recapitalization and financially restructured IPC enabling it to invest in
strategic acquisitions and next generation technologies. Prior to IPC,

28

---



Mr. Reach was
the Chief Financial Officer of Celadon Group, Inc. and Cantel Industries, Inc.
Mr. Reach became a certified public accountant in 1980 and received his
Bachelor of Science degree in accounting from the University of Scranton in
1977.

Joseph P.
Ritorto has been a member of our Board since January 2002. Mr. Ritorto is the
co-founder of First Aviation Services, Inc., which is located in Teterboro
Airport, Teterboro, New Jersey and provides a variety of aviation support
services. Mr. Ritorto has been an officer, in various capacities, of First
Aviation Services since 1986. From 1991, until he retired in May 2001, Mr.
Ritorto served as the Senior Executive Vice President and Chief Operating
Officer of Silverstein Properties, Inc. In this capacity, Mr. Ritortos
responsibilities included overseeing operations and directing the lease
administration of Silverstein owned and managed properties.

Robert L. De
Lia, Sr. has been a member of our Board since May 2004. Currently, Mr. De Lia
is vice president of TJs Motorsport, a privately held company dedicated to supplying
quality motor sport products. From 2002 to 2003, Mr. De Lia was the President
and Chief Executive Officer of Airorlite Communications, Inc., a company that
specializes in designing, manufacturing and maintaining wireless communications
equipment used to enhance and extend emergency radio frequency services and
cellular communication for both fixed and mobile applications. In April 2004, a
wholly-owned subsidiary of the Company purchased all of the issued and
outstanding shares of stock of Airorlite Communications, Inc. From 1987 to
1999, Mr. De Lia was the President and Chief Executive Officer of Fiber
Options, Inc. Mr. De Lia graduated from the New York Institute of Technology in
1969.

David Sands
has served as a director of the Company since 2005. Mr. Sands is a certified
public accountant and a partner of Buchbinder Tunick & Company LLP where he
is the head of the tax department. Mr. Sands is a member of the American
Institute of Certified Public Accountants and the New York State Society of
CPAs. Mr. Sands has also lectured at the New York University Summer Continuing
Education and the Foundation for Accounting Education Programs. Mr. Sands
received a Bachelor of Science from SUNY at Buffalo and a Master of Science in
Taxation from Pace University.

James W. Power
has served as a director of the Company since December 2005. Mr. Power is
Chairman of AXIUM, Inc., a digital video recording company; Chairman of MDI,
Inc, a Nasdaq listed provider of integrated access control and physical
security products for government and commercial organizations; director of RAE
Systems, Inc., a manufacturer of equipment used to detect weapons of mass
destruction, hazardous materials and toxic chemicals; and the principal partner
in J.W. Power & Associates. Mr. Power previously served as Chairman of the
Board of InfoGraphic Systems Corp.; President and Chief Executive Officer of
Martec\SAIC; President and Chief Executive Officer of Pinkerton Control Systems
and has held senior executive positions with Cardkey Systems, Inc., Nitrol
Corporation and TRW Data Systems. Previously, he has served as a director of
National Semiconductor, ICS Corporation, and Citicorp Custom Credit and
Citicorp Credit Services.

Richard D.
Rockwell has been Owner and Chairman of Professional Security Technologies LLC,
a full service security systems integrator since 1996. Mr. Rockwell has been
Owner and President of Main Security Surveillance, Inc. since 2005. From 1982
to 2003, Mr. Rockwell was Founder, Owner and Chief Executive Officer of Professional
Security Bureau, Ltd. (PSB), a

29

---



security guard
services company. In 2003 PSB, with annual revenues in excess of $100 million,
was divested to Allied Security. From 1997 through 2003, Mr. Rockwell was
co-founder and Chairman of TransNational Security Group, LLC (TSG). TSG
afforded the member companies with opportunities for national sales and
marketing, national contracting, and combined purchasing power. From 1995 to
2005, Mr. Rockwell was founder and owner of PeopleVision, a full service advertising
and display manufacturing company. From 1981 to 1982, Mr. Rockwell was vice
president, legal affairs of Metropolitan Maintenance Company, a publicly-traded
company listed on the Boston stock exchange. Mr. Rockwell received a Bachelor
of Arts from Ithaca College and a Juris Doctor from Western New England College
of Law.

John P.
Hopkins was appointed Chief Financial Officer in August 2006. Prior to joining
the Company, Mr. Hopkins was Chief Financial Officer for Measurement
Specialties from July 2002 to August 2006, was Vice President, Finance from
April 2001 to July 2002, and was Vice President and Controller from January
1999 to March, 2001, with Cambrex Corporation, a provider of scientific
products and services to the life sciences industry. From 1988 to 1998, he held
various senior financial positions with ARCO Chemical Company, a manufacturer
and marketer of specialty chemicals and chemical intermediates. Mr. Hopkins is
a Certified Public Accountant and was an Audit Manager for Coopers & Lybrand
prior to joining ARCO Chemical. Mr. Hopkins holds a B.S. in Accounting from
West Chester University, and an M.B.A. from Villanova University.

Brian J. Smith
was appointed Corporate Controller in April 2007. Prior to joining the Company,
Mr. Smith was VP-General Manager NetVersant of New York, a provider of voice
and data system infrastructure from 2002. From 1991 to 2002 Mr. Smith held
various senior financial positions with Insilco Technologies, a manufacturer
and distributor of electronic components. Mr. Smith is a Certified Public
Accountant and began his career as an auditor for KPMG Peat Marwick. Mr. Smith
holds a B.S. in Accounting from Fordham University.

(c) Compliance
with Section 16(a) of the Exchange Act

Section 16(a)
of the Exchange Act, requires our directors and officers, and persons who own
more than 10% of our Common Stock, to file with the Securities and Exchange
Commission initial reports of beneficial ownership and reports of changes in
beneficial ownership of our Common Stock and other equity securities. Our
officers, directors and greater than 10% beneficial owners are required by SEC
regulation to furnish us with copies of all Section 16(a) forms they file.

To our
knowledge, for the year ended December 31, 2007, based solely on a review of
the copies of such reports furnished to the Company and representations by
these individuals that no other reports were required during the year ended
December 31, 2007, all Section 16(a) filing requirements applicable to our
directors, officers and greater than 10% beneficial owners have been timely
filed.

(d) Code of
Conduct and Ethics

We have a Code of Conduct
that applies to all of our directors, officers and employees, including our
principal executive officer, principal financial officer and principal
accounting officer and a

30

---



Code of Ethics
that applies to our senior financial officers. You can find our Code of Conduct
and Code of Ethics on our website: www.hbe-inc.com. We will post there any
amendments to these Codes, as well as any waivers that are required to be
disclosed by the rules of either the Securities and Exchange Commission or
American Stock Exchange.

31

---



Item 11. Executive Compensation

Summary
Compensation Table

The following
table sets forth summary information concerning the annual compensation for the
years ended December 31, 2007 and 2006 for our principal executive officer
(PEO), principal financial officer (PFO) and our most highly compensated
executive officers other than our PEO and our PFO for the year ended December
31, 2007:

|                                                                            |  |      |          |              |  |                |  |                        |    |                                    |  |              |  |  |    |  |  |                | 
|--------------------------------------------------------------------------- |  | ---- | -------- | ------------ |  | -------------- |  | ---------------------- | -- | ---------------------------------- |  | ------------ |  |  | -- |  |  | -------------- | 
|Name and Principal Position                                                 |  | Year |          | Salary
  ($) |  | Bonus
  ($)    |  | Option Awards
  ($)(1) |    | All Other
  compensation
  ($) (2) |  | Total
  ($)  | 
|                                                                            |  |      |          |              |  |                |  |                        |    |                                    |  |              | 
|James E Henry, Chairman, Chief Executive Officer,
Treasurer and Director    |  |      | 20072006 |              |  | 174,148130,680 |  |                        |  |                                    |  |            |  |  |  |  |  | 174,148130,680 | 
|Brian Reach, President, Chief Operating Officer, Secretary
and Director (3) |  |      | 20072006 |              |  | 173,01972,000  |  |                        |  |                                    |  | 10,62642,363 |  |  |  |  |  | 183,645114,363 | 
|John P. Hopkins, Chief Financial Officer (4)                                |  |      | 2007     |              |  | 175,000        |  |                        |   |                                    |  | 31,879       |  |  |   |  |  | 206,879        | 
|                                                                            |  |      | 2006     |              |  | 69,000         |  |                        |   |                                    |  | 13,283       |  |  |   |  |  | 82,283         | 
|Brian J. Smith (5)                                                          |  |      | 2007     |              |  | 100,223        |  |                        |   |                                    |  | 12,035       |  |  |   |  |  | 112,258        | 
|Christopher Peckham (6)                                                     |  |      | 2007     |              |  | 36,058         |  |                        |   |                                    |  | 5,407        |  |  |   |  |  | 41,465         | 

(1) Represents the dollar
amount recognized for financial statement reporting purposes with respect to
the year ended December 31, 2007 for the fair value of the option granted to
the named executive officer. The fair value was estimated in accordance with
FASB 123R. For a more detailed discussion on the valuations made and
assumptions used to calculate the fair value of our options refer to Note 10 of
our Annual Report on Form 10-K for the year ended December 31, 2007.

(2) Less than $10,000

(3) Effective August 8, 2006,
Mr. Reach assumed the position of Chief Operating Officer. Effective March 23,
2007, Mr. Reach assumed the additional position of President.

(4) Effective August 8, 2006,
Mr. Hopkins became the Chief Financial Officer.(5) Effective April 14, 2007
Mr. Smith became the Corporate Controller.

(6) Effective September 10,
2007 Mr. Peckham became the Chief Information Officer / Chief Security Officer.

Grants of Plan-Based Awards in 2007.

The following
table contains information related to the grant of stock options under our
existing stock option plans issued by us during 2007 to executive officers
named in the Summary Compensation Table with awards disclosed on a
grant-by-grant basis:

32

---



|                    |  |            |           |                                                               |  |                                             |  |                                                        |   |        |  |         |     |  |      |  |  |        | 
|------------------- |  | ---------- | --------- | ------------------------------------------------------------- |  | ------------------------------------------- |  | ------------------------------------------------------ | - | ------ |  | ------- | --- |  | ---- |  |  | ------ | 
|                    |  |            |           | Estimated Future payouts Under Equity
  Incentive Plan Awards |  | Exercise or
  Base Price of
  Option Awards |  | Grant Date Fair
  Value of Stock
  and Option
  Awards |  
|                    |  |            |           |                                                               |  |                                             | 
|                    |  | Grant Date |           | Threshold                                                     |  | Target                                      |  | Maximum                                                |   |        | 
|                    |  |            |           |                                                               |  |                                             |  |                                                        |   |        |  |         |    
|Name                |  | (1)        |           | (#)                                                           |  | (#)                                         |  | (#)                                                    |   | ($/Sh) |  | ($) (2) |    
|                    |  |            |           |                                                               |  |                                             |  |                                                        |   |        |  |         |    
|James E. Henry      |  |            |          |                                                               |  |                                            |  |                                                        |  |        |  |        |     |  |     |  |  |       | 
|                    |  |            |           |                                                               |  |                                             |  |                                                        |   |        |  |         |     |  |      |  |  |        | 
|Brian Reach         |  |            |          |                                                               |  |                                            |  |                                                        |  |        |  |        |     |  |     |  |  |       | 
|                    |  |            |           |                                                               |  |                                             |  |                                                        |   |        |  |         |     |  |      |  |  |        | 
|John P. Hopkins     |  |            |          |                                                               |  |                                            |  |                                                        |  |        |  |        |     |  |     |  |  |       | 
|                    |  |            |           |                                                               |  |                                             |  |                                                        |   |        |  |         |     |  |      |  |  |        | 
|Brian J. Smith      |  |            | 5/14/2007 |                                                               |  |                                            |  |                                                        |  |        |  | 40,000  | (3) |  | 4.26 |  |  | 69,636 | 
|                    |  |            |           |                                                               |  |                                             |  |                                                        |   |        |  |         |     |  |      |  |  |        | 
|Brian J. Smith      |  |            | 11/8/2007 |                                                               |  |                                            |  |                                                        |  |        |  | 10,000  | (4) |  | 4.11 |  |  | 16,655 | 
|                    |  |            |           |                                                               |  |                                             |  |                                                        |   |        |  |         |     |  |      |  |  |        | 
|Christopher Peckham |  |            | 9/11/2007 |                                                               |  |                                            |  |                                                        |  |        |  | 50,000  | (5) |  | 4.65 |  |  | 92,697 | 

(1) Represents grants under
the Companys 2002 Stock Option Plan.

(2) Represents the dollar amount
recognized for financial statement reporting purposes with respect to the year
ended December 31, 2007 for the fair value of the option granted to the named
executive officer. The fair value was estimated in accordance with FASB 123R.
For a more detailed discussion on the valuations made and assumptions used to
calculate the fair value of our options refer to Note 10 of our Annual Report
on Form 10-K for the year ended December 31, 2007.

(3) Represents grant of 40,000
incentive stock options which vests in five equal installments of 8,000 on May
14, 2008, 2009, 2010, 2011, and 2012, respectively.

(4) Represents grant of 10,000
incentive stock options which vests in five equal installments of 2,000 on
November 14, 2008, 2009, 2010, 2011, and 2012, respectively.

(5) Represents grant of 50,000
incentive stock options which vests in five equal installments of 10,000 on
September 11, 2008, 2009, 2010, 2011, and 2012, respectively.

33

---



Outstanding Equity Awards at December 31,
2007.

The following
table contains information concerning unexercised options held as of December
31, 2007 by the executive officers named in the Summary Compensation Table:

|                    |  |                                                         |  |                                                           |     |                                                                                                |  |  |                        |     |                      |  |  |   |  |  |  |  |      |  |  |  |  |           |  | 
|------------------- |  | ------------------------------------------------------- |  | --------------------------------------------------------- | --- | ---------------------------------------------------------------------------------------------- |  |  | ---------------------- | --- | -------------------- |  |  | - |  |  |  |  | ---- |  |  |  |  | --------- |  | 
|                    |  | Option
Awards                                           | 
|                    |  |                                                         | 
|Name                |  | Number
of
Securities
Underlying
Options
Exercisable
(#) |  | Number
of
Securities
Underlying
Options
Unexercisable
(#) |     | Equity
Incentive Plan
Awards: Number of
Securities Underlying
Unexercised Unearned
Options
(#) |  |  | OptionExercisePrice($) |     | OptionExpirationDate | 
|                    | 
|James E. Henry      |  |                                                         |  |                                                          |     |                                                                                                |  |  |                       |     |                      |  |  |  |  |  |  |  |     |  |  |  |  |          |  | 
|Brian Reach         |  |                                                         |  | 100,000                                                   | (1) |                                                                                                |  |  |                       |     |                      |  |  |  |  |  |  |  | 7.10 |  |  |  |  | 5/31/2009 |  | 
|Brian Reach         |  |                                                         |  | 10,000                                                    | (2) |                                                                                                |  |  | 40,000                 | (2) |                      |  |  |  |  |  |  |  | 3.71 |  |  |  |  | 8/8/2012  |  | 
|John P. Hopkins     |  |                                                         |  | 30,000                                                    | (3) |                                                                                                |  |  | 120,000                | (3) |                      |  |  |  |  |  |  |  | 3.71 |  |  |  |  | 8/8/2012  |  | 
|Brian Smith         |  |                                                         |  |                                                          |     |                                                                                                |  |  | 40,000                 | (4) |                      |  |  |  |  |  |  |  | 4.26 |  |  |  |  | 5/14/2013 |  | 
|Brian Smith         |  |                                                         |  |                                                          |     |                                                                                                |  |  | 10,000                 | (5) |                      |  |  |  |  |  |  |  | 4.11 |  |  |  |  | 11/8/2013 |  | 
|Christopher Peckham |  |                                                         |  |                                                          |     |                                                                                                |  |  | 50,000                 | (6) |                      |  |  |  |  |  |  |  | 4.65 |  |  |  |  | 9/11/2013 |  | 

(1) Represents grant of 100,000
incentive stock options which vests equally in 25 monthly installments of
4,000, with the installment vesting on June 30, 2004.

(2) Represents grant of
50,000 incentive stock options which vests in five equal installments of 10,000
on August 8, 2007, 2008, 2009, 2010, and 2011, respectively.

(3) Represents grant of
150,000 incentive stock options which vests in five equal installments of
30,000 on August 8, 2007, 2008, 2009, 2010, and 2011, respectively.

(4) Represents grant of
40,000 incentive stock options which vests in five equal installments of 8,000
on April 13, 2008, 2009, 2010, 2011, and 2012, respectively.

(4) Represents grant of
10,000 incentive stock options which vests in five equal installments of 2,000
on November 8, 2008, 2009, 2010, 2011, and 2012, respectively.

(4) Represents grant of
50,000 incentive stock options which vests in five equal installments of 10,000
on September 11, 2008, 2009, 2010, 2011, and 2012, respectively.

Directors who
are also our employees receive no additional compensation for attendance at
board meetings. Mr. Henry and Mr. Reach are the only members of the Board of
Directors who are also employees. The Companys non-employee directors receive
a quarterly fee of $1,250 and an annual stock option grant to purchase 2,000
shares of the Companys common stock at the closing share price on the day of
the grant and $1,000 for attendance at each Board or Committee meeting. For the
year ended December 31, 2007, all of our outside Directors, that is,

34

---



Directors who
are not employees or full-time consultants of the Company, each received
compensation as follows:

|                        |  |                                     |  |                       |  |          |  |  |       |     |  |  |  |        |  | 
|----------------------- |  | ----------------------------------- |  | --------------------- |  | -------- |  |  | ----- | --- |  |  |  | ------ |  | 
|Name                    |  | Fees
Earned or
Paid in Cash
($) (1) |  | Option
Awards
($) (2) |  | Total($) | 
|                        | 
|Robert De Lia, Sr.      |  |                                     |  | 9,000                 |  |          |  |  | 4,520 | (3) |  |  |  | 13,520 |  | 
|James W. Power          |  |                                     |  | 9,000                 |  |          |  |  | 4,520 | (4) |  |  |  | 13,520 |  | 
|Joseph P. Ritorto       |  |                                     |  | 9,000                 |  |          |  |  | 4,520 | (5) |  |  |  | 13,520 |  | 
|David Sands             |  |                                     |  | 9,000                 |  |          |  |  | 4,520 | (6) |  |  |  | 13,520 |  | 
|Richard D. Rockwell (7) |  |                                     |  |                      |  |          |  |  |      |     |  |  |  |       |  | 

(1) Outside Directors each
receive a cash retainer at a rate of $5,000 per annum. The Company reimburses
Directors for out-of-pocket expenses incurred traveling to Board of Directors
meetings.

(2) Represents the dollar
amount recognized for financial statement reporting purposes with respect to
the year ended December 31, 2007 for the fair value of the option granted to
the named executive officer. The fair value was estimated in accordance with
FASB 123R. For a more detailed discussion on the valuations made and
assumptions used to calculate the fair value of our options refer to Note 10 of
our Annual Report on Form 10-K for the year ended December 31, 2007.

(3) At December 31, 2007, Mr.
De Lia, Sr. held options to purchase 8,000 shares of Common Stock.

(4) At
December 31, 2007, Mr. Power held options to purchase 6,000 shares of Common
Stock.

(5) At December 31, 2007, Mr. Ritorto held options to purchase 13,000
shares of Common Stock.

(6) At December 31, 2007, Mr.
Sands held options to purchase 6,000 shares of Common Stock.

(7) Mr. Rockwell was elected
a Board member on November 14, 2007.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION

The members of
the Compensation Committee in 2007 were Messrs. De Lia, Power and Ritorto. The
Board made all decisions concerning executive compensation during 2007. No executive
officer of the Corporation served as a member of the Board of Directors of
another entity during 2007. None of the members of the Compensation Committee
has ever been an officer or employee of Henry Bros. Electronics, Inc. or any of
its subsidiaries, and no compensation committee interlocks existed during
fiscal 2007.

35

---



COMPENSATION DISCUSSION AND ANALYSIS

Through the
following questions and answers we explain all material elements of our
executive compensation:

What are the
objectives of our executive compensation programs?

Our corporate
goal is to maximize our total return to our shareholders through share price
appreciation. Towards this goal, we seek to compensate our executives at levels
that are competitive with peer companies so that we may attract, retain and
motivate highly capable executives. We also design our compensation programs to
align our executives interests with those of our shareholders.

Our 2007
executive compensation, including stock option grants awarded for and in 2007,
reflects our effort to realize these objectives.

What are the
principal components of our executive compensation programs?

Overview: Our
executive compensation programs consist of three principal components: (i) a
base salary; (ii) annual bonuses; and (iii) stock option grants. The Companys
policy for compensating our executive officers is intended to provide
significant annual long-term performance incentives. We describe each of these
principal components below.

Relationship of the principal components: We have allocated the three principal
components of our executive compensation programs in a manner that we believe
optimizes each executives contribution to us. We have not established specific
formulae for making the allocation.

Base Salary: We do
not have employment agreements with any of our executives. Base salaries for executive
officers are determined by evaluating a variety of factors, including the
experience of the individual, the competitive marketplace for managerial
talent, the Companys performance, the executives performance, and the
responsibilities of the executive. Although our Compensation Committee annually
reviews salaries of our executive officers, our Compensation Committee does not
automatically adjust base salaries if it concludes that adjustments to other
components of the executives compensation would be more appropriate.

Annual Bonus: Cash
bonus awards are based on a variety of factors, including the individual
performance of the executive and the Companys performance.

Long-Term Incentive Compensation (Stock
Options for Common Shares): The Compensation Committee believes that stock-based
compensation arrangements are essential in aligning the interests of management
and the stockholders. The Companys 2002, 2006 and 2007 Stock Plan provides for
the issuance of stock options to its executive officers and other employees.
Stock options to purchase shares of the Companys common stock are issued at an
exercise price equal to the fair market value of such stock on the date
immediately preceding the date on which the stock option is granted. These options
typically vest over a three to five year period from the date of grant and are
granted to the Companys executive officers and other employees as a reward for
past individual and corporate performance and as an incentive for future
performance. The size of awards is determined by the Committee based on factors
such as the executives position, individual performance and the Companys
performance.

36

---



What do we seek to
reward and accomplish through our executive compensation programs?

We believe
that our compensation programs, collectively, enable us to attract, retain and
motivate high quality executives. We provide annual bonus awards primarily to
provide performance incentives to our key employees to meet corporate
performance objectives. Our corporate objectives are measured by sales
increases, operating margins, net income and other items of performance as
determined on an annual basis. We design long-term incentive awards primarily
to motivate and reward key employees over longer periods. Through vesting and
forfeiture provisions that we include in awards of stock options we provide an
additional incentive to executives to act in furtherance of our longer-term
interests. An executive whose employment with us terminates before equity-based
awards have vested, either because the executive has not performed in
accordance with our expectations or because the executive chooses to leave,
will generally forfeit the unvested portion of the award.

Why have we selected
each principal component of our executive compensation programs?

We have
selected programs that we believe are commonly used by public companies, both
within and outside of our industry, because we believe commonly used programs
are well understood by our shareholders, employees and analysts. Moreover, we
selected each program only after we first confirmed, with the assistance of
outside professional advisors, that the program comports with settled legal and
tax rules.

How do we determine
the amount of each principal component of compensation to our executives?

Our
Compensation Committee exercises judgment and discretion in setting
compensation for our senior executives. The Committee exercises its judgment
and discretion only after it has first evaluated the recommendations of our
Chief Executive Officer and evaluated our corporate performance.

What specific items
of corporate performance do we take into account in setting compensation
policies and making compensation decisions?

Our corporate
performance primarily impacts the annual bonuses and long-term incentive
compensation that we provide our executive officers. We use or weight items of
corporate performance differently in our annual bonus and long-term
compensation awards and some items are more determinative than others.

Goals for
executives in 2007 varied because the areas of responsibility of executives
differ. Goals are generally developed around metrics tied to our growth and
profitability, including increases in revenue and operating profit, decreases
in expenses, completion of developments in accordance with budgets and
timelines, execution of acquisitions in accordance with targets, enhanced
operational efficiencies and development of additional opportunities for our
long-term growth.

37

---



How do we determine
when awards are granted, including awards of equity-based compensation?

Historically,
our Compensation Committee has awarded annual bonuses in the quarter following
the year end. The Compensation Committee makes awards of stock options on an ad
hoc basis, but generally quarterly, following review of pertinent financial
information and industry data. In addition, the Compensation Committee conducts
a thorough review of stock option awards and grant procedures annually. The
date on which the Committee has met has varied from year to year, primarily
based on the schedules of Committee members and the timing of compilation of
data requested by the Committee.

Over the past
years our equity-based awards to executives have taken the form of stock
options. The number of stock options subject to an award has been computed by
taking into account the Companys performance, the particular executives
performance, our retention objectives, and other factors.

What factors do we
consider in decisions to increase or decrease compensation materially?

Historically,
we have generally not decreased the base salaries of our executive officers or
reduced their incentive compensation targets due to individual performance.
When an executives performance falls short of our expectations then we believe
our interests are best served by replacing the executive with an executive who
performs at the level we expect. The factors that we consider in decisions to
increase compensation include the individual performance of the executive,
responsibility of the executive and our corporate performance, as discussed
above.

To what extent does
our Compensation Committee consider compensation or amounts realizable from
prior compensation in setting other elements of compensation?

The primary
focus of our Compensation Committee in setting executive compensation is the
executives current level of compensation, including recent awards of long-term
incentives, taking into account the executives performance and our corporate
performance. The Committee has not adopted a formulaic approach for considering
amounts realized by an executive from prior equity-based awards.

How do accounting
considerations impact our compensation practices?

Accounting
consequences are not a material consideration in designing our compensation practices.
However, we design our equity awards so that its overall cost fell within a
budgeted dollar amount and so that the awards would qualify for classification
as equity awards under FAS 123R. Under FAS 123R the compensation cost
recognized for an award classified as an equity award is fixed for the
particular award and, absent modification, is not revised with subsequent
changes in market prices of our common shares or other assumptions used for
purposes of the valuation.

How do tax
considerations impact our compensation practices?

Prior to
implementation of a compensation program and awards under the program, we
evaluate the federal income tax consequences, both to us and to our executives,
of the program and

38

---



awards. Before
approving a program, our Compensation Committee receives an explanation from
our outside professionals as to the tax treatment of the program and awards
under the program and assurances from our outside professionals that the tax
treatment should be respected by taxing authorities.

Section 162(m)
of the Internal Revenue Code limits our tax deduction each year for
compensation to each of our Chief Executive Officer and our four other highest
paid executive officers to $1 million unless, in general, the compensation is
paid under a plan that is performance-related, non-discretionary and has been
approved by our shareholders. Generally, Section 162(m) has not had a
significant impact on our compensation programs.

What are our equity
or other security ownership requirements for executives and our policies
regarding hedging the economic risk of share ownership?

We do not
maintain minimum share ownership requirements for our executives. We do not
have a policy regarding hedging the economic risk of share ownership.

To what extent do we
benchmark total compensation and material elements of compensation and what are
the benchmarks that we use?

While the
Compensation Committee does not perform formal benchmarks, they do compare the
elements of total compensation to compensation provided by knowledge gained in
the industry.

Do we have a policy
regarding the recovery of awards or payments if corporate performance measures
upon which awards or payments are based are restated or adjusted in a manner
that would reduce the size of an award or payment?

For
non-executive officers, we have a policy that provides for a case-by-case
review to determine if a recovery of an award is necessary if a performance
measure used to calculate the award is subsequently adjusted in a manner that
would have reduced the size of the award. For executive officers, we have a
policy that requires a recovery of an award if a performance measure used to
calculate the award is subsequently adjusted in a manner that would have
reduced the size of the award.

What is the role of
our executive officers in the compensation process?

Our
Compensation Committee meets periodically with our Chief Executive Officer to
address executive compensation, including the rationale for our compensation
programs and the efficacy of the programs in achieving our compensation
objectives. The Compensation Committee also relies on executive management to
evaluate compensation programs to assure that they are designed and implemented
in compliance with laws and regulations, including SEC reporting requirements.
The Compensation Committee relies on the recommendations of our Chief Executive
Officer regarding the performance of individual executives. At meetings in 2007
the Compensation Committee received recommendations from our Chief Executive
Officer regarding salary adjustments and annual bonus and stock option awards
for our executive officers. Our Chief Executive Officer plays a significant
role in determining the annual cash compensation of our executive officers. The
Compensation Committee believes that it is important for it to receive the
input of the Chief Executive Officer on compensation matters since he is
knowledgeable about the activities of our executive officers and the
performance of

39

---



their duties
and responsibilities, as well as their contributions to the growth of the
Company and its business. The Compensation Committee accepted these
recommendations after concluding that the recommendations comported with the
Committees objectives and philosophy and the Committees evaluation of our
performance and industry data.

Compensation Committee Report

Our
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis with our management and based on the review and discussion
recommended to the Board that the Compensation Discussion and Analysis be
included in this Annual Report on Form 10-K. The Board accepted the
Compensation Committees recommendation. This report is made by the undersigned
members of the Compensation Committee:

Robert L. De
Lia, Sr. (Chair) 
James W. Power 
Joseph P. Ritorto

Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters

a) The
following table provides information with respect to the equity securities that
are authorized for issuance under our compensation plans as of December 31,
2007:

Equity
Compensation Plan Information - For the Year Ended December 31, 2007:

|                                                            |  |  |  |                                                                                                |  |  |  |                                                                                | 
|----------------------------------------------------------- |  |  |  | ---------------------------------------------------------------------------------------------- |  |  |  | ------------------------------------------------------------------------------ | 
|Plan
category                                               |  |  |  | Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights(a) |  |  |  | Weighted
average
exercise price of
outstanding
options, warrants
and rights(b) | 
|                                                            |  |  |  |                                                                                                |  |  |  |                                                                                | 
|Equity compensation plans
 approved by security holders     |  |  |  | 916,900*                                                                                       |  |  |  | $4.51                                                                          | 
|                                                           
|Equity compensation plans
 not approved by security holders |  |  |  | 199,662**                                                                                      |  |  |  | $7.58                                                                          | 
|                                                            |  |  |  |                                                                                                |  |  |  |                                                                                | 
|                                                            |  |  |  |                                                                                                |  |  |  |                                                                                | 
|Total                                                       |  |  |  | 1,116,522                                                                                      |  |  |  | $5.06                                                                          | 
|                                                            |  |  |  |                                                                                                |  |  |  |                                                                                | 

---

* This amount includes
options issuable pursuant to our 2002, 2006 and 2007 Stock Option Plans. The
    plans authorizes the issuance of options to purchase up to 230,000, 250,000
    and 250,000 shares of our Common Stock to employees, directors, and consultants
    of the Company under the 2002 and 2006 Stock Option Plans, respectively.

Also included are options
issuable pursuant to our Incentive Stock Option Plan. The Board of Directors
and our shareholders approved the adoption of the Incentive Stock Option Plan
on December 23, 1999. Our Incentive Stock Option Plan provides for the granting
of options to purchase a maximum of 500,000 shares of the Companys common
stock.

** This amount includes a
five year option granted to the Wall Street Group (WSG) consisting of 5,996
shares granted November 5, 2002 with an exercise price of $6.90 per share,
issued in connection with an agreement to

40

---



provide certain services
dated November 1, 2001 and terminated in April 2003. Also included are warrants
to purchase 138,333 and 55,333 shares at $7.60 expiring January 27, 2010, that
were granted in connection with the issuance of 553,333 shares of our common
stock to certain qualified institutional investors and the placement agent,
respectively, in July 2004.

b) Security
Ownership Of Certain Beneficial Owners And Management And Related Stockholder
Matters

The table that
follows sets forth, as of March 17, 2008 certain information regarding
beneficial ownership of our common stock by each person who is known by us to
beneficially own more than 5% of our common stock. The table also identifies
the stock ownership of each of our directors, each of our officers, and all
directors and officers as a group. Except as otherwise indicated, the
stockholders listed in the table have sole voting and investment powers with
respect to the shares indicated. Unless otherwise indicated, the business
address for each of the named individuals is Henry Bros. Electronics, Inc.,
17-01 Pollitt Drive, Fair Lawn, New Jersey 07410.

Shares of
common stock which an individual or group has a right to acquire within 60 days
pursuant to the exercise or conversion of options, warrants or other similar
convertible or derivative securities are deemed to be outstanding for the
purpose of computing the percentage ownership of such individual or group, but
are not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person shown in the table.

The applicable
percentage of ownership is based on 5,936,065 shares outstanding as of March
17, 2008.

41

---



|                                                                                            |  |                                        |  |                                                   |  
|------------------------------------------------------------------------------------------- |  | -------------------------------------- |  | ------------------------------------------------- | -
|Name address and title of beneficial owner                                                  |  | Number of
 shares
 beneficially
 owned |  | Percentage of
 Common
 Stock
 Beneficially
 Owned |  
|                                                                                            |  |                                        |  |                                                   |  
|James E. Henry, Chairman, Chief Executive Officer, Treasurer and
Director                   |  | 1,385,500                              |  | 23.3                                              | %
|                                                                                            |  |                                        |  |                                                   |  
|Brian Reach, Vice-Chairman, President, Chief Operating Officer,
 Secretary,and Director (1) |  | 205,000                                |  | 3.5                                               | %
|                                                                                            |  |                                        |  |                                                   |  
|John P. Hopkins, Chief Financial Officer (2)                                                |  | 34,500                                 |  | *                                                 |  
|                                                                                            |  |                                        |  |                                                   |  
|Brian J. Smith, Corporate Controller (3)                                                    |  | 8,000                                  |  | *                                                 |  
|                                                                                            |  |                                        |  |                                                   |  
|Christopher Peckham, Chief Information Officer / Chief Security
 Officer                    |  |                                       |  |                                                  |  
|                                                                                            |  |                                        |  |                                                   |  
|Robert De Lia, Sr., Director (4)                                                            |  | 46,000                                 |  | *                                                 |  
|                                                                                            |  |                                        |  |                                                   |  
|James W. Power, Director (5)                                                                |  | 6,000                                  |  | *                                                 |  
|                                                                                            |  |                                        |  |                                                   |  
|Joseph P. Ritorto, Director (6)                                                             |  | 48,000                                 |  | *                                                 |  
|                                                                                            |  |                                        |  |                                                   |  
|David Sands, Director (7)                                                                   |  | 6,000                                  |  | *                                                 |  
|                                                                                            |  |                                        |  |                                                   |  
|Richard D. Rockwell (8)                                                                     |  | 1,915,800                              |  | 32.3                                              | %
|                                                                                            |  |                                        |  |                                                   |  
|All executive officers and directors as a group (10 persons)
(9)                            |  | 3,654,800                              |  | 61.6                                              | %

*     Less
than 1%

(1) The amount shown for Mr. Reach includes a currently
exercisable option to purchase 100,000 shares of the Companys Common Stock at
a price of $7.10 per share and a currently exercisable option to purchase
10,000 shares of the Companys Common Stock at a price of $3.71 per share.

(2) The amount shown for Mr.
Hopkins includes a currently exercisable option to purchase 30,000 shares of
the Companys Common Stock at a price of $3.71 per share.

2) The amount shown for Mr.
Smith includes a currently exercisable option to purchase 8,000 shares of the
Companys Common Stock at a price of $4.26 per share.

(4) The amount shown for Mr.
De Lia, Sr. includes four currently exercisable options to purchase 2,000
shares each of the Companys Common Stock at a price of $7.19, $4.90, $3.33 and
$4.65 per share, respectively.

(5) The amount shown for Mr.
Power includes three currently exercisable options to purchase 2,000 shares
each of the Companys Common Stock at a price of $6.08,,$3.33 and $4.65 per
share, respectively.

(6) The amount shown for Mr.
Ritorto includes currently exercisable options to purchase 5,000 shares at
$7.95 and 2,000 shares each of the Companys common stock at $7.19, $4.90,
$3.33 and $4.65 per share, respectively.

(7) The amount shown for Mr.
Sands includes three currently exercisable options to purchase 2,000 shares
each of the Companys Common Stock at a price of $4.90, $3.33 and $4.65 per
share, respectively.

(8) The amount shown for Mr.
Rockwell is pursuant to a Schedule 13D/A, filed on January 23, 2008,

(9) The amount shown
includes currently exercisable options to purchase 156,000 shares of the
Companys common stock.

42

---



Item 13. Certain Relationships and Related
Transactions and Director Independence

a) In 2007 and 2006, the Company had revenues
of $546,375 and $678,138, respectively, associated with an integrated security
systems project with First Aviation Services, Inc. (First Aviation). Joseph
P. Ritorto, a member of our Board of Directors since January 2002, is
co-founder of First Aviation.

b) The Company considers Messrs. Ritorto, De
Lia, Sands and Power to be independent directors in accordance with Section
121A of the American Stock Exchanges listing standards.

Item 14. Principal Accountant Fees and
Services

Fees Paid to Our Independent Auditors During
2007 and 2006

Audit Fees

The aggregate
fees billed by Amper, Politziner & Mattia, P.C. for professional services
rendered for the audits of the Companys annual financial statements on Form
10-K in 2007 and the review of the financial statements on Form 10-Q for the
quarter ended September 30, 2007 were $144,200.

The aggregate
fees billed by Demetrius & Company, L.L.C. for professional services
rendered for the audits of the Companys annual financial statements on Form
10-K in 2006 and the reviews of the financial statements on Form 10-Q for the
quarters ended March 30 and June 30, 2007 were $108,000.

Audit-Related Fees

The aggregate
fees billed for audit-related services by Demetrius & Company, L.L.C. for
the years ended December 31, 2007 and 2006 were approximately $2,200 in each of
these years.

Audit related
services include due diligence in connection with acquisitions, consultation on
accounting and internal control matters, audits in connection with proposed or
consummated acquisitions and review of registration statements.

Tax Fees

The aggregate
fees billed for tax compliance, tax advice and tax planning rendered by
Demetrius & Company, L.L.C. for the fiscal year ended December 31, 2007 was
$0, and for the year ended December 31, 2006 was $22,500. The services
comprising these fees include tax consulting and submitting tax returns.

All Other Fees

The aggregate
fees billed for all other professional services rendered by Demetrius &
Company, L.L.C. for the year ended December 31, 2007 was $15,000 and for the
year ended December 31, 2006 was $12,047. These fees related to a 401(k) plan
audit in 2007 and work performed on consents on Form S-8 Registrations in 2006.

Pre-Approval of Audit and Permissible Non-Audit Services

The Audit
Committee approved 100% of the fees paid to the principal accountant for audit-related,
tax and other fees. The Audit Committee pre-approves all non-audit services to
be performed by the auditor. The percentage of hours expended on the principal
accountants engagement to audit the Companys financial statements for the
most recent year that were

43

---



attributed to
work performed by persons other than the principal accountants full-time,
permanent employees was 0%.

Part IV

Item 15. Exhibits, Financial Statement
Schedules

(a) The following consolidated financial
statements and schedules are filed at the end of this report, beginning on page
F-l. Other schedules are omitted because they are not required or are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.

(b) See Exhibit Index following this Annual
Report on Form 10-K.

|                                                                                                      |             
|----------------------------------------------------------------------------------------------------- | ------------
|Document                                                                                              | Pages       
|                                                                                                     
|Reports of Independent Registered Public Accounting Firms                                             | F-1 to F-1.1
|                                                                                                     
|Consolidated Balance Sheet as of December 31, 2007 and 2006                                           | F-2         
|                                                                                                     
|Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005            | F-3         
|                                                                                                     
|Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2007, 2006 and 2005  | F-4         
|                                                                                                     
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005            | F-5         
|                                                                                                     
|Notes to Consolidated Financial Statements                                                            | F-6 to F-35 
|                                                                                                     
|Schedule II  Valuation and Qualifying Accounts, for the Years Ended December 31, 2007, 2006 and 2005 | S-1         

44

---



SIGNATURES

Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934 as amended, the Registrant had duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|      |  |                |  |                                                           
|----- |  | -------------- |  | ----------------------------------------------------------
|Date: |  | March 31, 2008 |  | HENRY BROTHER ELECTRONICS,
 INC.                          
|     
|      |  |                |  | By:   /s/ James
 E. Henry                                 
|      |  |                |  |                                                           
|      |  |                |  | James E. Henry                                            
|      |  |                |  | Chairman, Chief Executive
 Officer, Treasurer and Director

Pursuant to the requirements
of the Securities Exchange Act of 1934 as amended, this report has been signed
below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

Each person, in so signing
also makes, constitutes, and appoints James E. Henry and Brian Reach, and each
of them acting alone, as his true and lawful attorneys-in-fact, with full power
of substitution, in his name, place, and stead, to execute and cause to be
filed with the SEC any or all amendments to this report.

|      |  |                |  |                                                           
|----- |  | -------------- |  | ----------------------------------------------------------
|      |  |                |  |                                                           
|      |  |                |  | SIGNATURE                                                 
|      |  |                |  |                                                           
|Date: |  | March 31, 2008 |  | /s/ James E. Henry                                        
|      |  |                |  |                                                           
|      |  |                |  | James E. Henry                                            
|      |  |                |  | Chairman, Chief Executive
 Officer, Treasurer and Director
|     
|Date: |  | March 31, 2008 |  | /s/ Brian Reach                                           
|      |  |                |  |                                                           
|      |  |                |  | Brian Reach                                               
|      |  |                |  | Vice Chairman, President,
 Chief Operating Officer,       
|      |  |                |  | Secretary and Director                                    
|     
|Date: |  | March 31, 2008 |  | /s/ John P. Hopkins                                       
|      |  |                |  |                                                           
|      |  |                |  | John P. Hopkins                                           
|      |  |                |  | Chief Financial Officer                                   
|     
|Date: |  | March 31, 2008 |  | /s/ Joseph P. Ritorto                                     
|      |  |                |  |                                                           
|      |  |                |  | Joseph P. Ritorto                                         
|      |  |                |  | Director                                                  
|     
|Date: |  | March 31, 2008 |  | /s/ Robert L. DeLia Sr.                                   
|      |  |                |  |                                                           
|      |  |                |  | Robert L. DeLia Sr.                                       
|      |  |                |  | Director                                                  
|     
|Date: |  | March 31, 2008 |  | /s/ David Sands                                           
|      |  |                |  |                                                           
|      |  |                |  | David Sands                                               
|      |  |                |  | Director                                                  
|     
|Date: |  | March 31, 2008 |  | /s/ James W. Power                                        
|      |  |                |  |                                                           
|      |  |                |  | James W. Power                                            
|      |  |                |  | Director                                                  
|     
|Date: |  | March 31, 2008 |  | /s/ Richard D. Rockwell                                   
|      |  |                |  |                                                           
|      |  |                |  | Richard D. Rockwell                                       
|      |  |                |  | Director                                                  

45

---



| |                                                        
| | -------------------------------------------------------
| | Report of Independent Registered Public Accounting Firm

Board of Directors and StockholdersHenry Bros. Electronics, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Henry Bros. Electronics, Inc. and Subsidiaries as of December 31, 2007, and the related consolidated statements of operations, stockholders equity, and
cash flows for the year then ended. These financial statements are the responsibility of the Companys management.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly we express no such opinion.An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Henry Bros. Electronics, Inc. and Subsidiaries as of December 31, 2007, and the
results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 9 to the consolidated financial statements, in 2007, Henry Bros. Electronics Inc. and Subsidiaries adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No. 109.

In connection with our audit of the financial statements referred to above, we audited Schedule II  Valuation and Qualifying Accounts. In our opinion, the financial schedule, when considered in relation to the
financial statements taken as a whole, presents fairly, in all material respects, the information stated therein.

|                                 
|---------------------------------
|/s/ Amper, Politziner & Mattia PC
|                                 
|March 29, 2008Edison, New Jersey 

F-1

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and 
Stockholders of Henry Bros. Electronics, Inc. and Subsidiaries

We have audited the accompanying consolidated balance
sheet of Henry Bros. Electronics, Inc. and Subsidiaries as of December 31, 2006,
and the  related consolidated statements of operations, changes in stockholders equity
and cash flows for each of the two years in the period ended December 31, 2006.
These consolidated financial statements are the responsibility of the  Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements, as of January 1, 2006.

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial position
of the Henry Bros. Electronics, Inc. and Subsidiaries as of December 31, 2006,
and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 2006, in conformity with U.S. generally
accepted accounting principles.

As discussed in Notes 1 and 18, the Company has corrected the consolidated balance sheet as of December 31, 2005 and the related consolidated statements of operations, changes is stockholders equity and cash flows for
the years ended December 31, 2005 and 2004.

/s/ Demetrius & Company, L.L.C.

Wayne, New JerseyOctober 17, 2007



F-1.1

---



HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                                                                                                                    |  |              |            |      |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ---- | - | ---------- | -
|                                                                                                                                    |  | December 31, |           
|                                                                                                                                    |  |              |           
|                                                                                                                                    |  | 2007         |            | 2006 |  
|                                                                                                                                    |  |              |            |      |  
|ASSETS                                                                                                                              |  |              |            |      |   |            |  
|CURRENT
  ASSETS                                                                                                                    |  |              |            |      |   |            |  
|Cash and cash equivalents                                                                                                           |  | $            | 3,277,450  |      | $ | 199,853    |  
|Accounts receivable-net of allowance for doubtful
accounts                                                                          |  |              | 13,306,558 |      |   | 13,628,358 |  
|Inventory                                                                                                                           |  |              | 1,460,931  |      |   | 1,707,933  |  
|Costs in excess of billings and estimated
profits                                                                                   |  |              | 3,195,039  |      |   | 4,643,469  |  
|Deferred tax asset                                                                                                                  |  |              | 739,563    |      |   | 906,255    |  
|Retainage receivable                                                                                                                |  |              | 1,708,125  |      |   | 1,390,468  |  
|Prepaid expenses and income tax
receivable                                                                                          |  |              | 900,924    |      |   | 454,801    |  
|Other assets                                                                                                                        |  |              | 315,081    |      |   | 290,079    |  
|                                                                                                                                    |  |              |            |      |   |            |  
|Total current assets                                                                                                                |  |              | 24,903,671 |      |   | 23,221,216 |  
|                                                                                                                                    |  |              |            |      |   |            |  
|Property and equipment - net of accumulated
depreciation                                                                            |  |              | 2,408,640  |      |   | 2,402,394  |  
|Goodwill                                                                                                                            |  |              | 3,379,030  |      |   | 3,316,530  |  
|Intangible assets - net of accumulated
amortization                                                                                 |  |              | 1,183,547  |      |   | 1,436,414  |  
|Deferred tax asset                                                                                                                  |  |              | 306,224    |      |   | 166,262    |  
|Other assets                                                                                                                        |  |              | 150,458    |      |   | 151,145    |  
|                                                                                                                                    |  |              |            |      |   |            |  
|TOTAL ASSETS                                                                                                                        |  | $            | 32,331,570 |      | $ | 30,693,961 |  
|                                                                                                                                    |  |              |            |      |   |            |  
|                                                                                                                                    |  |              |            |      |   |            |  
|LIABILITIES & STOCKHOLDERS EQUITY                                                                                                  |  |              |            |      |   |            |  
|CURRENT
  LIABILITIES                                                                                                               |  |              |            |      |   |            |  
|Accounts payable                                                                                                                    |  | $            | 8,157,774  |      | $ | 5,973,047  |  
|Accrued expenses                                                                                                                    |  |              | 3,128,965  |      |   | 4,786,203  |  
|Accrued taxes                                                                                                                       |  |              | 139,403    |      |   | 58,914     |  
|Billings in excess of costs and estimated
profits                                                                                   |  |              | 1,577,002  |      |   | 1,167,259  |  
|Deferred income                                                                                                                     |  |              | 206,460    |      |   | 476,775    |  
|Current portion of long-term debt                                                                                                   |  |              | 634,948    |      |   | 505,028    |  
|Revolving loan                                                                                                                      |  |              | 3,635,897  |      |   |           |  
|Other current liabilities                                                                                                           |  |              | 451,490    |      |   | 252,881    |  
|                                                                                                                                    |  |              |            |      |   |            |  
|Total current liabilities                                                                                                           |  |              | 17,931,939 |      |   | 13,220,107 |  
|                                                                                                                                    |  |              |            |      |   |            |  
|Long-term debt, less current portion                                                                                                |  |              | 465,539    |      |   | 3,463,236  |  
|                                                                                                                                    |  |              |            |      |   |            |  
|TOTAL LIABILITIES                                                                                                                   |  |              | 18,397,478 |      |   | 16,683,343 |  
|                                                                                                                                    |  |              |            |      |   |            |  
|                                                                                                                                    |  |              |            |      |   |            |  
|STOCKHOLDERS
  EQUITY                                                                                                              |  |              |            |      |   |            |  
|Preferred stock, $.01 par value; 10,000,000 shares
authorized; no
  shares issued                                                   |  |              |           |      |   |           |  
|Common stock, $.01 par value; 10,000,000 shares
authorized; 5,926,065
  shares issued and outstanding in 2007 and 5,916,065 in 2006 |  |              | 59,261     |      |   | 59,161     |  
|Additional paid in capital                                                                                                          |  |              | 17,165,892 |      |   | 16,900,653 |  
|Accumulated deficit                                                                                                                 |  |              | (3,291,061 | )    |   | (2,949,196 | )
|                                                                                                                                    |  |              |            |      |   |            |  
|TOTAL EQUITY                                                                                                                        |  |              | 13,934,092 |      |   | 14,010,618 |  
|                                                                                                                                    |  |              |            |      |   |            |  
|TOTAL LIABILITIES & STOCKHOLDERS
EQUITY                                                                                            |  | $            | 32,331,570 |      | $ | 30,693,961 |  
|                                                                                                                                    |  |              |            |      |   |            |  

See accompanying notes to the consolidated
financial statements.

F-2

---



HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                   |  |                                  |            |      |   |             |   |   |            |  
|-------------------------------------------------- |  | -------------------------------- | ---------- | ---- | - | ----------- | - | - | ---------- | -
|                                                   |  | For the years ended December 31, |           
|                                                   |  |                                  |           
|                                                   |  | 2007                             |            | 2006 |   | 2005        |  
|                                                   |  |                                  |            |      |   | (Corrected) |  
|                                                   |  |                                  |            |      |   |             |  
|Revenue                                            |  | $                                | 57,852,216 |      | $ | 42,132,852  |   | $ | 42,156,188 |  
|Cost of revenue                                    |  |                                  | 45,575,305 |      |   | 31,586,736  |   |   | 31,581,187 |  
|                                                   |  |                                  |            |      |   |             |   |   |            |  
|Gross profit                                       |  |                                  | 12,276,911 |      |   | 10,546,116  |   |   | 10,575,001 |  
|                                                   |  |                                  |            |      |   |             |   |   |            |  
|Operating expenses:                                |  |                                  |            |      |   |             |   |   |            |  
|Selling, general and
  administrative expenses     |  |                                  | 12,196,330 |      |   | 11,952,477  |   |   | 8,422,193  |  
|Goodwill and intangible
  asset impairment charges |  |                                  | 43,999     |      |   | 1,191,000   |   |   | 44,999     |  
|                                                   |  |                                  |            |      |   |             |   |   |            |  
|Operating (loss) profit                            |  |                                  | 36,582     |      |   | (2,597,361  | ) |   | 2,107,809  |  
|                                                   |  |                                  |            |      |   |             |   |   |            |  
|Interest income                                    |  |                                  | 73,493     |      |   | 19,515      |   |   | 12,507     |  
|Other expense                                      |  |                                  | (191       | )    |   | (674        | ) |   | (3,780     | )
|Interest expense                                   |  |                                  | (349,907   | )    |   | (103,923    | ) |   | (84,985    | )
|                                                   |  |                                  |            |      |   |             |   |   |            |  
|(Loss) income before tax
  expense                 |  |                                  | (240,023   | )    |   | (2,682,443  | ) |   | 2,031,551  |  
|                                                   |  |                                  |            |      |   |             |   |   |            |  
|Provision for (benefit
  from) income taxes        |  |                                  | 63,281     |      |   | (422,305    | ) |   | 893,577    |  
|                                                   |  |                                  |            |      |   |             |   |   |            |  
|Net (loss) income after
  taxes                    |  | $                                | (303,304   | )    | $ | (2,260,138  | ) | $ | 1,137,974  |  
|                                                   |  |                                  |            |      |   |             |   |   |            |  
|                                                   |  |                                  |            |      |   |             |   |   |            |  
|                                                   |  |                                  |            |      |   |             |   |   |            |  
|BASIC (LOSS) EARNINGS PER
  COMMON SHARE:          |  |                                  |            |      |   |             |   |   |            |  
|Basic (loss) earnings per
  common share           |  | $                                | (0.05      | )    | $ | (0.39       | ) | $ | 0.20       |  
|                                                   |  |                                  |            |      |   |             |   |   |            |  
|Weighted average common
  shares                   |  |                                  | 5,768,864  |      |   | 5,749,964   |   |   | 5,739,398  |  
|                                                   |  |                                  |            |      |   |             |   |   |            |  
|                                                   |  |                                  |            |      |   |             |   |   |            |  
|DILUTED (LOSS) EARNINGS
  PER COMMON SHARE:        |  |                                  |            |      |   |             |   |   |            |  
|Diluted (loss) earnings
  per common share         |  | $                                | (0.05      | )    | $ | (0.39       | ) | $ | 0.20       |  
|                                                   |  |                                  |            |      |   |             |   |   |            |  
|Weighted average diluted
  common shares           |  |                                  | 5,768,864  |      |   | 5,749,964   |   |   | 5,773,097  |  
|                                                   |  |                                  |            |      |   |             |   |   |            |  

See accompanying notes to the consolidated
financial statements.

F-3

---



HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|----------------------------------------------------------------------------- | ------ | ----------------------------------------------------- | --------- | ------------------------ | - | --------------------------- |  | ------------------- | ---------- | ----- | - | -------- | - | - | ---------- | - | - | ---------- | -
|                                                                              |        | Common Stock
  par value $.01
  10,000,000 Authorized |           | AdditionalPaid-inCapital |   | Deferred
  Comp-
  ensation |  | Retained
  Earnings |            | Total |  
|                                                                             
|                                                                             
|                                                                              |        |                                                       |          
|                                                                              | Shares |                                                       | Amount    |                          |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |  
|Balance at December 31, 2004 (Corrected)                                      |        |                                                       | 5,739,398 |                          | $ | 57,394                      |  | $                   | 16,602,366 |       | $ | (178,942 | ) | $ | (1,827,032 | ) | $ | 14,653,786 |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Value of stock option grants                                                  |        |                                                       |           |                          |   |                             |  |                     | 355,142    |       |   | (355,142 | ) |   |            |   |   |           |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Amortization of value assigned to stock
  option grants                       |        |                                                       |           |                          |   |                             |  |                     |            |       |   | 191,206  |   |   |            |   |   | 191,206    |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Shares issued in connection with the
  acquisition of Securus, Inc.           |        |                                                       | 150,001   |                          |   | 1,500                       |  |                     | (1,500     | )     |   |          |   |   |            |   |   |           |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Net income for 2005 (Corrected)                                               |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   | 1,137,974  |   |   | 1,137,974  |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Balance at December 31, 2005 (Corrected)                                      |        |                                                       | 5,889,399 |                          |   | 58,894                      |  |                     | 16,956,008 |       |   | (342,878 | ) |   | (689,058   | ) |   | 15,982,966 |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Employee stock options exercised                                              |        |                                                       | 6,666     |                          |   | 67                          |  |                     | 30,930     |       |   |          |   |   |            |   |   | 30,997     |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Value of stock option grants                                                  |        |                                                       |           |                          |   |                             |  |                     | 230,267    |       |   | (230,267 | ) |   |            |   |   |           |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Shares issued in connection with the
  acquisition of CIS Security Systems    |        |                                                       | 20,000    |                          |   | 200                         |  |                     | 67,000     |       |   |          |   |   |            |   |   | 67,200     |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Stock option expense                                                          |        |                                                       |           |                          |   |                             |  |                     |            |       |   | 189,593  |   |   |            |   |   | 189,593    |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Net loss for December 31, 2006                                                |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   | (2,260,138 | ) |   | (2,260,138 | )
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Balance at December 31, 2006                                                  |        |                                                       | 5,916,065 |                          |   | 59,161                      |  |                     | 17,284,205 |       |   | (383,552 | ) |   | (2,949,196 | ) |   | 14,010,618 |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Reclassification of deferred stock
  compensation upon adoption of SFAS 123 R |        |                                                       |           |                          |   |                             |  |                     | (383,552   | )     |   | 383,552  |   |   |            |   |   |           |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Cumulative effect
    for adoption of Fin 48                                  |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   | (38,561    | ) |   | (38,561    | )
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Shares issued in connection with the
  acquisition of CIS Security Systems    |        |                                                       | 10,000    |                          |   | 100                         |  |                     | 37,400     |       |   |          |   |   |            |   |   | 37,500     |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Stock option expense                                                          |        |                                                       |           |                          |   |                             |  |                     | 227,839    |       |   |          |   |   |            |   |   | 227,839    |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Net loss for December 31, 2007                                                |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   | (303,304   | ) |   | (303,304   | )
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  
|Balance at December 31, 2007                                                  |        | $                                                     | 5,926,065 |                          | $ | 59,261                      |  | $                   | 17,165,892 |       | $ |         |   | $ | (3,291,061 | ) | $ | 13,934,092 |  
|                                                                              |        |                                                       |           |                          |   |                             |  |                     |            |       |   |          |   |   |            |   |   |            |  

See accompanying notes to the consolidated
financial statements.

F-4

---



HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                     |  |                                  |            |      |   |                    |   |   |            |  
|---------------------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | ---- | - | ------------------ | - | - | ---------- | -
|                                                                                                     |  | For the years ended December 31, |           
|                                                                                                     |  |                                  |           
|                                                                                                     |  | 2007                             |            | 2006 |   | 2005
  (Corrected) |  
|                                                                                                     |  |                                  |            |      |   |                    |  
|Cash flows from operating activities:                                                                |  |                                  |            |      |   |                    |   |   |            |  
|Net (loss) income                                                                                    |  | $                                | (303,304   | )    | $ | (2,260,138         | ) | $ | 1,137,974  |  
|Adjustments to reconcile net (loss) income to net cash
  provided by (used in) operating activities: |  |                                  |            |      |   |                    |   |   |            |  
|                                                                                                     |  |                                  |            |      |   |                    |   |   |            |  
|                                                                                                     |  |                                  |            |      |   |                    |   |   |            |  
|Depreciation and amortization                                                                        |  |                                  | 899,325    |      |   | 699,559            |   |   | 647,243    |  
|Bad debt expense                                                                                     |  |                                  | 41,123     |      |   | 172,402            |   |   | 453,889    |  
|Provision for obsolete inventory                                                                     |  |                                  | 180,000    |      |   | 384,000            |   |   |           |  
|Impairment charges                                                                                   |  |                                  | 43,999     |      |   | 1,191,000          |   |   | 44,999     |  
|Stock option expense                                                                                 |  |                                  | 227,839    |      |   | 189,593            |   |   | 191,106    |  
|Deferred income taxes                                                                                |  |                                  | (26,730    | )    |   | (386,007           | ) |   | 684,682    |  
|Changes in operating assets and
liabilities:                                                         |  |                                  |            |      |   |                    |   |   |            |  
|Accounts receivable                                                                                  |  |                                  | 280,677    |      |   | (3,071,303         | ) |   | (1,327,191 | )
|Inventories                                                                                          |  |                                  | 67,002     |      |   | (801,540           | ) |   | (353,296   | )
|Costs in excess of billings and estimated
profits                                                    |  |                                  | 1,448,430  |      |   | (1,484,855         | ) |   | (525,876   | )
|Retainage receivable                                                                                 |  |                                  | (317,657   | )    |   | (180,454           | ) |   | (857,967   | )
|Other assets                                                                                         |  |                                  | (25,002    | )    |   | (21,809            | ) |   | (161,093   | )
|Prepaid expenses and income tax
receivable                                                           |  |                                  | (446,123   | )    |   | (204,614           | ) |   | 220,210    |  
|Accounts payable                                                                                     |  |                                  | 2,184,728  |      |   | 1,930,035          |   |   | 201,181    |  
|Accrued expenses                                                                                     |  |                                  | (1,576,749 | )    |   | 2,285,202          |   |   | 299,739    |  
|Billings in excess of cost and estimated
profits                                                     |  |                                  | 409,743    |      |   | (9,554             | ) |   | (174,485   | )
|Deferred income                                                                                      |  |                                  | (270,315   | )    |   | (93,714            | ) |   | 527,995    |  
|Other liabilities                                                                                    |  |                                  | 198,609    |      |   | 19,587             |   |   |           |  
|                                                                                                     |  |                                  |            |      |   |                    |   |   |            |  
|Net cash provided by (used in) operating
activities                                                  |  |                                  | 3,015,594  |      |   | (1,642,610         | ) |   | 1,009,110  |  
|                                                                                                     |  |                                  |            |      |   |                    |   |   |            |  
|Cash flows from investing activities:                                                                |  |                                  |            |      |   |                    |   |   |            |  
|Purchase of businesses, net of cash
acquired                                                         |  |                                  | (25,000    | )    |   | (1,666,363         | ) |   | (1,084,528 | )
|Purchase of property and equipment                                                                   |  |                                  | (652,704   | )    |   | (1,393,001         | ) |   | (211,542   | )
|                                                                                                     |  |                                  |            |      |   |                    |   |   |            |  
|Net cash used in investing activities                                                                |  |                                  | (677,704   | )    |   | (3,059,364         | ) |   | (1,296,070 | )
|                                                                                                     |  |                                  |            |      |   |                    |   |   |            |  
|Cash flows from financing activities:                                                                |  |                                  |            |      |   |                    |   |   |            |  
|Proceeds from issuance of common stock - net of
fees                                                 |  |                                  |           |      |   | 30,997             |   |   |           |  
|Net proceeds and (payments) from revolving bank
lines                                                |  |                                  | 788,000    |      |   | 2,847,896          |   |   | 951,692    |  
|Proceeds from bank loans                                                                             |  |                                  |           |      |   | 186,500            |   |   |           |  
|Payments of bank loans                                                                               |  |                                  | (206,602   | )    |   | (217,810           | ) |   | (1,545,171 | )
|Repayments of other debt                                                                             |  |                                  | (9,135     | )    |   | (26,465            | ) |   | (18,498    | )
|Change in equipment financing                                                                        |  |                                  | 167,443    |      |   | (96,977            | ) |   | (78,349    | )
|                                                                                                     |  |                                  |            |      |   |                    |   |   |            |  
|Net Cash provided by (used in) financing
activities                                                  |  |                                  | 739,706    |      |   | 2,724,141          |   |   | (690,326   | )
|                                                                                                     |  |                                  |            |      |   |                    |   |   |            |  
|Increase (decrease) in cash and cash
equivalents                                                     |  |                                  | 3,077,597  |      |   | (1,977,833         | ) |   | (977,286   | )
|Cash and cash equivalents - beginning of
period                                                      |  |                                  | 199,853    |      |   | 2,177,686          |   |   | 3,154,972  |  
|                                                                                                     |  |                                  |            |      |   |                    |   |   |            |  
|Cash and cash equivalents - end of period                                                            |  | $                                | 3,277,450  |      | $ | 199,853            |   | $ | 2,177,686  |  
|                                                                                                     |  |                                  |            |      |   |                    |   |   |            |  
|Supplemental disclosure of cash flow information:                                                    |  |                                  |            |      |   |                    |   |   |            |  
|Amount paid for the period for:                                                                      |  |                                  |            |      |   |                    |   |   |            |  
|Interest                                                                                             |  | $                                | 331,924    |      | $ | 86,093             |   | $ | 84,985     |  
|Taxes                                                                                                |  |                                  | 240,000    |      |   | 325,812            |   |   | 41,124     |  
|Non-cash investing and financing activities:                                                         |  |                                  |            |      |   |                    |   |   |            |  
|Equipment financed                                                                                   |  |                                  | 359,040    |      |   | 250,493            |   |   | 151,154    |  
|Issuance of stock to acquire businesses                                                              |  |                                  | 37,500     |      |   | 67,200             |   |   |           |  
|Value of stock options issued to employees                                                           |  |                                  | 528,511    |      |   | 230,267            |   |   | 355,142    |  

See accompanying notes to the consolidated
financial statements.

F-5

---



HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

NATURE OF OPERATIONS

Henry Bros.
Electronics, Inc., (the Company) and its subsidiaries, are divided into two
business segments  Security System Integration (Integration) and Specialty
Products and Services (Specialty). The Integration segment provides cradle
to grave services for a wide variety of security, communications and control
systems. The Company specializes in turn-key systems that integrate many
different technologies. Systems are customized to meet the specific needs of
its customers. Through the Specialty Products and Services segment we provide
emergency preparedness programs, mobile digital recording solutions and
specialized radio frequency communication equipment and integration. Each of
the Companys segments markets nationwide with an emphasis in the Arizona,
California, Colorado, Maryland, New Jersey, New York, Texas and Virginia
metropolitan areas. Customers are primarily medium and large businesses and
governmental agencies. The Company derives a majority of its revenues from
project installations and to a smaller extent, maintenance service revenue.

The table
below shows revenue percentage by geographic location for each of the years
ended December 31:

|                              |  |      |  |      |     |      |  |  |  |     |   |  |  |  |     |  
|----------------------------- |  | ---- |  | ---- | --- | ---- |  |  |  | --- | - |  |  |  | --- | -
|                              |  | 2007 |  | 2006 |     | 2005 | 
|                              |  |      |  |      |     |      | 
|New
  Jersey/New York         |  |      |  |      | 46  | %    |  |  |  | 44  | % |  |  |  | 53  | %
|California                    |  |      |  |      | 20  | %    |  |  |  | 27  | % |  |  |  | 23  | %
|Texas                         |  |      |  |      | 4   | %    |  |  |  | 3   | % |  |  |  | 8   | %
|Arizona                       |  |      |  |      | 8   | %    |  |  |  | 7   | % |  |  |  | 6   | %
|Colorado (1)                  |  |      |  |      | 9   | %    |  |  |  | 11  | % |  |  |  | 2   | %
|CIS -
  Virginia/Maryland (2) |  |      |  |      | 8   | %    |  |  |  | 4   | % |  |  |  |    |  
|                              |  |      |  |      |     |      |  |  |  |     |   |  |  |  |     |  
|Integration segment           |  |      |  |      | 95  | %    |  |  |  | 96  | % |  |  |  | 92  | %
|Specialty segment             |  |      |  |      | 7   | %    |  |  |  | 7   | % |  |  |  | 9   | %
|Inter-segment                 |  |      |  |      | -2  | %    |  |  |  | -3  | % |  |  |  | -1  | %
|                              |  |      |  |      |     |      |  |  |  |     |   |  |  |  |     |  
|Total revenue                 |  |      |  |      | 100 | %    |  |  |  | 100 | % |  |  |  | 100 | %
|                              |  |      |  |      |     |      |  |  |  |     |   |  |  |  |     |  

(1) Acquired
October 10, 2005

(2) Acquired
October 2, 2006

F-6

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Principles
of Consolidation

The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. Acquisitions are recorded as of the purchase date,
and are included in the consolidated financial statements from the date of
acquisition. All material intercompany transactions have been eliminated in
consolidation.

(b) Reclassifications

The
presentation of certain prior year information has been reclassified to conform
to the current year presentation.

(c) Revenue Recognition

Revenue from a
project in either the Integration or Specialty segments are recognized on the
percentage of completion method, whereby revenue and the related gross profit
are determined based upon the actual costs incurred to date for the project to
the total estimated project costs at completion. Project costs generally
include all material and shipping costs, the Companys direct labor,
subcontractor costs and an allocation of indirect costs related to the direct
labor. Changes in the project scope, site conditions, staff performance and
delays or problems with the equipment used on the project can result in
increased costs that may not be billable or accepted by the customer and
results in a loss or lower profit from what was originally anticipated at the
time of the proposal.

Estimates for
the costs to complete the project are periodically updated by management during
the performance of the project. Provision for changes in estimated costs and
losses, if any, on uncompleted projects are made in the period in which such
losses are determined. In general, we determine a project to be
substantially completed after:

1.
The scope of work is completed which includes installing the equipment as
required in the contract.

2.
System is functional and has been tested.

3.
Training has been provided.

The majority
of the Companys projects are completed within a year. Revenue from product
sales are recognized when title and risk of loss passes to the customer.
Service contracts, which are separate and distinct agreements from project
agreements, are billed either monthly or

F-7

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

quarterly.
Accordingly, revenues from service contracts are recognized ratably over the
length of the agreement.

(d) Use of Estimates

The preparation
of financial statements, in conformity with generally accepted accounting
principles in the United States, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities, at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Revenue and
costs relating to security integration systems projects and service agreements
are particularly affected by managements estimates. The contract sale price
and estimated costs are based upon the facts and circumstances known at the
time of the proposal. Estimates for the costs to complete the contract are
periodically updated during the performance of the contract. Unpredictable
events can occur during the performance of the contract that can increase the
costs and reduce the estimated gross profit. Change orders to record additional
costs may not be approved or can become subject to long negotiations with the
customer and can result in concessions by the Company. Considerable judgments
are made during the performance of the contract that affects the Companys
revenue recognition and cost accruals that may have a significant impact on the
results of operations reported by the Company.

(e) Cash Equivalents

The Company
considers highly liquid instruments with original maturity of three months or
less to be cash equivalents.

(f) Trade Receivables and Allowance for
Doubtful Accounts

Trade
receivables are stated at net realizable value. This value includes an
appropriate allowance for estimated uncollectible accounts. The allowance is
evaluated on a regular basis by management and is based upon historical experience
with the customer, the aging of the past due amounts and the relationship with
and economic status of our customers. The evaluation is based upon estimates
taking into account the facts and circumstances at the time of the evaluation.
Actual uncollectible accounts could exceed the Companys estimates and changes
to its estimates will be accounted for in the period of change. Account
balances are charged against the allowance after all means of collection have
been exhausted and the potential for recovery is considered remote. Asa
condition of the waiver associated with the bank covenants in default, the
Company agreed to grant TD Banknorth a first security interest on its accounts
receivable (See Note 8).

F-8

---



HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (continued)

(g) Inventory

Inventory is
stated at the lower of cost or market value. Cost has been determined using the
first-in, first-out method. Inventory quantities on-hand are regularly reviewed,
and where necessary, reserves for excess and obsolete inventories are recorded.

(Sh) Retainage Receivable

Retainage
receivables represent balances billed but not paid pursuant to retainage
provisions of the project contracts and will be due and payable upon completion
of specific tasks or the completion of the contract.

(i) Property and Equipment

Property and
equipment are recorded at cost, net of accumulated depreciation. Depreciation
is computed on a straight-line basis over estimated useful lives of five to
seven years. Leasehold improvements are amortized over the shorter of related
lease term or the estimated useful lives. Upon retirement or sale, the costs
    of the assets disposed of and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in the
determination of income. Repairs and maintenance costs are expensed as
incurred. Annually, the Company routinely reviews its property and equipment
for impairment, and accordingly, will write-down those assets to their
estimated fair value. There was no impaired property and equipment in 2007,
2006 and 2005.

(j) Intangible Assets

The Companys
intangible assets include goodwill and other intangibles that consist of the
fair value of acquired customer lists, service contracts acquired, trade names,
and covenants not to compete. Goodwill represents the excess of purchase price
over fair value of net assets acquired at the date of acquisition.

Effective
January 1, 2002, the Company adopted the provisions of Statement of Financial
and Accounting Standards (SFAS) 142 Goodwill and Other Intangible Assets.
In accordance with that statement, goodwill and intangible assets with indefinite
lives are not amortized, but are tested at least annually for impairment. Prior
to January 1, 2002, the Company had not recorded goodwill or other intangible
assets of indefinite lives. Intangible assets with estimable useful lives,
consisting primarily of acquired customer lists, service contracts and
covenants not to compete, are amortized on a straight-line basis over their
estimated useful lives of three to fifteen years and are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset or asset group may not be recoverable. If the
intangible assets remaining useful life is changed, the intangible asset will
be amortized over the remaining useful life. If the asset being amortized is
determined to have an indefinite useful life, the asset

F-9

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

will be tested
for impairment. The impairment test will consist of measuring its fair value
with its carrying amount. If the carrying amount of the intangible assets
exceeds its fair value, an impairment loss is recognized for an amount equal to
the excess and the adjusted carrying amount is recognized as its new accounting
basis. The Company recorded an impairment charge of $43,999, $0, and $44,999
for the write down of trade names, customer lists and service contract rights
for the years ended December 31, 2007, 2006 and 2005, respectively.

(k) Goodwill

The Companys
goodwill impairment test is based on a two part procedure consistent with the
requirements of SFAS 142. The first test consists of determining the fair value
of the reporting unit and comparing it to the carrying value of the reporting
unit. If the carrying value of the reporting unit exceeds the fair value of the
reporting unit,a second test is performed. In step two, the implied fair value
of the goodwill (which is the excess of the fair value of the reporting unit
over the fair value of the net assets) is compared to the carrying value of the
goodwill. An impairment loss is recognized for any excess value of goodwill
over the implied value. The Company determines the reporting unit by analyzing
geographic region, as management evaluates the Companys performance in this
manner. We identified five separate and distinct operating units for the
testing requirements of SFAS 142. In 2007 and 2005, no charges to operations
resulted from managements goodwill impairment evaluation. However, based
upon our 2006 evaluation, the Company took a charge to operations of $1.2 million
(or$.21 per diluted share) associated with goodwill impairment associated with
our California banking vertical market.

(l) Concentrations of Credit Risk

Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash, cash equivalents and accounts receivable. At
various times, the Company had cash balances at certain financial institutions
in excess of federally insured limits. However, the Company does not believe
that it is subject to unusual credit risk beyond the normal credit risk associated
with commercial banking relationships.

Credit risk is
generally diversified due to the large number of customers that make up the
Companys customer base and their geographic dispersion. The Company performs
an ongoing credit evaluation of its customers. In 2007, billings to one
customer represented 12.0% of the Companys consolidated revenue or 12.3% of
revenue from the Integration segment. In 2007, accounts receivable from one
customer represented 14.8% of the Companys consolidated accounts receivable.
Revenues from local government agencies were 39.8%, 22.6% and 39% of total
revenue for the years ended December 31, 2007, 2006 and 2005, respectively.

There area few
vendors from whom we obtain devices and software for specific access control,
imaging, remote transmission, smart key and mobile applications. The loss of
any one of these

F-10

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

companies as
suppliers could have a materially adverse impact on our business, financial
condition and results of operations if we are unable to develop or acquire new
technologies from other sources. W e believe there are alternative vendors to
source such products.

Timely vendor
deliveries of equipment meeting our quality control standards from all
suppliers are also important to our business because each installed system
requires the integration of a variety of elements to be fully functional. The
failure to deliver any component when required, in operating condition, can
delay the project, triggering contract penalties, delay in progress payments
and may result in cancellation of the project.

(m) Income Taxes

Deferred taxes
are provided on the asset and liability method whereby assets and liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the amounts reported for financial statement purposes and
corresponding amounts for tax purposes. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.

(n) Fair Value of Financial Instruments

The carrying
amounts of the Companys financial instruments, which include cash equivalents,
accounts receivable, accounts payable, accrued expenses, short and long-term
debt, approximate their fair values as of December 31, 2007.

(o) Advertising Costs

The Company
expenses advertising cost when the advertisement occurs. Total advertising
expenses amounted to approximately $63,759, $67,542 and $40,346 for the years
ended December 31, 2007, 2006 and 2005, respectively.

(p) Stock Based Compensation

On January 1, 2006, the Company adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004), Shared Based Payment, (SFAS No. 123R). SFAS No. 123R requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period that the employee
is required to perform services in exchange for the award. SFAS No. 123R also requires measurement of the cost of employee services received in exchange for an award based on the grant date fair value of the award. The Company adopted SFAS No. 123R
using the modified prospective method. Under this application, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding
at the date of adoption.

(q) Warranty

The Company
offers warranties on all products, including parts and labor that ranges from
one to three years, depending upon the product. For products made by others,
the Company passes along the manufacturers warranty to the end user. For the
years ended December 31, 2007, 2006 and 2005, warranty expense was
approximately $44,868, $34,490 and $49,231, respectively.

F-11

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

(r) Net (Loss) Earnings Per Share

The
computation of basic (loss) earnings per share is based upon the weighted
average number of shares of common stock outstanding during the period. The
computation of diluted (loss) earnings per share includes the dilutive effects
of common stock equivalents of options and warrants. Potentially dilutive
securities are not included in earnings per share for the years ended December
31, 2007 and 2006 as their inclusion would be antidilutive.

The following
securities were not included in the computation of diluted net (loss) earnings
per share as their effect would have been anti-dilutive:

|                                                                                   |  |              |         |      |  |         |  |  |   |  | 
|---------------------------------------------------------------------------------- |  | ------------ | ------- | ---- |  | ------- |  |  | - |  | 
|                                                                                   |  | December 31, |         |     
|                                                                                   |  |              |         |     
|                                                                                   |  | 2007         |         | 2006 |  | 2005    |  | 
|                                                                                   |  |              |         |      |  |         |  | 
|Options to
 purchase common stock                                                  |  |              | 50,834  |      |  | 1,149   |  |  |  |  | 
|                                                                                   |  |              |         |      |  |         |  |  |   |  | 
|Shares
 issued in connection with the acquisition of Securus
 Inc., held in escrow |  |              | 150,001 |      |  | 150,001 |  |  |  |  | 

(s) Segment
Information

FASB issued
Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and
Related Information (Statement 131), that establish standards for
the reporting by public business enterprises of financial and descriptive
information about reportable operating segments in annual financial statements
and interim financial reports issued to shareholders. The Company has
identified two operating segments in which it operates; Security Systems
Integration (Integration) and Specialty Products and services (Specialty).
The Integration segment provides design, installation and support services for
a wide variety of security, communications and control systems. The Company
specializes in turn-key systems that integrate many different technologies.
Systems are customized to meet the specific needs of its customers. The
Specialty Products and Services segment (Specialty) includes the Companys
emergency preparedness planning programs business and its wireless business
specializes in designing, manufacturing and maintaining wireless communications
equipment used to enhance and extend emergency radio frequency services and
cellular communication for both fixed and mobile applications.

Each of the
Companys segments market nationwide with an emphasis in the Arizona,
California, Colorado, Maryland, New Jersey, New York, Texas and Virginia
metropolitan areas. Customers are primarily medium and large businesses and
governmental agencies. The Company derives a majority of its revenues from
project installations and, to a smaller extent, maintenance service revenue.

F-12

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

(t) Recently Adopted
Accounting Pronouncements

In June 2006,
FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
 an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainties in
income taxes recognized in an enterprises financial statements in accordance
with SFAS 109, Accounting for Income Taxes. This Interpretation prescribes a
comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. Under FIN 48, the tax effects of a position should
be recognized only if it is more-likely-than-not to be sustained on
examination by the taxing authorities, based on its technical merits as of the
reporting date. The tax benefits recognized in the financial statements from
such a position should be measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
settlement. The interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The Company has adopted the provisions of FIN 48 as
of January 1, 2007, but this did not have a material impact on the financial
statements.

On September
13, 2006, the Securities Exchange Commission (SEC) staff issued Staff
Accounting Bulletin (SAB) Topic No. 108, Financial Statements  Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (SAB 108). SAB 108 addresses how a
registrant should evaluate whether an error in its financial statements is
material. The SEC staff concludes in SAB 108 that materiality should be
evaluated using both the rollover and iron curtain methods. Registrants are
required to comply with the guidance in SAB 108 in financial statements for
fiscal years ending after November 15, 2006. As disclosed in the 2006 Form
10-K, certain deficiencies in the accounting for income taxes were identified
that pertained to years 2002 through 2005. After analyzing the materiality of
the impact arising from these deficiencies in accordance with the provisions of
SAB 108 (See Note 18), management concluded that the Consolidated Financial
Statements for the years ended December 31, 2005 and 2004, and the Selected
Financial Data for the years ended December 2002 through 2005, needed to be
corrected in order to reflect the proper accounting related to income taxes.
The impact resulting from these corrections for income tax accounting that had
an income statement impact was to increase (decrease) tax expense by $(29,696),
$(125,618), $111,080, and $99,776, for the years ended December 31, 2005, 2004,
2003 and 2002, respectively, with a corresponding increase or decrease to net tax
liabilities. The impact resulting from these corrections for income tax
accounting that only had a balance sheet impact was to increase net deferred
tax liabilities by $549,262, $580,032, $533,648, and $533,648 for the years
ended December 31, 2005, 2004, 2003 and 2002, respectively, with a
corresponding net increase to goodwill. Unadjusted differences were not
material to 2006 or individually to the prior years.

F-13

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

(u) Recently Issued Accounting Pronouncements

In September
2006, the FASB issued No. 157, Fair Value
Measurements(SFAS No. 157).
This new standard provides guidance for using fair value to measure assets and
liabilities. The FASB believes the standard also responds to investors
requests for expanded information about the extent to which companies measure
assets and liabilities at fair value, the information used to measure fair
value, and the effect of fair value measurements on earnings. SFAS No. 157
applies whenever other standards require (or permit) assets or liabilities to
be measured at fair value but does not expand the use of fair value in any new
circumstances.

Under SFAS No.
157, fair value refers to the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. In this
standard, the FASB clarifies the principle that fair value should be based on
the assumptions market participants would use when pricing the asset or
liability. In support of this principle, SFAS No. 157 establishes a fair value
hierarchy that prioritizes the information used to develop those assumptions.
The fair value hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data, for example, the
reporting entitys own data. Under the standard, fair value measurements would
be separately disclosed by level within the fair value hierarchy.

The provisions
of SFAS No. 157 are effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged, provided that the reporting entity
has not yet issued financial statements for that fiscal year, including any
financial statements for an interim period within that fiscal year. On February
12, 2008 the FASB issued Financial Staff Position (FSP) No. 157-2 which
deferred the effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years for item within
the scope of the FSP. The Company is currently quantifying the impact of SFAS
No. 157.

In February
2007, FASB issued FAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115 (FAS
159). FAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value. FAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
impact of adopting FAS 159 on its financial statements.

The FASB is
currently working on amendments to the existing accounting standards governing
asset transfers and impairment tests, among other issues. Upon completion of
these standards, the Company will need to re-evaluate its accounting and
disclosures. Due to the ongoing deliberations of the standard setters, the
Company is unable to accurately determine the effect of future amendments or
proposals at this time.

F-14

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

2.  ACCOUNTS RECEIVABLE

Accounts
receivable consisted of the following:

|                                           |  |              |            |      |   |            | 
|------------------------------------------ |  | ------------ | ---------- | ---- | - | ---------- | 
|                                           |  | December 31, |           
|                                           |  |              |           
|                                           |  | 2007         |            | 2006 |  
|                                           |  |              |            |      |  
|Completed contracts,
 including retentions |  | $            | 2,665,882  |      | $ | 7,002,134  | 
|Contracts in progress:                     |  |              | 11,451,264 |      |   | 7,610,015  | 
|                                           |  |              |            |      |   |            | 
|                                           |  |              |            |      |   |            | 
|                                           |  |              | 14,117,146 |      |   | 14,612,149 | 
|Less: Allowance for
 doubtful accounts     |  |              | 810,588    |      |   | 983,791    | 
|                                           |  |              |            |      |   |            | 
|                                           |  | $            | 13,306,558 |      | $ | 13,628,358 | 
|                                           |  |              |            |      |   |            | 

At December 31, 2007
and 2006, the largest accounts receivable from any one customer represented
14.8% and 9.7% of the net accounts receivable, respectively.

F-15

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)

3. COSTS AND BILLINGS ON UNCOMPLETED
CONTRACTS

Costs and
billing on uncompleted contracts consisted of the following:

|                                         |  |              |            |      |   |            | 
|---------------------------------------- |  | ------------ | ---------- | ---- | - | ---------- | 
|                                         |  | December 31, |           
|                                         |  |              |           
|                                         |  | 2007         |            | 2006 |  
|                                         |  |              |            |      |  
|Cost
  incurred on uncompleted contracts |  | $            | 43,011,153 |      | $ | 38,769,725 | 
|Billings on
  uncompleted contracts      |  |              | 41,393,116 |      |   | 35,293,515 | 
|                                         |  |              |            |      |   |            | 
|                                         |  | $            | 1,618,037  |      | $ | 3,476,210  | 
|                                         |  |              |            |      |   |            | 

Included in accompanying Balance Sheets under
the following captions:

|                                                    |  |              |           |      |   |           | 
|--------------------------------------------------- |  | ------------ | --------- | ---- | - | --------- | 
|                                                    |  | December 31, |          
|                                                    |  |              |          
|                                                    |  | 2007         |           | 2006 |  
|                                                    |  |              |           |      |  
|Costs in
  excess of billings and estimated profits |  | $            | 3,195,039 |      | $ | 4,643,469 | 
|Billing in
  excess of costs and estimated profits  |  |              | 1,577,002 |      |   | 1,167,259 | 
|                                                    |  |              |           |      |   |           | 
|                                                    |  | $            | 1,618,037 |      | $ | 3,476,210 | 
|                                                    |  |              |           |      |   |           | 

F-16

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)

4. INVENTORY

Inventories
consisted of the following:

|                            |  |              |           |      |   |           |  
|--------------------------- |  | ------------ | --------- | ---- | - | --------- | -
|                            |  | December 31, |          
|                            |  |              |          
|                            |  | 2007         |           | 2006 |  
|                            |  |              |           |      |  
|Component
  parts           |  | $            | 194,669   |      | $ | 434,282   |  
|Finished
  goods            |  |              | 1,861,801 |      |   | 1,689,190 |  
|                            |  |              |           |      |   |           |  
|                            |  |              | 2,056,470 |      |   | 2,123,472 |  
|Less:
  Valuation allowance |  |              | (595,539  | )    |   | (415,539  | )
|                            |  |              |           |      |   |           |  
|Net
  inventory             |  | $            | 1,460,931 |      | $ | 1,707,933 |  
|                            |  |              |           |      |   |           |  

5. PROPERTY AND EQUIPMENT

Property and
equipment consisted of the following:

|                                 |  |              |            |      |   |            |  
|-------------------------------- |  | ------------ | ---------- | ---- | - | ---------- | -
|                                 |  | December 31, |           
|                                 |  |              |           
|                                 |  | 2007         |            | 2006 |  
|                                 |  |              |            |      |  
|Office
  equipment               |  | $            | 468,046    |      | $ | 432,519    |  
|Demo and
  testing equipment     |  |              | 144,376    |      |   | 133,448    |  
|Automotive
  equipment           |  |              | 1,797,947  |      |   | 1,582,834  |  
|Computer
  equipment             |  |              | 1,420,511  |      |   | 1,239,364  |  
|Machinery
  and equipment        |  |              | 618,728    |      |   | 372,565    |  
|Leasehold
  improvements         |  |              | 367,686    |      |   | 500,325    |  
|                                 |  |              |            |      |   |            |  
|                                 |  |              | 4,817,294  |      |   | 4,261,055  |  
|Less:
  Accumulated depreciation |  |              | (2,408,654 | )    |   | (1,858,661 | )
|                                 |  |              |            |      |   |            |  
|                                 |  | $            | 2,408,640  |      | $ | 2,402,394  |  
|                                 |  |              |            |      |   |            |  

Depreciation
expense was $689,884, $515,972 and $488,899 for the years ended December 31,
2007, 2006 and 2005, respectively.

F-17

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)

Equipment
under capital leases included in Property and Equipment are as follows:

|                               |  |              |          |      |   |          |  
|------------------------------ |  | ------------ | -------- | ---- | - | -------- | -
|                               |  | December 31, |         
|                               |  |              |         
|                               |  | 2007         |          | 2006 |  
|                               |  |              |          |      |  
|Automotive equipment           |  | $            | 871,032  |      | $ | 511,992  |  
|Less: Accumulated depreciation |  |              | (313,590 | )    |   | (137,475 | )
|                               |  |              |          |      |   |          |  
|                               |  | $            | 557,442  |      | $ | 374,517  |  
|                               |  |              |          |      |   |          |  

6. GOODWILL

Goodwill
consisted of the following:

|                                         |  |             |           |      |   |           | 
|---------------------------------------- |  | ----------- | --------- | ---- | - | --------- | 
|                                         |  | December 31 |          
|                                         |  |             |          
|                                         |  | 2007        |           | 2006 |  
|                                         |  |             |           |      |  
|National Safe
  of California, Inc.      |  | $           | 483,753   |      | $ | 483,753   | 
|Photo Scan
  Systems, Inc.               |  |             | 472,475   |      |   | 472,475   | 
|Henry Bros.
  Electronics, LLC (Arizona) |  |             | 317,114   |      |   | 317,114   | 
|Airolite
  Communications, Inc.          |  |             | 250,034   |      |   | 250,034   | 
|Securus,
  Inc.                          |  |             | 971,210   |      |   | 971,210   | 
|CIS Security
  Systems Corp.             |  |             | 846,150   |      |   | 783,650   | 
|Southwest
  Securityscan, Inc.           |  |             | 38,294    |      |   | 38,294    | 
|                                         |  |             |           |      |   |           | 
|                                         |  | $           | 3,379,030 |      | $ | 3,316,530 | 
|                                         |  |             |           |      |   |           | 

In 2007 and
2005, no charges to operations resulted from managements goodwill impairment
evaluation. However, based upon the Companys 2006 goodwill evaluation under
the requirements of FAS 142, the Company took a charge to operations of $1.2
million (or $.21 per diluted share) associated with goodwill impairment
associated with our California banking vertical market (National Safe of
California).

F-18

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)

7. INTANGIBLE ASSETS



Intangible assets consist of the following:

|                                 |  |                            |          |                  |   |                             |   |              |          |                                   |   |              |   |                     |           |   |   |         |  |   |           |  
|-------------------------------- |  | -------------------------- | -------- | ---------------- | - | --------------------------- | - | ------------ | -------- | --------------------------------- | - | ------------ | - | ------------------- | --------- | - | - | ------- |  | - | --------- | -
|                                 |  | Acquired
  Customer
  List |          | Service
  Rights |   | Covenant
  Not to
  Compete |   | Trade
  Name |          | Total
  Amortizable
  Intangibles |   | Trade
  Name |   | Total
  Intangibles |          
|                                 |  |                            |          |                  |   |                             |   |              |          |                                   |   |              |   |                     |          
|Gross carrying value:            |  |                            |          |                  |   |                             |   |              |          |                                   |   |              |   |                     |           |   |   |         |  |   |           |  
|December 31, 2004                |  | $                          | 426,248  |                  | $ | 473,208                     |   | $            | 287,773  |                                   | $ |             |   | $                   | 1,187,229 |   | $ | 315,114 |  | $ | 1,502,343 |  
|Additions (deletions)            |  |                            | 260,000  |                  |   |                            |   |              |         |                                   |   | 80,000       |   |                     | 340,000   |   |   |        |  |   | 340,000   |  
|Impairment charge                |  |                            | (17,742  | )                |   | (36,559                     | ) |              |         |                                   |   |             |   |                     | (54,301   | ) |   |        |  |   | (54,301   | )
|                                 |  |                            |          |                  |   |                             |   |              |          |                                   |   |              |   |                     |           |   |   |         |  |   |           |  
|December 31, 2005                |  | $                          | 668,506  |                  | $ | 436,649                     |   | $            | 287,773  |                                   | $ | 80,000       |   | $                   | 1,472,928 |   | $ | 315,114 |  | $ | 1,788,042 |  
|Additions (deletions)            |  |                            | 291,492  |                  |   |                            |   |              |         |                                   |   |             |   |                     | 291,492   |   |   |        |  |   | 291,492   |  
|Impairment charge                |  |                            |         |                  |   |                            |   |              |         |                                   |   |             |   |                     |          |   |   |        |  |   |          |  
|                                 |  |                            |          |                  |   |                             |   |              |          |                                   |   |              |   |                     |           |   |   |         |  |   |           |  
|December 31, 2006                |  |                            | 959,999  |                  |   | 436,648                     |   |              | 287,773  |                                   |   | 80,000       |   |                     | 1,764,420 |   |   | 315,114 |  |   | 2,079,534 |  
|Additions (deletions)            |  |                            |         |                  |   |                            |   |              |         |                                   |   |             |   |                     |          |   |   |        |  |   |          |  
|Impairment charge                |  |                            |         |                  |   |                            |   |              |         |                                   |   | (43,999      | ) |                     | (43,999   | ) |   |        |  |   | (43,999   | )
|                                 |  |                            |          |                  |   |                             |   |              |          |                                   |   |              |   |                     |           |   |   |         |  |   |           |  
|December 31, 2007                |  |                            | 959,999  |                  |   | 436,648                     |   |              | 287,773  |                                   |   | 36,001       |   |                     | 1,720,421 |   |   | 315,114 |  |   | 2,035,535 |  
|                                 |  |                            |          |                  |   |                             |   |              |          |                                   |   |              |   |                     |           |   |   |         |  |   |           |  
|                                 |  |                            |          |                  |   |                             |   |              |          |                                   |   |              |   |                     |           |   |   |         |  |   |           |  
|Accumulated amortization:        |  |                            |          |                  |   |                             |   |              |          |                                   |   |              |   |                     |           |   |   |         |  |   |           |  
|December 31, 2004                |  |                            | (71,040  | )                |   | (100,527                    | ) |              | (138,924 | )                                 |   |             |   |                     | (310,491  | ) |   |        |  |   | (310,491  | )
|2005 Amortization                |  |                            | (38,879  | )                |   | (54,829                     | ) |              | (60,636  | )                                 |   | (4,000       | ) |                     | (158,344  | ) |   |        |  |   | (158,344  | )
|Impairment charge                |  |                            | 4,651    |                  |   | 4,651                       |   |              |         |                                   |   |             |   |                     | 9,302     |   |   |        |  |   | 9,302     |  
|                                 |  |                            |          |                  |   |                             |   |              |          |                                   |   |              |   |                     |           |   |   |         |  |   |           |  
|December 31, 2005                |  |                            | (105,268 | )                |   | (150,705                    | ) |              | (199,560 | )                                 |   | (4,000       | ) |                     | (459,533  | ) |   |        |  |   | (459,533  | )
|2006 Amortization                |  |                            | (67,583  | )                |   | (37,759                     | ) |              | (62,245  | )                                 |   | (16,000      | ) |                     | (183,587  | ) |   |        |  |   | (183,587  | )
|Impairment charge                |  |                            |         |                  |   |                            |   |              |         |                                   |   |             |   |                     |          |   |   |        |  |   |          |  
|                                 |  |                            |          |                  |   |                             |   |              |          |                                   |   |              |   |                     |           |   |   |         |  |   |           |  
|December 31, 2006                |  |                            | (172,852 | )                |   | (188,464                    | ) |              | (261,805 | )                                 |   | (20,000      | ) |                     | (643,120  | ) |   |        |  |   | (643,120  | )
|2007 Amortization                |  |                            | (118,702 | )                |   | (48,197                     | ) |              | (25,968  | )                                 |   | (16,001      | ) |                     | (208,868  | ) |   |        |  |   | (208,868  | )
|Impairment charge                |  |                            |         |                  |   |                            |   |              |         |                                   |   |             |   |                     |          |   |   |        |  |   |          |  
|                                 |  |                            |          |                  |   |                             |   |              |          |                                   |   |              |   |                     |           |   |   |         |  |   |           |  
|December 31, 2007                |  |                            | (291,554 | )                |   | (236,661                    | ) |              | (287,773 | )                                 |   | (36,001      | ) |                     | (851,988  | ) |   |        |  |   | (851,988  | )
|                                 |  |                            |          |                  |   |                             |   |              |          |                                   |   |              |   |                     |           |   |   |         |  |   |           |  
|Net carrying value               |  | $                          | 668,445  |                  | $ | 199,987                     |   | $            |         |                                   | $ |             |   | $                   | 868,433   |   | $ | 315,114 |  | $ | 1,183,547 |  
|                                 |  |                            |          |                  |   |                             |   |              |          |                                   |   |              |   |                     |           |   |   |         |  |   |           |  
|                                 |  |                            |          |                  |   |                             |   |              |          |                                   |   |              |   |                     |           |   |   |         |  |   |           |  
|Weighted average life in
  years |  |                            | 11       |                  |   | 6                           |   |              | 3        |                                   |   | 5            |   |                     | 6         |   |   |         |  |   |           |  

Amortization
expense was $208,868, $183,587 and $158,344 for the years ended December 31,
2007, 2006 and 2005, respectively.

Future
amortization expense for the next five years is as follows:

|            |  |   |         | 
|----------- |  | - | ------- | 
|December 31 |  |   |         | 
|            |  |   |         | 
|2008        |  | $ | 166,899 | 
|2009        |  |   | 151,176 | 
|2010        |  |   | 151,176 | 
|2011        |  |   | 151,176 | 
|2012        |  |   | 151,176 | 

F-19

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

8. LONG-TERM DEBT

On June 30,
2005, the Company entered into a loan agreement (the Loan Agreement) with TD
Banknorth, N.A. (TD Banknorth, formerly known as Hudson United Bank) pursuant
to which TD Banknorth extended a $4 million two-year credit facility (the
Revolving Loan), to the Company and refinanced $1 million of existing
indebtedness to TD Banknorth into a five year term loan (the Term Loan).

Advances under
the Revolving Loan may be used to finance working capital and acquisitions.
Interest is paid monthly in arrears at TD Banknorths prime rate (7.25%, 8.25%
and 7.25% at December 31, 2007, 2006 and 2005, respectively) through April 30,
2009, when all amounts outstanding under the Revolving loan come due. The
Revolving Loan was originally due May 1, 2007; however, in December 2006 TD
Banknorth provided the Company a one year extension. In March 2008 TD Banknorth
provided the Company an additional one year extension. The Revolver Loan now
comes due on April 30, 2009.

The Term Loan
provides for the payment of sixty equal monthly installments of principal and
interest in the amount of $19,729.65 commencing July 30, 2005 and continuing through
June 30, 2010. Interest under the Term Loan is 6.75%.

The Company is
required to maintain certain financial and reporting covenants and is
restricted from paying dividends under the terms of the Loan Agreement. The
Company was not in compliance with certain of these bank covenants at December
31, 2007. TD Banknorth provided the Company with a waiver associated with the
bank covenants in default on March 28, 2008. As a condition of the waiver, the
Company agreed to grant TD Banknorth a first security interest on its accounts
receivable. Long-term debt included the following balances:

Long-term debt included the following balances:

F-20

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

|                                                                                                        |  |              |            |      |   |           |  
|------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ---- | - | --------- | -
|                                                                                                        |  | December 31, |           
|                                                                                                        |  |              |           
|                                                                                                        |  | 2007         |            | 2006 |  
|                                                                                                        |  |              |            |      |  
|                                                                                                        |  |              |            |      |   |           |  
|Term loan at
  6.75% interest payable in monthly installments of $19,730 thru June 30, 2010             |  | $            | 324,520    |      | $ | 531,122   |  
|                                                                                                        |  |              |            |      |   |           |  
|                                                                                                        |  |              |            |      |   |           |  
|Revolving
  line at the prime rate of interest, payable in monthly installments thru May
  1, 2009      |  |              | 3,635,897  |      |   | 2,847,897 |  
|                                                                                                        |  |              |            |      |   |           |  
|                                                                                                        |  |              |            |      |   |           |  
|Corporate
  insurance financed at 8.49% in monthly installments thru October 1, 2008                    |  |              | 172,807    |      |   | 162,397   |  
|                                                                                                        |  |              |            |      |   |           |  
|                                                                                                        |  |              |            |      |   |           |  
|Capitalized
  lease obligations due in monthly installments, with interest ranging from 6.4%
  to 11.7% |  |              | 595,587    |      |   | 399,731   |  
|                                                                                                        |  |              |            |      |   |           |  
|Other
  miscellaneous debt                                                                              |  |              | 7,573      |      |   | 27,117    |  
|                                                                                                        |  |              |            |      |   |           |  
|                                                                                                        |  |              | 4,736,384  |      |   | 3,968,264 |  
|Less:
  Current Portion                                                                                 |  |              | (634,948   | )    |   | (505,028  | )
|Revolving loan                                                                                          |  |              | (3,635,897 | )    |   |          |  
|                                                                                                        |  |              |            |      |   |           |  
|                                                                                                        |  | $            | 465,539    |      | $ | 3,463,236 |  
|                                                                                                        |  |              |            |      |   |           |  

The weighted
average prime interest rate for the years ended December 31, 2007, 2006 and
2005 were 8.1%, 7.9% and 6.4%, respectively.

Aggregate
maturities of all outstanding debt at December 31, 2007:

|     |  |   |           | 
|---- |  | - | --------- | 
|2008 |  | $ | 4,270,845 | 
|2009 |  |   | 267,811   | 
|2010 |  |   | 123,995   | 
|2011 |  |   | 73,733    | 
|     |  |   |           | 
|     |  | $ | 4,736,384 | 
|     |  |   |           | 

F-21

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

Obligations
Under Capital Leases:

Future minimum
lease payments for assets under capital leases outstanding at December 31,
2007:

|                                            |                                      |   |         |         |  
|------------------------------------------- | ------------------------------------ | - | ------- | ------- | -
|2008                                        |                                      | $ | 267,956 |        
|2009                                        |                                      |   | 174,541 |        
|2010                                        |                                      |   | 146,407 |        
|2011                                        |                                      |   | 62,374  |        
|                                            |                                      |   |         |        
|                                            |                                      |   | 651,278 |        
|                                            | Less: Amount
  representing interest |   |         | (55,691 | )
|                                            |                                      |   |         |        
|Present value of net minimum lease
payments |                                      | $ | 595,587 |        
|                                            |                                      |   |         |        
|                                            |                                      |   |         |        
|                                            |                                      |   |         |        

|                                             | 
|-------------------------------------------- | 
|9. INCOME TAXES                             
|                                            
|The tax provision consists
of the following:

|         |  |                         |         |      |   |          |   |   |         | 
|-------- |  | ----------------------- | ------- | ---- | - | -------- | - | - | ------- | 
|         |  | Years Ended December 31 |        
|         |  |                         |        
|         |  | 2007                    |         | 2006 |   | 2005     |  
|         |  |                         |         |      |   |          |  
|Federal  |  |                         |         |      |   |          |   |   |         | 
|Current  |  | $                       | 5,869   |      | $ | (130,790 | ) | $ | 112,790 | 
|Deferred |  |                         | 24,465  |      |   | (318,002 | ) |   | 594,579 | 
|         |  |                         |         |      |   |          |   |   |         | 
|         |  |                         | 30,334  |      |   | (448,792 | ) |   | 707,369 | 
|         |  |                         |         |      |   |          |   |   |         | 
|         |  |                         |         |      |   |          |   |   |         | 
|State    |  |                         |         |      |   |          |   |   |         | 
|Current  |  |                         | 63,934  |      |   | 94,492   |   |   | 95,945  | 
|Deferred |  |                         | (30,987 | )    |   | (68,005  | ) |   | 90,263  | 
|         |  |                         |         |      |   |          |   |   |         | 
|         |  |                         | 32,947  |      |   | 26,487   |   |   | 186,208 | 
|         |  |                         |         |      |   |          |   |   |         | 
|         |  | $                       | 63,281  |      | $ | (422,305 | ) | $ | 893,577 | 
|         |  |                         |         |      |   |          |   |   |         | 

F-22

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

The components of the
deferred tax asset (liability) as of December 31, 2007 and 2006 are as follows:

|                                 |  |      |           |      |   |           |  
|-------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|                                 |  | 2007 |           | 2006 |  
|                                 |  |      |           |      |  
|Deferred
 Tax Asset:            
|Allowance for Doubtful Accounts  |  | $    | 313,385   |      | $ | 398,548   |  
|Accrued Absences                 |  |      | 220,139   |      |   | 280,475   |  
|Accrued warranty                 |  |      | 188,922   |      |   | 125,554   |  
|Depreciation                     |  |      |           |      |   | 13,871    |  
|Inventory                        |  |      | 230,855   |      |   | 137,748   |  
|Deferred Rent                    |  |      | 20,622    |      |   |          |  
|Stock Compensation               |  |      | 64,217    |      |   | 54,267    |  
|Unearned Maintenance             |  |      | 40,131    |      |   | 213,296   |  
|Intangible assets                |  |      |          |      |   |          |  
|Net Operating loss carry forward |  |      | 592,281   |      |   | 526,406   |  
|                                 |  |      |           |      |   |           |  
|                                 |  |      |           |      |   |           |  
|Total
 Deferred Tax Asset        |  |      | 1,670,552 |      |   | 1,750,165 |  
|                                 |  |      |           |      |   |           |  
|                                 |  |      |           |      |   |           |  
|Deferred
 Tax Liability:         |  |      |           |      |   |           |  
|Deferred Revenue                 |  |      | (274,490  | )    |   | (249,365  | )
|Depreciation                     |  |      | (23,646   | )    |   |          |  
|Intangible Assets                |  |      | (326,629  | )    |   | (428,283  | )
|                                 |  |      |           |      |   |           |  
|                                 |  |      |           |      |   |           |  
|Total
 Deferred Tax Liability    |  |      | (624,765  | )    |   | (677,648  | )
|                                 |  |      |           |      |   |           |  
|                                 |  |      |           |      |   |           |  
|                                 |  |      |           |      |   |           |  
|Net
 Deferred Tax                |  | $    | 1,045,787 |      | $ | 1,072,517 |  
|                                 |  |      |           |      |   |           |  
|Short Term                       |  |      | 739,563   |      |   | 906,255   |  
|                                 |  |      |           |      |   |           |  
|Long Term                        |  |      | 306,224   |      |   | 166,262   |  
|                                 |  |      |           |      |   |           |  

As of December
31, 2007, the Company generated a net operating loss carryforwards of
approximately $377,000 available for carryforward through 2026. Additionally,
there is approximately $1,040,000 of acquired NOLs which are subject to
various expiration dates. The acquired NOLs are also subject to limitations in
their use based on the value of the acquired company at the date of the change
of ownership.

The Company also has State NOLs of approximately $5.3 million
    for which a tax benefit of approximately $100,000 has been recorded in the
    schedule above. The state tax benefit is net of approximately $100,000 of
    a valuation allowance since the Company does not believe it is more likely
than not they will be able to utilize all State NOLs in the near future.

F-23

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

The provision
for income taxes reported for the years ended December 31, differs from that
computed using the United States statutory tax rate of 34% due to the
following:

|                                                                     |  |                         |         |      |   |          |   |   |         | 
|-------------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | -------- | - | - | ------- | 
|                                                                     |  | Years Ended December 31 |        
|                                                                     |  |                         |        
|                                                                     |  | 2007                    |         | 2006 |   | 2005     |  
|                                                                     |  |                         |         |      |   |          |  
|Provision (benefit) for taxes using statutory rate                   |  | $                       | (81,608 | )    | $ | (918,977 | ) | $ | 690,727 | 
|State taxes, net of federal tax benefit                              |  |                         | 10,823  |      |   | 17,481   |   |   | 122,897 | 
|Uncertain tax positions                                              |  |                         | 8,539   |      |   |         |   |   |        | 
|State taxes, net of federal benefit - change
      in estimated rate |  |                         | 1,841   |      |   |         |   |   |        | 
|Change in Prior Year Deferred Tax Estimates - State                  |  |                         | 5,280   |      |   |         |   |   |        | 
|Change in Prior Year Deferred Tax Estimates - Federal                |  |                         | 23,076  |      |   | 404,940  |   |   |        | 
|Permanent Differences:                                               |  |                         |        |      |   | 58,501   |   |   | 40,081  | 
|Goodwill Impairment                                                  |  |                         | 14,960  |      |   | 15,750   |   |   | 39,872  | 
|Goodwill Tax Amortization                                            |  |                         | (8,651  | )    |   |         |   |   |        | 
|Qualified Stock Based Compensation                                   |  |                         | 66,585  |      |   |         |   |   |        | 
|Other                                                                |  |                         | 22,435  |      |   |         |   |   |        | 
|                                                                     |  |                         |         |      |   |          |   |   |         | 
|Provision (Benefit) for Income Taxes                                 |  | $                       | 63,281  |      | $ | (422,305 | ) | $ | 893,577 | 
|                                                                     |  |                         |         |      |   |          |   |   |         | 

The Company
adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 as
of January 1, 2007. As a result of the implementation of FIN 48, the Company
recognized an approximate $38,561 increase in the liability for unrecognized
tax benefits and a decrease to the January 1, 2007 balance of retained
earnings. As of December 31, 2007, the Company had $47,100 of unrecognized
income tax benefits, all of which would affect the Companys effective tax rate
if recognized.

A reconciliation of the
beginning and ending balances of the total amounts of gross unrecognized tax
benefits as of and during the year ended December 31, 2007 is as follows:

|                                                             |  |   |        | 
|------------------------------------------------------------ |  | - | ------ | 
|Gross
 unrecognized income tax benefits at January 1, 2007   |  | $ | 38,561 | 
|Additions
 for tax positions of the current year             |  |   |       | 
|Additions
 for tax positions of prior years (interest only)  |  |   | 8,539  | 
|Reductions
 for tax positions of prior years for:            |  |   |        | 
|Settlements during the period                                |  |   |       | 
|Lapses of applicable statue of limitations                   |  |   |       | 
|                                                             |  |   |        | 
|Gross
 unrecognized income tax benefits at December 31, 2007 |  | $ | 47,100 | 
|                                                             |  |   |        | 

The Company
has analyzed filing positions in all of the federal and state jurisdictions
where it is required to file income tax returns, as well as all open tax years
in these jurisdictions.

F-24

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)

The Company has
identified its federal consolidated tax return and its state tax returns in New
York, New Jersey and California as major tax jurisdictions, as defined. The
only periods subject to examination for the Companys federal return are the
2004 through 2006 tax years. The periods subject to examination for the
Companys state returns in New York, New Jersey and California are years 2004
through 2006. The Company recognizes potential accrued interest and penalties
related to unrecognized tax benefits in income tax expense. At December 31,
2007, the Company recognized approximately $12,092 in potential interest and penalties associated with uncertain tax positions. The
change in the unrecognized tax benefit within the next 12 months is not
expected to be material to the financial statements.

10. INCENTIVE STOCK OPTION PLAN

The Company
has a Stock Option Plan (the 1999 Plan), for the benefit of employees of the
Company, under which options to purchase up to a maximum of 500,000 shares of
its common stock may be issued. The maximum term of any option is ten years,
and the option price per share may not be less than the fair market value of
the Companys shares at the date the option is granted. However, options
granted to persons owning more than 10% of the voting shares will have a term
not to exceed five years, and the option price will not be less than 110% of
fair market value. Options granted to an optionee will usually vest 33 1/3%
annually, beginning on the first anniversary of the option grant, subject to
the discretion of the Compensation Committee of the Board of Directors. The
1999 Plan will terminate on December 23, 2009 or on such earlier date as the
Board of Directors may determine. Any option outstanding at the termination
date will remain outstanding until it expires or is exercised in full,
whichever occurs first.

On May 10,
2002, the Board of Directors approved the 2002 Incentive Stock Option Plan (the
2002 Plan), which the shareholders subsequently approved on October 28, 2002.
On August 2, 2006, the Board of Directors approved the 2006 Stock Option Plan
(the 2006 Plan), which the shareholders subsequently approved on November 1,
2006. On November 8, 2007, the Board of Directors approved the 2007 Stock
Option Plan (the 2007 Plan), which the shareholders subsequently approved on
November 12, 2007.

The 2002, 2006
and 2007 Plans (collectively the Plans) allow the granting of incentive stock
options or non-qualified stock options to the Companys employees, directors
and consultants, up to a maximum of 230,000, 250,000 and 250,000 shares of its
common stock for the 2002, 2006 and 2007 Plans, respectively. All stock options
granted under the Plans will be exercisable at such time or times and in such
installments, if any, as our Compensation Committee or the Board may determine
and expire no more than ten years from the date of grant. The 2002 Plan will
terminate on May 9, 2012, the 2006 Plan will terminate on August 2, 2016, and
the 2007 Plan will terminate on November 8, 2017, or such earlier date as the
Board of Directors may determine. Any option outstanding at the termination
date will remain outstanding until it

F-25

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)

expires or is
exercised in full, whichever occurs first. The exercise price of the stock
option will be at fair market value. Vesting is at the discretion of the
Compensation Committee. The Plans allow for immediate vesting if there is a
change of control. As of December 31, 2007, in total, 287,909 options are available
for future grant under the 1999, 2002 and 2006 Plans. The Company charged $227,839,
$189,593 and $191,206 to operations for the years ended December 31, 2007, 2006
and 2005, respectively, for the fair value of those options granted subsequent
to January 1, 2003.

A summary of
stock option activity under the Plans follows:

|                  |  |                  |         |                                 |  |             |         |             |  |  |      |  |  |  |      |  | 
|----------------- |  | ---------------- | ------- | ------------------------------- |  | ----------- | ------- | ----------- |  |  | ---- |  |  |  | ---- |  | 
|                  |  | Number of Shares |         | Weighted Average Exercise Price | 
|                  |  |                  |         |                                 | 
|                  |  | Outstanding      |         | Exercisable                     |  | Outstanding |         | Exercisable | 
|                  |  |                  |         |                                 |  |             |         |             | 
|                 
|December 31, 2005 |  |                  | 471,375 |                                 |  |             | 240,375 |             |  |  | 5.95 |  |  |  | 6.70 |  | 
|Granted at market |  |                  | 256,000 |                                 |  |             |         |             |  |  | 3.90 |  |  |  |      |  | 
|Exercised         |  |                  | (6,666  | )                               |  |             |         |             |  |  | 4.65 |  |  |  |      |  | 
|Terminated        |  |                  | (50,109 | )                               |  |             |         |             |  |  | 5.65 |  |  |  |      |  | 
|                  |  |                  |         |                                 |  |             |         |             |  |  |      |  |  |  |      |  | 
|December 31, 2006 |  |                  | 670,600 |                                 |  |             | 290,435 |             |  |  | 5.17 |  |  |  | 6.37 |  | 
|Granted at market |  |                  | 309,800 |                                 |  |             |         |             |  |  | 4.32 |  |  |  |      |  | 
|Exercised         |  |                  |        |                                 |  |             |         |             |  |  |      |  |  |  |      |  | 
|Terminated        |  |                  | (63,500 | )                               |  |             |         |             |  |  | 5.39 |  |  |  |      |  | 
|                  |  |                  |         |                                 |  |             |         |             |  |  |      |  |  |  |      |  | 
|December 31, 2007 |  |                  | 916,900 |                                 |  |             | 354,620 |             |  |  | 4.87 |  |  |  | 5.68 |  | 
|                  |  |                  |         |                                 |  |             |         |             |  |  |      |  |  |  |      |  | 

A summary of the status of the Companys nonvested shares as of December 31, 2007 and changes during the year ended December 31, 2007 is presented below:

|                               |  |        |         |            |  |      | 
|------------------------------ |  | ------ | ------- | ---------- |  | ---- | 
|Nonvested Shares               |  | Shares |         | Fair Value | 
|                               |  |        |         |            | 
|Nonvested at January 1, 2007   |  |        | 380,165 |            |  | 1.67 | 
|                               |  |        |         |            |  |      | 
|Granted in 2007                |  |        | 309,800 |            |  | 2.16 | 
|                               |  |        |         |            |  |      | 
|Vested in 2007                 |  |        | (84,215 | )          |  | 1.75 | 
|                               |  |        |         |            |  |      | 
|Forfeited (nonvested)          |  |        | (43,470 | )          |  | 2.09 | 
|                               |  |        |         |            |  |      | 
|Nonvested at December 31, 2007 |  |        | 562,280 |            |  | 1.91 | 
|                               |  |        |         |            |  |      | 

As of December
31, 2007, there was $684,224 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements under the Plan. That cost is
expected to be recognized over a weighted-average period of 4.2 years.

F-26

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

The aggregate
fair value of options outstanding at December 31, 2007, was $ 1,704,413 and had
a weighted-average remaining contractual life of 2.5 years. Of these options
outstanding, 354,620 were exercisable and 502,148 were expected to vest, and
had an aggregate fair value of $949,060 with a weighted-average remaining
contractual life of 4.0 years. The following table provides information related
to options exercised during the years ended December 31, 2007, 2006, and 2005:

|                               |  |      |   |      |  |        |  |  |   | 
|------------------------------ |  | ---- | - | ---- |  | ------ |  |  | - | 
|                               |  | 2007 |   | 2006 |  | 2005   | 
|                               |  |      |   |      |  |        | 
|Total
 intrinsic value         |  |      |  |      |  | 39,596 |  |  |  | 
|Cash
 received upon exercise   |  |      |  |      |  | 30,997 |  |  |  | 
|Related tax
 benefits realized |  |      |  |      |  | 2,924  |  |  |  | 

Stock based
compensation is being amortized over the vesting period of up to five years.
The fair value of the Companys stock option awards was estimated assuming no
expected dividends and the following weighted-average assumptions for the years
ended December 31:

|                                        |  |      |      |      |   |      |   |   |      |  
|--------------------------------------- |  | ---- | ---- | ---- | - | ---- | - | - | ---- | -
|                                        |  | 2007 |      | 2006 |   | 2005 |  
|                                        |  |      |      |      |   |      |  
|Expected
 Life (years)                  |  |      | 3    |      |   | 3    |   |   | 3    |  
|Expected
 volatility                    |  |      | 52.5 | %    |   | 36.8 | % |   | 33.0 | %
|Risk-free
 interest rates               |  |      | 3.8  | %    |   | 4.2  | % |   | 3.9  | %
|Dividend
 Yield                         |  |      |     |      |   |     |   |   |     |  
|Weighted-average
 grant-date fair value |  | $    | 2.16 |      | $ | 1.44 |   | $ | 1.78 |  

The
assumptions above are based on multiple factors, including historical exercise
patterns of employees with respect to exercise and post-vesting employment
termination behaviors, expected future exercise patterns for these employees
and the historical volatility of our stock price. The expected term of options
granted is derived using company-specific, historical exercise information and
represents the period of time that the options granted are expected to be
outstanding. The risk-free interest rate for periods within the contractual
life of the option is based on the U.S. Treasury yield curve in effect at the
time of the grant.

11. STOCKHOLDERS EQUITY

In connection
with the acquisition of all the capital stock of CIS Security Systems Corp.
(CIS) on October 2, 2006, the Company issued an aggregate of 20,000 shares of
its common stock, valued at $67,200. The Company issued an additional 10,000
shares of its restricted common stock in 2007 to CISs selling shareholder
after CIS met certain performance targets. The issuance of the shares of
restricted stock in connection with the aforementioned acquisition was

F-27

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

made in
reliance upon the exemption provided in section 4(2) of the Securities Act of
1933, as amended. In addition, the selling shareholder may earn an additional
60,000 shares of the Companys common stock if CIS achieves certain performance
targets through December, 2011.

In connection
with the acquisition of Securus, Inc. on October 10, 2005, the Company issued
an aggregate of 150,001 shares of its common stock, all of which are being held
in escrow pursuant to the stock purchase escrow agreement between the Company
and the selling shareholders of Securus, Inc. The issuance of the shares of
restricted stock, in connection with the aforementioned acquisition, was made
in reliance upon the exemption provided in section 4(2) of the Securities Act
of 1933, as amended.

Holders of
common stock are entitled to one vote for each share held on all matters
submitted for a vote of stockholders and do not have cumulative voting rights.
Apart from preferences that may be applicable to any shares of preferred stock
outstanding at the time, holders of our common stock are entitled to receive
dividends ratably, if any, as may be declared from time to time by our board of
directors out of funds legally available. Upon the liquidation, dissolution or
winding up of the Company, the holders of common stock are entitled to receive
ratably the net assets available after the payment of all liabilities and
liquidation preferences on any outstanding preferred stock. Holders of common
stock have no preemptive, subscription, redemption or conversion rights, and
there are no redemption or sinking fund provisions applicable to the common
stock.

Preferred Stock Our board of directors is authorized, without stockholder approval, to
issue up to 2,000,000 shares of preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions of these shares,
including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, and to fix the number of shares
constituting any series and the designations of these series. These shares may
have rights senior to our common stock. The issuance of preferred stock may
have the effect of delaying or preventing a change in control. The issuance of
preferred stock could decrease the amount of earnings and assets available for
distribution to the holders of our common stock or could aversely affect the
rights and powers, including voting rights, of the holders of our common stock.
At present, we have no plans to issue preferred stock in the foreseeable
future.

Warrants- In connection with the Companys private placement of its common stock to
certain qualified institutional investors in July 2004 (as noted above), such
investors were issued warrants to acquire 138,333 shares of common stock at an
exercise price of $7.60 per share, exercisable for a period commencing six
months after the date of issuance through the fifth anniversary of the
issuance. In addition, the Placement Agent was issued warrants to acquire
55,333 shares of common stock with the same terms as those issued to the
institutional investors. These warrants will expire January 27, 2010.

F-28

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

A total of
1,203,809 common shares are reserved for exercise of employee stock options and
warrants as of December 31, 2007.

12. COMMITMENTS

Leases
- The Company leases its office and warehouse facilities under operating leases
that expire through 2016. Future minimum rental payments, under non-cancelable
leases as of December 31, 2007, are as follows:

|           |  |   |           | 
|---------- |  | - | --------- | 
|2008       |  | $ | 774,536   | 
|2009       |  |   | 712,718   | 
|2010       |  |   | 627,823   | 
|2011       |  |   | 423,318   | 
|2012       |  |   | 286,213   | 
|Thereafter |  |   | 823,338   | 
|           |  |   |           | 
|           |  |   |           | 
|Total      |  | $ | 3,647,946 | 
|           |  |   |           | 

Rent expense
under operating leases were approximately $754,000, $663,000 and $421,000 for
the years ended December 31, 2007, 2006 and 2005, respectively.

13. EMPLOYEE BENEFIT PLAN

As of January
1, 2003, the Company sponsored a 401-K plan, including discretionary profit
sharing (the 401-K Plan). The Company has implemented a match for 2008
whereby the Company will match 25% of employees contributions, up to 10% of
the employees salary, with a maximum match of $750. As of September 1, 2003,
the Company decided to discontinue matching employee contributions to the 401-K
Plan but announced to its employees that it will resume discretionary matches in
2008. The Companys contributions to the employees accounts vest equally over
three years and the employee contribution to their own account vests
immediately. There were no Company matching contributions to the 401-K plan
during 2007, 2006 or 2005.

14. RELATED PARTY TRANSACTIONS

In 2007 and
2006, the Company had revenues of $546,375 and $678,138 principally associated

F-29

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

with an
integrated security systems project with First Aviation Services, Inc. (First
Aviation). Joseph P. Ritorto, a member of our Board of Directors since January
2002, is co-founder of First Aviation. The outstanding accounts receivable due
from First Aviation at December 31, 2007 was $124,863.

15. CONTINGENT LIABILITIES

In July 2007
an accident occurred in Corona, California involving one of the Companys
vehicles. The operator of a motorcycle was killed in the accident. His family
has commenced litigation against the Company employee who was driving the
vehicle, as well as the Company. The litigation is still in an early stage.
While the Company believes any recovery would be fully covered by its
insurance, there can be no assurance to that effect.

From time to
time, the Company is subject to various claims with respect to matters arising
out of the normal course of business. In managements opinion, none of these
claims is likely to have a material affect on the Companys consolidated
financial statements.

16. SEGMENT DATA

Selected
information by business segment is presented in the following tables for the
years ended December 31:

|                              |  |                                 |            |      |   |            |   |   |            |  
|----------------------------- |  | ------------------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                              |  | For the year ended December 31, |           
|                              |  |                                 |           
|                              |  | 2007                            |            | 2006 |   | 2005       |  
|                              |  |                                 |            |      |   |            |  
|Revenue                       |  |                                 |            |      |   |            |   |   |            |  
|Integration                   |  | $                               | 56,332,837 |      | $ | 40,606,101 |   | $ | 38,848,317 |  
|Specialty                     |  |                                 | 2,147,355  |      |   | 2,766,024  |   |   | 3,890,952  |  
|Inter-segment                 |  |                                 | (627,976   | )    |   | (1,239,273 | ) |   | (583,081   | )
|                              |  |                                 |            |      |   |            |   |   |            |  
|Total Revenue                 |  | $                               | 57,852,216 |      | $ | 42,132,852 |   | $ | 42,156,188 |  
|                              |  |                                 |            |      |   |            |   |   |            |  
|                              |  |                                 |            |      |   |            |   |   |            |  
|Operating (Loss) Profit       |  |                                 |            |      |   |            |   |   |            |  
|Integration                   |  | $                               | 3,159,353  |      | $ | 144,229    |   | $ | 2,928,282  |  
|Specialty                     |  |                                 | (544,471   | )    |   | (751,919   | ) |   | 574,920    |  
|Corporate                     |  |                                 | (2,578,300 | )    |   | (1,989,671 | ) |   | (1,395,393 | )
|                              |  |                                 |            |      |   |            |   |   |            |  
|Total Operating (Loss) Profit |  | $                               | 36,582     |      | $ | (2,597,361 | ) | $ | 2,107,809  |  
|                              |  |                                 |            |      |   |            |   |   |            |  

F-30

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES 
Notes to the Consolidated Financial Statements (continued)

Selected
balance sheet information by business segment is presented in the following
table as of December 31:

|               |  |              |            |      |   |            | 
|-------------- |  | ------------ | ---------- | ---- | - | ---------- | 
|               |  | December 31, |           
|               |  |              |           
|               |  | 2007         |            | 2006 |  
|               |  |              |            |      |  
|Total
 Assets: |  |              |            |      |   |            | 
|Integration    |  | $            | 26,821,570 |      | $ | 28,209,608 | 
|Specialty      |  |              | 1,198,340  |      |   | 1,421,956  | 
|Corporate      |  |              | 4,311,660  |      |   | 1,062,397  | 
|               |  |              |            |      |   |            | 
|Total Assets   |  | $            | 32,331,570 |      | $ | 30,693,961 | 
|               |  |              |            |      |   |            | 

17. ACQUISITIONS

On October 10,
2005 we acquired Securus, Inc. (Securus), a privately held company
established in 1969, having offices in Denver and Colorado Springs, Colorado.
Securus designs, installs and maintains physical electronic security systems
for government and commercial enterprises. Securus will be included as part of
our Integration business segment.

Under the
terms of the Stock Purchase Agreement with the Securus shareholders, pursuant
to which we acquired all of the issued and outstanding stock of Securus, we
paid an aggregate purchase price of $1,110,000 comprised of $770,000 cash to
the selling shareholders, the assumption and subsequent repayment of $240,000
of Securus bank debt and incurred approximately $100,000 in transactions costs.
We also issued and placed into escrow 150,001 shares of our common stock which
may be earned out through December 31, 2010, based upon the aggregate value of
the earnings before interest and tax (EBIT) to $2,960,000. In addition, the
selling shareholders may earn an additional amount of up to $200,000 based upon
one third of the aggregate EBIT earned in excess of $2,960,000 thru December
31, 2010.

The purchase
price was allocated to the assets acquired and liabilities assumed based upon
the estimated fair market values as follows:

F-31

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)

|                                 |  |   |           |  
|-------------------------------- |  | - | --------- | -
|Cash and
  cash equilivalents    |  | $ | 31,009    |  
|Accounts
  receivable - net      |  |   | 645,016   |  
|Inventory                        |  |   | 95,859    |  
|Cost in
  excess of billings     |  |   | 135,130   |  
|Other assets                     |  |   | 80,443    |  
|                                 |  |   |           |  
|Total current assets             |  |   | 987,457   |  
|Property and
  equipment - net   |  |   | 24,368    |  
|Amortizable
  intangible assets: |  |   |           |  
|Customer relationship            |  |   | 260,000   |  
|Trademark and tradename          |  |   | 80,000    |  
|Deferred tax
  asset             |  |   | 306,770   |  
|Other assets                     |  |   | 31,110    |  
|                                 |  |   |           |  
|Total assets                     |  |   | 1,689,705 |  
|Accounts
  Payables              |  |   | (513,391  | )
|Other
  current liabilities      |  |   | (952,119  | )
|Deferred tax
  liability         |  |   | (136,000  | )
|                                 |  |   |           |  
|Net assets acquired              |  | $ | 88,195    |  
|                                 |  |   |           |  

The excess
purchase price of $971,210 was assigned to goodwill.

Selected
unaudited pro forma consolidated statements of income data for the year ended
December 31, 2005  assuming that Securus
was included in our results from the beginning of 2005 is as follows:

|                                  |  |      |            | 
|--------------------------------- |  | ---- | ---------- | 
|                                  |  | 2005 |           
|                                  |  |      |           
|Revenue                           |  | $    | 45,888,287 | 
|Net Income                        |  |      | 1,187,156  | 
|                                  |  |      |            | 
|Earnings per
  share:             |  |      |            | 
|Basic                             |  | $    | 0.21       | 
|Diluted                           |  |      | 0.20       | 
|                                  |  |      |            | 
|Weighted
  average common shares: |  |      |            | 
|Basic                             |  |      | 5,739,398  | 
|Diluted                           |  |      | 5,889,399  | 

The pro forma
information is for illustrative purposes only, and does not necessarily indicate
what the operating results of the combined companies would be had the
acquisition actually occurred at the beginning of 2005, nor does it necessarily
indicate the Companys future operating results.

F-32

---



HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)

On October 2,
2006, the Company consummated the acquisition of all the capital stock of CIS
Security Systems Corp. (CIS), a privately-held security systems integrator
with offices in Baltimore, Maryland and Newington, Virginia, for an aggregate
purchase price of $1,545,973 ($850,000 in cash to the selling shareholder, the
assumption and subsequent repayment of CIS debt in the amount of $603,364, the
issuance of 20,000 shares of the Companys $0.01 par value common stock valued
at $67,200 and $25,409 in transaction costs). In addition, the selling
shareholder may earn an additional amount up to $250,000 in cash and 80,000
additional shares of the Companys common stock if CIS achieves certain performance
targets through December, 2011. As of December 31, 2007, on a cumulative basis
the selling shareholder has earned $25,000 in cash and 10,000 additional shares
(valued at $37,500) of the Companys common stock through the achievement of
certain performance targets, which resulted in the $62,500 additional goodwill
during the year ended December 31, 2007.

Established in
1987, CIS provides design, engineering and installation services for integrated
electronic security systems for both commercial and government clients in the
Washington-Baltimore metropolitan area. CIS also provides design-build services
for large-scale security systems for malls, shopping centers and stadiums
throughout the country.

The purchase
price was allocated to the assets acquired and liabilities assumed based upon
the estimated fair market values as follows:

|                                 |  |   |           |  
|-------------------------------- |  | - | --------- | -
|Cash and
  cash equilivalents    |  | $ | 15,721    |  
|Accounts
  receivable - net      |  |   | 794,503   |  
|Inventory                        |  |   | 62,522    |  
|Cost in
  excess of billings     |  |   | 47,810    |  
|Other assets                     |  |   | 14,901    |  
|                                 |  |   |           |  
|Total current assets             |  |   | 935,457   |  
|Property and
  equipment - net   |  |   | 74,722    |  
|Amortizable
  intangible assets: |  |   |           |  
|Customer relationship            |  |   | 235,000   |  
|Deferred tax
  asset             |  |   | 265,739   |  
|Other assets                     |  |   | 8,330     |  
|                                 |  |   |           |  
|Total assets                     |  |   | 1,519,248 |  
|Accounts
  Payables              |  |   | (504,620  | )
|Other
  current liabilities      |  |   | (158,305  | )
|Deferred tax
  liability         |  |   | (94,000   | )
|                                 |  |   |           |  
|Net assets acquired              |  | $ | 762,323   |  
|                                 |  |   |           |  

The excess
purchase price of $846,150 was assigned to goodwill.

F-33

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)

On October 2,
2006, the Company acquired certain assets of Southwest Securityscan, Inc.
(SSI), a privately-held company headquartered in Duncanville, Texas. In
exchange for certain inventory, furniture, equipment, vehicles, customer lists,
customer monitoring contracts and relationships, the Company paid outstanding
SSI indebtedness of $88,014 on behalf of SSI and $6,773 in cash to SSI.  Established in 1974, SSI provides
installation, service and monitoring of access, surveillance and alarm
systems.

Pro forma
information is not required for either the CIS or SSI acquisition.

18. CORRECTION OF ERRORS:

As disclosed
in the 2006 Form 10-K, certain deficiencies in the accounting for income taxes
were identified that pertained to years 2002 through 2005.  After analyzing the materiality of the
impact arising from these deficiencies in accordance with the provisions of SAB
108 (See Note 1), management concluded that the Consolidated Financial
Statements for the years ended December 31, 2005 and 2004, and the Selected
Financial Data for the years ended December 2002 through 2005, needed to be
corrected to reflect the proper accounting related to income taxes.    The impact resulting from these corrections
for income tax accounting that had an income statement impact was to increase
(decrease) tax expense by $(29,696), $(125,618), $111,080, and $99,776, for the
years ended December 31, 2005, 2004, 2003 and 2002, respectively, with a
corresponding increase or decrease to net tax liabilities.  The impact resulting from these corrections
for income tax accounting that only had a balance sheet impact was to increase
net deferred tax liabilities by $549,262, $580,032, $533,648, and $533,648 for
the years ended December 31, 2005, 2004, 2003 and 2002, respectively, with a
corresponding net increase to goodwill.
Unadjusted differences were not material to 2006 or individually to the
prior years.

F-34

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)

19. QUARTERLY FINANCIAL INFORMATION
(UNAUDITED):

Presented
below is a schedule of selected quarterly operating results:

|                             |  |                                |            |                                |   |                                |   |                                    |            |   |   |            |  
|---------------------------- |  | ------------------------------ | ---------- | ------------------------------ | - | ------------------------------ | - | ---------------------------------- | ---------- | - | - | ---------- | -
|                             |  | First Quarter
  Ended March 31 |            | Second Quarter
  Ended June 30 |   | Third Quarter
  Ended Sept. 30 |   | Fourth Quarter
  Ended Dec. 31 (1) |           
|                             |  |                                |            |                                |   |                                |   |                                    |           
|Year Ended December 31, 2007 |  |                                |            |                                |   |                                |   |                                    |            |   |   |            |  
|Revenue                      |  | $                              | 10,871,301 |                                | $ | 13,521,198                     |   | $                                  | 15,861,239 |   | $ | 17,598,478 |  
|Gross profit                 |  |                                | 2,156,176  |                                |   | 3,280,279                      |   |                                    | 3,470,612  |   |   | 3,369,844  |  
|Net (loss) income            |  |                                | (820,415   | )                              |   | 150,044                        |   |                                    | 328,040    |   |   | 39,027     |  
|                             |  |                                |            |                                |   |                                |   |                                    |            |   |   |            |  
|(Loss) earnings per share    |  |                                |            |                                |   |                                |   |                                    |            |   |   |            |  
|Basic                        |  | $                              | (0.14      | )                              | $ | 0.03                           |   | $                                  | 0.06       |   | $ | 0.01       |  
|Diluted                      |  |                                | (0.14      | )                              |   | 0.03                           |   |                                    | 0.05       |   |   | 0.01       |  
|                             |  |                                |            |                                |   |                                |   |                                    |            |   |   |            |  
|Year Ended December 31, 2006 |  |                                |            |                                |   |                                |   |                                    |            |   |   |            |  
|Revenue                      |  | $                              | 9,144,828  |                                | $ | 10,139,969                     |   | $                                  | 8,281,405  |   | $ | 14,566,650 |  
|Gross profit                 |  |                                | 2,938,175  |                                |   | 2,212,794                      |   |                                    | 2,087,193  |   |   | 3,307,954  |  
|Net (loss) income            |  |                                | 101,687    |                                |   | (393,999                       | ) |                                    | (528,815   | ) |   | (1,439,011 | )
|                             |  |                                |            |                                |   |                                |   |                                    |            |   |   |            |  
|(Loss) earnings per share    |  |                                |            |                                |   |                                |   |                                    |            |   |   |            |  
|Basic                        |  | $                              | 0.02       |                                | $ | (0.07                          | ) | $                                  | (0.09      | ) | $ | (0.25      | )
|Diluted                      |  |                                | 0.02       |                                |   | (0.07                          | ) |                                    | (0.09      | ) |   | (0.25      | )

(1) Fourth quarter 2007 not
previously reported.

Earnings per share are
computed independently for each of the quarters presented, on the basis
described in Note 1.  The sum of the
quarters may not be equal to the full year earnings per share amount.

F-35

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES

SCHEDULE II

VALUATION
AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

|                                |  |                                  |         |                                  |           |                                        |  |                       |        |                           |   |         |  |   |         | 
|------------------------------- |  | -------------------------------- | ------- | -------------------------------- | --------- | -------------------------------------- |  | --------------------- | ------ | ------------------------- | - | ------- |  | - | ------- | 
|Col. A                          |  | Col. B                           |         | Col. C                           |           | Col. D                                 |  | Col. E                |       
|                                |  |                                  |         |                                  |           |                                        |  |                       |       
|                                |  |                                  |         |                                  | Additions |                                        |  |                       |        |                           |   |        
|                                |  |                                  |         |                                  |           |                                        |  |                       |        |                           |   |        
|Description                     |  | Balance at
 Beginning
 of Period |         | Charged
 to Costs
 and
 Expenses |           | Charged
 to Other
 Accounts-
 Describe |  | Deductions-
 Describe |        | Balance at
 End of Period |  
|                                |  |                                  |         |                                  |           |                                        |  |                       |        |                           |  
|Year ended December 31, 2007    |  |                                  |         |                                  |           |                                        |  |                       |        |                           |   |         |  |   |         | 
|Deducted
 from asset accounts:  |  |                                  |         |                                  |           |                                        |  |                       |        |                           |   |         |  |   |         | 
|Allowance for doubtful accounts |  | $                                | 983,791 |                                  | $         | 41,123                                 |  | $                     |       |                           | $ | 214,327 |  | $ | 810,587 | 
|Inventory allowance             |  |                                  | 415,539 |                                  |           | 180,000                                |  |                       |       |                           |   |        |  |   | 595,539 | 
|Warranty reserve                |  |                                  | 392,307 |                                  |           | 44,868                                 |  |                       |       |                           |   | 44,955  |  |   | 392,220 | 
|Year ended December 31, 2006    |  |                                  |         |                                  |           |                                        |  |                       |        |                           |   |         |  |   |         | 
|Deducted
 from asset accounts:  |  |                                  |         |                                  |           |                                        |  |                       |        |                           |   |         |  |   |         | 
|Allowance for doubtful accounts |  |                                  | 811,389 |                                  |           | 206,894                                |  |                       |       |                           |   | 34,492  |  |   | 983,791 | 
|Inventory allowance             |  |                                  | 31,539  |                                  |           | 384,000                                |  |                       |       |                           |   |        |  |   | 415,539 | 
|Warranty reserve                |  |                                  | 393,405 |                                  |           | 34,490                                 |  |                       |       |                           |   | 35,588  |  |   | 392,307 | 
|Year ended December 31, 2005    |  |                                  |         |                                  |           |                                        |  |                       |        |                           |   |         |  |   |         | 
|Deducted
 from asset accounts:  |  |                                  |         |                                  |           |                                        |  |                       |        |                           |   |         |  |   |         | 
|Allowance for doubtful accounts |  |                                  | 357,500 |                                  |           | 421,239                                |  |                       | 32,650 |                           |   |        |  |   | 811,389 | 
|Inventory allowance             |  |                                  | 50,000  |                                  |           | 55,000                                 |  |                       |       |                           |   | 73,461  |  |   | 31,539  | 
|Warranty reserve                |  |                                  | 351,451 |                                  |           | 43,950                                 |  |                       |       |                           |   | 1,996   |  |   | 393,405 | 

S - 1

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES

EXHIBIT INDEX

The following exhibits are
filed herewith as part of this Report on Form 10-K:

|                 |  |                                                                                                                                                                  |  |                    |     
|---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----
|Exhibit
  Number |  | Description of Document                                                                                                                                          |  | Method
  of Filing
|                 |  |                                                                                                                                                                  |  |                   
|3.1
            |  | Certificate of Incorporation of the Company                                                                                                                      |  |                    | (1) 
|                 |  |                                                                                                                                                                  |  |                   
|3.2
            |  | By-laws of the Company                                                                                                                                           |  |                    | (1) 
|                 |  |                                                                                                                                                                  |  |                   
|3.3
            |  | Certificate of Amendment of the Certificate of Incorporation of the
  Company, filed on July 5, 2001                                                             |  |                    | (2) 
|                 |  |                                                                                                                                                                  |  |                   
|3.4
            |  | Certificate of Amendment of the Certificate of Incorporation of the
  Company, filed on August 28, 2001                                                          |  |                    | (2) 
|                 |  |                                                                                                                                                                  |  |                   
|3.5
            |  | Certificate of Amendment of the Certificate of Incorporation of the
  Company, filed on August 9, 2005                                                           |  |                    | (3) 
|                 |  |                                                                                                                                                                  |  |                   
|3.6
            |  | Amended and Restated By-laws of the Company, filed on August 9,
2005                                                                                             |  |                    | (3) 
|                 |  |                                                                                                                                                                  |  |                   
|4.1
            |  | Specimen Common Stock Certificate of the Company                                                                                                                 |  |                    | (4) 
|                 |  |                                                                                                                                                                  |  |                   
|10.1
           |  | 2002 Stock Option Plan                                                                                                                                           |  |                    | (5) 
|                 |  |                                                                                                                                                                  |  |                   
|10.5
           |  | 1999 Incentive Stock Option Plan and form of Stock Option
Agreement                                                                                              |  |                    | (1) 
|                 |  |                                                                                                                                                                  |  |                   
|10.8
           |  | Office Lease between the Company and Eagle-DFW, Inc                                                                                                              |  |                    | (6) 
|                 |  |                                                                                                                                                                  |  |                   
|10.11
          |  | Agreement between the Company and Administaff, Inc                                                                                                               |  |                    | (7) 
|                 |  |                                                                                                                                                                  |  |                   
|10.12
          |  | Loan Agreement between the Company and Hudson United Bank                                                                                                        |  |                    | (8) 
|                 |  |                                                                                                                                                                  |  |                   
|10.13
          |  | Stock Purchase Agreement between the Company and Securus,
Inc                                                                                                    |  |                    | (9) 
|                 |  |                                                                                                                                                                  |  |                   
|10.14
          |  | Office Lease between the Company and C.K. Bergen Holdings,
LLC                                                                                                   |  |                    | (10)
|                 |  |                                                                                                                                                                  |  |                   
|10.15
          |  | Stock Purchase Agreement between the Company and CIS Security
  Systems, Corporation                                                                             |  |                    | (11)
|                 |  |                                                                                                                                                                  |  |                   
|10.16
          |  | 2006 Stock Option Plan                                                                                                                                           |  |                    | (12)
|                 |  |                                                                                                                                                                  |  |                   
|10.17
          |  | 2007 Stock Option
    Plan                                                                                                                                       |  |                    | (5) 
|                 |  |                                                                                                                                                                  |  |                   
|14.1
           |  | Code of Ethics                                                                                                                                                   |  |                    | (13)
|                 |  |                                                                                                                                                                  |  |                   
|14.2
           |  | Nominating Committee Charter                                                                                                                                     |  |                    | (14)
|                 |  |                                                                                                                                                                  |  |                   
|14.3
           |  | Audit Committee Charter                                                                                                                                          |  |                    | (14)
|                 |  |                                                                                                                                                                  |  |                   
|21.1
           |  | List of Subsidiaries                                                                                                                                             |  |                    | (*) 
|                 |  |                                                                                                                                                                  |  |                   
|23.1
           |  | Consent of Amper, Politziner & Mattia PC                                                                                                                         |  |                    | (*) 
|                 |  |                                                                                                                                                                  |  |                   
|23.2
           |  | Consent of Demetrius & Company, LLC                                                                                                                              |  |                    | (*) 
|                 |  |                                                                                                                                                                  |  |                   
|24
             |  | Power of Attorney (included on signature page (hereto)                                                                                                           |  |                    | (*) 
|                 |  |                                                                                                                                                                  |  |                   
|31.1
           |  | Certification of Chief Executive Officer pursuant to Rule 13a- 14 (a)
  or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley
  Act of 2002 |  |                    | (*) 
|                 |  |                                                                                                                                                                  |  |                   
|31.2
           |  | Certification of Chief Operating Officer pursuant to Rule 13a- 14 (a)
  or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley
  Act of 2002 |  |                    | (*) 
|                 |  |                                                                                                                                                                  |  |                   
|31.3
           |  | Certification of Chief Financial Officer pursuant to Rule 13a- 14(a)
  or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley
  Act of 2002  |  |                    | (*) 
|                 |  |                                                                                                                                                                  |  |                   
|32
             |  | Section 1350 Compliance                                                                                                                                          |  |                    | (*) 
|                 |  |                                                                                                                                                                  |  |                   
|99
             |  | Audit Committee Report                                                                                                                                           |  |                    | (*) 

46

---



HENRY BROS. ELECTRONICS, INC. AND
SUBSIDIARIES

(1)
Incorporated by reference to the Registration Statement on Form SB-2 File No.
333-94477, filed with the Securities and Exchange Commission on January 12,
2002(The Registration Statement).

(2) Incorporated
by reference to Amendment No. 4 to the Registration Statement filed with the
Securities and Exchange Commission on September 25, 2001.

(3)
Incorporated by reference to the Companys Current Report on Form 8-K, filed
with the Securities and Exchange Commission on August 9, 2005.

(4)
Incorporated by reference to Amendment No. 6 to the Registration Statement
filed with the Securities and Exchange Commission on November 13, 2001.

(5)
Incorporated by reference to the Companys Definitive Proxy on Form 14A, filed
with the Securities and Exchange Commission on September 27, 2002 for the 2002 Stock Option Plan and on November 9, 2007 for the 2007 Stock Option Plan.

(6)
Incorporated by reference to Post-Effective Amendment No. 1 to the Registration
Statement filed on February 8, 2001.

(7)
Incorporated by reference to the Companys Annual Report on 10-KSB for the
Company for the Year Ended December 31, 2004 filed with the Securities and
Exchange Commission on March 28, 2005.

(8)
Incorporated by reference to the Companys Current Report on Form 8-K, filed
with the Securities and Exchange Commission on July 7, 2005.

(9)
Incorporated by reference to the Companys Current Report on Form 8-K, filed
with the Securities and Exchange Commission on October 14, 2005.

(10)
Incorporated by reference to the Companys Current Report on Form 8-K, filed
with the Securities and Exchange Commission on June 2, 2006.

(11)
Incorporated by reference to the Companys Current Report on Form 8-K, filed
with the Securities and Exchange Commission on October 5, 2006.

(12)
Incorporated by reference to the Companys Definitive Proxy on Form 14A, filed
with the Securities and Exchange Commission on September 22, 2006.

(13)
Incorporated by reference to the Companys Annual Report on 10-KSB for the
Company for the Year Ended December 31, 2003 filed with the Securities and Exchange
Commission on April 1, 2004.

(14)
Incorporated by reference to the Companys Definitive Proxy on Form 14A, filed
with the Securities and Exchange Commission on July 5, 2005.

(15)
Incorporated by reference to the Companys Definitive Proxy on Form 14A, filed
with the Securities and Exchange Commission on November 9, 2007.

(*) Filed
herewith.

47

---