UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(Mark
One)


x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES AND


EXCHANGE
ACT OF 1934


FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2009




OR




 ̈ 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
            The
      NASDAQ Stock Market







Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  ̈
    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   ̈     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   ̈





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.  ̈





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  ̈   Non-accelerated
filer  ̈  
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   ̈    
No  x
..




At June
30, 2009, 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 $14,835,726 (based on
the closing price of the registrant’s common stock on the NASDAQ Stock
Market  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 8,
  2010Common
      Stock, par value $.01 per share
              
              6,035,366





Documents Incorporated by
Reference:       None








HENRY BROS. ELECTRONICS, INC.


Table of
Contents




PART
      IItem
      1. Business
                                                                                                        3Item
      1A.  Risk Factors
                                                                                                        7Item
      1B.  Unresolved Staff Comments
                                                                                                        9Item
      2. Properties
                                                                                                        9Item
      3. Legal Proceedings
                                                                                                        10Item
      4. (Removed and Reserved)
                                                                                                        10PART
      IIItem
      5. Market for Registrant’s Common Equity and Related Stockholder Matters
      and Issuer Purchases of Equity Securities
                                                                                                        10Item
      6. Selected Financial Data
                                                                                                        12Item
      7. Management's Discussion and Analysis of Financial Condition and Results
      of Operations
                                                                                                        12Item
      7A. Quantitative and Qualitative Disclosures About Market
    Risk
                                                                                                        19Item
      8. Financial Statements and Supplementary Data
                                                                                                        19Item
      9. Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
                                                                                                        19Item
      9A. Controls and Procedures
                                                                                                        20Item
      9B. Other Information
                                                                                                        20PART
      IIIItem
      10. Directors, Executive Officers and Corporate Governance
                                                                                                        21Item
      11. Executive Compensation
                                                                                                        23Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholders Matters
                                                                                                        29Item
      13. Certain Relationships and Related Transactions and Director
      Independence
                                                                                                        31Item
      14. Principal Accountant Fees and Services
                                                                                                        31PART
      IVItem
      15. Exhibits, Financial Statement Schedules
                                                                                                        32Signatures
                                                                                                        33Financial Statements and Accompanying
      Notes
                                                                                                        F-1




2





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 NASDAQ 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.





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 2008 revenue
the top 100 largest firms selling closed circuit TV (“CCTV”), access control and
integrated security systems.  We were ranked  No. 14 in
SDM's Top Systems Integrators Report published in July 2009. 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.


3





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 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.


4





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 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.


5





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 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 8, 2010, we had 205 full time employees, including officers, of whom: 113
were engaged in engineering, systems installation and maintenance services, 57
in administration and accounting, and 35 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, 2009, the dollar amount of backlog believed to be firm was
$28,021,794. At December 31, 2008, our backlog was $23,701,243.




All
orders are subject to modification or cancellation by the customer within the
limits of contractual agreements . We believe that backlog alone is not an
indicator 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 .





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.




Current
economic conditions may cause a decline in business spending which could
adversely affect our business and financial performance.




Our
operating results are impacted by the health of the U.S economy.  Our
business and financial performance may be adversely affected by current and
future economic conditions, such as a reduction in the availability of credit to
our customers and recession.




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 our largest customer accounted for 9.1% of
total revenue during 2009, with our five largest customers represented
approximately 22.9% of our 2009 revenue. Revenues from governmental agencies
accounted for 34.2 % in 2009, versus 36.7% and 40.7% in 2008 and 2007,
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.




7





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, 2009, the dollar amount of backlog believed
to be firm was $28.021,794.




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, 2009, 2008 and 2007 our revenues were $55,105,469,
$62,357,466 and $57,852,216, respectively.  Our net loss was $823,957
for the year ended December 31, 2009.  We had net income of $1,557,756
for the year ended December 31, 2008 and a net loss of $303,304 for the year
ended December 31, 2007.  Accordingly, 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.




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.


8





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.




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 Nasdaq Stock Market.  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.




·
            8,980 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 $113,148 and has an annual escalation
      clause, payable in equal monthly installments of $9,429, 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.


·
            3,000
      square foot sales, office and warehouse facility in Houston, Texas. 
      A single-story, brick veneer building in an office complex, this space is
      leased until February 28, 2012 at an annual rental of $18,000, 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 September  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.




9





·
            7,636 square foot sales, office
      and warehouse facility in Wheat Ridge, Colorado. This facility is in a
      single-story, multi-office complex. The lease on this space terminates May
      2014 and provides for an average annual rent of $55,068 and has an annual
      escalation clause, payable in initial monthly installments of $4,773, 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.  This
      facility is in a single story multi-office complex.  The lease
      terminates July 2012 and provides for an annual rent of $19,800 and has an
      annual escalation clause, payable in monthly installments of $1,650, 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.  This facility is
      in a single story multi-office complex.  The annual rent is
      $83,738 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.  This facility is in a single
      story brick multi-office complex. The annual rent is $29,722 and has an
      annual escalation clause.  The lease expires on August 31, 2011.
      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





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





Item
4.  (Removed and Reserved)




PART
II




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





On
October 1, 2008, we switched the listing of our common stock from the American
Stock Exchange (“AMEX”) to The Nasdaq Stock Market® (“NASDAQ”). Our common
stock, $.01 par value per share, is now traded under the symbol NASDAQ: HBE. The
following table presents high and low sales prices of our common stock as
reported on the NASDAQ or AMEX, as appropriate, for the periods
indicated:


10





The following table indicates high and low stock prices for each
period.





2009
                    
                    High
                    
                    
                    LowFirst
      Quarter
                    
                    $
                    7.52
                    
                    
                    $
                    5.50Second
      Quarter
                    
                    $
                    7.34
                    
                    
                    $
                    5.58Third
      Quarter
                    
                    $
                    6.00
                    
                    
                    $
                    4.40Fourth
      Quarter
                    
                    $
                    5.49
                    
                    
                    $
                    3.792008
                    
                    High
                    
                    
                    LowFirst
      Quarter
                    
                    $
                    5.00
                    
                    
                    $
                    4.14Second
      Quarter
                    
                    $
                    6.55
                    
                    
                    $
                    4.95Third
      Quarter
                    
                    $
                    7.10
                    
                    
                    $
                    5.52Fourth
      Quarter
                    
                    $
                    6.80
                    
                    
                    $
                    4.73




(a)
            Number of Holders of Common
      Stock.  The number of holders of record of our Common Stock on
      December 31, 2008 was 36. 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.  On November 11, 2009, the Company's Certificate of
      Incorporation was amended to increase the number of the Company's
      authorized shares of Common Stock from 10,000,000 shares to 20,000,000
      shares.




(b)
            Dividends.  There were
      no cash dividends or other cash distributions made by us during the years
      ended December 31, 2009 and 2008.  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.




(c)
            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.  These
      shares held in escrow 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. 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.




(d)
            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.   The Company issued an
      additional 55,000 shares of its restricted common stock since the
      acquisition 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 25,000
      shares of the Company’s common stock if CIS achieves certain performance
      targets through December 2011
..




(e)
            Securities authorized for
      issuance under equity compensation
plans.




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




11





Item
6.   Selected Financial Data





Years ended December 31,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Results
      of operations:Net
      revenues
                
                $
                55,105,469
                
                
                
                62,357,466
                
                
                $
                57,852,216
                
                
                $
                42,132,852
                
                
                $
                42,156,188Cost
      of revenue
                
                
                40,848,553
                
                
                
                46,465,194
                
                
                
                45,076,126
                
                
                
                30,818,832
                
                
                
                31,581,187Selling,
      general and administrative
                
                
                14,985,849
                
                
                
                12,797,730
                
                
                
                12,695,509
                
                
                
                12,720,381
                
                
                
                8,422,193Net
      (loss) income
                
                
                (823,957)
                
                
                
                1,557,756
                
                
                
                (303,304
                )
                
                
                (2,260,138
                )
                
                
                1,137,974Per
      common share:Net
      (loss) incomeBasic
                
                $
                (0.14)
                
                
                
                0.27
                
                
                $
                (0.05
                )
                
                $
                (0.39
                )
                
                $
                0.20Diluted
                
                
                (0.14)
                
                
                
                0.26
                
                
                
                (0.05
                )
                
                
                (0.39
                )
                
                
                0.20Cash
      dividends declared
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Financial
      position at year-end:Total
      assets
                
                $
                32,692,295
                
                
                
                36,610,108
                
                
                $
                32,331,570
                
                
                $
                31,371,609
                
                
                $
                25,161,530Long
      term debt, net of current portion
                
                
                4,830,517
                
                
                
                4,855,662
                
                
                
                465,539
                
                
                
                3,463,236
                
                
                
                727,961Total
      Liabilities
                
                
                16,751,915
                
                
                
                20,551,151
                
                
                
                18,397,478
                
                
                
                17,360,991
                
                
                
                9,178,564Shareholders'
      equity
                
                
                15,940,380
                
                
                
                16,058,957
                
                
                
                13,934,092
                
                
                
                14,010,618
                
                
                
                15,982,966




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 the Company’s segments markets 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.




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.




12





Trends




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:




In
June 2009, the FASB issued guidance now codified as FASB ASC Topic 105,
“Generally Accepted Accounting Principles,” as the single source of
authoritative nongovernmental U.S. GAAP. FASB ASC Topic 105 does not change
current U.S. GAAP, but is intended to simplify user access to all authoritative
U.S. GAAP by providing all authoritative literature related to a particular
topic in one place. All existing accounting standard documents will be
superseded and all other accounting literature not included in the FASB
Codification will be considered non-authoritative. These provisions of FASB ASC
Topic 105 are effective for interim and annual periods ending after
September 15, 2009 and, accordingly, are effective for the Company for the
current fiscal reporting period. The adoption of this pronouncement did not have
an impact on the Company’s financial condition or results of operations, but
will impact our financial reporting process by eliminating all references to
pre-codification standards. On the effective date of this Statement, the
Codification superseded all then-existing non-SEC accounting and reporting
standards, and all other non-grandfathered non-SEC accounting literature not
included in the Codification became non-authoritative.





In April
2008, the FASB issued additional guidance within ASC 350-30, General Intangibles
Other than Goodwill (“ASC 350-30”). The required provisions within ASC 350-30
amend the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under the prior guidance within ASC 350  Intangibles – Goodwill and
Other . The guidance shall be applied prospectively to intangible assets
acquired after adoption, and the disclosure requirements shall be applied
prospectively to all intangible assets recognized as of, and subsequent to,
adoption.  ASC 350-30 is intended to improve the consistency between
the useful life of an intangible asset determined under prior requirements
within ASC 350 and the period of expected cash flows used to measure the fair
value of the asset under ASC 805 and other GAAP. We have evaluated the new
statement and have determined that it does not have a significant impact on the
determination ore reporting of our financial results.





In April
2009, the FASB amended Fair Value Accounting to provides additional guidance for
estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased and also provides guidance on identifying
circumstances that indicate a transaction is not orderly. We have evaluated the
new statement and have determined the adoption did not have a material impact on
the Consolidated Financial Statements.





In
May 2009, the FASB issued guidance now codified as FASB ASC Topic 855,
“Subsequent Events,” which establishes general standards of accounting for, and
disclosures of, events that occur after the balance sheet date but before
financial statements are issued. This pronouncement is effective for interim or
fiscal periods ending after June 15, 2009. The adoption of this
pronouncement did not have a material impact on our consolidated financial
position, results of operations or cash flows. However, the provisions of FASB
ASC Topic 855 resulted in additional disclosures with respect to subsequent
events. The Company evaluated all events or transactions that occurred after
December 31, 2009 up through the date we filed this annual report on Form
10-K.  During this period no material subsequent events came to our
attention.





In
April 2009, the FASB issued guidance now codified as FASB ASC Topic 825,
“Financial Instruments,” which amends previous Topic 825 guidance to require
disclosures about fair value of financial instruments in interim as well as
annual financial statements. This pronouncement is effective for periods ending
after June 15, 2009. The adoption of this pronouncement did not have a
material impact on our consolidated financial position, results of operations or
cash flows.


13





Critical Accounting Policies and
Estimates




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 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 2007, 2008 and 2009,
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.




14





Intangible Assets




The
Company’s intangible assets include goodwill and other intangibles. Other
intangibles 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. Collectively, these
assets which affect the amount of future period amortization expense and
possible impairment expense that we will incur. Management’s judgments regarding
the existence of impairment indicators are based on various factors, including
market conditions and operational performance of our business. As of December
31, 2009 and 2008, we had $4,674,232 and $4,608,745, respectively, of goodwill
and other intangibles, accounting for 14.3% and 12.6% of our total assets at the
respective dates. The goodwill is not amortizable; the majority of other
intangibles are. The determination of the value of such intangible assets
requires management to make estimates and assumptions that affect our
consolidated financial statements. We test our goodwill for impairment, at least
annually. This test is conducted in December of each year in connection with the
annual budgeting and forecast process. Also, on a quarterly basis, we evaluate
whether events have occurred that would negatively impact the realizable value
of our intangibles or goodwill.




Effective
January 1, 2002, the Company adopted the provisions of FASB ASC
350 “Goodwill and Other”.   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 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 FASB ASC 350. 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 FASB ASC 350, and evaluate each reporting unit
for impairment.





We
completed our annual goodwill impairment analysis as of December 31, 2009. Our
assessment did not result in good will impairment. Significant assumptions used
in the include revenue growth, margins and discount rates. We used historical
performance and management estimates of future performance to determine margins
and growth rates. Of reporting units with goodwill, these entities had a
combined fair value that is in excess of its carrying value by approximately
147%. However, there were certain individual entities that, while not requiring
an impairment expense in 2009, given the current economic climate, resulted in a
reduction in the fair value that is in excess of its carrying value compared to
the impairment  analysis conducted in 2008.  Considerable
management judgment is necessary to evaluate the impact of operating changes and
to estimate future cash flows. Changes in our actual results and/or estimates or
any of our other assumptions used in our analysis could result in a different
conclusion.





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.


15





Comparison
of the year ended December 31, 2009 to the year ended December 31,
2008





Analysis
of consolidated statement of operations


For the years ended December
      31,2009
                  
                  
                  2008
                  
                  
                  % changeRevenue
                  
                  $
                  55,105,469
                  
                  
                  $
                  62,357,466
                  
                  
                  
                  -11.6
                  %Cost
      of revenue
                  
                  
                  40,848,553
                  
                  
                  
                  46,465,194
                  
                  
                  
                  -12.1
                  %Gross
      profit
                  
                  
                  14,256,916
                  
                  
                  
                  15,892,272
                  
                  
                  
                  -10.3
                  %Operating
      expenses:Selling,
      general & administrative expenses
                  
                  
                  14,985,849
                  
                  
                  
                  12,797,730
                  
                  
                  
                  17.1
                  %Operating
      (loss) profit
                  
                  
                  (728,933
                  )
                  
                  
                  3,094,542
                  
                  
                  
                  -123.6
                  %Interest
      income
                  
                  
                  28,610
                  
                  
                  
                  91,558
                  
                  
                  
                  -68.8
                  %Other
      income
                  
                  
                  38,885
                  
                  
                  
                  17,266
                  
                  
                  
                  125.2
                  %Interest
      expense
                  
                  
                  (280,911
                  )
                  
                  
                  (271,290
                  )
                  
                  
                  3.5
                  %(Loss)
      income before tax expense
                  
                  
                  (942,349
                  )
                  
                  
                  2,932,076
                  
                  
                  
                  -132.1
                  %Tax
      (benefit) expense
                  
                  
                  (118,392
                  )
                  
                  
                  1,374,320
                  
                  
                  
                  -108.6
                  %Net
      (loss) income
                  
                  $
                  (823,957
                  )
                  
                  $
                  1,557,756
                  
                  
                  
                  -152.9
                  %





Revenue - Revenue for the year
ended December 31, 2009 was $55,105,469, representing a decrease of $7,251,997
or 11.6%, as compared to revenue of $62,357,466 for the year ended December 31,
2008.   Revenue was down in the Company’s New Jersey, California,
Arizona, and Mid-Atlantic regions in 2009 versus 2008.  The New Jersey
region had the greatest decrease, as a result of the winding down of large
projects that were not replaced by similar projects due to competitive margin
pressure in the marketplace.   The overall declines in revenues are also
due to the protracted credit freeze and economic downturn, which is having a
significant negative impact on construction markets and capital spending
patterns of commercial businesses. Partially offsetting these declines was an
increase in revenue resulting from the L-3 Contract (in February 2008, the
Company entered into a subcontractor agreement with Global Security &
Engineering Solutions, a division of L-3 Services,
Inc.      (“L-3”) pursuant to which L-3 would
issue task orders under its Indefinite Quantity Firm Fixed Price Contract with
the U.S. Marine Corp Systems Command to deliver a Tactical Video Capture System
(“TVCS”))., and increases in the Colorado and Texas regions, which were up 12.4%
on a combined basis. The L-3 contract generated $3.5 million incremental revenue
in 2009 over 2008 and the Company’s Airorlite business also had a modest
increase in 2009 over the prior year.




Cost of Revenue - Cost of
revenue for the year ended December 31, 2009 was $40,848,553 as compared to
$46,465,194 for the year ended December 31, 2008. While gross profit dollars
were lower in 2009 versus 2008, principally as a result of the lower revenues,
the gross profit margin for the year ended December 31, 2009 was 25.9% as
compared to 25.5% for the year ended December 31, 2008.   In the first
quarter of 2008, our Airorlite subsidiary incurred significant losses in order
to complete work on certain open contracts which depressed gross profit for that
period in 2008.  Our New Jersey, Arizona, Mid-Atlantic and California
Banking operations had both lower period-over-period gross profit margin and
gross profit dollars due to a combination of: 1) decline in revenues; 2)
competitive pricing of projects given the current economy, and 3) cost overruns
on a limited number of projects.   The L-3 Contract generated
profit during the year ended December 31, 2009, albeit at a lower margin percent
than the Company’s overall gross margin.





Selling, General and Administrative
Expenses - Selling, general and administrative expense was $14,985,849
for the year ended December 31, 2009 as compared to $12,797,730 for the year
ended December 31, 2008. This increase of $2,188,119 or 17.1% was mainly
attributable to higher personnel related costs, higher bad debt expense and
professional fees, and lower overhead absorption into cost of goods sold due to
the lower revenues in 2009 compared to 2008. As part of our strategic growth
initiative, we have increased our sales force starting in the last quarter of
2008 and continuing throughout the third quarter of 2009.   This
initiative was implemented in order to take advantage of an anticipated increase
in security spending related to public projects and the expansion of the
Company’s national footprint into Houston, Texas.  Higher training
costs for our sales and technical staff, as well as costs for an internet based
service program, were also incurred during 2009 compared with 2008, which
contributed to the overall increase.




Interest Income – Interest
income for the year ended December 31, 2009 was $28,610 as compared to $91,558
for the year ended December 31, 2008.  This decrease was attributable
to lower average cash balances during the nine month period ended December 31,
2009 versus the same period in the prior year.




Interest Expense - Interest
expense for the year ended December 31, 2009 was $280,911 as compared to
$271,290 for the year ended December 31, 2008.  While the average
outstanding revolving debt balance was $1,362,901 higher in the year ended
December 31, 2009 versus that in the year ended December 31, 2008, the average
prime rate of interest paid was 155 basis points lower in the 2009 period than
it was in 2008 resulting in the lower interest expense.


16




Tax Expense –A tax benefit of
$118,392, based upon a loss before taxes of  $942,349 was realized for
the year ending December 31, 2009. The effective tax rate for the year
ended December 31, 2009 was 12.6%, The tax rate is a result of the Company
operating in multiple states and jurisdictions with higher tax rates, combined
with the impact of being unable to claim certain state tax benefits on
subsidiary losses.  Tax expense for the year ended December 31, 2008
was $1,374,320.  This provision was driven primarily as a result of
the Company operating in multiple states and jurisdictions with higher tax
rates, combined with the impact of being unable to claim a state tax benefit on
the Airorlite subsidiary losses.


Net (Loss) Income - As a
result of the above noted factors our net loss was $823,957 for the year ended
December 31, 2009 compared to net income of $1,557,756 for the year ended
December 31, 2008. This resulted in diluted loss per share of $0.12 on
weighted average diluted common shares outstanding of 5,865,187 for the year
ended December 31, 2009, as compared to diluted earnings per share of $0.26 on
weighted average diluted common shares outstanding of 5,988,782 for the year
ended December 31, 2008.





Comparison
of the year ended December 31, 2008 to the year ended December 31,
2007





Analysis
of consolidated statement of operations





For the years ended December
    312008
                  
                  
                  2007
                  
                  
                  % changeRevenue
                  
                  $
                  62,357,466
                  
                  
                  $
                  57,852,216
                  
                  
                  
                  7.8
                  %Cost
      of revenue
                  
                  
                  46,465,194
                  
                  
                  
                  45,076,126
                  
                  
                  
                  3.1
                  %Gross
      profit
                  
                  
                  15,892,272
                  
                  
                  
                  12,776,090
                  
                  
                  
                  24.4
                  %Operating
      expenses:Selling,
      general and administrative expenses
                  
                  
                  12,797,730
                  
                  
                  
                  12,695,509
                  
                  
                  
                  0.8
                  %Goodwill
      and intangible asset impairment charges
                  
                  
                  -
                  
                  
                  
                  43,999
                  
                  
                  
                  -100.0
                  %Operating
      profit
                  
                  
                  3,094,542
                  
                  
                  
                  36,582
                  
                  
                  
                  8359.3
                  %Interest
      income
                  
                  
                  91,558
                  
                  
                  
                  73,493
                  
                  
                  
                  24.6
                  %Other
      income (expense)
                  
                  
                  17,266
                  
                  
                  
                  (191
                  )
                  
                  
                  -9152.6
                  %Interest
      expense
                  
                  
                  (271,290
                  )
                  
                  
                  (349,907
                  )
                  
                  
                  -22.5
                  %Income
      (loss) before tax expense
                  
                  
                  2,932,076
                  
                  
                  
                  (240,023
                  )
                  
                  
                  1321.6
                  %Provision
      for income taxes
                  
                  
                  1,374,320
                  
                  
                  
                  63,281
                  
                  
                  
                  2071.8
                  %Net
      income (loss)
                  
                  $
                  1,557,756
                  
                  
                  $
                  (303,304
                  )
                  
                  
                  613.6
                  %





Revenue - Revenue for the year
ended December 31, 2008 was $62,357,466 representing an increase of $4,505,250
or 7.8%, as compared to revenue of $57,852,216 for the year ended December 31,
2007.  Arizona operations continued to show significant revenue
improvement as revenues from its top three customers showed year over year
increases.  Improved revenues from our Colorado and Virginia
operations also contributed to the higher revenues for the year ended December
31, 2008, compared to the same period in the prior year.  These
increases were partially offset by a decline in revenue from our California
Banking operations, as well as from our Airorlite subsidiary.  While
up significantly from preceding years, New Jersey / New York’s revenues were
flat in 2008 compared to 2007.  A significant portion of the revenues
in both years for New Jersey / New York resulted from work completed for several
large public agencies in the New York Metropolitan area.  In February
2008, the Company entered into a subcontractor agreement with Global Security
& Engineering Solutions, a division of L-3 Services,
Inc.      (“L-3”) pursuant to which L-3 would
issue task orders under its Indefinite Quantity Firm Fixed Price Contract with
the U.S. Marine Corp Systems Command to deliver a Tactical Video Capture System
(“TVCS”).  TVCS is used for real-time visualization and situational
awareness while Marine units are conducting military operations in urban terrain
training exercises.  The performance period of the contract is three
years.  In 2008, the revenue recognized under this contract
represented $2.6 million and there were outstanding task orders included in our
backlog of approximately $2.3 million at December 31, 2008.


17




Selling, General and Administrative
Expenses - Selling, general and administrative expenses were $12,797,730
for the year ended December 31, 2008 as compared to $12,695,509 for the year
ended December 31, 2007. This increase of 0.8% or $102,221 was mainly
attributable to higher vehicle expense due to increased fuel costs during 2008,
higher stock option expense and a net increase in bad debt expense for the
current year period, partially offset by improved labor utilization, lower
professional fees, and lower depreciation and amortization of intangibles
expense.





Interest Income – Interest
income for the year ended December 31, 2008 was $91,558 as compared to $73,493
for the year ended December 31, 2007.  This increase was attributable
to higher cash balances during the twelve month period ended December 31, 2008
versus the same period in the prior year.




Interest Expense - Interest
expense for the year ended December 31, 2008 was $271,290 as compared to
$349,907 for the year ended December 31, 2007.  Although the average
outstanding debt balance was only $171,391 higher in the twelve month period
ended December 31, 2008 versus that in the year ended December 31, 2007, the
average prime rate of interest paid was 301 basis points lower in the 2008
period than it was in 2007.




Tax Expense–Tax expense
for the year ended December 31, 2008 was $1,374,320.  This provision
was driven primarily as a result of the Company operating in multiple states and
jurisdictions with higher tax rates, combined with the impact of being unable to
claim a state tax benefit on the Airorlite subsidiary losses. Tax expense
for the year ended December 31, 2007 was $63,281.  This provision was
driven primarily by profitability in states with higher income tax
rates.





Net Income (Loss) - As a
result of the above noted factors our net income was $1,557,756 for the year
ended December 31, 2008 compared to a net loss of $303,304 for the year ended
December 31, 2007. This resulted in diluted earnings per share of $0.26 on
weighted average diluted common shares outstanding of 5,988,782 for the year
ended December 31, 2008, as compared to diluted loss per share of $0.05 on
weighted average diluted common shares outstanding of 5,768,864 for the year
ended December 31, 2007.




Liquidity and Capital
Resources – As of
December 31, 2009, we had cash and cash equivalents of $2,917,046.




Our
net current assets were $13,748,868 at December 31, 2009 versus $13,944,121 at
December 31, 2008. Total debt at December 31, 2009 was $5,367,070 compared to
the December 31, 2008 balance of $5,485,404.





Cash provided by operating
activities was $3,704,388 during the year ended December 31,
2009.  The most significant source of cash resulted from a net
decrease in accounts receivable and retainage receivable of $5,794,746, and
$1,460,554, respectively.  This was partially offset by a decrease in
accounts payable and accrued expenses of $1,566,894 and $1,326,558,
respectively, and an increase in prepaid expenses and income taxes receivable of
$545,537.




Cash used
in investing activities was $519,919.  The most significant
expenditures were for computer and software purchases and earn-out payments
related to the CIS acquisition, and a minor acquisition of another business in
2009.




Cash from
financing activities used $295,129, representing the final payoff of the term
loan and capital lease payments, partially offset by proceeds from stock option
exercises of $203,669.




We
currently have an $8 million revolving credit facility with TD
Bank.   Borrowings under the revolving credit facility were
$4,335,898, at December 31, 2009. It is our expectation and intent to use cash
from operations 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.   The
Company is required to maintain certain financial and reporting covenants and
restrictions on dividend payments under the terms of the Loan Agreement with TD
Bank, N.A. (See Note 8 to the Consolidated Financial Statements included in this
Annual Report on Form 10-K).





Backlog
and Bookings




Booked
orders of $59,426,020 for the year ended December 31, 2009 were general flat as
compared to $59,491,543 for the year ended December 31, 2008. The Company’s
backlog as of December 31, 2009 was $28,021,794 and was $23,701,243 at December
31, 2008.  The primary factor for the increase in the backlog is
attributable to the several large public agency jobs in New Jersey / New York
for which we were awarded the contracts to in the fourth quarter of 2009, as
well as increased bookings in our California integration and Texas operations,
partially offset by lower bookings related to the L-3 Contract. Booked orders
increased $2,874,564 to $59,491,543 in the year ended December 31, 2008 as
compared to $56,616,979 in the corresponding period of 2007.


18





DIVIDENDS




We have
not declared cash dividends on our common equity. The payment of dividends is
prohibited under the existing credit agreement with TD Bank, N. A.  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 and costs 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, 2009, the Company’s contractual obligations, including payments due
by period, are as follows:


Payment
      due by period2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  2014
                  
                  
                  Thereafter
                  
                  
                  TotalLong-term
      debt Obligations
                  
                  $
                  -
                  
                  
                  $
                  4,335,898
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  4,335,898Interest
      Obligations on Long-term debt
                  
                  
                  173,436
                  
                  
                  
                  86,718
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  260,154Capital
      Lease Obligations
                  
                  
                  347,018
                  
                  
                  
                  358,332
                  
                  
                  
                  218,595
                  
                  
                  
                  87,386
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,011,331Short-term
      debt
                  
                  
                  194,665
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  194,665$
                  715,119
                  
                  
                  $
                  4,780,948
                  
                  
                  $
                  218,595
                  
                  
                  $
                  87,386
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  5,802,048





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, 2009 and
2008 there was $4,335,898 outstanding under this revolving credit
facility.





Item
8.  Financial Statements and Supplementary Data




Refer to
pages F-1 through F-24.




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





None.





19





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, 2009. 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, 2009,
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




·
            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, 2009. 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, 2009, 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
2009 that have materially affected or are reasonably likely to materially affect
our internal control over financial reporting.




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





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.


20





PART III




Item 10.     
 Directors, Executive Officers and
Corporate




Identification
of Directors (ages are as of March 8, 2010):


DirectorName
                
                Age
                
                Position(s) with
      the  Company
                
                SinceRichard
      D. Rockwell
                
                54
                
                Chairman
      and Director
                
                2007James
      E. Henry
                
                56
                
                Vice-Chairman,
      Chief Executive Officer, Treasurer and Director
                
                1998Brian
      Reach.
                
                55
                
                President,
      Chief Operating Officer, Secretary and Director
                
                2004Robert
      L. De Lia Sr
                
                62
                
                Director
                
                2004James
      W. Power
                
                80
                
                Director
                
                2005Joseph
      P. Ritorto
                
                78
                
                Director
                
                2002David
      Sands
                
                53
                
                Director
                
                2005OfficerName
                
                Age
                
                Position(s) with
      the  Company
                
                SinceJames
      E. Henry
                
                56
                
                Vice-Chairman,
      Chief Executive Officer, Treasurer and Director
                
                1998Brian
      Reach.
                
                55
                
                President,
      Chief Operating Officer, Secretary and Director
                
                2004John
      P. Hopkins
                
                49
                
                Chief
      Financial Officer
                
                2006Brian
      J. Smith
                
                55
                
                Corporate
      Controller
                
                2007Christopher
      Peckham
                
                44
                
                Chief
      Information Officer / Chief Security Officer
                
                2007





Richard
D. Rockwell has served as a director of the Company since November 2007. In
December 2009, Mr. Rockwell was named Chairman of the Company's Board of
Directors, having previously served as Vice Chairman since November 2008. Mr.
Rockwell also serves the Company's Executive Committee as Chairman. Mr. 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 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.





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. Globix’s common stock is traded on the OTC
Bulletin Board. 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,
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.





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.


21





James
W. Power has been a member of our Board since December 2005. Mr. Power, 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.




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. Mr. Ritorto sold First Aviation Services to a
group led by Goldman Sachs in May 2008.  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.




David
Sands has been a member of our Board 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.




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.




Christopher
Peckham was appointed Chief Information Officer / Chief Security Officer in
September 2007.  Prior to joining the Company, Mr. Peckham was
Director of Operations with Sungard Higher Education from 2003.  From
1999 to 2003, Mr. Peckham served in several VP positions at Globix Corporation
in the areas of Network and Systems Engineering, Operations, and Information
Technology.  Prior to that, he held positions in networking and
systems at Icon CMT, PFMC, and NJIT.  Mr. Peckham received the B.S.,
M.S., and Ph.D. degrees in electrical engineering from the New Jersey Institute
of Technology and a MBA from Rutgers 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, 2009, 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, 2009, 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 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
NASDAQ.


22





Item
11.     Executive Compensation




Summary
Compensation Table




The
following table sets forth summary information concerning the annual
compensation for the years ended December 31, 2009 and 2008 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, 2009:




Salary
                                          
                                          
                                          Bonus
                                          
                                          
                                          Option
                                            Awards
                                          
                                          
                                          All Other
                                            compensation
                                          
                                          
                                          TotalName and Principal Position
                                          
                                          Year
                                          
                                          ($)
                                          
                                          
                                          ($)
                                          
                                          
                                          ($)(1)
                                          
                                          
                                          ($) (2)
                                          
                                          
                                          ($)James
      E Henry, Vice-Chairman,
                                          
                                          2009
                                          
                                          
                                          213,927
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          750
                                          
                                          
                                          
                                          214,677Chief
      Executive Officer, Treasurer
                                          
                                          2008
                                          
                                          
                                          180,131
                                          
                                          
                                          
                                          36,050
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          216,181and
      Director
                                          
                                          2007
                                          
                                          
                                          174,148
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          174,148Brian
      Reach, President, Chief Operating
                                          
                                          2009
                                          
                                          
                                          213,927
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          7,050
                                          
                                          
                                          
                                          220,977Officer, Secretary
      and Director
                                          
                                          2008
                                          
                                          
                                          180,131
                                          
                                          
                                          
                                          36,050
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          6,300
                                          
                                          
                                          
                                          222,4812007
                                          
                                          
                                          173,019
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          10,626
                                          
                                          
                                          
                                          6,281
                                          
                                          
                                          
                                          189,926John
      P. Hopkins, Chief Financial Officer
                                          
                                          2009
                                          
                                          
                                          199,388
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          6,750
                                          
                                          
                                          
                                          206,1382008
                                          
                                          
                                          180,131
                                          
                                          
                                          
                                          33,050
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          6,000
                                          
                                          
                                          
                                          219,1812007
                                          
                                          
                                          175,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          31,879
                                          
                                          
                                          
                                          6,500
                                          
                                          
                                          
                                          213,379Brian
      J. Smith (3)
                                          
                                          2009
                                          
                                          
                                          164,478
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          6,000
                                          
                                          
                                          
                                          170,4782008
                                          
                                          
                                          147,971
                                          
                                          
                                          
                                          17,803
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          6,000
                                          
                                          
                                          
                                          171,7742007
                                          
                                          
                                          100,223
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          12,035
                                          
                                          
                                          
                                          4,250
                                          
                                          
                                          
                                          116,508Christopher
      Peckham (4)
                                          
                                          2009
                                          
                                          
                                          149,260
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          5,550
                                          
                                          
                                          
                                          154,8102008
                                          
                                          
                                          125,926
                                          
                                          
                                          
                                          25,189
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          4,800
                                          
                                          
                                          
                                          155,9152007
                                          
                                          
                                          36,058
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          5,407
                                          
                                          
                                          
                                          1,400
                                          
                                          
                                          
                                          42,865





(1)
Represents the dollar amount recognized for financial statement reporting
purposes with respect to the years ended December 31, 2007 and 2006 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, 2009.
 
 (2) For
Mssrs. Hopkins, Smith and Peckham represents auto allowances. For Mr. Reach
represents medical premium reimbursement. For Mssrs. Henry, Reach, Hopkins and
Peckham, also includes 401(k) Plan matching contribution from the
Company.
 
 (3)
Effective April 14, 2007 Mr. Smith became the Corporate Controller.
 
 (4)
Effective September 10, 2007 Mr. Peckham became the Chief Information Officer /
Chief Security Officer.




Grants
of Plan-Based Awards in 2009





There
were no grants of stock options under our existing stock option plans issued by
us during 2009 to executive officers named in the Summary Compensation
Table.


23





Outstanding
Equity Awards at December 31, 2009





The
following table contains information concerning unexercised options held as of
December 31, 2009 by the executive officers named in the Summary Compensation
Table:




Option AwardsNumber of
                                  Securities
                                  Underlying
                                  Options
                                  Exercisable
                                
                                
                                Number of
                                  Securities
                                  Underlying
                                  Options
                                  Unexercisable
                                
                                
                                Equity IncentivePlan
                                  Awards:Number of
                                  SecuritiesUnderlying
                                  UnexercisedUnearned
                                  Options
                                
                                
                                Option
                                  Exercise
                                  Price
                                
                                Option
                                  ExpirationName
                                
                                (#)
                                
                                
                                (#)
                                
                                
                                (#)
                                
                                
                                ($)
                                
                                DateBrian
      Reach
                                
                                
                                100,000
                                (1)
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                7.10
                                
                                5/31/2010Brian
      Reach
                                
                                
                                30,000
                                (2)
                                
                                
                                20,000
                                (2)
                                
                                
                                -
                                
                                
                                
                                3.71
                                
                                8/8/2012John
      P. Hopkins
                                
                                
                                90,000
                                (3)
                                
                                
                                60,000
                                (3)
                                
                                
                                -
                                
                                
                                
                                3.71
                                
                                8/8/2012Brian
      Smith
                                
                                
                                16,000
                                
                                
                                
                                24,000
                                (4)
                                
                                
                                -
                                
                                
                                
                                4.26
                                
                                5/14/2013Brian
      Smith
                                
                                
                                4,000
                                
                                
                                
                                6,000
                                (5)
                                
                                
                                -
                                
                                
                                
                                4.11
                                
                                11/8/2013Christopher
      Peckham
                                
                                
                                20,000
                                
                                
                                
                                30,000
                                (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.(5)
      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.(6)
      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.   For the year ended December 31,
2009, all of our outside Directors, that is, Directors who are not employees or
full-time consultants of the Company, each received compensation as
follows:


24





Fees
                            Earned or
                            Paid in
                            Cash
                          
                          
                          Option
                            Awards
                          
                          
                          TotalName
                          
                          $(1)
                          
                          
                          $(2)
                          
                          
                          ($)Richard
      D. Rockwell
                          
                          
                          13,250
                          
                          
                          
                          5,840
                          (3)
                          
                          
                          19,090Robert
      De Lia, Sr.
                          
                          
                          13,250
                          
                          
                          
                          5,840
                          (4)
                          
                          
                          19,090James
      W. Power
                          
                          
                          13,250
                          
                          
                          
                          5,840
                          (5)
                          
                          
                          19,090Joseph
      P. Ritorto
                          
                          
                          13,250
                          
                          
                          
                          5,840
                          (6)
                          
                          
                          19,090David
      Sands
                          
                          
                          13,250
                          
                          
                          
                          5,840
                          (7)
                          
                          
                          19,090


(1)  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.




(2)  Represents
the dollar amount recognized for financial statement reporting purposes with
respect to the year ended December 31, 2008 for the fair value of the option
granted to the named Director.  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, 2008.





(3)  At
December 31, 2008, Mr. Rockwell held options to purchase 4,000 shares of Common
Stock.




(4)  At
December 31, 2008, Mr. De Lia, Sr. held options to purchase 14,000 shares of
Common Stock.




(5)   At
December 31, 2008, Mr. Power held options to purchase 12,000 shares of Common
Stock.





(6)  At
December 31, 2008, Mr. Ritorto held options to purchase 14,000 shares of Common
Stock.




(7)  At
December 31, 2008, Mr. Sands held options to purchase 12,000 shares of Common
Stock.




COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION




The
current members of the Compensation Committee are Messrs. Ritorto, DeLia and
Rockwell. The Board made all decisions concerning executive compensation related
to 2009. No executive officer of the Corporation served as a member of the Board
of Directors of another entity during 2009.  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 2009.




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 2009
executive compensation, 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.


25





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 Plans 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 part of their employment with the Company or as
a reward for past individual and corporate 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.




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 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 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 Chief Operating 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 2009 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, execution of acquisitions, enhanced operational efficiencies and
development of additional opportunities for our long-term
growth.


26





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, the timing of compilation of data requested
by the Committee and the timing related to the hiring of senior
management.




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 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.


27





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 and
Chief Operating 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 and Chief Operating Officer regarding the
performance of individual executives. At meetings in 2009 the Compensation
Committee received recommendations from our Chief Executive Officer and Chief
Operating Officer regarding salary adjustments and annual bonus and stock option
awards for our executive officers. Our Chief Executive Officer and Chief
Operating Officer play 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 and
Chief Operating Officer on compensation matters since they are knowledgeable
about the activities of our executive officers and the performance of 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:





Joseph P.
Ritorto (Chair)


Robert De
Lia, Sr.


Richard
D. Rockwell




28





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,
2009:





Equity
Compensation Plan Information - For the Year Ended December 31,
2009:




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)
                
                
                Number of
                  securities
                  remaining
                  available for
                  future issuance
                  under
                  equity
                  compensation
                  plans
                  (excluding
                  securities
                  reflected in
                  column (a))
                  (c)Equity
      compensation plans approved by security holders
                
                
                997,799
                *
                
                $
                4.96
                
                
                
                166,400Equity
      compensation plans not approved by security holders
                
                
                0
                
                
                $
                0
                
                
                
                0Total
                
                
                997,799
                
                
                $
                4.96
                
                
                
                166,400




* 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,
2006 and 2007 Stock Option Plans, respectively .





Also
included in the 997,799 issued options are options issued 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 plan expired December 24, 2009.





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




The table
that follows sets forth, as of March 8, 2010 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.




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.


29





The
applicable percentage of ownership is based on 5,971,583 shares outstanding as
of March 8, 2010.





Name address and title of beneficial owner (1)
                              
                              Number of
                                shares
                                beneficially
                                owned
                              
                              
                              Percentage ofCommon
                                StockBeneficially
                                OwnedRichard
      D. Rockwell, Chairman and Director (2)
                              
                              
                              2,096,013
                              
                              
                              
                              34.7
                              %James
      E. Henry, Vice-Chairman, Chief Executive Officer,
Treasurerand
      Director
                              
                              
                              1,205,519
                              
                              
                              
                              20.0
                              %Brian
      Reach, President, Chief Operating Officer,Secretary,
      and Director (3)
                              
                              
                              262,000
                              
                              
                              
                              4.3
                              %John
      P. Hopkins, Chief Financial Officer (4)
                              
                              
                              94,500
                              
                              
                              
                              1.6
                              %Brian
      J. Smith, Corporate Controller (5)
                              
                              
                              28,000
                              
                              
                              
                              *Christopher
      Peckham, Chief Information Officer / Chief Security Officer
      (6)
                              
                              
                              20,000
                              
                              
                              
                              *Robert
      De Lia, Sr., Director (7)
                              
                              
                              70,694
                              
                              
                              
                              1.2
                              %James
      W. Power, Director (8)
                              
                              
                              12,000
                              
                              
                              
                              *Joseph
      P. Ritorto, Director (9)
                              
                              
                              69,196
                              
                              
                              
                              1.1
                              %David
      Sands, Director (10)
                              
                              
                              12,000
                              
                              
                              
                              *All
      executive officers and directors as a group (10 persons)
    (10)
                              
                              
                              3,869,922
                              
                              
                              
                              64.1
                              %*  Less
      than 1%CERTAIN
      BENEFICIAL OWNERSNONE





(1)  Except
as otherwise indicated, the address of each individual listed is c/o the Company
at 17-01 Pollitt Drive, Fair Lawn, NJ 07410.





(2)  The
amount shown for Mr. Rockwell includes two currently exercisable options to
purchase 2,000 shares each of the Company’s Common Stock at a price of $5.60 and
$6.43.




(3) 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 30,000 shares of the Company’s Common
Stock at a price of $3.71 per share.




(4) The
amount shown for Mr. Hopkins includes a currently exercisable option to purchase
90,000 shares of the Company’s Common Stock at a price of $3.71 per
share.




(5) The
amount shown for Mr. Smith includes a currently exercisable option to purchase
16,000 shares of the Company’s Common Stock at a price of $4.26 per share and
4,000 shares of the Company’s Common Stock at a price of $4.11 per
share.




(6) The
amount shown for Mr. Peckham includes a currently exercisable option to purchase
20,000 shares of the Company’s Common Stock at a price of $4.65 per
share.




30





(7) 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 $4.90,
$3.33, $4.65 and $6.43 per share, respectively, and one currently exercisable
option to purchase 4,000 shares of the Company’s Common Stock at a price of
$5.60 per share.





(8) The
amount shown for Mr. Power includes four currently exercisable options to
purchase 2,000 shares each of the Company’s Common Stock at a price of $6.08,
$3.33, $4.65 and $6.43 per share, respectively, and one currently exercisable
option to purchase 4,000 shares of the Company’s Common Stock at a price of
$5.60 per share.





(9) The
amount shown for Mr. Ritorto includes four currently exercisable options to
purchase 2,000 shares each of the Company’s Common Stock at $4.90, $3.33, $4.65
and $6.43 per share, respectively, and one currently exercisable option to
purchase 4,000 shares of the Company’s Common Stock at a price of $5.60 per
share.




(10) The
amount shown for Mr. Sands includes four currently exercisable options to
purchase 2,000 shares each of the Company’s Common Stock at a price of $4.90,
$3.33, $4.65 and $6.43 per share, respectively, and one currently exercisable
option to purchase 4,000 shares of the Company’s Common Stock at a price of
$5.60 per share.




(11) The
amount shown includes currently exercisable options to purchase 314,000 shares
of the Company’s Common Stock.





Item
13.         Certain Relationships and
Related Transactions and Director Independence




a) Joseph
P. Ritorto, a member of our Board of Directors since January 2002, was
co-founder of First Aviation Services, Inc. (“First Aviation”).  Mr.
Ritorto sold First Aviation to a group led by Goldman Sachs in May 2008. In 2007
the Company had revenues of $546,375  principally associated with an
integrated security systems project with First Aviation.  During the
period in 2008 that the business was owned by Mr. Ritorto, the Company had no
revenues from First Aviation.  There are no outstanding accounts
receivable due from First Aviation at December 31, 2009 related to the period
that the business was owned by Mr. Ritorto.





Richard
D. Rockwell, a member of the Board of Directors since November 2007, has been
Owner and Chairman of Professional Security Technologies LLC, a full service
security systems integrator since 1996.  The Company had revenues
of  $120,130, $51,447 and $4,787 for the years 2009, 2008 and 2007,
respectively.  These revenues were principally related to the sale of
equipment.  There was a balance of $39,192 in accounts receivable as
of December 31, 2009.





b) The
Company considers Messrs. De Lia, Power , Ritorto, Rockwell and Sands to be
independent directors in accordance the NASDAQ’s listing standards.




Item
14.    Principal Accountant Fees and Services




Fees
Paid to Our Independent Auditors During 2009 and 2008




Audit
Fees




The aggregate fees paid to Amper,
Politziner & Mattia, LLP for professional services rendered for the audits
of the Company’s annual financial statements on Form 10-K  in 2009 and
the review of the financial statements on Form 10-Q for the quarters ended March
31, June 30, and September 30, 2009 were $253,860.




The aggregate fees paid to Amper,
Politziner & Mattia, LLP for professional services rendered for the audits
of the Company’s annual financial statements on Form 10-K in 2008 and the review
of the financial statements on Form 10-Q for the quarter ended September 30,
2008 were $161,710.




Audit-Related
Fees




There
were no audit-related fees paid to Amper, Politziner & Mattia, LLP in 2009
and 2008.





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.




31





Tax Fees




There
were no tax fees paid to Amper, Politziner & Mattia, LLP in 2009 and
2008.




All Other
Fees




There
were no other fees paid to Amper, Politziner & Mattia, LLP in 2009 and
2008.




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 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
              
              PagesReports
      of Independent Registered Public Accounting Firm
              
              F-1Consolidated
      Balance Sheet as of December 31, 2009 and 2008
              
              F-2Consolidated
      Statements of Operations for the Years Ended December 31, 2009, 2008 and
      2007
              
              F-3Consolidated
      Statements of Shareholder’s Equity for the Years Ended December 31, 2009,
      2008 and 2007
              
              F-4Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
      2007
              
              F-5Notes
      to Consolidated Financial Statements
              
              F-6
      to F-24




32





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 12, 2009
            HENRY
      BROTHER ELECTRONICS, INC.By:   /s/ James E.
      HenryJames
      E. HenryVice-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.





SIGNATUREDate:
      March 12, 2009
                /s/ Richard D. RockwellRichard
      D. RockwellChairman
      and DirectorDate:
      March 12, 2009
                /s/ James E. HenryJames
      E. HenryVice-Chairman,
      Chief Executive Officer, Treasurer and DirectorDate:
      March 12, 2009
                /s/ Brian ReachBrian
      ReachPresident,
      Chief Operating Officer,Secretary
      and DirectorDate:
      March 12, 2009
                /s/ John P. HopkinsJohn
      P. HopkinsChief
      Financial OfficerDate:
      March 12, 2009
                /s/  Robert L. DeLia
      Sr.Robert
      L. DeLia Sr.DirectorDate:
      March 12, 2009
                /s/ James W. PowerJames
      W. PowerDirectorDate:
      March 12, 2009
                /s/ Joseph P. RitortoJoseph
      P. RitortoDirectorDate:
      March 12, 2009
                /s/ David SandsDavid
      SandsDirector




33




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 sheets of Henry Bros. Electronics,
Inc. and Subsidiaries (the “Company”) as of December 31 2009 and 2008, and the
related consolidated statements of operations, stockholders’ equity, and cash
flows for the years 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
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 audits 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 audits provide 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, 2009 and 2008, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.





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 LLP





March 12,
2010


Edison,
New Jersey


F-1





Part I     Financial
Information





Item
1.    Financial Statements





HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





December
      31,
                          
                          
                          December
      31,2009
                          
                          
                          2008ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                          
                          $
                          2,917,046
                          
                          
                          $
                          27,704Accounts
      receivable-net of allowance for doubtful accounts of $712,206
      at December 31, 2009 and $801,306 at December 31,
    2008
                          
                          
                          12,053,139
                          
                          
                          
                          18,164,066Inventory
                          
                          
                          1,245,306
                          
                          
                          
                          1,201,477Costs
      in excess of billings and estimated profits
                          
                          
                          6,003,533
                          
                          
                          
                          5,512,101Deferred
      tax asset
                          
                          
                          1,251,443
                          
                          
                          
                          1,363,309Retainage
      receivable
                          
                          
                          295,928
                          
                          
                          
                          1,756,481Prepaid
      expenses and income tax receivable
                          
                          
                          1,423,541
                          
                          
                          
                          878,003Other
      assets
                          
                          
                          161,479
                          
                          
                          
                          330,052Total
      current assets
                          
                          
                          25,351,415
                          
                          
                          
                          29,233,193Property
      and equipment - net of accumulated depreciation of $3,622,058
      at December 31, 2009 and $2,993,961 at December 31,
      2008
                          
                          
                          2,254,054
                          
                          
                          
                          2,328,438Goodwill
                          
                          
                          3,785,480
                          
                          
                          
                          3,592,080Intangible
      assets - net of accumulated amortization $
      1,187,013 in 2009 and  $1,018,870 in 2008
                          
                          
                          888,752
                          
                          
                          
                          1,016,665Deferred
      tax asset
                          
                          
                          -
                          
                          
                          
                          -Other
      assets
                          
                          
                          412,594
                          
                          
                          
                          439,732TOTAL
      ASSETS
                          
                          $
                          32,692,295
                          
                          
                          $
                          36,610,108LIABILITIES
      & STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                          
                          $
                          5,360,471
                          
                          
                          $
                          6,927,365Accrued
      expenses
                          
                          
                          3,507,060
                          
                          
                          
                          4,833,618Accrued
      taxes
                          
                          
                          -
                          
                          
                          
                          200,774Billings
      in excess of costs and estimated profits
                          
                          
                          1,567,874
                          
                          
                          
                          2,006,751Deferred
      income
                          
                          
                          136,574
                          
                          
                          
                          157,890Current
      portion of long-term debt
                          
                          
                          536,552
                          
                          
                          
                          629,742Other
      current liabilities
                          
                          
                          494,017
                          
                          
                          
                          532,932Total
      current liabilities
                          
                          
                          11,602,548
                          
                          
                          
                          15,289,072Long-term
      debt, less current portion
                          
                          
                          4,830,517
                          
                          
                          
                          4,855,662Deferred
      tax liability
                          
                          
                          318,850
                          
                          
                          
                          406,417TOTAL
      LIABILITIES
                          
                          
                          16,751,915
                          
                          
                          
                          20,551,151STOCKHOLDERS'
      EQUITYPreferred
      stock, $.01 par value; 2,000,000 shares authorized; no shares
      issued
                          
                          
                          -
                          
                          
                          
                          -Common
      stock, $.01 par value; 20,000,000 shares authorized at December 31, 2009
      and 10,000,000 shares authorized at December 31,
      2008.  6,035,366 shares issued and outstanding in 2009 and
      5,966,583 shares in 2008
                          
                          
                          60,354
                          
                          
                          
                          59,666Additional
      paid in capital
                          
                          
                          18,437,288
                          
                          
                          
                          17,732,596Accumulated
      deficit
                          
                          
                          (2,557,262
                          )
                          
                          
                          (1,733,305
                          )TOTAL
      EQUITY
                          
                          
                          15,940,380
                          
                          
                          
                          16,058,957TOTAL
      LIABILITIES & STOCKHOLDERS' EQUITY
                          
                          $
                          32,692,295
                          
                          
                          $
                          36,610,108





F-2





HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS




For
      the years ended December 31,2009
                                              
                                              
                                              2008
                                              
                                              
                                              2007Revenue
                                              
                                              $
                                              55,105,469
                                              
                                              
                                              $
                                              62,357,466
                                              
                                              
                                              $
                                              57,852,216Cost
      of revenue
                                              
                                              
                                              40,848,553
                                              
                                              
                                              
                                              46,465,194
                                              
                                              
                                              
                                              45,076,126Gross
      profit
                                              
                                              
                                              14,256,916
                                              
                                              
                                              
                                              15,892,272
                                              
                                              
                                              
                                              12,776,090Operating
      expenses:Selling,
      general & administrative expenses
                                              
                                              
                                              14,985,849
                                              
                                              
                                              
                                              12,797,730
                                              
                                              
                                              
                                              12,695,509Intangible
      asset impairment charges
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              43,999Operating
      (loss) profit
                                              
                                              
                                              (728,933
                                              )
                                              
                                              
                                              3,094,542
                                              
                                              
                                              
                                              36,582Interest
      income
                                              
                                              
                                              28,610
                                              
                                              
                                              
                                              91,558
                                              
                                              
                                              
                                              73,493Other
      income
                                              
                                              
                                              38,885
                                              
                                              
                                              
                                              17,266
                                              
                                              
                                              
                                              (191
                                              )Interest
      expense
                                              
                                              
                                              (280,911
                                              )
                                              
                                              
                                              (271,290
                                              )
                                              
                                              
                                              (349,907
                                              )(Loss)
      income before tax expense
                                              
                                              
                                              (942,349
                                              )
                                              
                                              
                                              2,932,076
                                              
                                              
                                              
                                              (240,023
                                              )Tax
      (benefit) expense
                                              
                                              
                                              (118,392
                                              )
                                              
                                              
                                              1,374,320
                                              
                                              
                                              
                                              63,281Net
      (loss) income
                                              
                                              $
                                              (823,957
                                              )
                                              
                                              $
                                              1,557,756
                                              
                                              
                                              $
                                              (303,304
                                              )BASIC (LOSS) EARNINGS PER COMMON
      SHARE:Basic
      (loss) earnings per common share
                                              
                                              $
                                              (0.14
                                              )
                                              
                                              $
                                              0.27
                                              
                                              
                                              $
                                              (0.05
                                              )Weighted
      average common shares
                                              
                                              
                                              5,865,187
                                              
                                              
                                              
                                              5,786,104
                                              
                                              
                                              
                                              5,768,864DILUTED (LOSS) EARNINGS PER COMMON
      SHARE:Diluted
      (loss) earnings per common share
                                              
                                              $
                                              (0.14
                                              )
                                              
                                              $
                                              0.26
                                              
                                              
                                              $
                                              (0.05
                                              )Weighted
      average diluted common shares
                                              
                                              
                                              5,865,187
                                              
                                              
                                              
                                              5,988,782
                                              
                                              
                                              
                                              5,768,864




See
accompanying notes to the consolidated financial statements.





F-3




HENRY BROS. ELECTRONCS, INC. AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY




Common Stock
                                                
                                                
                                                Additionalpar value $0.01
                                                
                                                
                                                Paid-in
                                                
                                                
                                                RetainedShares
                                                
                                                
                                                Amount
                                                
                                                
                                                Capital
                                                
                                                
                                                Earnings
                                                
                                                
                                                TotalBalance
      at December 31, 2006
                                                
                                                
                                                5,916,065
                                                
                                                
                                                $
                                                59,161
                                                
                                                
                                                $
                                                16,900,653
                                                
                                                
                                                $
                                                (2,949,196
                                                )
                                                
                                                $
                                                14,010,618Cumualitive
      effect for adpotion of ASC 740
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (38,561
                                                )
                                                
                                                
                                                (38,561
                                                )Shares
      issued in connection withthe acquisition of CIS Security Systems
                                                
                                                
                                                10,000
                                                
                                                
                                                
                                                100
                                                
                                                
                                                
                                                37,400
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                37,500Amortization
      of value assigned tostock option grants
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                227,839
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                227,839Net
      loss
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (303,304
                                                )
                                                
                                                
                                                (303,304
                                                )Balance
      at December 31, 2007
                                                
                                                
                                                5,926,065
                                                
                                                
                                                
                                                59,261
                                                
                                                
                                                
                                                17,165,892
                                                
                                                
                                                
                                                (3,291,061
                                                )
                                                
                                                
                                                13,934,092Recovery
      from shareholder, net
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                59,443
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                59,443Surrendered
      shares to purchase fixed asset
                                                
                                                
                                                (3,200
                                                )
                                                
                                                
                                                (32
                                                )
                                                
                                                
                                                (14,048
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                (14,080
                                                )Employee
      stock options exercised
                                                
                                                
                                                23,718
                                                
                                                
                                                
                                                237
                                                
                                                
                                                
                                                119,021
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                119,258Shares
      issued in connection withthe acquisition of CIS Security Systems
                                                
                                                
                                                20,000
                                                
                                                
                                                
                                                200
                                                
                                                
                                                
                                                120,350
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                120,550Amortization
      of value assigned tostock option grants
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                281,938
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                281,938Net
      income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,557,756
                                                
                                                
                                                
                                                1,557,756Balance
      at December 31, 2008
                                                
                                                
                                                5,966,583
                                                
                                                
                                                
                                                59,666
                                                
                                                
                                                
                                                17,732,596
                                                
                                                
                                                
                                                (1,733,305
                                                )
                                                
                                                
                                                16,058,957Employee
      stock options exercised
                                                
                                                
                                                43,783
                                                
                                                
                                                
                                                438
                                                
                                                
                                                
                                                203,231
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                203,669Shares
      issued in connection withthe acquisition of CIS Security Systems
                                                
                                                
                                                25,000
                                                
                                                
                                                
                                                250
                                                
                                                
                                                
                                                139,100
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                139,350Amortization
      of value assigned tostock option grants
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                362,361
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                362,361Net
      loss
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (823,957
                                                )
                                                
                                                
                                                (823,957
                                                )Balance
      at December  31, 2009
                                                
                                                
                                                6,035,366
                                                
                                                
                                                $
                                                60,354
                                                
                                                
                                                $
                                                18,437,288
                                                
                                                
                                                $
                                                (2,557,262
                                                )
                                                
                                                $
                                                15,940,380




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 31,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2007Cash
      flows from operating activities:Net
      (loss) income
                                      
                                      $
                                      (823,957
                                      )
                                      
                                      $
                                      1,557,756
                                      
                                      
                                      $
                                      (303,304
                                      )Adjustments
      to reconcile net income from operationsto
      net cash provided by (used in) operating activities:Depreciation
      and amortization
                                      
                                      
                                      1,040,322
                                      
                                      
                                      
                                      840,738
                                      
                                      
                                      
                                      899,325Bad
      debt expense
                                      
                                      
                                      316,181
                                      
                                      
                                      
                                      346,602
                                      
                                      
                                      
                                      41,123Provision
      for obsolete inventory
                                      
                                      
                                      8,305
                                      
                                      
                                      
                                      202,490
                                      
                                      
                                      
                                      180,000Impairment
      charges
                                      
                                      
                                      
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      43,999Stock
      option expense
                                      
                                      
                                      362,361
                                      
                                      
                                      
                                      281,938
                                      
                                      
                                      
                                      227,839Deferred
      income taxes
                                      
                                      
                                      24,299
                                      
                                      
                                      
                                      88,895
                                      
                                      
                                      
                                      (26,730
                                      )Changes
      in operating assets and liabilities:Accounts
      receivable
                                      
                                      
                                      5,794,746
                                      
                                      
                                      
                                      (5,204,110
                                      )
                                      
                                      
                                      280,677Inventory
                                      
                                      
                                      (43,830
                                      )
                                      
                                      
                                      56,964
                                      
                                      
                                      
                                      67,002Costs
      in excess of billings and estimated profits
                                      
                                      
                                      (491,432
                                      )
                                      
                                      
                                      (2,317,062
                                      )
                                      
                                      
                                      1,448,430Retainage
      receivable
                                      
                                      
                                      1,460,554
                                      
                                      
                                      
                                      (48,357
                                      )
                                      
                                      
                                      (317,657
                                      )Other
      assets
                                      
                                      
                                      195,711
                                      
                                      
                                      
                                      (14,970
                                      )
                                      
                                      
                                      (25,002
                                      )Prepaid
      expenses and income tax receivable
                                      
                                      
                                      (545,537
                                      )
                                      
                                      
                                      22,920
                                      
                                      
                                      
                                      (446,123
                                      )Accounts
      payable
                                      
                                      
                                      (1,566,894
                                      )
                                      
                                      
                                      (1,230,408
                                      )
                                      
                                      
                                      2,184,728Accrued
      expenses
                                      
                                      
                                      (1,326,558
                                      )
                                      
                                      
                                      1,766,022
                                      
                                      
                                      
                                      (1,576,749
                                      )Taxes
      Payable
                                      
                                      
                                      (200,774
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Billings
      in excess of costs and estimated profits
                                      
                                      
                                      (438,877
                                      )
                                      
                                      
                                      429,749
                                      
                                      
                                      
                                      409,743Deferred
      income
                                      
                                      
                                      (21,317
                                      )
                                      
                                      
                                      (48,571
                                      )
                                      
                                      
                                      (270,315
                                      )Other
      liabilities
                                      
                                      
                                      (38,915
                                      )
                                      
                                      
                                      81,437
                                      
                                      
                                      
                                      198,609Net
      cash provided by (used in) operating activities
                                      
                                      
                                      3,704,388
                                      
                                      
                                      
                                      (3,187,967
                                      )
                                      
                                      
                                      3,015,595Cash
      flows from investing activities:Purchase
      of businesses, net of cash acquired
                                      
                                      
                                      (90,230
                                      )
                                      
                                      
                                      (62,500
                                      )
                                      
                                      
                                      (25,000
                                      )Purchase
      of property and equipment
                                      
                                      
                                      (429,688
                                      )
                                      
                                      
                                      (569,494
                                      )
                                      
                                      
                                      (652,704
                                      )Net
      cash used in investing activities
                                      
                                      
                                      (519,918
                                      )
                                      
                                      
                                      (631,994
                                      )
                                      
                                      
                                      (677,704
                                      )Cash
      flows from financing activities:Recovery
      from shareholder, net
                                      
                                      
                                      -
                                      
                                      
                                      
                                      59,443
                                      
                                      
                                      
                                      -Proceeds
      from exercising of stock options - net of fees
                                      
                                      
                                      203,669
                                      
                                      
                                      
                                      119,258
                                      
                                      
                                      
                                      -Borrowings
      under revolving loan agreement
                                      
                                      
                                      2,150,000
                                      
                                      
                                      
                                      700,001
                                      
                                      
                                      
                                      788,000Repayments
      under revolving agreement
                                      
                                      
                                      (2,150,000
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Payments
      of bank loans
                                      
                                      
                                      (103,410
                                      )
                                      
                                      
                                      (221,110
                                      )
                                      
                                      
                                      (206,602
                                      )Net
      repayments of other debt
                                      
                                      
                                      (74,328
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (9,135
                                      )Payments
      of equipment financing
                                      
                                      
                                      (321,059
                                      )
                                      
                                      
                                      (87,377
                                      )
                                      
                                      
                                      167,443Net
      cash used in financing activities
                                      
                                      
                                      (295,128
                                      )
                                      
                                      
                                      570,215
                                      
                                      
                                      
                                      739,706Increase
      (decrease) in cash and cash equivalents
                                      
                                      
                                      2,889,342
                                      
                                      
                                      
                                      (3,249,746
                                      )
                                      
                                      
                                      3,077,597Cash
      and cash equivalents - beginning of period
                                      
                                      
                                      27,704
                                      
                                      
                                      
                                      3,277,450
                                      
                                      
                                      
                                      199,853Cash
      and cash equivalents - end of period
                                      
                                      $
                                      2,917,046
                                      
                                      
                                      $
                                      27,704
                                      
                                      
                                      $
                                      3,277,450Supplemental
      disclosure of cash flow information:Amount
      paid for the period for:Interest
                                      
                                      $
                                      276,553
                                      
                                      
                                      $
                                      265,876
                                      
                                      
                                      $
                                      331,924Taxes
                                      
                                      
                                      707,083
                                      
                                      
                                      
                                      1,032,642
                                      
                                      
                                      
                                      240,000Non-cash
      investing and financing activities:Equipment
      financed
                                      
                                      
                                      368,108
                                      
                                      
                                      
                                      316,511
                                      
                                      
                                      
                                      359,040Issuance
      of stock to acquire businesses
                                      
                                      
                                      143,400
                                      
                                      
                                      
                                      120,550
                                      
                                      
                                      
                                      37,500Surrender
      shares to purchase fixed assets
                                      
                                      
                                      -
                                      
                                      
                                      
                                      14,080
                                      
                                      
                                      
                                      -




See
accompanying notes to the consolidated financial statements.





F-5




HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements





1. 
  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES




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:





Year endedDecember 31,2009
                            
                            
                            2008
                            
                            
                            2007New
      Jersey/New York
                            
                            
                            51
                            %
                            
                            
                            45
                            %
                            
                            
                            46
                            %California
                            
                            
                            17
                            %
                            
                            
                            20
                            %
                            
                            
                            20
                            %Texas
                            
                            
                            5
                            %
                            
                            
                            4
                            %
                            
                            
                            4
                            %Arizona
                            
                            
                            8
                            %
                            
                            
                            11
                            %
                            
                            
                            8
                            %Colorado
                            
                            
                            10
                            %
                            
                            
                            8
                            %
                            
                            
                            9
                            %Virginia
      / Maryland
                            
                            
                            8
                            %
                            
                            
                            10
                            %
                            
                            
                            8
                            %Integration
      segment
                            
                            
                            99
                            %
                            
                            
                            98
                            %
                            
                            
                            95
                            %Specialty
      segment
                            
                            
                            4
                            %
                            
                            
                            2
                            %
                            
                            
                            7
                            %Inter-segment
                            
                            
                            -3
                            %
                            
                            
                            0
                            %
                            
                            
                            -2
                            %Total
      revenue
                            
                            
                            100
                            %
                            
                            
                            100
                            %
                            
                            
                            100
                            %




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) 
 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.





F-6





HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements (continued)




Except
for projects in excess of $1 million, 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 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.





(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
periodically reviewed, and where necessary, reserves for excess and obsolete
inventories are recorded.




(h) 
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
four to ten 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
2009, 2008 and 2007.





F-7




HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements (continued)




(j) 
  Intangible Assets




The
Company’s intangible assets include goodwill and other intangibles. Other
intangibles 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. Collectively, these assets which affect the amount
of future period amortization expense and possible impairment expense that we
will incur. Management’s judgments regarding the existence of impairment
indicators are based on various factors, including market conditions and
operational performance of our business. As of December 31, 2009 and 2008, we
had $4,674,232 and $4,608,745, respectively, of goodwill and other intangibles,
accounting for 14.3% and 12.6% of our total assets at the respective dates. The
goodwill is not amortizable; the majority of other intangibles are. The
determination of the value of such intangible assets requires management to make
estimates and assumptions that affect our consolidated financial statements. We
test our goodwill for impairment, at least annually. This test is conducted in
December of each year in connection with the annual budgeting and forecast
process. Also, on a quarterly basis, we evaluate whether events have occurred
that would negatively impact the realizable value of our intangibles or
goodwill.




Effective
January 1, 2002, the Company adopted the provisions of FASB ASC
350 “Goodwill and Other”.   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
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 FASB ASC 350. 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 FASB ASC 350, and evaluate each reporting unit
for impairment.





We
completed our annual goodwill impairment analysis as of December 31, 2009. Our
assessment did not result in good will impairment. Significant assumptions used
in the include revenue growth, margins and discount rates. We used historical
performance and management estimates of future performance to determine margins
and growth rates. Of reporting units with goodwill, these entities had a
combined fair value that is in excess of its carrying value by approximately
147%. However, there were certain individual entities that, while not requiring
an impairment expense in 2009, given the current economic climate, resulted in a
reduction in the fair value that is in excess of its carrying value compared to
the impairment  analysis conducted in 2008.  Considerable management
judgment is necessary to evaluate the impact of operating changes and to
estimate future cash flows. Changes in our actual results and/or estimates or
any of our other assumptions used in our analysis could result in a different
conclusion.




The
Company recorded an impairment charge of $43,999 for the write down of a trade
name for the year ended December 31, 2007.  There were no write downs for
the years ended December 31, 2009 and 2008.





In
2009, 2008 and 2007 there no charges to operations resulted from management’s
goodwill impairment evaluation.




(k) 
 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.




F-8





HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements (continued)




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 2009, billings to one
customer represented 9.1% of the Company’s consolidated revenue or 9.8% of
revenue from the Integration segment. In 2009, accounts receivable from one
customer represented 10.7% of the Company’s consolidated net accounts
receivable.  Revenues from government agencies were 34.2%, 36.7% and
40.7%  of total revenue for the years ended December 31, 2009, 2008 and
2007, respectively.





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.




(l) 
 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.




(m) 
 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,
2009.




(n) 
 Marketing and Advertising Costs




The
Company expenses marketing and advertising cost when the marketing and
advertisement occurs.  Total marketing and advertising expenses amounted to
approximately $106,669, $93,599 and $63,759 for the years ended December 31,
2009, 2008 and 2007, respectively.




(o) 
 Stock Based Compensation





The
Company follows 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.





(p)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, 2009, 2008 and 2007, warranty
expense was $102,357, $40,155 and $44,868, respectively.




F-9




HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements (continued)




(q) 
 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 per share excludes the dilutive effects of common
stock equivalents such as options and warrants. Potentially dilutive securities
are not included in loss per share for the years ended December 31, 2009 and
2007 as their inclusion would be antidilutive.





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




December
      31,2009
                      
                      
                      2007Options
      to purchase common stock
                      
                      
                      39,837
                      
                      
                      
                      50,834Shares
      issued in connection with the acquisition of Securus Inc., held in
      escrow
                      
                      
                      150,001
                      
                      
                      
                      150,001




(r) 
 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.




(s) 
 Recent Accounting Pronouncements





In
June 2009, the FASB issued guidance now codified as FASB ASC Topic 105,
“Generally Accepted Accounting Principles,” as the single source of
authoritative nongovernmental U.S. GAAP. FASB ASC Topic 105 does not change
current U.S. GAAP, but is intended to simplify user access to all authoritative
U.S. GAAP by providing all authoritative literature related to a particular
topic in one place. All existing accounting standard documents will be
superseded and all other accounting literature not included in the FASB
Codification will be considered non-authoritative. These provisions of FASB ASC
Topic 105 are effective for interim and annual periods ending after
September 15, 2009 and, accordingly, are effective for the Company for the
current fiscal reporting period. The adoption of this pronouncement did not have
an impact on the Company’s financial condition or results of operations, but
will impact our financial reporting process by eliminating all references to
pre-codification standards. On the effective date of this Statement, the
Codification superseded all then-existing non-SEC accounting and reporting
standards, and all other non-grandfathered non-SEC accounting literature not
included in the Codification became non-authoritative.





In April
2008, the FASB issued additional guidance within ASC 350-30, General Intangibles
Other than Goodwill (“ASC 350-30”). The required provisions within ASC 350-30
amend the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under the prior guidance within ASC 350  Intangibles – Goodwill and Other .
The guidance shall be applied prospectively to intangible assets acquired after
adoption, and the disclosure requirements shall be applied prospectively to all
intangible assets recognized as of, and subsequent to, adoption.  ASC
350-30 is intended to improve the consistency between the useful life of an
intangible asset determined under prior requirements within ASC 350 and the
period of expected cash flows used to measure the fair value of the asset under
ASC 805 and other GAAP. We have evaluated the new statement and have determined
that it does not have a significant impact on the determination ore reporting of
our financial results.





F-10




HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements (continued)




In April
2009, the FASB amended Fair Value Accounting to provides additional guidance for
estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased and also provides guidance on identifying
circumstances that indicate a transaction is not orderly. We have evaluated the
new statement and have determined the adoption did not have a material impact on
the Consolidated Financial Statements.





In
May 2009, the FASB issued guidance now codified as FASB ASC Topic 855,
“Subsequent Events,” which establishes general standards of accounting for, and
disclosures of, events that occur after the balance sheet date but before
financial statements are issued. This pronouncement is effective for interim or
fiscal periods ending after June 15, 2009. The adoption of this
pronouncement did not have a material impact on our consolidated financial
position, results of operations or cash flows. However, the provisions of FASB
ASC Topic 855 resulted in additional disclosures with respect to subsequent
events. The Company evaluated all events or transactions that occurred after
December 31, 2009 up through the date we filed this annual report on Form
10-K.  During this period no material subsequent events came to our
attention.





In
April 2009, the FASB issued guidance now codified as FASB ASC Topic 825,
“Financial Instruments,” which amends previous Topic 825 guidance to require
disclosures about fair value of financial instruments in interim as well as
annual financial statements. This pronouncement is effective for periods ending
after June 15, 2009. The adoption of this pronouncement did not have a
material impact on our consolidated financial position, results of operations or
cash flows.




2 .       
  ACCOUNTS
RECEIVABLE




Accounts
receivable consisted of the following:




December
      31,2009
                            
                            
                            2008Completed
      contracts, including retentions
                            
                            $
                            4,407,312
                            
                            
                            $
                            2,829,701Contracts
      in progess:
                            
                            
                            8,358,033
                            
                            
                            
                            16,135,67112,765,345
                            
                            
                            
                            18,965,372Less:
      Allowance for doubtful accounts
                            
                            
                            712,206
                            
                            
                            
                            801,306$
                            12,053,139
                            
                            
                            $
                            18,164,066




At
December 31, 2009 and 2008, the largest accounts receivable from any one
customer represented 10.7% and 10.1% of the net accounts receivable,
respectively.




F-11


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
      31,2009
                            
                            
                            2008Cost
      incurred on uncompleted contracts
                            
                            $
                            46,259,927
                            
                            
                            $
                            68,235,896Billings
      on uncompleted contracts
                            
                            
                            41,824,268
                            
                            
                            
                            64,730,546$
                            4,435,659
                            
                            
                            $
                            3,505,350





Included
in accompanying Balance Sheets under the following captions:





December
      31,2009
                            
                            
                            2008Costs
      in excess of billings and estimated profits
                            
                            $
                            6,003,533
                            
                            
                            $
                            5,512,101Billing
      in excess of costs and estimated profits
                            
                            
                            1,567,874
                            
                            
                            
                            2,006,751$
                            4,435,659
                            
                            
                            $
                            3,505,350




4. 
         INVENTORY




Inventories
consisted of the following:




December
      31,2009
                              
                              
                              2008Component
      parts
                              
                              $
                              160,318
                              
                              
                              $
                              166,254Finished
      goods
                              
                              
                              1,542,169
                              
                              
                              
                              1,810,7621,702,487
                              
                              
                              
                              1,977,016Less:
      Valuation allowance
                              
                              
                              (457,181
                              )
                              
                              
                              (775,539
                              )Net
      inventory
                              
                              $
                              1,245,306
                              
                              
                              $
                              1,201,477




F-12




HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements





5. 
         PROPERTY AND EQUIPMENT




Property
and equipment consisted of the following:




December
      31,2009
                              
                              
                              2008Office
      equipment
                              
                              $
                              556,141
                              
                              
                              $
                              518,156Demo
      and testing equipment
                              
                              
                              430,104
                              
                              
                              
                              330,403Automotive
      equipment
                              
                              
                              2,256,036
                              
                              
                              
                              2,114,458Computer
      equipment
                              
                              
                              1,703,077
                              
                              
                              
                              1,669,172Machinery
      and equipment
                              
                              
                              437,043
                              
                              
                              
                              293,659Leasehold
      improvements
                              
                              
                              436,304
                              
                              
                              
                              396,5515,818,705
                              
                              
                              
                              5,322,399Less: 
      Accumulated depreciation
                              
                              
                              (3,564,651
                              )
                              
                              
                              (2,993,961
                              )$
                              2,254,054
                              
                              
                              $
                              2,328,438





Depreciation
expense was $872,181, $672,881 and $689,884 for the years ended December 31,
2009, 2008 and 2007, respectively.





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




December
      31,2009
                            
                            
                            2008Automotive
      equipment
                            
                            $
                            1,476,423
                            
                            
                            $
                            1,187,543Less:
      Accumulated depreciation
                            
                            
                            (745,008
                            )
                            
                            
                            (420,249
                            )$
                            731,415
                            
                            
                            $
                            767,294




6. 
         GOODWILL





Goodwill
consisted of the following:




December
      312009
                    
                    
                    2008National
      Safe of California, Inc.
                    
                    $
                    483,753
                    
                    
                    $
                    483,753Photo
      Scan Systems, Inc.
                    
                    
                    472,475
                    
                    
                    
                    472,475Henry
      Bros. Electronics, LLC (Arizona)
                    
                    
                    317,114
                    
                    
                    
                    317,114Airolite
      Communications, Inc.
                    
                    
                    250,034
                    
                    
                    
                    250,034Securus,
      Inc.
                    
                    
                    971,210
                    
                    
                    
                    971,210CIS
      Security Systems Corp.
                    
                    
                    1,252,600
                    
                    
                    
                    1,059,200Southwest
      Securityscan, Inc.
                    
                    
                    38,294
                    
                    
                    
                    38,294$
                    3,785,480
                    
                    
                    $
                    3,592,080




In 2009,
2008 and 2007 there were no charges to operations resulting from management’s
goodwill impairment evaluation.





F-13





HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements (continued)




7. 
         INTANGIBLE ASSETS





Intangible
assets consist of the following:




Amortizable
      IntangiblesAcquired
                                          
                                          
                                          
                                          
                                          
                                          Covenant
                                          
                                          
                                          
                                          
                                          
                                          TotalCustomer
                                          
                                          
                                          Service
                                          
                                          
                                          Not
      to
                                          
                                          
                                          Trade
                                          
                                          
                                          Amortizable
                                          
                                          
                                          Trade
                                          
                                          
                                          TotalList
                                          
                                          
                                          Rights
                                          
                                          
                                          Compete
                                          
                                          
                                          Name
                                          
                                          
                                          Intangibles
                                          
                                          
                                          Name
                                          
                                          
                                          IntangiblesGross carrying value:December
      31, 2007
                                          
                                          
                                          959,998
                                          
                                          
                                          
                                          436,649
                                          
                                          
                                          
                                          287,773
                                          
                                          
                                          
                                          36,001
                                          
                                          
                                          
                                          1,720,421
                                          
                                          
                                          
                                          315,114
                                          
                                          
                                          
                                          2,035,535Additions
      (deletions)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Impairment
      charge
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -December
      31, 2008
                                          
                                          
                                          959,998
                                          
                                          
                                          
                                          436,649
                                          
                                          
                                          
                                          287,773
                                          
                                          
                                          
                                          36,001
                                          
                                          
                                          
                                          1,720,421
                                          
                                          
                                          
                                          315,114
                                          
                                          
                                          
                                          2,035,535Additions
      (deletions)
                                          
                                          
                                          40,230
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          40,230
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          40,230Impairment
      charge
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -December
      31, 2009
                                          
                                          
                                          1,000,228
                                          
                                          
                                          
                                          436,649
                                          
                                          
                                          
                                          287,773
                                          
                                          
                                          
                                          36,001
                                          
                                          
                                          
                                          1,760,651
                                          
                                          
                                          
                                          315,114
                                          
                                          
                                          
                                          2,075,765Accumulated amortization:December
      31, 2007
                                          
                                          
                                          (291,553
                                          )
                                          
                                          
                                          (236,661
                                          )
                                          
                                          
                                          (287,773
                                          )
                                          
                                          
                                          (36,001
                                          )
                                          
                                          
                                          (851,988
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (851,988
                                          )2008
      Amortization
                                          
                                          
                                          (118,690
                                          )
                                          
                                          
                                          (48,193
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (166,883
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (166,882
                                          )Impairment
      charge
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -December
      31, 2008
                                          
                                          
                                          (410,243
                                          )
                                          
                                          
                                          (284,854
                                          )
                                          
                                          
                                          (287,773
                                          )
                                          
                                          
                                          (36,001
                                          )
                                          
                                          
                                          (1,018,871
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,018,870
                                          )2008
      Amortization
                                          
                                          
                                          (119,950
                                          )
                                          
                                          
                                          (48,192
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (168,142
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (168,143
                                          )Impairment
      charge
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -December
      31, 2009
                                          
                                          
                                          (530,193
                                          )
                                          
                                          
                                          (333,046
                                          )
                                          
                                          
                                          (287,773
                                          )
                                          
                                          
                                          (36,001
                                          )
                                          
                                          
                                          (1,187,013
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,187,013
                                          )Net
      carrying value
                                          
                                          $
                                          470,035
                                          
                                          
                                          $
                                          103,603
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          573,638
                                          
                                          
                                          $
                                          315,114
                                          
                                          
                                          $
                                          888,752Weighted
      average life in years
                                          
                                          
                                          11
                                          
                                          
                                          
                                          6
                                          
                                          
                                          
                                          3
                                          
                                          
                                          
                                          5
                                          
                                          
                                          
                                          6




Amortization
expense was $168,143, $166,882, and $208,868 for the years ended December 31,
2009, 2008 and 2007, respectively.




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




December 312010
                      
                      $
                      169,0722011
                      
                      
                      125,1202012
                      
                      
                      125,1202013
                      
                      
                      99,4712014
                      
                      
                      41,086





F-14





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 Bank, N.A. pursuant to which TD Bank extended a $4 million two-year
credit facility (the “Revolving Loan”), to the Company and refinanced $1 million
of existing indebtedness to TD Bank into a five year term loan (the “Term
Loan”).




On
October 6, 2008, the Company executed its fourth amendment to the Revolving Loan
with TD Bank, increasing its line of credit from $4 million to $8 million. The
Revolving Loan is subject to certain borrowing base limitations.  On
November 11, 2009 the term of the Revolving Loan  has been extended to June
30, 2011.  Advances under the Revolving Loan may be used to finance working
capital and acquisitions. Interest is paid monthly in arrears at TD Bank’s prime
rate (3.25% at both December 31, 2009 and December 31, 2008).  As part of
the extension of the Term Loan to June 30, 2011, the interest rate will now be
subject to a minimum floor rate of 4.0%.  TD Bank has a first priority
security interest on the Company’s accounts receivable and
inventory.





The Term
Loan provided for the payment of sixty equal monthly installments of principal
and interest in the amount of $19,730 commencing July 30, 2005 and continued
through June 30, 2009.  Interest under the Term Loan was
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 one of the covenants at December 31,
2009. The Company received a waiver from TD Bank on March 12, 2010.




Long-term
debt included the following balances:




December
      31,2009
                                                
                                                
                                                2008Term
      loan at 6.75% interest payable in monthly installmentsof $19,730 thru June 01, 2009
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                103,410Revolving
      line at the prime rate of interest, payable in monthlyinstallments thru June 30, 2011
                                                
                                                
                                                4,335,898
                                                
                                                
                                                
                                                4,335,898Corporate
      insurance financed at 5.99% payable in monthlyinstallments thru September 01, 2010
                                                
                                                
                                                194,665
                                                
                                                
                                                
                                                268,992Capitalized
      lease obligations due in monthly installments,with interest ranging from 6.4% to 12.7%
                                                
                                                
                                                836,506
                                                
                                                
                                                
                                                777,1045,367,069
                                                
                                                
                                                
                                                5,485,404Less:
      Current Portion
                                                
                                                
                                                (536,552
                                                )
                                                
                                                
                                                (629,742
                                                )$
                                                4,830,517
                                                
                                                
                                                $
                                                4,855,662









F-15





HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements (continued)




Aggregate
maturities of all outstanding debt at December 31, 2009:




2010
                          
                          $
                          481,1652011
                          
                          
                          4,623,6542012
                          
                          
                          184,9592013
                          
                          
                          77,291$
                          5,367,069





Future
minimum lease payments for assets under capital leases outstanding at December
31, 2009:




2010
                              
                              $
                              347,0182011
                              
                              
                              358,3322012
                              
                              
                              218,5952013
                              
                              
                              87,3861,011,331Less:
      Amount representing interest
                              
                              
                              (174,825
                              )Present
      value of net minimum lease payments
                              
                              $
                              836,506





F-16





HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements (continued)





9. 
         INCOME TAXES


The
tax provision consists of the following:





Years
      Ended December 31,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007Federal:Current
                                  
                                  $
                                  (281,705
                                  )
                                  
                                  $
                                  821,398
                                  
                                  
                                  $
                                  5,869Deferred
                                  
                                  
                                  84,844
                                  
                                  
                                  
                                  138,507
                                  
                                  
                                  
                                  24,465(196,861
                                  )
                                  
                                  
                                  959,905
                                  
                                  
                                  
                                  30,334State:Current
                                  
                                  
                                  138,890
                                  
                                  
                                  
                                  464,027
                                  
                                  
                                  
                                  63,934Deferred
                                  
                                  
                                  (60,421
                                  )
                                  
                                  
                                  (49,612
                                  )
                                  
                                  
                                  30,98778,469
                                  
                                  
                                  
                                  414,415
                                  
                                  
                                  
                                  32,947$
                                  (118,392
                                  )
                                  
                                  $
                                  1,374,320
                                  
                                  
                                  $
                                  63,281




The
components of the deferred tax asset (liability) as of December 31, 2009 and
2008 are as follows:





2009
                                            
                                            
                                            2008Deferred
      Tax Asset:Allowance
      for doubtful accounts
                                            
                                            $
                                            279,917
                                            
                                            
                                            $
                                            331,330Accrued
      absences
                                            
                                            
                                            218,298
                                            
                                            
                                            
                                            237,991Accrued
      warranty
                                            
                                            
                                            183,463
                                            
                                            
                                            
                                            219,514Bonus
      accrual
                                            
                                            
                                            99,647
                                            
                                            
                                            
                                            276,120Inventory
                                            
                                            
                                            183,693
                                            
                                            
                                            
                                            321,479Deferred
      rent
                                            
                                            
                                            63,372
                                            
                                            
                                            
                                            43,436Stock
      compensation
                                            
                                            
                                            67,385
                                            
                                            
                                            
                                            93,542Accrued
      commissions
                                            
                                            
                                            249,723
                                            
                                            
                                            
                                            -Net
      operating loss / charitable contribution carry forward
                                            
                                            
                                            566,505
                                            
                                            
                                            
                                            624,694Less: valuation allowance
                                            
                                            
                                            (85,108
                                            )
                                            
                                            
                                            (159,102
                                            )Total
      deferred tax asset
                                            
                                            $
                                            1,826,895
                                            
                                            
                                            $
                                            1,989,004Deferred Tax Liability:Deferred
      revenue
                                            
                                            
                                            -
                                            
                                            
                                            $
                                            (66,561
                                            )Depreciation
                                            
                                            
                                            (508,527
                                            )
                                            
                                            
                                            (503,838
                                            )Goodwill
                                            
                                            
                                            (82,702
                                            )
                                            
                                            
                                            (83,228
                                            )Intangible
      assets
                                            
                                            
                                            (303,073
                                            )
                                            
                                            
                                            (378,485
                                            )Total
      deferred tax liability
                                            
                                            $
                                            (894,302
                                            )
                                            
                                            $
                                            (1,032,112
                                            )Net
      deferred tax asset
                                            
                                            $
                                            932,593
                                            
                                            
                                            $
                                            956,892Net
      short-term asset
                                            
                                            $
                                            1,251,443
                                            
                                            
                                            $
                                            1,363,309Net
      long-term (liability) asset
                                            
                                            $
                                            (318,850
                                            )
                                            
                                            $
                                            (406,417
                                            )





F-17





HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements (continued)




The
Company has approximately $1.0 million and $5.7 million of federal and state net
operating loss carryforwards as of December 31, 2009.  Some of the net
operating loss carryforwards were acquired and are subject to limitation under
Internal Revenue Code Section 382.




A
valuation allowance is provided when it is more likely than not that some
portion of deferred tax assets will not be realized.  The Company has a
valuation allowance of approximately $85,000 as of December 31, 2009 to account
for a portion of the Company’s State deferred tax assets including State net
operating loss carryforwards that are not more likely than not to be
realized.  The valuation allowance decreased by approximately $74,000 for
the year ended December 31, 2009 due to the utilization of State net operating
loss carryforwards that were previously deemed unrealizable.




The
provision for income taxes differs from that computed using the United States
statutory tax rate of 34% due to the following:




Years
      Ended December 31,2009
                            
                            
                            2008
                            
                            
                            2007Provision
      (benefit) for taxes using statutory rate
                            
                            $
                            (320,275
                            )
                            
                            $
                            996,906
                            
                            
                            $
                            (81,608
                            )State
      taxes, net of federal tax benefit
                            
                            
                            159,769
                            
                            
                            
                            218,412
                            
                            
                            
                            10,823FIN
      48 state additional exposure (reduction)
                            
                            
                            (6,203
                            )
                            
                            
                            7,766
                            
                            
                            
                            8,539Change
      in valuation allowance
                            
                            
                            (73,994
                            )
                            
                            
                            -
                            
                            
                            
                            -State
      taxes, net of federal tax benefit-change in estimated rate
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,841Change
      in prior year deferred tax estimates - State
                            
                            
                            -
                            
                            
                            
                            6,880
                            
                            
                            
                            5,280Change
      in prior year deferred tax estimates - Federal
                            
                            
                            -
                            
                            
                            
                            31,397
                            
                            
                            
                            23,076Permanent
      differences:Goodwill
      impairment
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            14,960Goodwill
      tax amortization
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (8,651
                            )Qualified
      stock based compensation
                            
                            
                            78,779
                            
                            
                            
                            91,602
                            
                            
                            
                            66,585Other
      non-deductible expenses
                            
                            
                            43,532
                            
                            
                            
                            21,357
                            
                            
                            
                            22,435Provision
      (benefit) for income taxes
                            
                            $
                            (118,392
                            )
                            
                            $
                            1,374,320
                            
                            
                            $
                            63,280




The
Company adopted FASB provisions for accounting for uncertainty in income taxes
as of January 1, 2007.  As a result of this adoption, 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.  There were no additional tax liabilities identified in 2008 or
2009, except for the potential additional interest on those liabilities
recognized at December 31, 2007.   As of December 31, 2009 and 2008,
the Company had $48,663 and $54,866, respectively, 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 years ended December 31,
2009 and 2008 follows:




Years
      Ended December 31,2009
                      
                      
                      2008Gross
      unrecognized income tax benefits beginning of year
                      
                      $
                      54,866
                      
                      
                      $
                      47,100Reductions
      for tax positions due to statute of limitations expiration
                      
                      
                      (7,247
                      )
                      
                      
                      -Additions
      for the tax positions of prior years
                      
                      
                      1,044
                      
                      
                      
                      7,766Gross
      unrecognized income tax benefits at end of year
                      
                      $
                      48,663
                      
                      
                      $
                      54,866




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. 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 2006 through 2009 tax
years. The periods subject to examination for the Company’s state returns in New
York, New Jersey and California are years 2005 through 2009. The Company
recognizes potential accrued interest and penalties related to unrecognized tax
benefits in income tax expense.  At December 31, 2009 and 2008, the Company
recognized approximately $1,044 and $9,224, respectively, 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.


F-18





HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements (continued)




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 terminated on December 23, 2009 .  Any option outstanding at
the termination date remains 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 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, 2009, in total, 245,485 options are available for future grant
under the 2002, 2006 and 2007 Plans.  The Company charged $362,361,
$281,938, and $227,839 to operations for the years ended December 31, 2009, 2008
and 2007, 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
                              
                              
                              PriceOutstanding
                              
                              
                              Exercisable
                              
                              
                              Outstanding
                              
                              
                              ExercisableDecember
      31, 2006
                              
                              
                              670,600
                              
                              
                              
                              290,435
                              
                              
                              $
                              5.17
                              
                              
                              $
                              6.37Granted
      at market
                              
                              
                              309,800
                              
                              
                              
                              
                              
                              
                              
                              4.32Exercised
                              
                              
                              -Terminated
                              
                              
                              (63,500
                              )
                              
                              
                              
                              
                              
                              
                              5.39December
      31, 2007
                              
                              
                              916,900
                              
                              
                              
                              354,620
                              
                              
                              
                              4.87
                              
                              
                              
                              5.68Granted
      at market
                              
                              
                              128,000
                              
                              
                              
                              
                              
                              
                              
                              5.56Exercised
                              
                              
                              (21,218
                              )
                              
                              
                              
                              
                              
                              
                              5.07Terminated
                              
                              
                              (39,167
                              )
                              
                              
                              
                              
                              
                              
                              5.03December
      31, 2008
                              
                              
                              984,515
                              
                              
                              
                              496,856
                              
                              
                              
                              4.97
                              
                              
                              
                              5.44Granted
      at market
                              
                              
                              88,000
                              
                              
                              
                              
                              
                              
                              
                              5.31Exercised
                              
                              
                              (43,783
                              )
                              
                              
                              
                              
                              
                              
                              4.65Forfeited
      or expired
                              
                              
                              (30,933
                              )
                              
                              
                              
                              
                              
                              
                              6.49December
      31, 2009
                              
                              
                              997,799
                              
                              
                              
                              628,866
                              
                              
                              $
                              4.96
                              
                              
                              $
                              5.17





F-19





HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements (continued)




A
summary of the status of the Company’s nonvested shares as of December 31, 2009
and changes during the year ended December 31, 2009 is presented
below:




Grant
      DateNonvested
      Shares
                      
                      Shares
                      
                      
                      Fair
      ValueNonvested
      at December 31, 2007
                      
                      
                      562,280
                      
                      
                      $
                      1.91Granted
                      
                      
                      128,000
                      
                      
                      
                      2.56Vested
                      
                      
                      (237,918
                      )
                      
                      
                      1.75Forfeited
      (nonvested)
                      
                      
                      (35,297
                      )
                      
                      
                      2.03Nonvested
      at December 31, 2008
                      
                      
                      417,065
                      
                      
                      
                      2.00Granted
                      
                      
                      88,000
                      
                      
                      
                      2.42Vested
                      
                      
                      (122,799
                      )
                      
                      
                      1.93Forfeited
      (nonvested)
                      
                      
                      (13,333
                      )
                      
                      
                      2.07Nonvested
      at December 31, 2009
                      
                      
                      368,933
                      
                      
                      $
                      2.11




As of
December 31, 2009, there was $552,460 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 2.8
years.





The
aggregate fair value of options outstanding at December 31, 2009, was $1,739,886
and had a weighted-average remaining contractual life of 2.7 years. Of these
options outstanding, 628,866 were exercisable and 368,933 were expected to
vest, and had an aggregate fair value of $759,547 with a weighted-average
remaining contractual life of 3.7 years. The following table provides
information related to options exercised during the years ended December
31:




2009
                    
                    
                    2008
                    
                    
                    2007Total
      intrinsic value
                    
                    $
                    59,421
                    
                    
                    $
                    146,701
                    
                    
                    
                    -Cash
      received upon exercise
                    
                    
                    203,669
                    
                    
                    
                    119,258
                    
                    
                    
                    -Related
      tax benefits realized
                    
                    
                    12,784
                    
                    
                    
                    11,391
                    
                    
                    
                    -





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:





2009
                    
                    
                    2008
                    
                    
                    2007Expected
      Life (years)
                    
                    
                    5.4
                    
                    
                    
                    4.3
                    
                    
                    
                    4.0Expected
      volatility
                    
                    
                    49.4
                    %
                    
                    
                    42.9
                    %
                    
                    
                    51.9
                    %Risk-free
      interest rates
                    
                    
                    1.7
                    %
                    
                    
                    2.9
                    %
                    
                    
                    4.1
                    %Dividend
      yield
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Weighted-average
      grant-date fair value
                    
                    $
                    2.42
                    
                    
                    $
                    2.56
                    
                    
                    $
                    2.16




F-20




HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements (continued)





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 55,000 shares of its restricted common stock in 2009, 2008 and 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 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 25,000 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. These shares held in
escrow 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.




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 adversely
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.




A total
of 166,400 common shares are available for issuance of employee stock options
and warrants as of December 31, 2009.


F-21


HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements (continued)




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, 2009, are as follows:





2010
                    
                    $
                    602,8772011
                    
                    
                    540,0592012
                    
                    
                    364,9952013
                    
                    
                    263,8002014
                    
                    
                    245,181Thereafter
                    
                    
                    439,903$
                    2,456,815





Rent
expense under operating leases was $820,817, $890,778, and $754,258 for the
years ended December 31, 2009, 2008 and 2007, 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”). As of September 1, 2003, the Company decided
to discontinue matching employee contributions to the 401-K Plan, but resumed
discretionary matches in 2008. The Company has implemented a match for 2008 and
2009 whereby the Company matched 25% of employee’s contributions, up to 10% of
the employee’s salary, with a maximum match of $750.  An expense of
$76,483 and $73,879 was recorded for the years ended December 31, 2009 and 2008,
respectively, associated with the Company matching contribution. The Company
plans to continue the same discretionary match in 2010. 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.




14.
            RELATED
      PARTY TRANSACTIONS




Joseph P.
Ritorto, a member of our Board of Directors since January 2002, was co-founder
of First Aviation Services, Inc. (“First Aviation”).  Mr. Ritorto sold
First Aviation to a group led by Goldman Sachs in May 2008. In 2007 the Company
had revenues of $546,375  principally associated with an integrated
security systems project with First Aviation.  During the period in
2008 that the business was owned by Mr. Ritorto, the Company had no revenues
from First Aviation.  There are no outstanding accounts receivable due
from First Aviation at December 31, 2009 related to the period that the business
was owned by Mr. Ritorto.


Richard
D. Rockwell, a member of the Board of Directors since November 2007, has been
Owner and Chairman of Professional Security Technologies LLC, a full service
security systems integrator since 1996.  The Company had revenues of
$120,130, $51,447 and $4,787 for the years 2009, 2008 and 2007,
respectively.  These revenues were principally related to the sale of
equipment.  There was a balance of $39,192 in accounts receivable as
of December 31, 2009.


15.
            CONTINGENT
      LIABILITIES





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





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 effect on the Company’s consolidated
financial statements.


F-22





HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements (continued)




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 31,2009
                      
                      
                      2008
                      
                      
                      2007RevenueIntegration
                      
                      $
                      53,089,756
                      
                      
                      $
                      60,843,182
                      
                      
                      $
                      56,332,837Specialty
                      
                      
                      2,283,713
                      
                      
                      
                      1,514,284
                      
                      
                      
                      2,147,355Inter-segment
                      
                      
                      (268,000
                      )
                      
                      
                      -
                      
                      
                      
                      (627,976
                      )Total
      revenue
                      
                      $
                      55,105,469
                      
                      
                      $
                      62,357,466
                      
                      
                      $
                      57,852,216Operating ProfitIntegration
                      
                      $
                      2,267,910
                      
                      
                      $
                      7,019,073
                      
                      
                      $
                      3,159,353Specialty
                      
                      
                      703,468
                      
                      
                      
                      (625,431
                      )
                      
                      
                      (544,471
                      )Corporate
                      
                      
                      (3,700,311
                      )
                      
                      
                      (3,299,100
                      )
                      
                      
                      (2,578,300
                      )Total
      operating profit
                      
                      $
                      (728,933
                      )
                      
                      $
                      3,094,542
                      
                      
                      $
                      36,582





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





December 31,2009
                      
                      
                      2008Total Assets:Integration
                      
                      $
                      27,309,364
                      
                      
                      $
                      33,304,890Specialty
                      
                      
                      1,454,812
                      
                      
                      
                      1,756,730Corporate
                      
                      
                      3,928,119
                      
                      
                      
                      1,548,488Total
      assets
                      
                      $
                      32,692,295
                      
                      
                      $
                      36,610,108




17.
            ACQUISITIONS





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, 2009, on a
cumulative basis the selling shareholder has earned $137,500 in cash and 55,000
additional shares (valued at $297,400) of the Company’s common stock through the
achievement of certain performance targets, which resulted in the$193,400,
$213,050 and $62,500 additional goodwill during each of the years ended December
31, 2009, 2008 and 2007, respectively.




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.


F-23





HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES


Notes
to the Consolidated Financial Statements (continued)




18.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED):




Presented
below is a schedule of selected quarterly operating results:





First Quarter
                    
                    
                    SecondQuarter
                    
                    
                    ThirdQuarter
                    
                    
                    Fourth QuarterEnded March31
                    
                    
                    Ended June 30
                    
                    
                    Ended Sept.30
                    
                    
                    Ended Dec. 31(1)Year Ended December 31,
2009Revenue
                    
                    $
                    15,308,212
                    
                    
                    $
                    13,971,980
                    
                    
                    $
                    12,109,037
                    
                    
                    $
                    13,716,240Gross
      profit
                    
                    
                    4,222,014
                    
                    
                    
                    3,890,109
                    
                    
                    
                    3,022,057
                    
                    
                    
                    3,122,736Net
      income
                    
                    
                    166,122
                    
                    
                    
                    55,253
                    
                    
                    
                    (357,382
                    )
                    
                    
                    (687,950
                    )Earnings
      per shareBasic
                    
                    $
                    0.03
                    
                    
                    $
                    0.01
                    
                    
                    $
                    (0.06
                    )
                    
                    $
                    (0.12
                    )Diluted
                    
                    
                    0.03
                    
                    
                    
                    0.01
                    
                    
                    
                    (0.06
                    )
                    
                    
                    (0.12
                    )Year Ended December 31,
2008Revenue
                    
                    $
                    15,906,046
                    
                    
                    $
                    15,123,950
                    
                    
                    $
                    12,262,372
                    
                    
                    $
                    19,065,098Gross
      profit
                    
                    
                    3,689,108
                    
                    
                    
                    3,841,951
                    
                    
                    
                    3,612,452
                    
                    
                    
                    4,748,761Net
      income
                    
                    
                    283,957
                    
                    
                    
                    337,261
                    
                    
                    
                    210,782
                    
                    
                    
                    725,756Earnings
      per shareBasic
                    
                    $
                    0.05
                    
                    
                    $
                    0.06
                    
                    
                    $
                    0.04
                    
                    
                    $
                    0.12Diluted
                    
                    
                    0.05
                    
                    
                    
                    0.06
                    
                    
                    
                    0.04
                    
                    
                    
                    0.12





Earnings
(loss) 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.





(1) The
Company’s decrease in net income (loss) is principally the result of the overall
declines in revenues due to the protracted credit freeze and economic downturn,
which is having a significant negative impact on construction markets and
capital spending patterns of commercial businesses.




F-24




HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES




SCHEDULE
II





VALUATION
AND QUALIFYING ACCOUNTS


YEARS
ENDED DECEMBER 31, 2009, 2008, AND 2007





Column A
                
                Column B
                
                
                Column C
                
                
                Column D
                
                
                Column E
                
                
                Column FAdditionsDescription
                
                Balance at
                  Beginning of
                  Period
                
                
                Charged to
                  Costs and
                  Expenses
                
                
                Charged to
                  Other
                  Accounts-
                  Describe
                
                
                Deductions-
                  Describe
                
                
                Balance atEnd
                  ofPeriodYear
      ended December 31, 2009Deducted
      from asset accounts:Allowance
      for doubtful accounts
                
                $
                801,306
                
                
                $
                316,181
                
                
                $
                -
                
                
                $
                405,281
                
                
                $
                712,206Inventory
      allowance
                
                
                775,539
                
                
                
                8,305
                
                
                
                -
                
                
                
                326,663
                
                
                
                457,181Warranty
      reserve
                
                
                404,406
                
                
                
                102,357
                
                
                
                -
                
                
                
                41,377
                
                
                
                465,386Year
      ended December 31, 2008Deducted
      from asset accounts:Allowance
      for doubtful accounts
                
                
                810,587
                
                
                
                346,602
                
                
                
                -
                
                
                
                355,883
                
                
                
                801,306Inventory
      allowance
                
                
                595,539
                
                
                
                180,000
                
                
                
                -
                
                
                
                -
                
                
                
                775,539Warranty
      reserve
                
                
                392,220
                
                
                
                40,155
                
                
                
                -
                
                
                
                27,969
                
                
                
                404,406Year
      ended December 31, 2007
                
                
                -Deducted
      from asset accounts:Allowance
      for doubtful accounts
                
                
                983,791
                
                
                
                41,123
                
                
                
                -
                
                
                
                214,327
                
                
                
                810,587Inventory
      allowance
                
                
                415,539
                
                
                
                180,000
                
                
                
                -
                
                
                
                -
                
                
                
                595,539Warranty
      reserve
                
                
                392,307
                
                
                
                44,868
                
                
                
                -
                
                
                
                44,955
                
                
                
                392,220




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 Filing3.1
      —
              
              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)3.7
      —
              
              Certificate
      of Amendment of the Certificate of Incorporation of the Company, filed on
      November 12, 2009
              (*)4.1
      —
              
              Specimen
      Common Stock Certificate of the Company
              (4)10.1
      —
              
              2002
      Stock Option Plan
              (*)10.5
      —
              
              1999
      Incentive Stock Option Plan and form of Stock Option
    Agreement
              (1)10.11
      —
              
              Agreement
      between the Company and Administaff, Inc.
              (6)10.12
      —
              
              Loan
      Agreement between the Company and Hudson United Bank
              (7)10.13
      —
              
              Stock
      Purchase Agreement between the Company and Securus, Inc.
              (8)10.14
      —
              
              Office
      Lease between the Company and C.K. Bergen Holdings, LLC
              (9)10.15
      —
              
              Stock
      Purchase Agreement between the Company and CIS Security Systems,
      Corporation
              (10)10.16
      —
              
              2006
      Stock Option Plan
              (11)10.17
      —
              
              2007
      Stock Option Plan
              (14)14.1
      —
              
              Code
      of Ethics
              (*)14.2
      —
              
              Nominating
      Committee Charter
              (13)14.3
      —
              
              Audit
      Committee Charter
              (14)21.1
      —
              
              List
      of Subsidiaries
              (*)23.1
      —
              
              Consent
      of Amper, Politziner & Mattia, LLP
              (*)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
              (*)










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 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.




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




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




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




(10)
Incorporated by reference to the Company’s Current Report on Form 8-K, filed
with the Securities and Exchange Commission on October 5, 2006.




(11)
Incorporated by reference to the Company’s Definitive Proxy on Form 14A, filed
with the Securities and Exchange Commission on September 22, 2006.




(12)
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.




(13)
Incorporated by reference to the Company’s Definitive Proxy on Form 14A, filed
with the Securities and Exchange Commission on July 5, 2005.




(14)
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.