<PAGE>

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB
     [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
                        EXCHANGE ACT OF 1934, AS AMENDED

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

                                       OR

     [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                            AND EXCHANGE ACT OF 1934
          FOR THE TRANSITION PERIOD FROM _____________ TO _____________

                          Commission File No. 005-62411

                                   -----------

                          HENRY BROS. ELECTRONICS, INC.

           (Name of small business issuer as specified in its charter)

                                   -----------

                Delaware                               22-3690168
    (State or other jurisdiction of       (I.R.S. Employer Identification No.)
     incorporation or organization)

280 Midland Avenue, Saddle Brook, New Jersey                 07663
  (address of principal executive offices)                (Zip Code)

         Issuer's Telephone number, including area code: (201) 794-6500

                                   -----------

        Securities registered pursuant to Section 12(b) of the Act: None

                                   -----------

           Securities registered pursuant to Section 12(g) of the Act:

                                   -----------

                          Common Stock, $.01 par value
                                (Title of Class)

                                   -----------

Check whether Issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the Issuer was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]

Check if disclosure of delinquent filers pursuant to item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of the
Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this form 10-KSB or any amendment to
this Form 10-KSB. [_]

State the aggregate market value of the voting stock held by non-affiliates of
the Issuer: $18,677,128 (based upon the closing price of Issuer's Common Stock,
$.01 par value, as of March 21, 2006).

The Registrant's revenues for the year ended December 31, 2005 were $42,156,188.

Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.

        Common Stock, $.01 Par Value                       5,896,065
              (Title of Class)                    (No. of Shares Outstanding
                                                       at March 21, 2006)

                      Documents Incorporated By Reference:
                                      None

================================================================================




<PAGE>

                          HENRY BROS. ELECTRONICS, INC.
                                Table of Contents

<TABLE>
<S>                                                                                                                     <C>
PART I ..............................................................................................................    3

Item 1. Description of Business .....................................................................................    3

Item 2. Description of Property .....................................................................................   10

Item 3. Legal Proceedings ...........................................................................................   11

Item 4. Submission of Matters to a Vote of Stockholders .............................................................   11

PART II .............................................................................................................   12

Item 5. Market for Common Equity and Related Stockholder Matters ....................................................   12

Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................   13

Item 7. Financial Statements ........................................................................................   18

Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................   18

Item 8A. Controls and Procedures ....................................................................................   18

Item 8B. Other Information ..........................................................................................   19

PART III ............................................................................................................   19

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Sections (16a) of the Exchange
Act and Code of Ethics ..............................................................................................   19

Item 10. Executive Compensation .....................................................................................   23

Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters ............   25

Item 12. Certain Relationships and Related Transactions .............................................................   26

Item 13. Exhibits and Reports on Form 8-K ...........................................................................   26

Item 14. Principal Accountant Fees and Services .....................................................................   26

Signatures ..........................................................................................................   28
</TABLE>

      Forward Looking Statements

      This annual report contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, as amended.
Forward-looking statements inherently involve risks and uncertainties that could
cause actual results to differ materially from those stated. Such statements are
subject to certain risks and uncertainties, including our ability to utilize the
acquisitions we have made; possible significant variations in recognized revenue
due to customer caused delays in installations; cancellation of contracts by our
customers and competition, that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. The
Company does not assume any obligation to update the forward-looking information
and cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made.




<PAGE>

                                     PART I

Item 1. Description of Business

      (a) 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 President and Chief Operating Officer reacquired certain assets,
including the name Henry Bros. Electronics ("HBE") 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.

      In November 2001, we completed our initial public offering, including the
underwriter's over-allotment option of an aggregate of 1,725,000 shares of
common stock. Our shares are traded on the American Stock Exchange under the
ticker symbol HBE.

      In May 2002, we purchased Photo Scan Systems, Inc. ("Photo Scan") a
security integrator located in southern California and changed its name to Henry
Bros. Electronics, Inc. in December 2002.

      In August 2002, Photo Scan acquired National Safe of California, Inc.
which sells and services alarm security equipment, lock and timing mechanisms,
vault security, control and backup systems and high resolution security
equipment used by commercial banks.

      In September 2002, Photo Scan acquired Corporate Security Integration,
LLC. ("CSI") a security integrator located in Phoenix, Arizona, and subsequently
changed its name to Henry Bros. Electronics, LLC.

      In April 2004, we acquired Airorlite Communications, Inc., a company
located in Saddle Brook, 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.

      Our principal executive offices are located at 280 Midland Avenue, Saddle
Brook, New Jersey 07663, and our telephone number is (201) 794-6500.

      (b) Business of Issuer

      We are a single-source/turn-key provider of technology-based security
solutions for medium and large commercial enterprises and government agencies in
the United States.

      Security Distributing and Marketing magazine ("SDM") ranks by 2004 revenue
the top 100 largest firms selling closed circuit TV ("CCTV"), access control and
integrated security systems. We were ranked No. 21 in SDM's Top Systems
Integrators Report published in July 2005.

                                        3




<PAGE>

      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:

      o     Experience and expertise;
      o     Technological sophistication;
      o     Quality control; and
      o     Strong list of references.

      Our Strategy

      Our strategy consists of the following components:

      o     Maintain and develop long-term relationships with clients;
      o     Focus on high value-added services;
      o     Continue to expand our client base in targeted industries;
      o     Maintain a high level of technological sophistication;
      o     Sell additional services to our established client base; and
      o     Pursue strategic acquisitions that would be complementary to our
            business and accretive to earnings

      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
turnkey systems that integrate many different technologies. Systems are
customized to meet the specific needs of its customers. In October 2005 the
Company acquired Securus, Inc. a provider of security system integration with
offices in Denver and Colorado Springs Colorado. The Specialty Products and
Services segment ("Specialty") includes the Company's digital mobile recording
business, Viscom Products, Inc. ("Viscom") and the Emergency Preparedness
Planning Programs ("EPPP") division. In April 2004, the Company acquired
Airorlite Communications, Inc. ("Airorlite") which is included within the
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. Each of the Company's segments markets nationwide with an
emphasis in the New Jersey/New York, Southern California, Dallas, Phoenix and
Denver 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.

                                        4




<PAGE>

Our Integration Solution

      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:

      o     Consulting and planning;
      o     Engineering and design;
      o     Systems installation and management;
      o     Systems training; and
      o     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:

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

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

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

      Engineering and Design

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

                                        5




<PAGE>

      When retained as a single-source provider for turnkey 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:

      o     Access control systems, which are designed to exclude unauthorized
            personnel from specified areas;
      o     Intrusion detection systems, which detect unauthorized door and
            window openings, glass breakage, vibration, motion, noise and alarms
            and other peripheral equipment;
      o     Closed circuit television systems, which monitor and record entry
            and exit activity or provide surveillance of designated areas;
      o     Critical condition monitoring systems, which provide alarm
            monitoring and supervision of various systems and facilities; and
      o     Intercoms, public address, 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.

Our Specialty Solutions

      Viscom specialty is integrating digital video and voice recording
solutions for mobile deployment on municipal buses and trains. Viscom solutions
include products manufactured by third party vendors. 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 EPPP division works
with high-

                                        6




<PAGE>

rise office building management to analyze their specific facilities needs
relating to emergency response plans and the communication and training of such
plans to the building community.

      Marketing

      Our marketing activities are conducted on both national and regional
levels. We obtain engagements through direct negotiation with clients,
competitive bid processes and referrals. At the national level, we conduct
analyses of various industries and target those with significant demand for
security solutions. At a regional level, we have developed and implemented a
marketing plan that targets specific regions of the country. The plan identifies
prospective clients within specific regions of the country and sets forth a
strategy for developing relationships with them.

      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.

      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 February 2006, we had 172 full time employees, including officers,
of whom: 122 were engaged in engineering, systems installation and maintenance
services, 22 in administration and accounting, and 28 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.

                                        7




<PAGE>

      Pricing

      We employ a variety of pricing strategies for our services. Systems
integration projects are 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 rate quoted, 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 rates or on a project basis.

Risk Factors

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

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

      We have a small number of customers from which we receive a large portion
of our revenues. Our work with the Triborough Bridge & Tunnel Authority
accounted for 15% of total revenue during 2005, with our five largest customers
represented approximately 37% of our 2005 revenue. Revenues from governmental
agencies accounted for 39% in 2005 versus 20% in 2004. Consequently, we are
often required to replace one customer with one or more other customers in order
to generate the same amount of revenues. There can be no assurance that we will
continue to be able to do so.

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

      Some of our orders and contract backlog are subject to cancellation or
modification by our customers at any time so we cannot be certain that we will
recognize revenues from them. As of December 31, 2005, our backlog was
approximately $16,003,000.

      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.

                                        8




<PAGE>

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

      For the years ended December 31, 2005 and 2004 our revenues were
$42,156,188 and $29,725,718, respectively, and our net income was $1,108,278 and
$44,021 respectively. Our profit has not been continuous and 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 only a few key executives

      James E. Henry and Irvin F. Witcosky, our two key executives, are vital to
our business operations. The loss of either of them 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 our 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 revenues cycle

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

      Seasonality

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

      We may make acquisitions or form joint ventures that are unsuccessful

                                        9




<PAGE>

      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:

            o     We may not be able to identify suitable acquisition and joint
                  venture candidates.
            o     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.
            o     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
                  expenses and charges.
            o     We may not be able to retain key employees of the acquired
                  companies or maintain good relations with its customers or
                  suppliers.
            o     We may be required to incur additional debt.
            o     We may be required to issue equity securities to pay for such
                  acquisition, which will dilute existing shareholders.
            o     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 Chief Executive Officer and Chief Operating Officer own a significant
      amount of our common stock and their interests may be different from and
      conflict with yours

      The interests of the Chief Executive Officer and Chief Operating Officer
could conflict with the interests of our other stockholders. Mr. Henry and Mr.
Witcosky beneficially own a total of approximately 47.5% of our outstanding
common stock. Accordingly, if they act together, they may have the power to
control the election of all of our directors or other issues for which the
approval of our shareholders is required.

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

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

Item 2. Description of Property

      We lease a 17,055 square foot sales, office, and integration facility that
also serve as our corporate office in Saddle Brook, 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 June 30, 2006, and
provides for an annual rent of $98,400 until that date, payable in equal monthly
installments of $8,200, plus taxes of approximately $600 per month. We are also
responsible for the cost of property tax increases, utilities, repairs,
maintenance, alterations, cleaning and insurance.

      We lease a 9,553 square foot sales and office facility in Fullerton,
California. A two-story, concrete building in an office complex, this space is
leased until November 15, 2006 at an average

                                       10




<PAGE>

annual rent of $111,398 payable in equal monthly installments of $9,283, with
additional costs for insurance, repairs and alterations, utilities, taxes
increases and cleaning.

      We lease a 4,200 square foot sales and office facility in Grand Prairie,
Texas near the Dallas-Fort Worth Airport. A single-story, cinder block building
in an office complex, this space is leased until February 28, 2007 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, taxes and
cleaning.

      We lease a 3,906 square foot sales and office facility in Phoenix,
Arizona. A single-story, concrete building in an office complex, this space is
leased until August 2006 at an average annual rental of $60,576, payable in
average monthly installments of $5,048, with additional costs for insurance,
repairs and alterations, utilities, taxes increases and cleaning.

      We sublease approximately 1,750 square feet of office space in New York
City for sales and project management personnel. This lease expires on October
31, 2006, with an annual rental of $28,800, payable in equally monthly
installments of $2,400, inclusive of utilities.

      Our Airorlite subsidiary leases a 5,440 square foot sales, office and
warehouse facility in Saddle Brook, New Jersey. This facility is in a
single-story, cinder block building in a commercial and industrial park. The
lease on this space terminates on June 30, 2006, and provides for an annual rent
of $38,080 until that date, payable in equal monthly installments. We are also
responsible for the cost of property tax increases, utilities, repairs,
maintenance, alterations, cleaning and insurance.

      Our Securus, Inc. ("Securus") subsidiary leases a 16,045 square foot
sales, office and warehouse facility in Denver, Colorado. This facility is in a
single-story, cinder block building in a commercial and industrial park. The
lease on this space terminates April 2010 and provides for an annual rent of
$88,248 until that date, payable in equal monthly installments. Securus also
leases 3,500 square feet of office and warehouse space in Colorado Springs,
Colorado which terminates December 2010 and provides for an annual rent of
$23,832 payable in equal monthly installments. Securus is responsible for the
cost of property taxes, utilities, repairs, maintenance, alterations, cleaning
and insurance for both of these leased properties.

      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. Submission of Matters to a Vote of Security Holders

      No matters were submitted for a vote to our stockholders during our 2005
fourth quarter.

                                       11




<PAGE>

                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters and Small
        Business Issuer Purchases of Equity Securities

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

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

                2004                                      High     Low
                ----                                     ------   -----
                First Quarter                            $6.88    $5.50
                Second Quarter                           $9.90    $6.35
                Third Quarter                            $9.00    $5.20
                Fourth Quarter                           $5.55    $4.81

                2005
                ----
                First Quarter                            $5.75    $4.45
                Second Quarter                           $5.05    $3.10
                Third Quarter                            $6.85    $3.89
                Fourth Quarter                           $5.95    $4.20

      (b)   Number of Holders of Common Stock. The number of holders of record
            of our Common Stock on December 31, 2005 was 35. 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
            number of beneficial owners of common stock.

      (c)   Dividends. There were no cash dividends or other cash distributions
            made by us during the year ended December 31, 2005. Future dividend
            policy will be determined by our Board of Directors based on our
            earnings, financial condition, capital requirements and other
            existing conditions. It is anticipated that cash dividends will not
            be paid to the holders of our common stock in the foreseeable
            future.

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

                                       12




<PAGE>

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

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                                                            Number of securities
                                                                   Weighted average       remaining available for
                                      Number of securities to     exercise price of     future issuance under equity
                                      be issued upon exercise        outstanding       compensation plans (excluding
                                      of outstanding options,     options, warrants       securities reflected in
                                        warrants and rights           and rights                column (a))
           Plan category                        (a)                      (b)                        (c)
----------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                         <C>                  <C>
Equity compensation plans approved
by security holders                          471,375  *                 $5.95                     240,100
----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders                 239,662 **                 $7.48                           -
----------------------------------------------------------------------------------------------------------------------
Total                                        711,037                    $6.47                     240,100
----------------------------------------------------------------------------------------------------------------------
</TABLE>

----------
      * This amount includes options issuable pursuant to our 2002 Stock Option
Plan. Our Board of Directors approved this plan on May 10, 2002. Our
shareholders' approved it on October 28, 2002. The plan authorizes the issuance
of options to purchase up to 230,000 share of our Common Stock to employees,
directors, and consultants of the Company.

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

      ** This amount includes a five year options (currently exercisable)
granted to the Wall Street Group ("WSG") consisting of (i) 40,000 shares granted
November 5, 2001 with an exercise price of $7.00 per share and (ii) 5,996 shares
granted November 5, 2002 with an exercise price of $6.90 per share,, issued in
connection with an agreement to provided certain services dated November 1, 2001
and terminated in April 2003. Also included are warrants to purchase 138,333 and
55,333 shares at $7.60 expiring January 27, 2010, that were granted in
connection with the issuance of 553,333 shares of our common stock to certain
qualified institutional investors and the placement agent, respectively, in July
2004

Item 6. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

      We are a single-source/turn-key provider of technology-based security
solutions for medium and large commercial enterprises and government agencies in
the United States.

      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.

                                       13




<PAGE>

      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 turnkey
systems that integrate many different technologies. Systems are customized to
meet the specific needs of its customers. In October 2005 the Company acquired
Securus, Inc. a provider of security system integration with offices in Denver
and Colorado Springs Colorado. The Specialty Products and Services segment
("Specialty") includes the Company's digital mobile recording business, Viscom
Products, Inc. ("Viscom") and the Emergency Preparedness Planning Programs
("EPPP") division. In April 2004, the Company acquired Airorlite Communications,
Inc. ("Airorlite") which is included in the 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. Each of the
Company's segments markets nationwide with an emphasis in the New Jersey/New
York, Southern California, Dallas, Phoenix and Denver 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.

Comparison of the year ended December 31, 2005 to the year ended December 31,
2004

      Revenues

      Revenues for the year ended December 31, 2005 were $42,156,188,
representing an increase of $12,430,470 or 41.8%, as compared to $29,725,718 for
the year ended December 31, 2004. The increase in revenue was principally
related to an increase of $12,593,273 in the Company's integration business. The
New Jersey/New York region accounted for approximately $11.5 million of the
increased Integration revenue of which single customer project represented
approximately $5.2 million. Our backlog for this single customer project at
December 31, 2005 was approximately $3.2 million as compared to $6.8 million at
December 31, 2004.In October 2005, the Company acquired Securus, Inc., a
provider of security integration systems. Revenues for Securus were $1,101,509
for the period October 11, 2005 through December 31, 2005. Revenues to
governmental agencies represented 39% and 20% of total revenues, for the years
ended December 31, 2005 and 2004, respectively.

      Cost of Revenues

      Cost of revenues for the year ended December 31, 2005 was $31,581,187, as
compared to $22,305,632 for the year ended December 31, 2004. This was an
increase of $9,275,555 or 41.6% Gross profit margin was 25.1% for the year ended
December 31, 2005, as compared to 25.0 % for the year ended December 31, 2004.
Direct labor for our Integration segment decreased as a percent of revenue
accounting for most of the increase in this segments gross profit margin to
24.3% for the year ended December 31, 2005 versus 22.3% for the prior year
period. Our specialty segment gross profit margin decreased to 32.4% for the
year ended December 31, 2005 versus 43.3% for the same period of the prior year.
The decrease on a flat revenue comparison is due to a change in the revenue mix
from Airorlite to Viscom.

                                       14




<PAGE>

      Selling, General and Administrative Expenses

      Selling, general and administrative expenses increased to $8,467,192 for
the year ended December 31, 2005, from $7,020,885 for the year ended December
31, 2004. Selling, general and administrative expenses as a percentage of
revenues decreased to 20.1% for the year ended December 31, 2005 versus 23.6%
for the year ended December 31, 2004. This increase of $1,446,307, or 20.6%, was
primarily attributable to increased headcount and staff costs. As the Company's
revenues increased in 2005, our corporate expenses decreased as a percent of our
consolidated revenue to 3.3% for the year ended December 31, 2005 as compared
with 4.4% for the same period of the prior year.

      Interest Income

      Interest income for the year ended December 31, 2005 was $12,507, as
compared to $12,624 for year ended December 31, 2004.

      Interest Expense

      Interest expense for the year ended December 31, 2005 was $84,985, as
compared to $94,039 for the year ended December 31, 2004. The decrease of $9,054
was attributable to having an average lower debt balance of approximately
$1,279,468 for the year ended December 31, 2005 as compared to $1,783,342 for
the year ended December 31, 2004. This decrease was partially offset by
increases in interest rates as the weighted average prime rate increased to 6.4%
for the year ended December 31, 2005 versus 4.6% for the same period of the
prior year.

      Net Income

      As a result of the factors noted above, for the year ended December 31,
2005 our net income was $1,108,278, as compared to a net income of $44,021 for
the year ended December 31, 2004 This resulted in basic earnings per share of
$0.19 on weighted average common shares outstanding of 5,739,398 for the year
ended December 31, 2005, as compared to basic earnings per share of $0.01 on
weighted average common shares outstanding of 5,411,964 for the year ended
December 31, 2004.

      Liquidity and Capital Resources

      As of December 31, 2005, we had cash and cash equivalents of $2,177,686,
versus $3,154,972 as of December 31, 2004. This decrease is primarily
attributable to the acquisition of Securus, Inc in October 2005, in the net
amount of $1,110,000. We have a revolving loan facility of $4,000,000 with
Hudson United Bank that matures in May 2007. The amount available under the
revolving credit facility was approximately $4,000,000, as of December 31, 2005.
Our working capital was $10,302,321 as of December 31, 2005. We have total
short-term debts due of approximately $296,666 and purchase orders with our
vendors to fulfill customer orders of approximately $4,402,000.

      During the year ended December 31, 2005, net cash provided by operations
was $999,808. We purchased property and equipment of $202,240 and used $690,326
in cash from financing

                                       15




<PAGE>

activities. In addition, the company utilized $1,110,000 of net cash to acquire
Securus, Inc. in 2005.

      Our capital requirements have grown substantially as a result of the
growth of our operations and staffing since our public offering. Our cash and
cash equivalents have decreased by $977,286 during the year ended December 31,
2005, we believe that our current cash and available lines of credit should be
sufficient to meet our capital requirements for the next twelve months. However,
we may seek additional equity and /or debt financing to grow our operations.

      Critical Accounting Policies

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

      Revenue Recognition

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

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

      2.    System is functional and has been tested.

      3.    Training has been provided.

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

      Service contracts, which are generally separate and distinct agreements
from project

                                       16




<PAGE>

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 2004 and 2005, the
company did not bundle any significant service contracts with our systems
installation work.

      The Emergency Preparedness Planning Programs division provides emergency
planning services to commercial real estate owners and managers. In general,
project labor is the predominant cost associated with the completion of these
projects. The company utilizes labor as the output measure in order to recognize
revenue and believes this to be an accurate matching of costs and revenue.

      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. Our trade receivables are not collateralized.

      Inventory Valuation

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

      Warranty

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

      Intangible Assets

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

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

                                       17




<PAGE>

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

      Goodwill

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

      Income Taxes

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

Item 7. Financial Statements

      Refer to pages F-1 through F-25.

Item 8. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure

      During the year ended December 31, 2005, there were no changes in or
disagreements with the Company's principal independent accountant on accounting
or financial disclosure.

Item 8A. Controls and Procedures

      (a) The Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer, Chief Operating Officer and Chief Financial Officer, of the
design and operation of the Company's disclosure controls and procedures, as
defined under Rule 13a-15(e) of the Securities and Exchange Act of

                                       18




<PAGE>

1934, as of the end of the period covered by this report. Based upon that
evaluation, the Company's Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures:

      (i)   are effective in timely alerting them to material information
            relating to the Company (including its consolidated subsidiaries)
            required to be included in the Company's periodic SEC filings;

      (ii)  are designed to ensure that information required to be disclosed by
            the Company in the reports that it files or submits under the
            Securities and Exchange Act is recorded, processed, summarized and
            reported, within the time periods specified in the Commission's
            rules and forms; and

      (iii) include, without limitations, controls and procedures designed to
            ensure that information required to be disclosed by the Company in
            the reports that it files or submits under the Securities and
            Exchange Act is accumulated and communicated to the Company's
            management, including its principal executive and principal
            financial officers or persons performing similar functions, as
            appropriate to allow timely decisions regarding required disclosure.

      (b)   Change in Internal Controls over Financial Reporting

      As required by Rule 13a-15(d), the Company's executive management
including the Chief Executive Officer, the Chief Operating officer and the Chief
Financial Officer, also conducted an evaluation of the Company's internal
controls over financial reporting to determine whether any change occurred
during the Company's last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal controls over
financial reporting. Based on that evaluation, there have been no changes in the
Company's internal controls over financial reporting during the year covered by
this report that have materially affected, or are reasonably likely to
materially affect our internal controls over financial reporting.

Item 8B. Other Information

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

                                       19




<PAGE>

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act and Code of Ethics

      As of March 15, 2006, the Company's directors and executive officers were
as follows:

<TABLE>
<CAPTION>
Name                    Age      Position
----                    ---      --------
<S>                     <C>      <C>
James E. Henry          52       Chairman, Chief Executive Officer, Treasurer and Director
Brian Reach             51       Vice Chairman, Secretary and Director
Irvin F. Witcosky       67       President, Chief Operating Officer and Director
Philip A. Timpanaro     58       Chief Financial Officer
Robert DeLia Sr.        58       Director
James W. Power          76       Director
Joseph P. Ritorto       74       Director
David Sands             49       Director
</TABLE>

      James E. Henry, our Chief Executive Officer, co-founded our predecessor
company in 1989 and served as our President until December 2001 when he was
elected our Chief Executive Officer and Chairman of the Board. 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 our research and development.

      Brian Reach became a member of our board of directors in February 2004,
serving as the Chairman of our Audit Committee until June 2004, when Mr. Reach
became our Vice Chairman. In November 2004 Mr. Reach was appointed our
Secretary. Mr. Reach began his career in 1976 with PricewaterhouseCoopers,
becoming a CPA in 1980. From 1999 through 2002 Mr. Reach served as the Chief
Financial Officer for Globix Corporation. Mr. Reach has also served as the Chief
Financial Officer of IPC Communications, Inc., Celadon Group, Inc. and Cantel
Medical Corp. Mr. Reach has a wide range of corporate finance, restructuring and
governance experience having led the financing efforts to raise over $1 billion
during his career. He has also played key leadership roles in mergers and
acquisitions, a leveraged recapitalization, debt restructurings and the
development of controls for internal and external financial reporting. Mr. Reach
graduated with a Bachelor of Science degree in Accounting from the University of
Scranton.

      Irvin F. Witcosky co-founded our predecessor company in 1989 and served as
our Executive Vice President until December 2001 when he was elected our Chief
Operating Officer and President. Mr. Witcosky has also served as our Secretary
from 1989 to November 2004 and is on our Board of Directors. Mr. Witcosky
graduated from California Polytechnic University with a Bachelor of Science
degree in aeronautical engineering. In addition to his other responsibilities,
Mr. Witcosky has continued to design, integrate and market security and
communication systems as well as manage our operations and administration.

      Philip Timpanaro joined our Company in February 2005 and became our Chief
Financial

                                       20




<PAGE>

Officer effective on April 1, 2005. Mr. Timpanaro has more than 30 years of
executive-level experience in accounting and finance from a variety of companies
in the engineering, construction and consulting industries. From 2000 to 2005
Mr. Timpanaro served as Corporate Controller for Varsity Plumbing & Heating,
Inc, a $15 million private company based in Flushing, New York. Prior to that,
he served as Corporate Controller of ReGen Biologics, Inc. a public company
whose stock is traded on the over-the-counter market. Mr. Timpanaro is a
graduate of Bloomfield College with BS in Accounting.

      Robert L. De Lia, Sr. has been a member of our Board since May 2004. From
2002 to 2003, Mr. DeLia was the chief executive officer of Airorlite
Communications, Inc., a company that specialized in design, 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.

      James W. Powers became a member of our Board in December 2005. Mr. Power
brings more than 30 years of security industry experience to the Company. Mr.
Power is the principal partner in J.W. Power & Associates and is a Director and
Chairman of MDI, Inc. (a NASDAQ Company). He previously served as Chairman of
the Board of InfoGraphic Systems Corp.; president and CEO of Martec\SAIC;
President and CEO 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 became a member of our Board in January 2002. Mr.
Ritorto is the co-founder of First Aviation Services, Inc., which is located on
Teterboro Airport in New Jersey and provides a variety of aviation support
services. Mr. Ritorto has been an officer of First Aviation Services since 1986.
From 1991, until he retired in May 2001, Mr. Ritorto served as Senior Executive
Vice President and Chief Operating Officer of Silverstein Properties, Inc. and
was responsible for leasing operations and directing the lease administration of
Silverstein owned and managed properties.

      David Sands is a certified public accountant and is 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 B.S. from SUNY at Buffalo and a M.S. in
Taxation from Pace University.

                                       21




<PAGE>

      Background Information About Certain Key Employees

      Theodor Gjini has worked for us since 1988 in various capacities,
including as a sales engineer and project manager. In his current position as a
Vice President, he supervises the coordination of our personnel and their
activities in project installations, engineering and maintenance. Mr. Gjini
graduated from the New Jersey Institute of Technology with a Bachelor of Science
degree in electrical engineering and William Paterson College with a master in
business administration.

      Emil J. Marone has worked for us since 1965 in various capacities,
including as a hospital communication system specialist, security systems
supervisor, systems engineer, and quality control specialist. In his current
position as our Chief Technology Officer, he is responsible for the development
of special products and testing procedures as well as quality assurance and
management. He holds an associate science degree from Bergen County Community
College.

      Alex Pavlis has been a Vice President since April 2002. From January 2000
until March 2001, Mr. Pavlis was a Vice President of Sales and Marketing at
Intellisec a systems integrator. In this capacity, Mr. Pavlis was responsible
for all integrated security system sales in Northern and Southern California and
in Arizona. From October 1983 to January 2000, Mr. Pavlis was a Vice President
of Revenue and Marketing for UAC Security Systems where he oversaw UAC's
integrated security system revenue and operations department.

      Lee Masoian has been President of Airorlite Communications Inc. since its
acquisition in April 2004. Mr. Masoian was a founder of Airorlite Communication
Inc. and served as its President since incorporation in 2002. Mr. Masoian has
held numerous technical positions in the wireless field for the past thirty
years. He is a practicing engineer and led the development and design of many of
the products that are offered by Airorlite. Mr. Masoian is a patent holder of
several products. During his career, Mr. Masoian has held several positions of
instructor and assistant professor at a number of junior and four year colleges.
Mr. Masoian holds a BSEE and an MSEE from the Polytechnic Institute of NY with
majors in communication theory.

      Audit Committee and Audit Committee Financial Expert

      The Board has a separately designated, Audit Committee, in accordance with
regulations of the Securities and Exchange Commission and the American Stock
Exchange. The Audit Committee reviews, with the Company's independent public
accountants, the scope and adequacy of the audit to be performed by the
accountants, the Company's accounting practices, procedures and policies, and
all related-party transactions. The Audit Committee has adopted an Audit
Committee Charter. The Audit Committee met three times during 2005 and acted by
written consent once. The Audit Committee currently consists of David Sands,
James Power and Joseph Ritorto. The Board of Directors has determined that it
has at least one expert serving on the Company's Audit Committee. The Company's
Board of Director believes that David Sands is an "audit committee financial
expert" and is an independent member of the Board of Directors.

      Compliance with Section 16(a) of the Exchange Act

      The Securities and Exchange Act of 1934 requires our directors, officers
and persons who own more than 10% of our Common Stock to file with the
Securities and Exchange Commission

                                       22




<PAGE>

initial reports and changes in beneficial ownership of our Common Stock and
other equity securities. Our directors, officers 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, 2005,
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, 2005, all Section 16(a) filing requirements
applicable to our directors, officers and greater than 10% beneficial owners
have been timely filed except that Messrs. Ritorto and DeLia did not timely file
a Form 4. These forms have since been filed.

      Code of Ethics

      The Company has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. A copy of our code of
ethics is available on our website at www. dssi-hq.com under the "Corporate
Governance" section of the "Investors" web page.

Item 10. Executive Compensation

The table below reflects information concerning the annual compensation for
services in all capacities to the corporation for the fiscal years ended
December 31, 2005, 2004 and 2003 of those persons who were, as of December 31,
2005, (a) the Chief Executive Officer, and (b) the four most highly compensated
executive officers to the extent that such persons, total annual salary and
bonus exceeded $100,000.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                               Long-Term
                                                                             Compensation
                                                                                 Awards          Payouts
                                                                             -------------    ------------
                                                Annual Compensation           Securities       All Other
                                          --------------------------------     Underlying     Compensation
      Name and Principal Position         Year(s)  Salary ($)(1)  Bonus($)   Options/SARS #       ($)
---------------------------------------   -------  -------------  --------   --------------   ------------
<S>                                       <C>      <C>            <C>        <C>              <C>
James E. Henry                              2005     130,680        --             --              --
  Chairman and Chief Executive Officer,     2004     130,680        --             --              --
  Treasurer and Director                    2003     163,350        --             --           3,393(2)

Irvin F. Witcosky                           2005     130,680        --             --              --
  President, Chief Operating Officer,       2004     130,680        --             --              --
  and Director                              2003     163,350        --             --           3,393(2)

Philip A. Timpanaro                         2005     104,231        --           25,000            --
  Chief Financial Officer
</TABLE>

--------------------------------------------------------------------------------
(1) Effective in December 2003, Messrs Henry and Witcosky voluntarily reduced
their salaries by twenty percent.

(2) Company matching contribution under its 401-K and profit sharing plan.

                                       23




<PAGE>

(3) Mr. West resigned as our Chief Financial Officer in April 2005 and was
replaced by Philip Timpanaro that same month.

The following table sets forth certain information with respect to stock options
grants made to the named Executive Officers during 2005.

                              Option Grants in 2005
                                Individual Grants

                            Number of     % of Total
                            Securities     Options
                            Underlying    Granted to    Exercised
                             Options       Employees      price
                             Granted       in Fiscal       per       Expiration
         Name                   #            Year         Share         Date
-------------------         ----------    ----------    ---------    ----------
Philip A. Timpanaro           25,000         12.2%        $5.65       05/27/10

The following table sets forth information regarding options held by the named
Executive Officers at December 31, 2005.

             Aggregated Exercises and Year End Option Values in 2005

                                                   Number of
                                                   Securities         Value of
                                                   Underlying       Unexercised
                                                   Unexercised      In-the-Money
                                                   Options at        Options at
                                                   Year End #        Year End $
                        Shares
                      Acquired on     Values      Exercisable/      Exercisable/
         Name          Exercise      Realized    Unexercisable     Unexercisable
-------------------   -----------    --------    -------------     -------------
Brian Reach               --            --       80,000/20,000           --
Philip A. Timpanaro       --            --          0/25,000             --

Compensation of Directors

      Directors who are also our employees receive no additional compensation
for attendance at board meetings. The Company's non-employee directors receive a
quarterly fee of $1,250 and 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. In August 2005,
Messrs. DeLia Sr., Ritorto and Sands each received an option to purchase 2,000
shares of our common stock at $4.90 exercisable through December 2010. All
directors are entitled to be reimbursed for their travel, lodging and other
out-of-pocket expenses related to their attendance at board and committee
meetings.

                                       24




<PAGE>

Employment Agreements and Termination of Employment and Change in Control
Arrangements

      Messrs. Henry and Witcosky are serving as Chairman and Chief Executive
Officer and President and Chief Operating Officer, respectively, under
employment agreements for five years that commenced January 1, 2000. These
agreements provide for an initial annual compensation of $135,000, an increase
of 10% in compensation as of January 2002 and in each subsequent year of the
agreements and a one-year non-competition covenant covering the security
business that commences after termination of employment. In December 2003,
Messrs. Henry and Witcosky voluntarily waived the receipt of their respective
salaries by twenty percent to help reduce the Company's costs. Through 2005 this
salary reduction has not been restored.

Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

      The table that follows sets forth, as of March 21, 2006 certain
information regarding beneficial ownership of our common stock by each person
who is known by us to beneficially own more than 5% of our common stock. The
table also identifies the stock ownership of each of our directors, each of our
officers, and all directors and officers as a group. Except as otherwise
indicated, the stockholders listed in the table have sole voting and investment
powers with respect to the shares indicated.

      Unless otherwise indicated, the address for each of the named individuals
is Henry Bros. Electronics, Inc., 280 Midland Avenue, Saddle Brook, New Jersey
07663.

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

      The applicable percentage of ownership is based on 5,896,065 shares
outstanding as of March 21, 2006.

<TABLE>
<CAPTION>
                                                               Number of       Percentage of
                                                                 Shares        Common Stock
Name, Address and Title                                       Beneficially     Beneficially
of Beneficial Owner                                              Owned            Owned
----------------------------------------------------------    ------------     -------------
<S>                                                           <C>              <C>
James E. Henry, Chairman, Chief Executive Officer,
  Treasurer and Director .................................     1,400,000           23.7%

Irvin F. Witcosky, Chief Operating Officer, President,
  and Director ...........................................     1,400,000           23.7%

Brian Reach, Vice Chairman, Secretary and Director (1)           138,000            2.3%

Philip A.Timpanaro, Chief Financial Officer (2) ..........         8,333             *
</TABLE>

                                       25




<PAGE>

<TABLE>
<S>                                                            <C>                <C>
Robert DeLia Sr., Director (3) .......................            41,000             *

James W. Power, Director (4) .........................             2,000             *

Joseph Ritorto, Director (5) .........................            44,000             *

David Sands, Director (6) ............................             2,000             *

All executive officers and directors as a group
  (8 persons) (7) ....................................         3,035,333          50.5%
</TABLE>

*   Less than 1%

(1) The amount shown for Mr. Reach includes a currently exercisable option to
purchase 88,000 shares of the Company's Common Stock at a price of $7.10 per
share.

(2) The amount shown for Mr. Timpanaro includes a currently exercisable option
to purchase 8,333 shares of the Company's Common Stock at a price of $5.65 per
share.

(3) The amount shown for Mr. DeLia Sr. includes two currently exercisable
options to purchase 2,000 shares each of the Company's Common Stock at a price
of $7.19 and $4.90 per share, respectively.

(4) The amount shown for Mr. Power includes a currently exercisable option to
purchase 2,000 shares of the Company's Common Stock at a price of $6.08 per
share.

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

(6) The amount shown for Mr. Sands includes a currently exercisable option to
purchase 2,000 shares of the Company's Common Stock at a price of $4.90 per
share.

(7) The amount shown includes currently exercisable options to purchase 113,333
shares of the Company's common stock.

Item 12. Certain Relationships and Related Transactions

      A corporation that Robert Benou, a former Company director, is an officer
was paid consulting fees of $3,000 for services provided during the year ended
December 31, 2004.

Item 13. Exhibits and Reports

        See index of exhibits annexed hereto.

Item 14. Principal Accountant Fees and Services

      Audit Fees

      The aggregate fees billed by Demetrius & Company, L.L.C. for professional
services rendered for the audits of the Company's annual financial statements on
Form 10-KSB and the reviews of the financial statements on Form 10-QSB for the
fiscal year ended December 31, 2005 were $94,179 and for the year ended December
31, 2004 were approximately $60,400.

                                       26




<PAGE>

      Audit Related Fees

      The aggregate fees billed for audit related services by the principal
accountant for the year ended December 31, 2005 were approximately $72,804 and
for the year ended December 31, 2004 were $14,900. Audit related services
include due diligence in connection with acquisitions, consultation on
accounting and internal control matters, audits in connection with proposed or
consummated acquisitions and review of registration statements.

      Tax Fees

      The aggregate fees billed for tax compliance, tax advice and tax planning
rendered by our independent auditors for the fiscal year ended December 31, 2005
was $21,000, and for the year ended December 31, 2004 was $20,000. The services
comprising these fees include tax consulting and submitting tax returns.

      All Other Fees

      The aggregate fees billed for all other professional services rendered by
the Company's independent auditors for the year ended December 31, 2005 was $375
and for the year ended December 31, 2004 was $800.

      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%.

                                       27




<PAGE>

                                   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 30, 2006             DIVERSIFIED SECURITY SOLUTIONS, INC.

                                 By: /s/ James E. Henry
                                 ----------------------
                                 James E. Henry
                                 Chairman, Chief Executive Officer, Treasurer
                                 and Director

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

                                  SIGNATURE

Date: March 30, 2006             /s/ James E. Henry
                                 ------------------
                                 James E. Henry
                                 Chairman, Chief Executive Officer, Treasurer
                                 and Director

Date: March 30, 2006             /s/ Irvin F. Witcosky
                                 ---------------------
                                 Irvin F. Witcosky
                                 Chief Operating Officer, President and Director

Date: March 30, 2006             /s/ Philip A.Timpanaro
                                 ----------------------
                                 Philip A. Timpanaro
                                 Chief Financial Officer

Date: March 30, 2006             /s/ Robert DeLia Sr.
                                 --------------------
                                 Robert DeLia Sr.
                                 Director

Date: March 30, 2006             /s/ James W. Power
                                 ------------------
                                 James W. Power
                                 Director

Date: March 30, 2006             /s/ Joseph P. Ritorto
                                 ---------------------
                                 Joseph P. Ritorto
                                 Director

Date: March 30, 2006             /s/ Brian Reach
                                 ---------------
                                 Brian Reach
                                 Vice Chairman, Secretary and Director

                                       28




<PAGE>

Date: March 30, 2006             /s/ David Sands
                                 ---------------
                                 David Sands
                                 Director

                                       29




<PAGE>

                 HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
                        CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2005

<TABLE>
<S>                                                                         <C>
Report of Independent Registered Public Accounting Firm Report ........             F - 1

Consolidated Balance Sheet as of December 31, 2005 ....................             F - 2

Consolidated Statements of Operations
   for the Years Ended December 31, 2005 and 2004 .....................             F - 3

Consolidated Statements of Changes in Stockholders' Equity
   for the Years Ended December 31, 2005 and 2004 .....................             F - 4

Consolidated Statements of Cash Flows
   for the Years Ended December 31, 2005 and 2004 .....................             F - 5

Notes to Consolidated Financial Statements ............................     F - 6 - F -24
</TABLE>

                                       30




<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheet of Henry Bros.
Electronics, Inc. and Subsidiaries as of December 31, 2005, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the two year period then ended December 31, 2005.
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 standards of the Public Company
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Henry Bros.
Electronics, Inc. and Subsidiaries as of December 31, 2005, and the consolidated
results of their operations and their cash flows for each of the years in the
two-year period then ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.

s/s DEMETRIUS & COMPANY, L.L.C.

Wayne, New Jersey
March 29, 2006

                                       F-1




<PAGE>

                 HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                DECEMBER 31, 2005

<TABLE>
<S>                                                                                  <C>
                                           ASSETS
CURRENT ASSETS
   Cash and cash equivalents                                                         $  2,177,686
   Accounts receivable-net of allowance for doubtful accounts- $811,389                 9,934,954
   Inventory                                                                            1,227,871
   Costs in excess of billings and estimated profits                                    3,110,798
   Deferred tax asset                                                                     931,529
   Prepaid expenses and income tax receivable                                             250,187
   Other assets                                                                           327,535
                                                                                     ------------
      Total current assets                                                             17,960,560
                                                                                     ------------

PROPERTY AND EQUIPMENT - net of accumulated depreciation of $2,621,115                  1,123,561
GOODWILL                                                                                2,904,344
INTANGIBLE ASSETS - net of accumulated amortization of $459,533                         1,328,509
DEFERRED TAX ASSET                                                                         55,000
OTHER ASSETS                                                                            1,278,662
                                                                                     ------------
   TOTAL ASSETS                                                                      $ 24,650,636
                                                                                     ============

                               LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable                                                                  $  3,538,492
   Accrued expenses                                                                     1,598,086
   Accrued taxes                                                                          461,494
   Billings in excess of costs and estimated profits                                    1,176,813
   Deferred income                                                                        570,489
   Current portion of long term debt                                                      296,666
   Deferred tax liability                                                                  16,199
                                                                                     ------------
      Total current liabilities                                                         7,658,239
                                                                                     ------------

LONG-TERM DEBT, LESS CURRENT PORTION                                                      727,961
DEFERRED TAX LIABILITY                                                                    226,028
                                                                                     ------------
   TOTAL LIABILITIES                                                                    8,612,228
                                                                                     ------------

STOCKHOLDERS' EQUITY
   Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued             --
   Common stock, $.01 par value; 10,000,000 shares authorized;
      5,889,399 shares issued and outstanding in 2005 and 5,739,398 in 2004                58,894
   Additional paid in capital                                                          16,956,008
   Deferred compensation                                                                 (342,978)
   Accumulated deficit                                                                   (633,516)
                                                                                     ------------
   TOTAL EQUITY                                                                        16,038,408
                                                                                     ------------
   TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                                          $ 24,650,636
                                                                                     ============
</TABLE>

        The accompanying notes are an integral part of these statements

                                       F-2




<PAGE>

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

                                                         For the Year ended
                                                            December 31,
                                                        2005           2004
                                                    ------------   ------------
Revenue                                             $ 42,156,188   $ 29,725,718
Cost of revenue                                       31,581,187     22,305,632
                                                    ------------   ------------
   Gross profit                                       10,575,001      7,420,086
                                                    ------------   ------------

Operating Expenses:
Selling general & administrative expenses              8,467,192      7,020,885
                                                    ------------   ------------
Operating profit                                       2,107,809        399,201

Interest income                                           12,507         12,624
Other Expense                                             (3,780)
Interest expense                                         (84,985)       (94,039)
                                                    ------------   ------------
Income before tax expense                              2,031,551        317,786

Tax expense                                              923,273        273,765
                                                    ------------   ------------
Net income after taxes                              $  1,108,278   $     44,021
                                                    ============   ============

BASIC EARNINGS PER COMMON SHARE:
Basic Profit Per Common Share                       $       0.19   $       0.01
                                                    ============   ============
Weighted Average Common Shares                         5,739,398      5,411,964
                                                    ============   ============

DILUTED EARNINGS PER COMMON SHARE:
Diluted Profit Per Common Share:                    $       0.19   $       0.01
                                                    ============   ============
Weighted Average Diluted Common Shares                 5,773,097      5,411,964
                                                    ============   ============

   The accompanying notes are an integral part of these financials statements.

                                       F-3




<PAGE>

                  HENRY BROS. ELECTRONCS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                       Common Stock
                                       par value $.01                            Additional    Deferred
                                   10,000,000 Authorized     Treasury Stock        Paid-in       Comp-      Retained
                                      Shares     Amount     Shares    Amount       Capital     ensation     Earnings       Total
                                   -----------  --------  --------  ----------  ------------  ----------  ------------  ------------
<S>                                <C>          <C>       <C>       <C>         <C>           <C>         <C>           <C>
Balance at December 31, 2003         5,201,431  $ 52,015    70,891  $ (500,000) $ 13,512,939          --  $ (1,785,815) $ 11,279,139
                                   -----------  --------  --------  ----------  ------------  ----------  ------------  ------------
Shares issued in connection with
   the acquisition of Airorlite
   Communications, Inc.                 37,000       370                             266,030                                 266,400

Shares issued in July 2004 net
   of expenses                         553,333     5,533                           2,952,524                               2,958,057

Employee stock options exercised        18,525       185                             123,108                                 123,293

Value of stock option grants                                                         247,056  $ (247,056)                         --

Amortization of value assigned to
   stock option grants                                                                            68,114                      68,114

Treasury shares cancelled              (70,891)     (709)  (70,891)    500,000      (499,291)                                     --

Net Income for 2004                                                                                             44,021        44,021

                                   -----------  --------  --------  ----------  ------------  ----------  ------------  ------------
Balance at December 31, 2004         5,739,398    57,394        --          --    16,602,366    (178,942)   (1,741,794)   14,739,024
                                   -----------  --------  --------  ----------  ------------  ----------  ------------  ------------

Value of stock option grants                                                         355,142    (355,142)                         --

Amortization of value assigned to
   stock option grants                                                                           191,106                     191,106

Shares issued in connection with
the acquisition of Securus, Inc.       150,001     1,500                              (1,500)                                     --

Net Income for 2005                                                                                          1,108,278     1,108,278

                                   -----------  --------  --------  ----------  ------------  ----------  ------------  ------------
Balance at December 31, 2005         5,889,399  $ 58,894        --          --  $ 16,956,008  $ (342,978) $   (633,516) $ 16,038,408
                                   ===========  ========  ========  ==========  ============  ==========  ============  ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                      F-4




<PAGE>

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

<TABLE>
<CAPTION>
                                                                     For the years ended
                                                                         December 31,
                                                                      2005         2004
                                                                  -----------   -----------
<S>                                                               <C>           <C>
Cash flows from operating activities:
   Net income                                                     $ 1,108,278   $    44,021
   Adjustments to reconcile net income (loss) from operations
      to net cash provided by (used in) operating activities:
         Depreciation and amortization                                637,941       490,856
         Bad debt expense                                             453,889       203,324
         Impairment Charges                                            44,999        77,000
         Stock option expense                                         191,106        68,114
         Deferred income taxes                                        788,471       471,228
         Changes in operating assets and liabilities:
            Accounts receivable                                    (1,327,191)   (2,525,791)
            Inventories                                              (353,296)      214,664
            Costs in excess of billings and estimated profits        (525,876)   (1,819,017)
            Other assets                                           (1,019,060)       69,168
            Prepaid Expenses and income tax receivable                220,210      (284,770)
            Accounts payable                                          201,181     1,121,607
            Accrued expenses                                          225,646       839,245
            Billings in excess of cost and estimated profits         (174,485)      873,783
            Deferred Income                                           527,995      (112,783)
                                                                  -----------   -----------
            Net cash provided by (used in) operating activities       999,808      (269,351)
                                                                  -----------   -----------
Cash flows from investing activities:
   Purchase of business, net of cash acquired                      (1,084,528)     (166,875)
   Purchase of property and equipment                                (202,240)     (236,295)
                                                                  -----------   -----------
      Net Cash used in investing activities                        (1,286,768)     (403,170)
                                                                  -----------   -----------
Cash flows from financing activities:
   Proceeds from issuance of common stock - net of fees                    --     3,081,350
   Net (payments) proceeds from revolving bank lines                  951,692      (600,000)
   Payments of bank loans                                          (1,545,171)     (305,215)
   Net (payments) and proceeds of other debt                          (18,498)     (149,699)
   Capitalized lease payments                                         (78,349)      (26,359)
   Payment of loan payable to owner of acquired company                    --      (100,000)
                                                                  -----------   -----------
      Net Cash provided by (used in) financing activities            (690,326)    1,900,077
                                                                  -----------   -----------
   Increase (decrease) in cash and cash equivalents                  (977,286)    1,227,556
   Cash and cash equivalents - beginning of period                  3,154,972     1,927,416
                                                                  -----------   -----------
   Cash and cash equivalents - end of period                      $ 2,177,686   $ 3,154,972
                                                                  ===========   ===========
Supplemental disclosure of cash flow information:
Amount paid for the period for:
   Interest                                                       $    84,985   $    94,039
   Taxes                                                          $    41,124   $     9,334
Non-cash investing and financing activities:
   Equipment financed                                             $   151,154   $   258,841
   Issuance of stock to acquire businesses                                 --   $   266,400
   Value of stock options issued to employees                     $   355,142   $   247,056
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                       F-5




<PAGE>

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

NATURE OF OPERATIONS

      Henry Bros. Electronics, Inc., (the "Company") and its subsidiaries, are
divided into two business segments - Security System Integration ("Integration")
and Specialty Products and Services. The Integration segment provides design,
installation and support services for a wide variety of security, communications
and control systems. The Company specializes in turnkey systems that integrate
many different technologies. Systems are customized to meet the specific needs
of its customers. In October 2005 the Company acquired Securus, Inc. a provider
of security system integration with offices in Denver and Colorado Springs
Colorado. The Specialty Products and Services segment ("Specialty") includes the
Company's digital mobile recording business, Viscom Products, Inc. and its
emergency preparedness planning programs business. In April 2004, the Company
acquired Airorlite Communications, Inc. ("Airorlite") which is included within
the 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. Each of the Company's segments markets nationwide with an
emphasis in the New Jersey/New York, Southern California, Dallas, Phoenix and
Denver 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 the years ended
December 31:

                                          2005       2004
                                          ----       ----
                New Jersey/ New York        53%        35%
                California                  23         33
                Texas                        8         13
                Arizona                      6          7
                Colorado                     2          -
                                          ----       ----
                  Integration segment       92         88
                  Specialty segment          9         13
                Inter-segment               (1)        (1)
                                          ----       ----
                     Total revenue         100%       100%
                                          ====       ====

      The Company's headquarters are located in Saddle Brook, New Jersey with
sales and service facilities located near the Dallas-Fort Worth Airport, Phoenix
Arizona Airport, Denver and Colorado Springs, Colorado, two facilities in Saddle
Brook, New Jersey, Fullerton, California and New York City.

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its subsidiaries. All material
intercompany transactions have been eliminated in consolidation.

                                       F-6




<PAGE>

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

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

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

      2.    System is functional and has been tested.

      3.    Training has been provided.

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

      Service contracts, which are 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 2004 and
2005, the company did not bundle any significant service contracts with our
systems installation work.

      The Emergency Preparedness Planning Programs division provides emergency
planning services to commercial real estate owners and managers. In general,
project labor is the predominant cost associated with the completion of these
projects. The company utilizes labor as the output measure in order to recognize
revenue and believes this to be an accurate matching of costs and revenue.

      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.

                                       F-7




<PAGE>

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

      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 is continuously updated during the performance of the
contract. Unpredictable events can occur during the performance of the contract
that can increase the costs and reduced 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.

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

      Trade Receivables - 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. Our trade receivables are not
collateralized.

      Inventories - Inventories are 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.

      Property and Equipment - Property and equipment are recorded at cost, net
of accumulated depreciation. Depreciation is computed on a straight-line basis
over estimated useful lives of five to seven years. Leasehold improvements are
amortized over the shorter of related lease term or the estimated useful lives.
Upon retirement or sale, the costs of the assets disposed of and the related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the determination of income. Repairs and maintenance costs
are expensed as incurred. Annually, the Company routinely reviews its property
and equipment for impairment, and accordingly, will write-down those assets to
their estimated fair value.

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

      Effective January 1, 2002, the company adopted the provisions of Statement
of Financial and Accounting Standards (SFAS) 142 "Goodwill and Other Intangible
Assets". In accordance with that statement goodwill and intangible assets with
indefinite lives are not amortized, but are tested at least annually for
impairment. Prior to January 1, 2002, the company had not recorded goodwill or

                                       F-8




<PAGE>

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

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 recorded an
impairment charge of approximately $45,000 and $77,000 for the write down of
customer lists and service contract rights for the years ended December 31, 2005
and December 31, 2004, respectively.

      Goodwill - The Company's goodwill impairment test is based on a two part
procedure consistent with the requirements of SFAS 142. The first test consists
of determining the fair value of the reporting unit and comparing it to the
carrying value of the reporting unit. If the carrying value of the reporting
unit exceeds the fair value of the reporting unit, a second test is performed.
In step two, the implied fair value of the goodwill (which is the excess of the
fair value of the reporting unit over the fair value of the net assets) is
compared to the carrying value of the goodwill. An impairment loss is recognized
for any excess value of goodwill over the implied value. We determined the
Company's reporting unit by analyzing geographic region as management evaluates
the Company's performance in this manner. We identified five separate and
distinct operating units for the testing requirements of SFAS 142. In 2005 and
2004, no charges to operations resulted from management's goodwill impairment
evaluation.

      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. As of December 31, 2005, the Company
had cash balances at certain financial institutions in excess of federally
insured limits. However, the Company does not believe that it is subject to
unusual credit risk beyond the normal credit risk associated with commercial
banking relationships.

      Credit risk is generally diversified due to the large number of customers
that make up the Company's customer base and their geographic dispersion
resulting from three acquisitions in 2002. The Company performs an ongoing
credit evaluation of its customers. In 2005 billings to one customer represented
15% of the Company's consolidated revenue or 16% of revenue from the Integration
segment. Revenues to local government agencies were 39% and 20% of total revenue
for the years ended December 31, 2005 and 2004, 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

                                       F-9




<PAGE>

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

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.

      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.

      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, 2005.

      Advertising Costs - The Company expenses advertising cost when the
advertisement occurs. Total advertising expenses amounted to approximately
$40,346 and $44,466 for the years ended December 31, 2005 and 2004,
respectively.

      Stock Based Compensation - In December 2002, the FASB issued SFAS No. 148
"Accounting for Stock Based Compensation - Transition and Disclosure". SFAS No.
148 provides alternative methods of transitions to SFAS No 123's fair value
method of accounting for stock based employee compensation, but does not require
companies to use fair value method. It also amends the disclosure provisions of
SFAS No. 123 and APB No.25 to require, in the summary of significant policies,
the effect of an entity's accounting policy with respect to stock based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. The provision of this statement is effective for fiscal
years ending after December 15, 2002, and interim reporting periods beginning
after December 15, 2002. Accordingly, the fair value of all options granted on
and after January 1, 2003 is to be charged against income over the vesting
period. In 2005, the company charged $191,106 to operations for the fair value
of those options granted subsequent to January 1, 2003. Those issued prior to
adoption are accounted for under the intrinsic value method in accordance with
APB No. 25. The Company adopted the perspective method as permitted by SFAS No.
148 on January 1, 2003.

      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. The Company charges

                                      F-10




<PAGE>

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

operations with warranty expenses as incurred. For the years ended December 31,
2005 and 2004, warranty expense was approximately $49,231 and $152,500,
respectively.

      Net Income Per Share - The computation of basic earnings per share is
based upon the weighted average number of shares of common stock outstanding
during the period. The computation of diluted earnings per share includes the
dilutive effects of common stock equivalents of options and warrants.

      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 turnkey systems that integrate many different technologies.
Systems are customized to meet the specific needs of its customers. In October
2005 the Company acquired Securus, Inc. a provider of security system
integration with offices in Denver and Colorado Springs Colorado. The Specialty
Products and Services segment ("Specialty") includes the Company's digital
mobile recording business, Viscom Products, Inc. and its emergency preparedness
planning programs business. In April 2004, the Company acquired Airorlite
Communications, Inc. ("Airorlite") which is included within the 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. Each of the Company's segments market nationwide with an emphasis
in the New Jersey/New York, Southern California, Dallas, Phoenix and Denver
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.

      New Accounting Pronouncements - In May 2005, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 154,
"Accounting Changes and Error Corrections," ("SFAS No. 154") which replaces
Accounting Principles Board Opinion No. 20, "Accounting Changes", and SFAS No.
3, "Reporting Accounting Changes in Interim Financial Statements - An Amendment
of APB Opinion No. 28". SFAS No. 154 provides guidance on accounting for and
reporting changes in accounting principle and error corrections. SFAS No. 154
requires that changes in accounting principle be applied retrospectively to
prior period financial statements and is effective for fiscal years beginning
after December 15, 2005. The Company does not expect SFAS No. 154 to have a
material impact on its financial position, results of operations, or cash flows.

                                      F-11




<PAGE>

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

2.    ACCOUNTS RECEIVABLE

      Accounts receivable consisted of the following at December 31, 2005:

            Completed contracts including retentions                 $ 3,189,288
            Contracts in progess                                       6,894,444
            Current retentions                                           662,611
                                                                     -----------
                                                                      10,746,343
            Less allowance for doubtful accounts                         811,389
                                                                     -----------
                                                                     $ 9,934,954
                                                                     ===========

      At December 31, 2005 one customer represented 12.5% of the net accounts
receivable.

3.    COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS

      Costs and billing on uncompleted contracts at December 31, 2005
consisted of the following:

   Cost incurred on uncompleted contracts                           $ 32,014,993
   Billings on uncompleted contracts                                  30,081,008
                                                                    ------------
                                                                    $  1,933,985
                                                                    ============

   Included in accompanying Balance Sheets under the following captions:

   Costs in Excess of Billings on Uncompleted Contracts             $  3,110,798
   Billing in excess of costs on Uncompleted Contracts                 1,176,813
                                                                    ------------
                                                                    $  1,933,985
                                                                    ============

4.    INVENTORIES

      Inventories consist of the following at December 31, 2005:

            Component Parts       $   144,028
            Finished Goods          1,083,843
                                  -----------
                                  $ 1,227,871
                                  ===========

                                      F-12




<PAGE>

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

5.    PROPERTY AND EQUIPMENT

      Property and equipment consisted of the following at December 31, 2005:

            Office Equipment                                        $    949,148
            Demo and Testing Equipment                                   111,485
            Automotive Equipment                                       1,414,647
            Computer Equipment                                           960,134
            Machinery and Equipment                                      209,191
            Leasehold Improvements                                       100,071
                                                                    ------------
                                                                       3,744,676
            Less Accumulated Depreciation                              2,621,115
                                                                    ------------
                                                                    $  1,123,561
                                                                    ============

      Depreciation expense was approximately $488,899 and $340,268 for the years
ended December 31, 2005 and December 31, 2004, respectively.

Equipment under capital leases included in Property and Equipment at December
31, 2005 is as follows:

            Automotive equipment                                    $    309,128
            Less accumulated depreciation                                 99,306
                                                                    ------------
                                                                    $    209,822
                                                                    ============

6.    GOODWILL

      Goodwill, as of December 31, 2005, consisted of the following:

      National Safe of California                        $ 1,267,580
      Photo Scan Systems                                     346,000
      Henry Bros. Electronics (Arizona)                      317,114
      Airolite Communications, Inc.                          203,650
      Securus, Inc.                                          770,000
                                                         -----------
                                                         $ 2,904,344
                                                         ===========

                                      F-13




<PAGE>

                 HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7.    INTANGIBLE ASSETS

      Intangible assets consist of the following:

<TABLE>
<CAPTION>
                                     Acquired                Covenant                    Total
                                     Customer    Service      Not to       Trade      Amortizable      Trade         Total
                                       List       Rights     Compete        Name      Intangibles       Name      Intangibles
                                    ---------   ---------   ---------   -----------   -----------   -----------   -----------
<S>                                 <C>         <C>         <C>         <C>           <C>           <C>           <C>
Gross carrying value:
   December 31, 2004                $ 464,201   $ 494,108   $ 228,920                 $ 1,187,229   $   315,114   $ 1,502,343
Additions                             260,000                                80,000       340,000                     340,000
Impairment charge                     (17,742)    (36,559)                                (54,301)                    (54,301)
                                    ---------   ---------   ---------   -----------   -----------   -----------   -----------
   December 31, 2005                  706,459     457,549     228,920        80,000     1,472,928       315,114     1,788,042
                                    ---------   ---------   ---------   -----------   -----------   -----------   -----------

Accumulated amortization:
   December 31, 2004                  (71,040)   (100,527)   (138,924)                   (310,491)                   (310,491)
Amortization                          (38,879)    (54,829)    (60,636)       (4,000)     (158,344)                   (158,344)
Impairment charge                       4,651       4,651                                   9,302                       9,302
                                    ---------   ---------   ---------   -----------   -----------   -----------   -----------
   December 31, 2005                 (105,268)   (150,705)   (199,560)       (4,000)     (459,533)            -      (459,533)
                                    ---------   ---------   ---------   -----------   -----------   -----------   -----------
      Net Carrying Value            $ 601,191   $ 306,844   $  29,360   $    76,000   $ 1,013,395   $   315,114   $ 1,328,509
                                    =========   =========   =========   ===========   ===========   ===========   ===========
   Weighted average life in years          11           6           3             5             6
</TABLE>

      Amortization expense was $158,344 and $150,588 for the years ended
December 31, 2005 and December 31, 2004, respectively.

Future amortization expense for each of the next five years ended December 31
follows:

                            2006                 $166,227
                            2007                  163,560
                            2008                  163,560
                            2009                  111,972
                            2010                  111,972

8.    LONG-TERM DEBT

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

      Advances under the Revolving Loan may be used to finance working capital
and acquisitions. Interest is paid monthly in arrears at Hudson's prime rate
(7.25% at December 31, 2005) through May 1, 2007 when all amounts outstanding
under the Revolving loan is due. At December 31, 2005 there was no balance
outstanding under the Revolving Loan.

                                      F-14




<PAGE>

                 HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

      The Company is required to maintain certain financial and reporting
covenants under the terms of the Loan Agreement.

Long-term debt included of the following balances at December 31, 2005:

      Term loan at 6.75% interest, payable in monthly installments
      thru June 30, 2010                                             $  724,829

      Capitilzed lease obligations due in monthly installments of
      $9,083, including interest ranging from 4.25% to 5.0%             246,215

      Other miscellaneous debt                                           53,583
                                                                     ----------
                                                                      1,024,627
      Less current portion                                              296,666
                                                                     ----------
                                                                     $  727,961
                                                                     ==========

      The weighted average prime interest rtes for the years ended December 31,
2005 and 2004 were 6.4% and 4.6%, respectively.

      Future minimum lease payments for assets under capital leases for the
years ended

                                                     December 31,
                                                     ------------
                                                         2006       $   105,925
                                                         2007           105,925
                                                         2008            63,542
                                                         2009            16,841
                                                                    -----------
      Total                                                             292,233
      Amount representing interest                                       46,018
                                                                    -----------
      Present Value of net minimum lease payments                   $   246,215
                                                                    ===========

                                      F-15




<PAGE>

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

      Aggregate maturities of all outstanding debt for each of the years ended:

                                                 December 31,
                                                 ------------
                                                     2006       $   296,666
                                                     2007           314,039
                                                     2008           283,021
                                                     2009           130,901

9.    INCOME TAXES

      The tax provision for the years ended December 31, consists of the
following:

                                                     2005           2004
                                                 -----------     ----------
      Federal
         Current                                 $   854,857     $    5,117
         Benefit of net operating loss              (816,000)
         Deferred                                    670,500        122,704
      State
         Current                                     136,945        115,268
         Benefit of net operating loss               (41,000)
         Deferred                                    117,971         30,676
                                                 -----------     ----------
                                                 $   923,273     $  273,765
                                                 ===========     ==========

      Deferred income tax assets and liabilities at December 31, 2005 are
comprised of the following:

      Deferred tax asset:
           Allowance for doubtful accounts               $   318,730
           Accrued absences                                   26,361
           Accrued warranty                                  164,613
           Depreciation                                       16,426
           Inventory                                          10,188
           Stock compensation                                185,104
           Intangible assets                                  55,000
           Net operating loss carryforward                   210,107
                                                         -----------
      Total deferred tax asset                               986,529
                                                         -----------

         Short-term                                          931,529
         Long-term                                            55,000

      Deferred tax liability:
         Cash to accrual basis                               (16,199)
         Intangible assets                                  (226,028)
                                                         -----------
      Total deferred tax liability                          (242,227)
                                                         -----------
         Short-term                                          (16,199)
                                                         -----------
         Long-term                                          (226,028)
                                                         -----------
           Net deferred tax asset                        $   744,302
                                                         ===========

                                      F-16




<PAGE>

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

      The Company has a Federal net operating loss carryforward of approximately
$517,505 that expires in 2023.

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

                                                            2005         2004
                                                         ----------  ----------
      Provision for taxes computed using the
         statutory rate                                  $  737,275  $  108,048
      State taxes, net of federal tax benefit                95,660      69,916
      Permanent differences                                  14,782      15,066
      Other                                                  75,556           -
      Revised estimate to deferred tax                            -      71,401
      Additional state income tax from prior year                 -       9,334
                                                         ----------  ----------
         Provision for income taxes                      $  923,273  $  273,765
                                                         ==========  ==========

10.   INCENTIVE STOCK OPTION PLAN

      The Company has a Stock Option Plan (the "1999 Plan"), for the benefit of
employees of the Company, under which options to purchase up to a maximum of
500,000 shares of its common stock may be issued.

      The maximum term of any option is ten years, and the option price per
share may not be less than the fair market value of the Company's shares at the
date the option is granted. However, options granted to persons owning more than
10% of the voting shares will have a term not to exceed five years, and the
option price will not be less than 110% of fair market value. Options granted to
an optionee will usually vest 33 1/3% annually, beginning on the first
anniversary of the option grant, subject to the discretion of the Compensation
Committee of the Board of Directors.

      The 1999 Plan will terminate on December 23, 2009 or on such earlier date
as the Board of Directors may determine. Any option outstanding at the
termination date will remain outstanding until it expires or is exercised in
full, which ever 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. The 2002 Plan allows the granting of incentive stock options
or non-qualified stock options to the Company's employees, directors and
consultants, up to a maximum purchase of 230,000 shares of its common stock. All
stock options granted under the 2002 Plan will be exercisable at such time or
times and in

                                      F-17




<PAGE>

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

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, 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 2002 Plan allows
for immediate vesting if there is a change of control. As of December 31, 2005,
a total of 240,100 options are available for future grant under both the 1999
Plan and the 2002 Plan.

      A summary of stock option activity under the 1999 Plan and the 2002 Plan
are as follows:

                                                                    Shares
                              Shares            Weighted          subject to
                            subject to          average          exercisable
                              options        exercise price        options
                            ----------       --------------      -----------
   December 31, 2003          223,200          $    6.51           147,924

   Options granted            136,000          $    7.12
   Options exercised          (18,525)         $    6.66
   Options terminated         (31,100)         $    6.91
   December 31, 2003          309,575          $    6.79           192,457

   Options granted            205,000          $    4.87
   Options exercised               --                 --
   Options terminated         (43,200)         $    6.84
                              -------
   December 31, 2004          471,375          $    5.95           240,375
                              =======

      The following tables summarize information about stock options outstanding
under the 1999 Plan and 2002 Plan as of December 31, 2005:

                             Options Outstanding           Options Exercisable
                    ------------------------------------  ---------------------
                                   Weighted
                                    Average     Weighted    Number     Weighted
                       Number      Remaining    Average   Exercisable   Average
   Range of          Outstanding  Contractual   Exercise      At       Exercise
   Exercise Prices  At Dec. 2005  Life (Years)    Price    Dec. 2005     Price

   $ 4.65-$7.95        471,375        4.6       $ 5.95      240,375     $ 6.70

                                      F-18




<PAGE>

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

      Deferred compensation cost 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:

                                            Options
                                          -----------
                                          2005   2004
                                          ----   ----
      Expected Life (years)                  3      3
      Expected volatility                 33.0%  20.7%
      Risk-free interest rates             3.9%   3.3%

      The weighted average fair value per share of options granted during 2005
and 2004 was $1.77 and $1.82, respectively.

11.   STOCKHOLDERS' EQUITY

      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
150,001are being held in escrow pursuant to the stock purchase escrow agreement
between the Company and the selling shareholders of Securus, Inc. The issuance
of the shares of restricted stock in connection with the aforementioned
acquisition was made in reliance upon the exemption provided in section 4(2) of
the Securities Act of 1933, as amended.

      ACI Acquisition Corporation, a wholly-owned subsidiary of the Company,
purchased all of the issued and outstanding stock of Airorlite Communications,
Inc ("Airorlite") effective April 1, 2004. The purchase consisted of $200,000 in
cash and 37,000 shares of the Company's common stock, valued at $266,400. ACI
Acquisition Corporation was subsequently renamed Airorlite Communication's Inc.
These shares were issued in reliance on the exemption provided by Section 4(2)
of the Securities Act of 1933, as amended, regarding transactions not involving
a public offering.

      On July 28, 2004, the Company completed a $3,319,998 private placement of
its common stock to certain qualified institutional investors. Under the terms
of the agreement, the Company sold an aggregate of 553,333 shares of common
stock for $6.00 per share. The Company also has granted the investors a warrant
to acquire 138,333 shares of common stock at an exercise price of $7.60 per
share, exercisable for a period commencing six months after the date of issuance
through the fifth anniversary of the issuance. In addition, the Placement Agent
received a commission of 8% of the proceeds plus expenses and was issued a
warrant to acquire 55,333 shares of common stock with the same terms as those
issued to the institutional investors. After expenses, the net proceeds of the
transaction were $2,958,058. The Company filed a registration statement with the
SEC covering the resale of the shares sold under this private placement and the
shares issuable upon the exercise of the warrants on August 29, 2004, which
statement was declared effective on September 7, 2004.

      On December 31, 2003, the Board of Directors authorized the issuance of
52,550 shares of restricted stock to employees. These shares were valued at
$294,280 and the Company included this

                                      F-19




<PAGE>

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

expense in the Consolidated Statements of Operations for 2003. On November 5,
2004, the Company's shareholders approved the issuance of these shares. These
shares were restricted from resale for a one year period and were issued on
January 3, 2005.

      On November 1, 2001, the Company entered into an agreement with The Wall
Street Group, Inc. ("WSG") to provide financial public relations services to the
Company (the "Agreement"). Under the Agreement, WSG was paid a monthly fee and
reimbursed out-of-pocket expenses, and earned options for the purchase of the
Company's common stock. The Agreement also provided WSG with the right to have
the shares issued under the Agreement, registered for sale under the Securities
Act of 1933. Throughout the term of the Agreement until its termination on April
6, 2003, Wall Street Group earned options for the purchase of up to 45,996
shares of the Company's common stock having an average exercise price of $6.99
per share. These options are exercisable with 40,000 expiring in November 2006
and the balance in November 2007. The options were not granted as part of the
Company's 1999 Plan or 2002 Plan.

      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.

      Treasury Stock - On November 5, 2004, a resolution of the Board of
Directors provided for the return of shares held in treasury unissued shares.

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

Warrants - In connection with the Company's private placement of its common
stock to certain qualified institutional investors in July 2004 (as noted
above), such investors were issued warrants to acquire 138,333 shares of common
stock at an exercise price of $7.60 per share, exercisable for a period
commencing six months after the date of issuance through the fifth anniversary
of the

                                      F-20




<PAGE>

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

issuance. In addition, the Placement Agent was issued warrants to acquire 55,333
shares of common stock with the same terms as those issued to the institutional
investors. These warrants will expire January 27, 2010.

      A total of 951,137 common shares are reserved for exercise of employee
stock options and warrants as of December 31, 2005.

12.   COMMITMENTS

      Leases - The Company leases its office and warehouse facilities under
operating leases that expire through 2010. Future minimum rental payments, under
non-cancelable leases as of December 31, 2005, are as follows:

      2006           $ 396,000
      2007             119,000
      2008             114,000
      2009             115,000
      2010             101,000

      Rent expense under operating leases were approximately $421,000 and
$381,000 for the years ended December 31, 2005 and 2004, respectively.

13.   EMPLOYEE BENEFIT PLAN

      As of January 1, 2003, the Company sponsored a 401-K plan, including
discretionary profit sharing (the "401-K Plan"). The Company may match up to
three percent of qualifying employees' compensation when contributed to the
401-K Plan. As of September 1, 2003, the Company decided to discontinue matching
employee contributions to the 401-K Plan but may resume discretionary matches in
the future. 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 2005 or 2004.

14.   RELATED PARTED TRANSACTIONS

      The Company paid consulting fees of approximately $3,000 for the year
ended December 31, 2004, to a corporation that had a former Director of the
Company as an officer.

15.   CONTINGENT LIABILITIES

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

                                      F-21




<PAGE>

                 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:

                                            2005           2004
                                        ------------   ------------
            Revenue

            Integration                 $ 38,848,317   $ 26,255,044
            Specialty                      3,890,952      3,734,038
            Inter-segment                   (583,081)      (263,664)
                                        ------------   ------------
               Total revenue            $ 42,156,188   $ 29,725,418
                                        ============   ============

            Operating Profit

            Integration                 $  2,928,282   $    630,433
            Specialty                        574,920      1,084,167
            Corporate expenses            (1,395,393)    (1,315,399)
                                        ------------   ------------
               Total operating profit   $  2,107,809   $    399,201
                                        ============   ============

      Selected balance sheet information by business segment is presented in the
following table as of December 31, 2005:

            Total Assets

            Integration                 $ 18,972,912
            Specialty                      2,816,577
            Corporate                      2,861,147
                                        ------------
               Total assets             $ 24,650,636
                                        ============

17.   ACQUISITIONS

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

Under the terms of the Stock Purchase Agreement with the Securus shareholders,
pursuant to which we acquired all of the issued and outstanding stock of
Securus, we paid an aggregate purchase price of $1,110,000 comprised of $770,000
cash to the selling shareholders, the assumption and subsequent repayment of
$240,000 of Securus bank debt and incurred approximately $100,000 in
transactions costs. We also issued and placed into escrow 150,001 shares of our
common stock which may be earned out through December 31, 2010 based upon the
aggregate value of the earnings

                                      F-22




<PAGE>

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

before interest and tax ("EBIT") to $2,960,000. In addition, the selling
shareholders may earn an additional amount of up to $200,000 based upon one
third of the aggregate EBIT earned in excess of $2,960,000 thru December 31,
2010.

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

        Cash and cash equivalents                           $    25,472
        Accounts receivable-net                                 379,886
        Inventory                                                89,169
        Costs in excess of billings and estimated profits       314,322
        Other assets                                            300,581
                                                            -----------
           Total current assets                               1,109,430
                                                            -----------
        Property and equipment-net                               28,793
        Amortizable intangible assets:
           Customer relationships (9 year life)                 260,000
           Trademark and trade name (5 year life)                80,000
        Deferred tax asset                                      156,880
        Other assets                                             56,581
                                                            -----------
           Total assets                                       1,691,684
        Total current liabilities                            (1,091,287)
        Non current deferred revenue                           (260,397)
                                                            -----------
           Net assets acquired                              $   340,000
                                                            ===========

The excess purchase price of $770,000 was assigned to goodwill.

                                      F-23




<PAGE>

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

      Selected unaudited pro forma consolidated statements of income data for
each of the years ended December 31, 2005 and 2004 assuming that Securus was
included in our results from the beginning of 2004 is as follows:

                                                2005          2004
                                           ------------  ------------
         Revenue                           $ 45,888,287  $ 34,721,320
         Net income                        $  1,187,156  $   (217,517)

         Earnings per share:
            Basic                          $       0.21  $      (0.04)
            Diluted                        $       0.20  $      (0.04)

         Weighted average common shares:
            Basic                             5,739,398     5,411,964
            Diluted                           5,889,399     5,561,965

      The pro forma information is for illustrative purposes only, and does not
necessarily indicate what the operating results of the combined companies would
be had the acquisition actually occurred at the beginning of 2004, nor does it
necessarily indicate the company's future operating results.

      The above pro forma income data was prepared assuming that the acquisition
took place on January 1, 2004 and gives effect to the following items: (i) the
amortization of intangibles using there assumed useful life, (ii) interest
expense at 5% (the average prime rate for the period) on the purchase price less
the $240,000 of refinanced acquired debt from the beginning of the period
through the transaction date, (iii) the tax benefit on items (i) and (ii) using
a 46% effective tax rate.

                                      F-24




<PAGE>

                                  EXHIBIT INDEX

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

<TABLE>
<CAPTION>
Exhibit                                                                                      Method
Number     Description of Document                                                          of Filing
<S>        <C>                                                                              <C>
3.1   --   Certificate of Incorporation of the Company ..................................         (1)
3.2   --   By-laws of the Company .......................................................         (1)
3.3   --   Certificate of Amendment of the Certificate of Incorporation of the
           Company, filed on July 5, 2001 ...............................................         (2)
3.4   --   Certificate of Amendment of the Certificate of Incorporation of the
           Company, filed on August 28, 2001 ............................................         (2)
4.1   --   Specimen Common Stock Certificate of the Company .............................         (3)
4.2   --   Underwriter's Warrant Agreement ..............................................         (3)
10.1  --   2002 Stock Option Plan .......................................................         (5)
10.2  --   Employment Agreement between the Company and James E. Henry ..................         (1)
10.3  --   Employment Agreement between the Company and Irvin F. Witcosky ...............         (1)
10.4  --   Employment Agreement between the Company and Louis Massad ....................         (1)
10.5  --   1999 Incentive Stock Option Plan and form of Stock Option Agreement ..........         (1)
10.6  --   Amendment to Employment Agreement between the Company and Louis Massad .......         (2)
10.7  --   Office Lease between the Company and Midland Holding Co., Inc. ...............         (4)
10.8  --   Office Lease between the Company and Eagle-DFW, Inc. .........................         (4)
10.9  --   Amendment to Employment Agreement between the Company and James E. Henry .....         (4)
10.10 --   Amendment to Employment Agreement between the Company and Irvin F. Witcosky ..         (4)
10.11 --   Agreement between the Company and Administaff, Inc. ..........................         (7)
14.1  --   Code of Ethics ...............................................................         (6)
21.1  --   List of Subsidiaries .........................................................         (*)
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 ......................................................         (*)
</TABLE>






<PAGE>

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

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

(6) 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.

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

(*) Filed herewith.