Page 1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 [NO FEE REQUIRED]

     For the fiscal year ended: March 31, 1999

[ ]  Transition  report  pursuant to section 13 or 15(d) of the  Securities
     Exchange Act of 1934.

                         Commission File Number: 0-8125
                             ---------------------

                             DETECTION SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

State of New York                                                     16-0958589
(State or other jurisdiction                                    (I.R.S. Employer
of incorporation or organization)                         Identification Number)

                130 Perinton Parkway, Fairport, New York         14450
               (Address of principal executive offices)         (Zip Code)

                                 (716) 223-4060
              (Registrant's telephone number, including area code)

                              ---------------------

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

                              ---------------------

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

                     Common Stock, Par Value $.05 Per Share
                                (Title of Class)

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

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

As of  June  11  the  aggregate  market  value  of  the  voting  stock  held  by
non-affiliates of the registrant was approximately $45,136,618.

As of June 11 there were outstanding 6,336,645 shares of the registrant's common
stock, par value $.05 per share.

                       DOCUMENTS INCORPORATED BY REFERENCE

Proxy  Statement for 1999 Annual Meeting of Shareholders -- See Part III of this
Form 10-K Annual Report for portions incorporated by reference.
<PAGE>
                                     PART I

ITEM l.  BUSINESS

GENERAL

The Company is a supplier of equipment  to the  electronic  protection industry.
The Company designs, manufactures and markets electronic  detection, control and
communication  equipment  for  security,  fire  protection,  access  control and
closed circuit television ("CCTV") applications, offering products primarily for
the  commercial and mid- to high-end  residential  portions of the market.  From
its founding in 1968 until 1995, the Company was  primarily a niche  provider of
intrusion  detection  devices  for  the  domestic  market.  In 1995, the Company
adopted  a  strategy  designed  to  expand  its  product  offerings,  establish
an international sales presence, increase its manufacturing capacity and improve
its overall cost structure. The Company has since made nine acquisitions, opened
four sales  offices and  established  a  manufacturing  facility in Asia.  These
initiatives  have  enabled the Company to expand its product  catalog and market
reach  and to  increase  its  net  sales  from  $34,336,000  in  fiscal  1995 to
$138,045,000 in fiscal 1999.

The Company  manufactures system components for sale to installation  companies,
distributors and other equipment  manufacturers either as individual  components
or, increasingly, bundled with other compatible components to form an integrated
system for a specific customer's application.  The Company is not engaged in the
installation or monitoring aspects of the industry. The Company presently offers
products in all four of the principal  categories of the  electronic  protection
equipment market: security, fire, access control and CCTV.

ACQUISITIONS

The scale and  product  scope of the Company  has  increased  as a result of its
acquisitions,  beginning with the February 1996  acquisition of Radionics,  Inc.
("Radionics").  These  acquisitions  have also  helped the  Company  broaden its
catalog  and expand its  domestic  and  international  distribution  network.  A
summary of the Company's nine acquisitions is as follows:

RADIONICS. In February 1996 the Company acquired all of the outstanding stock of
Radionics.  Radionics had annual net sales of approximately $45,000,000 prior to
its acquisition.  This acquisition gave the Company access to Radionics' network
of over 1,000  dealers.  Radionics had a number of advanced  products and models
under development which have subsequently been completed by the Company, such as
a  246-zone  fully-integrated  security,  fire and  access  control  panel and a
control  communicator  which can function as a wired,  wireless or hybrid system
and can communicate using BellSouth's Cellemetry(R) technology.

SENSES.   In  July  1996  the  Company   acquired   certain   assets  of  Senses
International,  Inc.  ("Senses"),  a manufacturer  of long-range  wireless alarm
transmission  equipment marketed under the name "Safecom." Senses had annual net
sales of approximately $2,000,000 prior to its acquisition.

DA SYSTEMS.  In May 1997 the Company  acquired all of the  outstanding  stock of
Digital Audio Ltd. ("DA Systems"),  a British  manufacturer of security  control
equipment  with  annual  net  sales of  approximately  $10,800,000  prior to its
acquisition.  DA  Systems  provides  the  Company  with a line of  controls  and
communication devices approved for sale in the U.K.

SERIEE.  In June 1997, the Company  acquired 99.5% of the  outstanding  stock of
Seriee S.A.  ("Seriee").  Seriee is a French  manufacturer of electronic control
and communications  equipment with annual net sales of approximately  $6,300,000
prior to its acquisition.  Like the U.K., France has unique design  requirements
and this acquisition provides the Company with a line of French-approved control
panels and a distribution  network of 8 offices located throughout France. Prior
to its acquisition, Seriee was a distributor for certain Company products.

RAS. In June 1997, the Company  acquired 98.7% of the outstanding  stock of
Radio-active  Systems  N.V.  ("RAS").  RAS,  with five  regional  sales  offices
throughout  Belgium,  had annual net sales of approximately  $9,900,000 prior to
its  acquisition.  RAS had been a distributor  for the Company for over 15 years
and,  immediately  prior to its  acquisition,  was the Company's  second largest
distributor.

SECURITY  SUPPLIES.  In November 1997, the Company  purchased the assets of
Security  Supplies NZ Ltd.  ("Security  Supplies").  Security  Supplies is a New
Zealand  distributor of security products with annual net sales of approximately
$800,000 prior to its acquisition.

EDM. In January  1998,  the Company  acquired  all of the  outstanding  stock of
Electronics Design and Manufacturing Pty Limited ("EDM").  With annual net sales
of approximately $4,600,000 prior to its acquisition,  EDM is one of the largest
Australian  manufacturers  of residential  and commercial  control  panels.  The
acquisition  of  EDM,   combined  with  the  Company's   existing   distribution
operations,  gives the Company a comprehensive catalog and sales presence in the
Australian market.

EFSEC. In June 1998, the Company acquired all of the outstanding  stock of Efsec
AB ("Efsec").  Efsec is a Swedish  distributor of electronic  security equipment
and had annual net sales of approximately $3,000,000 prior to its acquisition.

ALARM CENTER. In June 1998, the Company acquired all of the outstanding stock of
Alarm Center Kft ("Alarm  Center").  Alarm Center is a Hungarian  distributor of
electronic security equipment and had annual net sales of approximately $500,000
prior to its acquisition.

PRODUCT LINE

The Company  produces and  distributes a wide variety of  electronic  protection
equipment,  offering a single source of products to the professional  installers
who provide  custom  systems for  different  types of buildings  and  protection
requirements.

Since  early  1995,  the Company has  introduced  several  internally  developed
products including, among others, its TriTech pet avoidance detectors, a control
panel that offers both wired and wireless on-premise  communication  capability,
an  enhanced  and  broadened  line of smoke  detectors,  a new  line of  passive
infrared  intrusion  detectors,  and a fire  system  control  and  communication
product.  In addition,  the Company  completed  Radionics'  second generation of
integrated   panels   which  are  capable  of   simultaneously   controlling   a
full-featured  security  system,  fire  system and access  control  system.  The
Company  has also  expanded  its product  catalog by  entering  into a number of
alliances with partners that have technological capabilities that complement the
Company's internal capabilities.

Security Products

Security  systems  consist of  intrusion  detectors  coupled  with  control  and
communications  equipment  and,  in many  cases,  notification  devices.  When a
triggering  event occurs,  a detector  senses the event and notifies the control
equipment,  which in turn  causes the  communications  equipment  to transmit an
alarm signal to an  on-premise  monitoring  location or a remote  central  alarm
monitoring service.  The control equipment also activates  notification  devices
such as strobes, horns and sirens if these options are features of the system.

Detectors.  Security  detectors are the  components  of a security  system which
sense intrusion into protected  areas.  The Company markets  security  detectors
under a number of brand names,  including:  Detection  Systems,  Radionics,  and
Seriee.  Security detectors differ in three primary respects: the way they sense
intrusion or another  alarm  condition,  the way they  communicate  with control
equipment and the type of information they transmit to the control equipment.

The Company offers detectors which  use various basic  technological  approaches
for sensing the existence of an intrusion or other alarm  condition, including:
passive infrared body heat detection, combination passive infrared and microwave
detection  ("dual  detectors"),  combination  passive  infrared  and  camera,
photoelectric  beam  interruption,   acoustic  glass break detection, vibration
detection, and magnetic contacts.

These   different   types  of  detectors  are  needed  for  different  types  of
applications in commercial and mid- to high-end residential security systems and
complement each other in their system applications and the types of environments
in which they function best. Many alarm systems  incorporate  several  different
types of detectors in a single alarm system to maximize the effectiveness of the
system.

Detectors can  communicate  with an alarm system's  control  equipment  directly
(wired),  indirectly  (wireless)  or on a combined or "hybrid"  basis (where the
detector  communicates via wireless transmission to a peripheral device which is
wired to the control equipment).  The Company offers detectors which are used in
each of these types of systems.  The information  that detectors  communicate to
the control equipment ranges from a simple communication that an alarm event has
occurred to, in a multiplex  system,  the  identity of the detector  sensing the
alarm  condition,  the nature of the alarm condition and diagnostic  information
about the detector.

Control  Equipment.  The control  components of a security system manage all the
functions of the system and provide the link between the system's  detectors and
communications  equipment.  The Company markets  control  products under various
brand names, including:  Radionics,  Detection Systems,  Abacus, EDM and Seriee.
The Company's  control products include control panels which collect,  interpret
and transmit the signals from the detectors and arming  stations  which are used
to  program  certain  features  of the  system  and to arm and  disarm  it.  The
Company's control and  communication  product offerings were expanded in 1996 by
its acquisition of the Radionics  control product line,  which was well known in
the industry for alarm control and communication equipment.

The Company's  security control product line includes  products that are used in
all three types of systems  installed  by security  professionals.  Conventional
security  systems  include  wired,  wireless and hybrid  (combination  wired and
wireless)  systems and communicate on which zone of detectors an alarm condition
exists. In the next level, multiplex systems, each sensor is addressable,  which
means that the specific  location of the alarm  condition  is  reported.  At the
highest level, the Company's  advanced multiplex systems feature the capacity to
report  back  addressable  test,  diagnostic  and alarm  condition  information,
assuring that the system is working  properly,  and to report whether a detector
has been tampered with.

The  Company  has a wide range of control  panels,  ranging  from its  Detection
Systems'  low-cost  six-zone  panel  which  can  operate  six  detection  device
circuits,  to Radionics'  246-zone fully  integrated  security,  fire and access
control panel which can operate a combination of up to 246 intrusion  detection,
smoke detection and access control circuits and devices.

Communications  Equipment.  The  Company  offers a broad line of  communications
equipment,  ranging from Radionics' central station receiving  equipment,  which
performs the function of receiving  alarm  signals  from  multiple  sources,  to
transmission  equipment capable of accessing telephone lines, as well as some of
the alternative communication technologies which are commercially available. One
of these  technologies  is BellSouth's  new  Cellemetry(R)  data service,  which
permits  wireless  transmission  of alarm  signals  to a central  station  using
existing cellular networks.  Another is the ARDIS radio network,  which offers a
more secure alternative to telephone lines as the means for contacting a central
monitoring  station,  and ultimately the police or fire  department.  A third is
LAN/WAN interface,  which allows  communications over private data networks.  In
addition,  the Company offers its Safecom long-range wireless alarm transmission
system which allows a monitoring company to establish and maintain a proprietary
two-way radio network to transmit and receive  alarm  signals.  The Company also
offers its Fastlink system which provides  one-way radio  communication of alarm
signals to a remote monitoring station.  The Company,  through its Radionics and
DA Systems  subsidiaries,  is licensed to  manufacture  and sell in the U.K. and
U.S. derived channel  communication devices that transmit alarm signals over the
unused  bands of  standard  telephone  lines.  This allows  alarm  signals to be
transmitted  at the  same  time  a  telephone  line  is  being  used  for  voice
communications.

Security Escort.  The Company's  Security Escort product is a multiple user help
call system which allows a user to alert  appropriate  security  personnel as to
their  location,  name  and any  handicap  or  other  special  data  by  using a
transmitter  the size of an auto keyless entry device.  Security  Escort systems
may be  enabled  to permit a user to trigger a strobe and sound a siren as well.
The primary components of a Security Escort system are a central command station
which is  monitored  by security  personnel,  a Microsoft  Windows-based  system
software  package,  transceivers,  receivers and individual  transmitters.  This
system uses a digital  micro-cellular  architecture  which accommodates up to 16
million individual user ID codes.

The Security Escort's advanced design features include:  self-supervision of the
system's  operational  integrity by internally  generating and  monitoring  test
transmissions;  testing of transmitters by users; and  system-generated  notices
regarding system maintenance requirements. Security Escort allows a user to test
the system and his or her transmitter at any time, from any location and receive
visual confirmation that both are functioning properly. In addition,  the system
software  provides for full archiving of all system  activity  including  victim
tracking and alarm map recall.

Fire Products

Fire  detection  systems work in the same manner as security  systems.  In fact,
many fire detection systems are operated in tandem with a security system by the
same control  equipment.  Fire alarm  systems range from  conventional  systems,
which can sense and signal a fire  condition or  non-condition,  to  addressable
systems,  which  permit  identification  of the  triggered  detector  within the
system, and analog systems,  which permit communication of information regarding
the condition of the  environment at the detector  location.  The Company offers
fire detection  products under the brand names Detection  Systems and Radionics.
The Company's fire  detection  product line,  which  includes  products for both
residential  and  commercial   applications,   features  detection   components,
dedicated control panels, communication equipment and notification devices.

Detectors.  The Company's fire detection  components sense the presence of smoke
and heat by employing a variety of technologies, including beam smoke detectors,
photoelectric  spot smoke  detectors,  ionization  spot smoke detectors and heat
probes.  The Company's smoke detectors are  differentiated by a patented chamber
which provides  increased  immunity to dust, which is the leading cause of false
fire alarms. The Company also has a automatic test and calibration feature which
continuously senses and signals if dust or other conditions cause the detector's
sensitivity to deviate from its acceptable range.

Control  Equipment.  As described  above,  many of the Company's  control panels
operate both  security and fire alarm  systems;  however,  some of the Company's
control panels are designed  exclusively  for operating fire alarm systems.  The
Company  originally  entered the fire detection  business as an extension of the
security  products line by providing  fire  detection  features and  accessories
through the security control panel. The Company is in the process of introducing
new control product lines for the dedicated fire market.

Communication  Equipment.  The technologies  the Company's  products provide for
communicating  fire alarm signals are the same as those provided by its security
alarm communications equipment.

Notification  Devices.  The  Company  distributes  a full range of  notification
devices such as strobes,  horns and sirens varying in color and intensity  which
fully  comply with the  Americans  with  Disabilities  Act.  These  products are
distributed under the Company's name.

Access Control Products

Electronic  access  control  systems  consist of equipment  that can identify an
authorized  individual and permit that person to enter a restricted  area. While
intrusion  control products protect the property when no one is on-site,  access
control  products  protect the  property  while it is  occupied.  The market for
access  control  systems  is  divided  into  three  major  end-user  categories:
industrial, commercial, and governmental.

Access control systems can include card-based systems, CCTV-based systems, audio
systems and bar code systems. The Company distributes access control products on
an OEM  basis  under  the  brand  names  Readykey(R),  Easikey(R),  DS Entry and
Radionics.  Access control products sold by the Company include control systems,
card readers, cards and detector accessories.

CCTV Products

CCTV is a system of relaying  video and audio signals from a camera to a monitor
or a recording device.  The term CCTV refers to a closed-circuit  system sending
signals to select receivers as opposed to a system  broadcasting  signals to the
general public.  The Company  distributes  CCTV products and offers its own CCTV
products  on an OEM  basis as well as under  the  brand  name DS  Vision.  These
products  consist  of  cameras,  monitors,  recorders,  control  units and other
accessories.  The Company  distributes color and black-and-white as well as both
high and low resolution cameras and monitors.

MARKETING

The Company's primary customers are: (i) national and regional  installation and
service  companies;  (ii) national  distributors;  and (iii) original  equipment
manufacturers. The Company has a sales force of approximately 97 representatives
of which 36 are domestic and 61 are  international.  The Company's  products are
installed in industrial, commercial, institutional and residential buildings, in
both new and upgraded system installations.

Domestically,  large  regional and national  accounts are supported  directly by
regional  sales and service  managers.  The  Company's  sales  managers  provide
technical  support  to  customers  regarding  system  design,  installation  and
service.  The Company also conducts regular training  programs for its customers
as well as technical  seminars at national and regional  trade shows.  A call to
the Company's 800 sales number  typically  results in same-day  shipment of most
standard  products from one of two warehouses.  To support the on-site installer
or service person, toll-free 800 lines connect directly to the Technical Service
Department.

The Company  markets the Security Escort multiple user help call system in North
America  and in  Australia.  While the system  was  initially  designed  for the
protection of individuals on college and university campuses, it is suitable for
many other  applications and is now used in apartment  complexes,  condominiums,
retirement  communities,   hospitals,   correctional  facilities,   governmental
facilities and manufacturing facilities.

The Company markets CCTV products primarily in Australia, Belgium and China.

COMPETITION

The markets in which the Company operates are highly competitive.  The Company's
competitors include  manufacturers of security and fire alarm equipment from all
over the world. The Company  believes its two major  competitors are Pittway and
the Berwind  Group.  In  addition,  the Company  may face  competition  from new
entrants into these markets and increased competition from existing competitors.
A number of the Company's  competitors have substantially  greater financial and
other  resources than the Company.  In many cases the Company's  competitors are
concentrated in one market niche in the electronic protection industry, allowing
them to concentrate  their resources in that niche.  The Company competes on the
basis of providing superior value to customers with respect to both products and
services.  When selecting intrusion and fire detection  equipment,  professional
installation and service  companies  consider the breadth of products offered by
manufacturers and distributors,  product performance and reliability, as well as
the incorporation of advanced  technological features such as automatic testing,
efficiency of delivery,  ease of installation  and service,  sales and technical
support  services  and  price.  There  can be no  assurance  that the  Company's
products and services will continue to be competitive and accepted by the market
in the future.

MANUFACTURING

The Company  designs  its products and prepares specifications for the component
parts  used  in  its  products.  The  Company  purchases certain components from
outside sources and then assembles them into finished products.

The Company has manufacturing  facilities in Fairport,  New York; Zhuhai, China;
Southall,  England; Lille, France and Sydney, Australia. The Company is ISO 9002
certified at its Fairport, Zhuhai and Southall locations.

The majority of the Company's  manufacturing is conducted in its China facility.
These  manufacturing  operations,   which  commenced  during  fiscal  1996,  are
conducted in a 70,000  square foot  manufacturing  facility in Zhuhai,  People's
Republic of China.  The Company is in the process of transferring  manufacturing
of DA Systems products to the China facility. The Company is also in the process
of consolidating its purchasing for all of its manufacturing materials, which it
expects  over  time will  result in  additional  cost  savings.  There can be no
assurance  that  such  cost  savings  will  be  achieved.  See  Note  10 to  the
Consolidated  Financial  Statements  for  further  discussion  of the  Company's
restructuring   actions.  For  further  information   concerning  the  Company's
manufacturing  operations  in  China,  see  Sections  entitled  "Risk  Factors,"
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and "Forward Looking Statements."

INTELLECTUAL PROPERTY

The Company has  obtained  over 40 patents  related to its  products.  While the
Company  obtains  patents as  appropriate  and considers  certain of its patents
valuable,  it does not  believe  any one of them by  itself  is  crucial  to the
successful  conduct of its  business.  The Company  relies on a  combination  of
patents,  trademark registrations,  copyrights and confidentiality agreements to
protect its intellectual property.

RESEARCH AND DEVELOPMENT

The  Company  has  continually  placed  significant  emphasis  on  research  and
development activities through internal efforts and partnering arrangements with
third parties.  The acquisitions of Radionics,  Safecom, DA Systems,  Seriee and
EDM has provided  additional  technologies to those it already possessed.  It is
the Company's intent to continue with its development  efforts to keep pace with
technological  advances in the security and fire protection industries by either
further internal efforts,  additional acquisitions,  or partnering arrangements.
The Company  expended  approximately  $8,507,000,  $8,579,000  and $8,115,000 on
research and development activities during 1999, 1998 and 1997, respectively.

BACKLOG

Backlog is not  significant in the business of the Company.  In general,  orders
are processed from inventory on a relatively  current basis. It is the Company's
goal to maintain  four weeks of finished  goods  inventory  for all  products in
order to meet customer requirements.

YEAR 2000 ISSUES

The Company is in the process of implementing the necessary changes related
to Year  2000  issues.  See  discussion  regarding  Year  2000 in  "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

SUPPLIERS

The Company  purchases raw  materials,  components  and certain  finished  goods
worldwide from numerous suppliers. The majority of these materials are generally
available from more than one supplier.  Certain  products  needed by the Company
can be obtained only from a limited  number of suppliers,  the shortage of which
could  adversely  impact  production  and/or  sale of certain  equipment  by the
Company. The Company does not believe that the loss of any other suppliers would
have a material adverse effect on its overall business.

REGULATION

Many of the Company's  products require  approval by the Federal  Communications
Commission (FCC) before they can be marketed in the United States.  In addition,
commercial  acceptance of the Company's  products is typically  dependent on the
listing of such products by Underwriters  Laboratories  ("UL").  The Company has
successfully  obtained  FCC approval and UL listing of its products in the past;
however,  it cannot predict whether it will obtain approvals for future products
or whether FCC regulations or UL listing requirements  relating to the Company's
current or future  products might change.  Internationally  there are equivalent
approval requirements. See section entitled "Risk Factors."

A number of municipalities have enacted or are considering  enacting legislation
which  penalizes  false  alarms  which  trigger  responses  by  police  or  fire
departments.  The Company is unable to quantify the effects such legislation may
have on the security and fire protection  markets as a whole, or on the Company.
However,  because  the  Company  competes  in the mid- to high-end  market,  its
products  generally  have  lower  false  alarm  rates  than  low-  and mid-range
products.  Consequently,  it would be expected  that  the  impact  of  any  such
regulation would be less to the Company than the impact  of such  regulation  on
companies competing the low- and mid-range product markets.

Compliance  with federal,  state and local laws and  regulations  regulating the
discharge  of  materials  into the  environment,  or  otherwise  relating to the
protection  of the  environment  have not had,  and are not  expected to have, a
material effect upon the capital expenditures,  earnings or competitive position
of the Company.

EMPLOYEES

As of March 31, 1999, the Company directly or indirectly employed  approximately
1,100  persons  worldwide.  Included  in this total are 460 persons at the China
manufacturing  facility.  None of the Company's  employees are  represented by a
collective  bargaining  organization,  and  the  Company's  management  believes
employee relations are good.

RISK FACTORS

Impact and Risks of Acquisitions

Between  February  1996  and June  1998  the  Company  made  nine  acquisitions:
Radionics,  DA Systems,  Senses, Seriee, RAS, Security Supplies,  EDM, Efsec and
Alarm  Center.  Part of the Company's  growth  strategy is to expand its product
catalog,  technologies and markets through additional acquisitions.  Integration
of  the  operations,  management  and  business  information  systems  of  those
acquisitions is ongoing. There can be no assurance that the Company will be able
to   successfully   integrate  the  operations  and  management  of  its  recent
acquisitions  or that the Company will be able to consummate or, if consummated,
successfully  integrate  the  operations,  management  and business  information
systems of future acquisitions.  Acquisitions involve several significant risks,
including  but not  limited  to risks  associated  with:  (i) the  diversion  of
management's attention to the assimilation of the acquired businesses;  (ii) the
ability of the  acquired  businesses  to maintain  the  quality of products  and
services that the acquired businesses have historically provided; (iii) the need
to  integrate  financial  and other  systems  with those of the  Company and the
difficulty  of  achieving  adequate  internal and  financial  control and timely
reporting;  (iv) the loss of key employees of the acquired  businesses after the
acquisition;  (v)  unforeseen  liabilities  of the acquired  business;  (vi) the
dilutive  effect of the  issuance of  additional  equity  securities;  (vii) the
incurrence  of  additional  debt as part of  such  acquisitions  or to fund  the
operations of the acquired business; and (viii) the amortization of goodwill and
other  intangible  assets  involved in any  acquisitions  that are accounted for
using the purchase method of accounting. In addition,  certain of the businesses
acquired by the Company  have been  unprofitable  and there can be no  assurance
that  they  can be  made  profitable.  There  can be no  assurance  that  future
acquisition opportunities will become available, that future acquisitions can be
consummated on favorable terms or that such  acquisitions will contribute to the
Company's  profitability.  The Company  continues  to  investigate  and consider
acquisition opportunities.

Management of Growth

Recent  growth  through  acquisitions,  expansion and related  consolidation had
resulted  in  financial  and   manufacturing   system  weaknesses  and  resource
constraints on the Company's  operations.  The Company has made  improvements to
its financial controls and enhanced its manufacturing information systems during
fiscal 1998 and 1999 in  continuing  efforts to keep pace with its  expanded and
more complex operations. During fiscal 1998, several steps were taken to address
these  matters,  including  (i)  establishing  and filling  three new  financial
positions,  including  a Chief  Accounting  Officer,  and (ii)  replacing  three
different  management  information  systems at its three  primary  sites with an
integrated  system and  developing  that  system  further  to improve  financial
control.  Despite the  Company's  continuing  efforts to improve  its  financial
controls and management information systems, no assurance can be given that such
weaknesses  will not reoccur.  In the event of such  reoccurrence  the Company's
inability to manage growth and the related consolidation  effectively could have
adverse effects on the Company's results of operations,  financial condition and
financial reporting information.

Risks Associated with International Operations

The China factory is dependent on the local Chinese government for personnel and
utilities  as  well  as   all   other   municipal   services.   See  "Business--
Manufacturing."  The  Company  believes  that  its  relationship  with the local
Chinese   government  is  good,  however,  any   future  deterioration  of  such
relationship  could have a material  adverse effect on the Company's  results of
operations.  One aspect of the  Company's  business  strategy is to increase the
sale of its  products in  international  markets.  The  Company's  international
operations give rise to political and economic  uncertainties relating to, among
other things, U.S. and foreign trade restrictions; foreign government stability;
risk of  re-negotiation  or modification of existing  agreements or arrangements
with  governmental  authorities;  foreign  economic  or  political  instability;
shipping costs and delays;  tariffs;  export  controls;  government  regulation;
patent and trademark availability, protection and registration; foreign exchange
restrictions which limit the repatriation of investments and earnings therefrom;
changes in taxation or  international  tax treaties;  military  action and other
hostilities or confiscation of property.  While the United States imposes quotas
and duties on selected imported products,  there are currently no U.S. quotas on
the Company's products.

The  Company is  subject  to  currency  exchange  risks to the  extent  that its
purchases  and  sales  occur  outside  the  United  States  and it is  unable to
denominate its purchases or sales in dollars or otherwise shift to its customers
or suppliers the risks of currency exchange rate  fluctuations.  Currently,  the
Company does not engage in currency hedging transactions.  However, it may do so
in the  future.  Fluctuations  in  exchange  rates may  affect  the  results  of
operations  and  financial  position of the Company's  international  operations
reported  in  dollars.  Additionally,  the  results  of  operations,   financial
condition  and  competitive  position  of the  Company  may be  affected  by the
relative strength of the currencies in countries where its products are sold.

Dependence on Significant Customers

The success of the Company  depends on the  business it conducts  with a limited
number of significant  customers.  One customer is also a significant competitor
of the Company  across many of its product  lines and  purchases  the  Company's
products to incorporate them into its products and systems.  The Company has had
long-standing relationships with most of its significant customers;  however, it
generally  does not have supply  contracts  with them and they may  unilaterally
reduce or discontinue their purchases without penalty. The Company's loss of (or
failure to retain a significant  amount of business with) any of these customers
could have a material  adverse effect on the Company.  The Company believes that
its acquisitions,  its international marketing initiatives and its increased use
of  distributors  may help  reduce the  potential  impact of sales  fluctuations
associated with the Company's  largest  customers.  During fiscal 1999, sales to
the Company's two  largest  customers accounted for 11.3% and 4.6% of net sales,
respectively.  In 1998,  sales to the  Company's two largest customers accounted
for  9.9%  and  6.6% of  net sales,  respectively.  During  1997,  sales to  the
Company's  two  largest  customers  accounted  for 10.7% and 10.6% of net sales,
respectively.  See  Note 9 to the  Consolidated  Financial  Statements  found in
Exhibit  13 of this  Form  10-K for more  detailed  information  about  sales to
significant customers.

Intellectual Property

The Company's ability to compete effectively depends, in part, on its ability to
protect its intellectual property, including its patents, trademarks, copyrights
and trade secrets, and on its ability to develop and protect future intellectual
property.  In addition  to  patents,  the  Company  relies on a  combination  of
trademark  registrations,  copyrights and confidentiality  agreements to protect
its  proprietary  rights in  intellectual  property.  The  Company's  ability to
compete  effectively  also  depends on its  ability to avoid  infringing  on the
proprietary  rights of others.  New patent  applications  are continually  being
filed and prosecuted,  and pending U.S.  patent  applications  are  confidential
until  patents are issued.  As a result,  it is  impossible  to  anticipate  all
potential patent infringement  issues.  There can be no assurance that the steps
taken by the Company to protect its  intellectual  property  will be adequate to
prevent   misappropriation  or  that  others  will  not  independently   develop
technology  or products that compete with or are superior to the products of the
Company.  Likewise,  there  can  be no  assurance  that  the  Company  will  not
inadvertently infringe on the intellectual property rights of others.

Risks of Technological Change

The electronic protection industry is characterized by continuous  technological
advances, frequent new product introductions and enhancements,  declining market
prices for similar products over time and changes in customer requirements.  The
Company's  future  success will depend on its ability to continue to develop new
products  and  technology  to meet  customer  needs  as well as to  enhance  its
existing  products and to  continually  reduce  product  costs.  There can be no
assurance  that  the  Company's  products  and  services  will  continue  to  be
competitive and accepted by the market in the future. Any failure by the Company
to anticipate or respond  rapidly to  technological  advances,  new products and
enhancements by competitors,  or changes in customer  requirements  could have a
material adverse effect on the Company. See "Business--Intellectual Property."

Dependence on Key Personnel

The Company is  dependent  upon the efforts of certain key members of its senior
management  team,  including Karl H.  Kostusiak,  Chairman  and Chief  Executive
Officer.  The loss of a key member of the Company's senior management team could
have an adverse effect on the operations of the Company.  The Company carries no
key  man  life  insurance  on any of its  management,  but  has  non-competition
agreements with certain key officers and technical personnel.

Product Liability Claims

If an intrusion, fire or other event that the Company's products are designed to
detect occurs in a setting where the Company's products have been installed, the
Company  may be subject to a claim that an error or  omission on the part of the
Company  contributed  to the damages  resulting  from such event,  which damages
could be  substantial.  Such a claim could be made whether or not the  Company's
product  performed  properly  under  the  circumstances.  From  time to time the
Company is subject to product  liability  claims in the  ordinary  course of its
business.  The Company carries  product  liability  insurance  which  management
believes is adequate;  however,  a product  liability  judgment or settlement in
excess of available  insurance  proceeds could have a material adverse effect on
the financial condition and results of operations of the Company and any adverse
claim or settlement could have an adverse effect on the availability and cost to
the Company of product  liability  insurance.  The Company does not believe that
any pending or threatened  litigation will have a material adverse effect on the
financial  condition or results of operation of the Company.  See "Item 3--Legal
Proceedings."

Dependence on Suppliers; Concentration of Manufacturing

While the Company  manufactures  most of the  products it sells,  certain of the
components  used in its  products  are  purchased  from  third  parties  and are
available from a limited  number of sources.  The loss of any one supplier or an
inability of  suppliers  to provide the Company  with the  required  quantity or
quality of these components  could have an interruptive  effect on the Company's
business  until  such time as an  alternative  source  of  supply is found.  See
"Business--Manufacturing."

Substantially  all of the products  manufactured  by the Company are produced at
facilities  in  Fairport,   New  York,  Zhuhai,  China  or  Sydney,   Australia.
Accordingly,  any event  resulting  in the  slowdown or stoppage of any of these
manufacturing operations could have a material adverse effect on the Company.

Government Regulation and Product Listing

Many of the  Company's  products  require  approval  by FCC  before  they can be
marketed  in the  United  States.  In  addition,  commercial  acceptance  of the
Company's products is typically dependent on the listing of such products by UL.
The  Company  has  successfully  obtained  FCC  approval  and UL  listing of its
products  in the  past;  however,  it  cannot  predict  whether  it will  obtain
approvals  for  future  products  or  whether  FCC  regulations  or  UL  listing
requirements  relating to the Company's current or future products might change.
Failure to comply with FCC regulations or UL listing requirements,  an inability
to receive  approval  for  products  under  development  or a change in existing
regulations  or listing  requirements  that would make  products  non-compliant,
could have a material  adverse effect on the financial  condition and results of
operations of the Company.  Most foreign countries also have similar  regulatory
agencies and private  certification or listing  organizations,  which could have
the same impact on sales of the Company's  products within those  countries.  In
addition to the  regulation  of its  products,  the Company is subject to local,
state,  federal and foreign laws  regarding the discharge of materials  into the
environment.

Volatility of Stock Price

The Common Stock has  experienced  significant  volatility  since the  Company's
acquisition  of  Radionics  in  February  1996.  The  market for  securities  of
technology  companies  historically  has been more  volatile than the market for
stocks in  general.  The  trading  price of the  Company's  common  stock may be
subject to wide  fluctuations  in response to  quarter-to-quarter  variations in
operating  results,  announcement  of  future  developments  including  possible
acquisitions, new products by the Company or its competitors and other events or
factors.  These  fluctuations  may be compounded by the historically low trading
volume in the  Company's  common stock.  In addition,  the stock market has from
time to time  experienced  extreme  price  and  volume  fluctuations  that  have
affected the market price for many technology companies and that often have been
unrelated to the operating  performance of these  companies.  These broad market
fluctuations  may  adversely  affect the market  price of the  Company's  common
stock.  See Market for the Registrants  Common Stock and Related Security Holder
Matters--Price Range of Common Stock."

Litigation

The Company and certain  officers and  directors  have been named  defendants in
several lawsuits alleging  violations of federal securities laws relating to the
Company's September 1997 public offering.  For additional  information regarding
these lawsuits and associated risk factors, see Item 3 of this Form 10-K---Legal
Proceedings  and Note 10 to the  Consolidated  Financial  Statements,  which are
incorporated herein by reference.

Year 2000

The Company is in the process of implementing  the necessary  changes related to
Year 2000 issues. For additional  information regarding Year 2000, see Item 7 of
this Form 10-K--Management's  Discussion and Analysis of Financial Condition and
Results of Operations, which is incorporated herein by reference.

Anti-takeover Provisions

The Company maintains employment and consulting agreements with certain officers
which provide that upon the occurrence of certain  events  following a change in
control of the Company,  such officers may be entitled to receive the equivalent
of three years'  compensation and other payments.  See  "Management---Employment
Agreements." The shares  beneficially owned by the Company's  executive officers
and  directors  and the  compensation  payable to certain  officers  following a
change in control may have the effect of  discouraging  persons from  pursuing a
non-negotiated  takeover  of the  Company  and  preventing  certain  changes  of
control.  Also,  Section 912 of the New York Business  Corporation Law, which is
applicable to the Company,  contains  provisions that restrict  certain business
combinations  with  interested  shareholders,  which  may  have  the  effect  of
inhibiting a non-negotiated  merger or other business combination  involving the
Company.

ITEM 2. Properties.

The Company conducts  manufacturing,  research and general office  operations at
its 92,000 square foot facility at 130 Perinton Parkway, Fairport, New York.

Radionics' product  configuration and general office operations are conducted at
its 156,000 square foot facility  located in Salinas,  California,  the lease on
which  expires in July 1999.  Radionics  has  relocated to a 78,000  square foot
facility in June 1999.

The  China  manufacturing  operations  are  conducted  in a 70,000  square  foot
manufacturing facility in Zhuhai,  People's Republic of China. Detection Systems
(HK) Ltd. ("DS Hong Kong"),  a subsidiary  of the Company has a  sub-contracting
agreement  with the local  Chinese  government  which runs through June 2000 and
requires the  government  to arrange for a factory,  personnel and utilities and
for  DS  Hong  Kong  to  furnish  manufacturing  equipment,  raw  materials  and
management  services.  It is expected that the agreement will be extended beyond
June 2000.  Pursuant to this  agreement  DS Hong Kong pays a fee and  production
expenses to and makes payments to the workers at the facility.

DS-Australia,  a subsidiary  of the  Company,  has a three year lease for 15,500
square feet of  manufacturing  and office space from the former principal of EDM
which expires January 20, 2001.

ITEM 3. Legal Proceedings.

The Company and certain  officers and  directors  have been named  defendants in
several  class-action  lawsuits alleging  violations of federal  securities laws
relating to the Company's  September 1997 public  offering.  The underwriters of
the public  offering  have also been named as defendants in three of these class
actions.  The  actions  allege that the  Company,  certain of its  officers  and
directors and the underwriters made or are responsible for alleged misstatements
and  omissions in various  press  releases  and public  filings  concerning  the
Company's business and financial condition.  The Company believes these suits to
be without merit and intends to defend against them vigorously.  However,  it is
possible that an  unfavorable  resolution to such lawsuits would have a material
adverse  impact on the financial  condition  and/or results of operations of the
Company. For additional information regarding these lawsuits, see Note 10 to the
Consolidated Financial Statements, which is incorporated herein by reference.

The Company  experiences  routine  litigation  in the normal course of business.
Also,  the Company  occasionally  receives,  and may  continue to receive in the
future,  communications  from third parties claiming that the Company's products
or technologies  infringe on such parties'  intellectual  property  rights.  The
Company  does  not  believe  that  any  pending  or  threatened   litigation  or
intellectual  property  claims  will  have  a  material  adverse  effect  on the
financial condition or results of the operations of the Company.

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

There  were no  matters  submitted  to a vote of  security  holders  during  the
Company's fourth quarter ending March 31, 1999.

                                     PART II

ITEM 5.  Market for the  Registrant's  Common  Stock and  Related  Security
         Holder Matters.

The  Company's  common  stock trades on The Nasdaq  National  Market tier of The
Nasdaq Stock Market under the symbol: DETC. On June 11, 1999, the closing price,
as reported by The Nasdaq Stock Market,  was $8.06 per share,  and the number of
shareholders was  approximately  4,366,000.  Certain  information  regarding the
price range of the Company's  Common Stock (quarterly high and low) is presented
below:

PRICE RANGE OF COMMON STOCK

The quarterly high and low bid of the Company's common stock during the past two
years (in dollars):
<TABLE>
<CAPTION>
<S>                                                <C>                 <C>

Fiscal Year Commencing April 1, 1999               High                Low
                                                   ----                ---
  First quarter (through June 11, 1999)           $9.125             $6.750

Fiscal Year Ended March 31, 1999
  Fourth quarter                                 $10.500             $8.000
  Third quarter                                   11.875              8.625
  Second quarter                                  10.500              8.125
  First quarter                                   12.125              8.813

Fiscal Year Ended March 31, 1998
  Fourth quarter                                 $14.125             $8.500
  Third quarter                                   21.250             13.125
  Second quarter                                  22.500             17.250
  First quarter                                   20.250             12.500
</TABLE>

                                 DIVIDEND POLICY

The Company has never  declared or paid any cash  dividends on its Common Stock.
The Company currently  anticipates that all of its earnings will be retained for
development  and  expansion of the  Company's  business and does not  anticipate
paying any cash dividends in the foreseeable future. Any future determination as
to the payment of cash dividends  will depend on a number of factors,  including
future earnings, capital requirements,  the financial condition and prospects of
the Company and any restrictions  under credit agreements  existing from time to
time, as well as such other factors as the Company's Board of Directors may deem
relevant.  Certain financial covenants in the Company's current credit facility,
including  a covenant  to  maintain  a minimum  tangible  net  worth,  limit the
Company's ability to pay dividends.

ITEM 6. Selected Financial Data.
<TABLE>

The fiscal 1999 and 1998 results are not comparable due to the acquisitions made
during these years which were  accounted  for as  purchases.  Unaudited  interim
quarterly  results for the  Company  over the past two years were as follows (in
thousands, except per share data):
<CAPTION>

Fiscal Year Ending                                   NET     EARNINGS (LOSS)
                            NET      GROSS        INCOME        PER SHARE
March 31,                 SALES     MARGIN        (LOSS)      BASIC     DILUTED
---------                ------    -------       -------     ------     -------
1999                                   (Unaudited)
<S>                     <C>        <C>            <C>         <C>         <C>

Fourth quarter          $34,581    $13,406        $1,178      $0.19       $0.17
Third quarter            34,201     13,147         1,231       0.19        0.18
Second quarter           35,455     13,559         1,230       0.19        0.18
First quarter *          33,808     12,770           832       0.13        0.12

1998
Fourth quarter*         $32,325    $11,458         $(347)    $(0.06)     $(0.06)
Third quarter            31,347      9,910           (76)     (0.01)      (0.01)
Second quarter           34,463     11,430           672       0.14        0.12
First quarter            28,208     10,652         1,133       0.25        0.22
</TABLE>

*Includes  charges  relating  to  restructuring  actions.  See  Note  10 to  the
Consolidated  Financial  Statements  of this Form  10-K,  which is  incorporated
herein by reference.

The  Company's  five year  summary of operations  is  presented  below.  See the
discussion  of  acquisitions  in  "Business--Acquisitions" (in thousands, except
per share data):
<TABLE>
<CAPTION>

Year Ended March 31,                  1999         1998        1997        1996        1995
                                      ====         ====        ====        ====        ====
<S>                                <C>         <C>          <C>           <C>        <C>
Net sales                          $138,045    $126,343     $101,251      $41,858    $34,336
Income (loss) before taxes            7,307       2,337        5,250      (10,665)     2,592
Provision (benefit) for taxes         2,836         955        1,525       (2,810)     1,078
Net income (loss)                     4,471       1,382        3,725       (7,855)     1,514

AT YEAR END
Current assets                      $66,341     $68,520      $50,501      $28,426    $17,953
Current liabilities                  17,244      23,576       19,434       12,714      2,990
Working capital                      49,097      44,944       31,067       15,712     14,963
Total assets                         92,812      94,044       68,276       45,897     24,745
Long term debt                       17,179      16,549       28,086       17,936        746
Shareholders' equity                 55,744      51,264       17,831       11,569     19,194
Number of employees                   1,100       1,100          744          595        320
Number of shareholders                4,400       4,400        4,000        3,200      3,000


PER SHARE AMOUNTS*
Net income (loss)-basic               $0.71       $0.25        $0.85       $(1.87)    $0.38
Net income (loss)-diluted              0.65        0.24         0.76        (1.87)     0.35
Shareholders' equity                   8.49        7.86         3.99         2.75      4.59

RATIOS/PERCENTAGES
Gross profit / sales                   38.3%       33.6%       35.9%        33.2%     39.3%
Pre-tax profit (loss) / sales           5.3%        1.9%        5.2%       (25.5)%     7.5%
Net income (loss) / sales               3.2%        1.1%        3.7%        (8.8)%     4.4%
Current ratio                           3.8         2.9         2.6          2.2       6.0
</TABLE>

*Restated to reflect the  adoption of SFAS No. 128,  and the  three-for-two
stock split distributed December 17, 1996.


ITEM 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations.

Overview

The Company is a supplier of equipment to the  electronic  protection  industry.
The Company designs,  manufactures and markets electronic detection, control and
communication equipment for security, fire protection, access control and closed
circuit television  ("CCTV")  applications,  offering products primarily for the
commercial  and mid- to high-end  residential  portions of the market.  From its
founding  in 1968 until 1995,  the Company was  primarily a provider of security
sensor devices for the domestic market.  In 1995, the Company adopted a strategy
designed to expand its  product  offerings,  establish  an  international  sales
presence, increase its manufacturing capacity and improve its manufacturing cost
structure.  The Company  has since made nine  acquisitions,  opened  four  sales
offices and established a manufacturing facility in Asia. These initiatives have
enabled the Company to significantly expand its product catalog and market reach
and to increase its net sales from $34,336,000 in fiscal 1995 to $138,045,000 in
fiscal 1999.

During fiscal 1996 through 1999, the Company  completed nine  acquisitions:  (i)
the purchase in February 1996 of Radionics of  California,  which had annual net
sales of  approximately  $45,000,000,  (ii) the purchase in July 1996 of certain
assets of Senses of  California,  which had  annual  net sales of  approximately
$2,000,000,  (iii) the purchase in May 1997 of DA Systems of the United Kingdom,
which had annual net sales of  approximately  $10,800,000,  (iv) the purchase in
June 1997 of Seriee of  France,  which  had  annual  net sales of  approximately
$6,300,000,(v) the purchase in June 1997 of RAS of Belgium, which had annual net
sales  of  approximately  $9,900,000,  (vi) the  purchase  in  November  1997 of
Security  Supplies of New Zealand,  which had annual net sales of  approximately
$800,000,  (vii) the  purchase in January  1998 of EDM of  Australia,  which had
annual net sales of approximately  $4,600,000,  (viii) the purchase in June 1998
of Efsec of Sweden, which had annual net sales of approximately $3,000,000,  and
(ix) the purchase in June 1998 of Alarm Center of Hungary,  which had annual net
sales of approximately $500,000.  These acquisitions have served both to broaden
the Company's  product  lines and to increase its  international  presence.  The
acquisitions have a significant impact on comparative  financial information for
fiscal years 1999, 1998 and 1997.

The  Company  recognizes  net sales upon  shipment  of  products  to  customers.
Production expenses include materials,  direct labor and manufacturing  overhead
as well as an allocated portion of indirect  overhead.  Research and development
expenses  include  costs  associated  with  salaries  and  benefits  for certain
engineering employees,  supplies, agency approvals,  depreciation and occupancy,
as well as charges for independent  testing and independent  contractors engaged
for specific  projects.  Marketing,  administrative and general expenses include
costs  related  to  the  Company's  sales  efforts  and  corporate  and  general
administrative functions, including costs of executive, administrative and sales
personnel,  marketing/selling supplies,  advertising,  outgoing freight, customs
and other costs associated with product delivery,  depreciation and professional
fees.

Results of Operations

The following table sets forth, for the periods indicated,  the percentages
which certain items of income and expense bear to net sales:
<TABLE>
<CAPTION>

Fiscal Year Ended March 31,                 1999         1998           1997
<S>                                        <C>          <C>            <C>
                                            ====         ====           ====
Net sales                                  100.0%       100.0%         100.0%
Costs and expenses:
  Production                                61.7         65.6           64.2
  Research and development                   6.1          6.8            8.0
  Marketing, administrative & general       25.9         23.8           21.2
                                            ----         ----           ----
Operating income                             6.3          3.8            6.6

Net interest expense                        (1.1)        (1.6)          (1.6)
Other income (expense)                       0.1         (0.4)           0.2
                                             ---          ---            ---
Income before income taxes                   5.3          1.8            5.2
Provision for income taxes                   2.1          0.7            1.5
                                             ---          ---            ---
Net income                                   3.2%         1.1%           3.7%
                                             ===          ===            ===
</TABLE>

Year Ended March 31, 1999 Compared to Year Ended March 31, 1998

The  Company's  net sales  increased  9.3% to  $138,045,000  in fiscal 1999 from
$126,343,000 in fiscal 1998. The net sales of acquired businesses  accounted for
$9,496,000 of this increase,  while sales from the company's on-going businesses
accounted for approximately  $2,206,000.  Net sales during the current period by
the Company's on-going  operations were favorably impacted compared to the prior
year period by increased sales of security  sensors and controls as well as CCTV
products.  This was offset,  in part, by the continued  impact of lower sales to
one of the Company's major domestic  customers and by the acquisition of several
of the Company's domestic customers by other businesses who are not standardized
on the Company's products.  See Note 9 to the Consolidated  Financial Statements
for  information  regarding  the  Company's  sales by  geographic  region and to
significant customers.

Production   expenses   increased  2.7%  to  $85,163,000  in  fiscal  1999  from
$82,893,000  in fiscal 1998. As a percentage of net sales,  production  expenses
decreased to 61.7% from 65.6%. The increase in production expenses was primarily
due to a  corresponding  increase in the  Company's  net sales.  The decrease in
production  expenses  as  a  percentage  of  net  sales  was  primarily  due  to
improvements in the Company's cost structure and changes in product mix.

Research and development expenses decreased $72,000 to $8,507,000 in fiscal 1999
from  $8,579,000  in  fiscal  1998.  As a percent  of net  sales,  research  and
development  expenses decreased to 6.1% in fiscal 1999 from 6.8% in fiscal 1998.
The decrease in research and  development  expenses as a percentage of net sales
was primarily due to the acquisition of redistributor  businesses  during fiscal
1999 and 1998  which  have  sales  but do not  incur  significant  research  and
development expenditures.

Marketing,   administrative  and  general  expenses   increased   $5,688,000  to
$35,727,000  in fiscal 1999 from  $30,039,000 in fiscal 1998. As a percentage of
net sales, marketing,  administrative and general expenses increased to 25.9% in
fiscal 1999 from 23.8% in fiscal 1998. The increase in marketing, administrative
and  general  expenses in the  aggregate  and as a  percentage  of net sales was
primarily due to the acquisition of redistributor  businesses in fiscal 1999 and
a full year of ownership of  redistributor  businesses  acquired  during  fiscal
1998. Redistributor  businesses typically have higher marketing,  administrative
and general expenses  associated with product  redistribution than do businesses
with manufacturing operations.

Included  in other  income  (expense)  are gains from  fluctuations  in currency
exchange rates of  approximately  $140,000,  compared to a loss of approximately
$298,000  in the prior  year.  The  Company  does not  currently  hedge  foreign
exchange risk, but may develop a formal hedging program in fiscal 2000.

Net  interest  expense  decreased  $531,000  to  $1,504,000  in fiscal 1999 from
$2,035,000 in fiscal 1998.  The decrease was  primarily due to lower  borrowings
outstanding. During fiscal 1999 approximately $1,642,000 of debt was repaid with
cash generated from operations.

The Company's effective income tax rate for fiscal 1999 was 38.8% compared to an
effective rate of 40.9% in fiscal 1998.

Year Ended March 31, 1998 Compared to Year Ended March 31, 1997

The  Company's net sales  increased  24.8% to  $126,343,000  in fiscal 1998 from
$101,251,000  in fiscal  1997.  The  acquisition  of  businesses  in fiscal 1998
accounted for approximately  $24,229,000 of this increase,  while sales from the
Company's on-going businesses accounted for approximately $863,000. Sales of the
Company's  on-going  operations  were impacted by its purchase of RAS and Seriee
during fiscal 1998, both of whom had been distributors of the Company's products
in Europe. Sales to RAS and Seriee were approximately $1,300,000 in fiscal 1997.
Sales were also impacted by lower than anticipated sales to one of the Company's
major customers and the  acquisition of two of the Company's  customers by other
businesses.  The Company has been able to offset, in part, the declines in sales
to those customers with increased sales to a broader base of customers. See Note
9 to  the  Consolidated  Financial  Statements  for  information  regarding  the
Company's sales by geographic region and to significant customers.

Production   expenses  increased  27.7%  to  $82,893,000  in  fiscal  1998  from
$64,916,000  in fiscal 1997. As a percentage of net sales,  production  expenses
increased to 65.6% from 64.2%. The increase in production expenses was primarily
due to the  increase  in net sales.  The  increase in  production  expenses as a
percentage  of net sales was  primarily  due to  acquisitions  of  redistributor
businesses during fiscal 1998 and unexpected manufacturing  inefficiencies.  The
lower margin earned by the Company's acquisitions is reflective of the fact that
margins associated with the product redistribution  business are typically lower
than margins  associated  with the sale of  proprietary  product.  Excluding the
impact  of  acquisitions,  production  expenses  as  a  percent  of  sales  were
consistent with the prior year at 64.2%.

Research and  development  expenses  increased  $464,000 to $8,579,000 in fiscal
1998 from $8,115,000 in fiscal 1997. As a percentage of net sales,  research and
development  expenses decreased to 6.8% in fiscal 1998 from 8.0% in fiscal 1997.
The increase in research and  development  expenses is due to the acquisition of
certain businesses with research and development activities (DA Systems, EDM and
Seriee) and the  continued  emphasis of the Company on new product  development.
The decrease in research and  development  expenses as a percentage of net sales
is due to a lower rate of spending on research and development by the businesses
acquired in fiscal 1998 compared to the  Company's  on-going  operations,  since
most of the businesses acquired in fiscal 1998 focus on product distribution. In
addition,  the  Company  continued  to  benefit  from  synergies  created by the
consolidation of certain domestic research and development activities.

Marketing,   administrative  and  general  expenses   increased   $8,537,000  to
$30,039,000  in fiscal 1998 from  $21,502,000 in fiscal 1997. As a percentage of
net sales, marketing,  administrative and general expenses increased to 23.8% in
fiscal 1998 from 21.2% in fiscal 1997. The increase in marketing, administrative
and general  expenses was  primarily  due to the  acquisition  of  businesses in
fiscal 1998. Acquired businesses accounted for approximately  $6,284,000 of this
increase.  In addition,  a charge of approximately  $400,000 was recorded in the
fourth  quarter of fiscal 1998  relating to the  restructuring  of the Company's
Radionics  manufacturing  facility.  This  restructuring  relates  to  severance
associated with the transfer of all remaining  manufacturing  from the Company's
Radionics facility to its Asia facility.

Included in other  income  (expense)  are losses from  fluctuations  in currency
exchange rates of  approximately  $298,000,  compared to a gain of approximately
$75,000 in the prior year.

Net  interest  expense  increased  $401,000  to  $2,035,000  in fiscal 1998 from
$1,634,000 in fiscal 1997. The increase was primarily  attributable  to a higher
average  outstanding  balance of debt in fiscal 1998  compared  to fiscal  1997,
which resulted from the Company's  international  expansion and higher inventory
levels.

The Company's effective income tax rate for fiscal 1998 was 40.9% compared to an
effective  rate of 29.0% in  fiscal  1997.  The  effective  income  tax rate was
primarily impacted by non-deductible  goodwill,  and the elimination of research
and development credits.

Liquidity and Capital Resources

The  Company  considers  liquidity  to be its  ability  to meet  its  long-  and
short-term cash  requirements.  Prior to 1996, those requirements were primarily
met by cash generated by the Company's  operating  activities and cash reserves.
Since the  implementation  of the  Company's  strategy  designed  to enhance its
product  offerings,   manufacturing   capacity  and  international   operations,
particularly  its  acquisitions  and the  development of the Asia facility,  the
Company has required  external  sources of  financing  to satisfy its  liquidity
needs.

During fiscal 1999, the Company's  operating  activities  provided $7,197,000 of
operating  cash  flow.  Net  income,   depreciation  and  amortization  provided
$7,694,000.  A decrease  in  inventories  provided  $1,022,000.  A  decrease  in
accounts payable used $5,642,000 and a decrease in accounts  receivable provided
$2,704,000. Other account changes provided $1,419,000 of operating cash flow.

During  fiscal 1999,  cash used in investing  activities  was  $3,859,000.  This
related to the acquisitions of Efsec and Alarm Center and capital expenditures.

During fiscal 1999, cash used in financing activities was $1,818,000,  primarily
representing principal repayments of debt.

Pursuant to the terms of the Company's debt agreements,  the Company has certain
ratios and covenants to maintain with respect to such items as working  capital,
funded  debt  and  fixed  charges.  Failure  to  comply  with  these  guidelines
constitutes a default and permits the lenders to cause the obligations to become
currently due. The Company is in compliance with all covenants and  requirements
under the terms of the borrowing agreements.

Capital  Resources.  On  March  31,  1999,  the  Company  had cash  balances  of
$4,414,000.  On that  date,  the  Company  had a  $17,000,000  revolving  credit
facility that was not drawn.  This credit  facility  bears  interest  based upon
either the  federal  funds  rate,  the prime rate or LIBOR,  each  adjusted by a
factor  which  varies  based upon the rates of funded  debt to  earnings  before
interest, tax, depreciation and amortization, and matures on July 31, 2000.

The Company expects to continue its pursuit of acquisitions  and the development
of  new  products  and  markets.  Significant  expenditures  will  also  include
continued  research  and  development  investment  in  detection,   control  and
communication projects. The Company also plans to continue its efforts to market
its products internationally.

The Company  believes that the  combination of its current cash  balances,  cash
flows from operations and existing credit  facilities will be sufficient to fund
its planned operations during fiscal 2000.

Year 2000.  The  Company  has  appointed a team to assess the impact of the year
2000 on its information systems,  products, and business. This team includes two
members of senior management and is led by the Vice President of Operations.  To
ensure year 2000 compliance,  the Company has established specific categories to
be reviewed:

Products.  The Company  places a high priority on ensuring its products are year
2000 ready.  The  Company  has  completed  its review of all  products  that are
manufactured  domestically  and at its Asia  manufacturing  facility  as well as
products purchased for resale by its domestic  businesses.  The Company believes
these  products  to be year 2000  compatible.  The  Company  is  completing  its
assessment of year 2000 compatibility of products manufactured and purchased for
resale  at  its  other  foreign  subsidiaries.   The  Company  does  not  expect
significant  issues with year 2000  readiness  of  products  sold by its foreign
subsidiaries  as  products  sold  by  the  Company  generally  do not  use  date
information for calculations or comparisons.

Manufacturing.  Some of the tools and equipment  (hardware and software) used to
develop and manufacture the Company's products are  date-sensitive.  The Company
believes that the  date-sensitive  tools and equipment used by it to manufacture
products are now year 2000  compatible.  As a result the Company does not expect
significant  interruption  to  its  manufacturing  capabilities  because  of the
failure of tools and/or equipment.

Non-Manufacturing Business Applications. The Company is in the process of fixing
and testing all  non-manufacturing  business applications such as core financial
information and reporting systems, procurement, human resources/payroll, factory
applications, customer service systems, and revenue systems, and does not expect
any significant year 2000 problems in this area.

The  Company's  domestic  business  information  systems  required  upgrades and
enhancements to be made year 2000 compatible.  These upgrades have been made and
are currently being tested.  Necessary upgrades to other information  technology
infrastructure  have been identified and  remediation is in process.  Testing of
year 2000 upgrades is expected to be completed prior to the year 2000.

Most of the Company's non-US  subsidiaries'  information systems require various
degrees of upgrade or  replacement  to be capable of  handling  year 2000 issues
(excluding  the Hong Kong  subsidiary,  which  utilizes the  Company's  domestic
information  system).  The  Company  has  purchased  a new  enterprise  resource
planning  system  capable  of  handling  the year 2000 that is  currently  being
implemented at its foreign  subsidiaries.  This implementation is expected to be
complete at all locations  prior to December 31, 1999. The Company expects to be
capable  of  handling  the  year  2000  at  all  locations  without  significant
interruption to business activity.

Facilities  and  Infrastructure.  The Company has evaluated its  facilities  and
infrastructure   (health,    safety   and   environment   systems,    buildings,
security/alarms/doors, desktop computers, networks) to ensure they are year 2000
compatible. Upgrades are being implemented where needed and the Company does not
expect significant  interruption to its operations because of year 2000 problems
with its facilities and infrastructure.

Logistics.  Of  importance  to the  Company  for year 2000 is the  readiness  of
suppliers  and the  products  the Company  procures  from  suppliers  as well as
customers  and service  providers.  The Company has a  comprehensive  program to
identify and obtain year 2000 information from its critical suppliers, customers
and service providers.  The program includes awareness letters,  questionnaires,
and a review of year 2000 web-sites.  The Company has mailed a questionnaire  to
substantially all suppliers, customers and service providers regarding year 2000
readiness.   Responses  are  currently  being  received  and  evaluated  and  no
significant issues have been noted as of the date of this report. If a supplier,
customer or service  provider is of concern  regarding year 2000 readiness,  the
Company will develop contingency plans to minimize the year 2000 risk.

The Company  estimates that its aggregate  costs for year 2000  activities  from
1997  through  2000 will be  approximately  $800,000.  External  costs  incurred
through  March 31, 1999 were  approximately  $560,000 and  primarily  related to
computer  hardware and software.  It is anticipated that the remaining year 2000
costs will relate to computer  software,  computer hardware and consulting fees.
The Company does not separately  track internal costs relating to the year 2000,
and they are not included in the  Company's  estimate of year 2000 costs.  These
costs do not include  estimates for potential  litigation,  which at the present
time is not viewed as a significant  risk. The Company  reviews and updates data
for costs incurred and forecasted  costs each quarter.  These costs are based on
management's  estimates,  which were  determined  based on assumptions of future
events,  some within the  Company's  control,  but some  outside  the  Company's
control.

Management's estimate of the costs and completion dates are dependent on various
factors  including  the  availability  of skilled  resources  and the ability to
locate and modify all  relevant  software  code.  No amount of  preparation  and
testing can guarantee year 2000 compliance. Nevertheless, the Company recognizes
that failing to resolve its year 2000 issues on a timely basis would, in a worst
case scenario, significantly limit its ability to manufacture and distribute its
products  and  process  its daily  business  transactions  for a period of time,
especially  if such  failure  is  coupled  with  third  party or  infrastructure
failures.  Similarly, the Company could be significantly affected by the failure
of  one  or  more   significant   suppliers,   customer  or  components  of  the
infrastructure to conduct their respective operations without interruption after
1999.  Because of the  difficulty of assessing the year 2000  compliance of such
third parties,  the Company considers the potential  disruptions  caused by such
parties to present the most  reasonably  likely  worst-case  scenarios.  Adverse
effects on the Company could include business disruption,  increased costs, loss
of sales and other similar  ramifications.  However,  the Company believes it is
taking  appropriate  preventive  measures and will be successful in avoiding any
material adverse effect on the Company's operations or financial condition.

Euro  Conversion.  The Company is assessing the potential impact that may result
from the euro  conversion  in a number of areas,  including the  following:  (1)
accounting and tax; (2) management  information  systems required to accommodate
euro-denominated  transactions;  (3) the impact on currency  exchange  costs and
currency exchange rate risk; and (4) the impact on existing contracts.

Dividend Policy. The Company is dedicated to promoting shareholder value through
long term  profitability  and growth and believes that continued  investments in
future product  development are essential to this goal. For this reason,  it has
been the Company's policy not to pay cash dividends.

Inflation.  During  fiscal 1999,  1998 and 1997,  inflation  did not have a
significant impact on the Company's business, or results of operations.

Forward-Looking Statements

This Report contains certain "forward-looking  statements" within the meaning of
Section  27A of  the  Securities  Act of 1933, as amended and Section 21E of the
Securities  Exchange  Act of 1934,  as amended  which  represent  the  Company's
expectations or beliefs,  including,  but not limited to, statements  concerning
industry   performance,   the  Company's  operations,   performance,   financial
condition, growth and acquisition strategies, margins and growth in sales of the
Company's products. For this purpose, any  statements  contained  in this Report
that are not statements of historical  fact may be deemed to be  forward-looking
statements.  Without  limiting the  generality of the  foregoing,  words such as
"may," "will," "expect,"  "believe,"  "plan,"  "anticipate,"  "intend," "could,"
"estimate," "continue," "goal" or "strategy" or the negative or other variations
thereof or  comparable  terminology  are  intended to  identify  forward-looking
statements.  These  statements  by their nature  involve  substantial  risks and
uncertainties,  certain of which are beyond the  Company's  control,  and actual
results  may differ  materially  depending  on a variety of  important  factors,
including those described previously in the "Risk Factors" section and elsewhere
in this Form 10-K, which is incorporated herein by reference thereto.

ITEM 8. Financial Statements and Supplementary Data.

The financial  statements  and  supplementary  data required in this section are
included  as  Exhibit  13 of this Form  10-K,  which is  incorporated  herein by
reference thereto.

ITEM 9. Disagreements on Accounting and Financial Disclosure.

        Not applicable.


<PAGE>
                                    PART III

ITEM 10. Directors and Executive Officers of the Registrant.

The officers of the Company are as follows:

Name and Age                    Position, Offices Held and Year Appointed
------------                    -----------------------------------------
Karl H. Kostusiak (60)          President (1968)

David B. Lederer (59)           Vice President, Business Development (1968)

George E. Behlke (42)           Vice President, Operations (1995)

Frank J. Ryan (45)              Vice President, Secretary and Treasurer (1982)

Lawrence R. Tracy (52)          President, Detection Systems International, Inc.
                                 subsidiary of Detection Systems, Inc. (1995)

Christopher P. Gerace (31)      Vice President, Chief Accounting Officer (1999)

Jeffrey M. Swan (34)            Vice President, Engineering (1999)

Each  officer  is  elected  to serve  until  the first  meeting  of the Board of
Directors  held  after the next  annual  meeting of  shareholders  and until his
successor is elected and has qualified.  There is no family relationship between
any of the above officers.

Messrs.  Kostusiak  and  Lederer  have been  President  and  Executive  Vice
President of the Company since it was formed in 1968.  Effective  April 1, 1998,
Mr. Lederer has reduced his  involvement to half time. In connection  with this,
Mr. Lederer's title was changed from Executive Vice President to Vice President,
Business  Development.  Mr.  Ryan has been  employed  by the  Company in various
financial  positions  since 1980 and was promoted to Vice President in 1989. Mr.
Tracy was hired in February 1995 as President of the Company's Detection Systems
International,  Inc. subsidiary.  Mr. Behlke has been employed by the Company in
various  engineering  positions since 1977 and was promoted to Vice President in
May 1995.  Mr.  Gerace has been  employed  by the  Company  as Chief  Accounting
Officer  since 1997 and was promoted to Vice  President  in June 1999.  Prior to
working  for the  Company Mr.  Gerace was with the Audit and  Business  Advisory
Services  Group of  Pricewaterhouse,  LLP.  Mr.  Swan has been  employed  by the
Company in various  engineering  positions  since 1992 and was  promoted to Vice
President in June, 1999.

The  Company's  Proxy  Statement  for the 1999  Annual  Meeting of  Shareholders
contains  the  other  information  required  by  Item  10  of  Form  10-K.  That
information is incorporated by reference in this Form 10-K.

ITEM 11. Executive Compensation.

The "Executive  Compensation"  section of the Company's  Proxy Statement for its
1999 Annual Meeting of Shareholders  contains the  information  required by Item
11, and is incorporated by reference in this Form 10-K.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management.

The Company has stock  purchase  agreements  with Messrs.  Kostusiak and Lederer
which could in the future result in a change of control of the registrant. These
agreements are included in Exhibit 10 in this Form 10-K.

The  Company's  Proxy  Statement  for its 1999  Annual  Meeting of  Shareholders
contains the  information  required by Item 12, and is incorporated by reference
in this Form 10-K.

ITEM 13. Certain Relationships and Related Transactions.

The  Company's  Proxy  Statement  for its 1999  Annual  Meeting of  Shareholders
contains the  information  required by Item 13, and is incorporated by reference
in this Form 10-K.

                                     PART IV

ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) Documents filed as part of this report:
                                                                            Page
                                                                          ------
    (1)  Consolidated Financial Statements:
         Report of Independent Accountants....................................31
         Consolidated Balance Sheet...........................................32
         Consolidated Statement of Operations and Retained Earnings...........33
         Consolidated Statement of Cash Flows.................................34
         Notes to Consolidated Financial Statements...........................35

    (2)  Consolidated Financial Statement Schedule V-Valuation
            and Qualifying Accounts...........................................30

         Financial statement schedules other than those listed above have been
         omitted  because  the  required   information  is  contained  in  the
         financial statements and notes thereto, or because such schedules are
         not required or applicable.

    (3)  See Exhibit index beginning on page 27 of this Form 10-K.

(b)   There  were no Form 8-K  filings  during  the last  quarter  of the period
      covered by this report.




<PAGE>


                                   SIGNATURES

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

                                                 DETECTION SYSTEMS, INC.
                                                 (Registrant)



Date:  June 29, 1999                             By: /s/ Karl H. Kostusiak
                                                 Karl H. Kostusiak
                                                 President

        Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,
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                       Title                           Date
---------                       -----                           -----

/s/ Karl H. Kostusiak           President and Director          June 29, 1999
Karl H. Kostusiak               (Principal Executive
                                Officer)

/s/ Frank J. Ryan               Vice President                  June 29, 1999
Frank J. Ryan                   Secretary/Treasurer
                                (Principal Financial
                                Officer)

/s/ Christopher P. Gerace       Vice President                  June 29, 1999
Christopher P. Gerace           Chief Accounting Officer
                                (Principal Accounting Officer)

Donald R. Adair                 Director

Mortimer B. Fuller, III         Director

/s/ David B. Lederer            Vice President and Director     June 29, 1999
David B. Lederer

Edward C. McIrvine              Director

By: /s/ Karl H. Kostusiak       Attorney-in-Fact                June 29, 1999
Karl H. Kostusiak


<PAGE>
                                  EXHIBIT INDEX

Item
No.                 Exhibits                                Location

3(a)      Detection Systems, Inc.              Incorporated by reference to
          Certificate of                       Exhibit 3 of the Company's
          Incorporation as amended             Quarterly Report on Form 10-Q for
                                               the quarter ended 9/30/98

3(b)      Detection Systems, Inc.              Incorporated by reference to
          By-Laws as amended                   Exhibit 3(b) of the Company's
                                               1997 Annual Report on Form 10-K

10(a)     Medical reimbursement plan           Incorporated by reference to
                                               Exhibit 10(b) of the Company's
                                               1997 Annual Report on Form 10-K

10(b)     Employee stock purchase              Incorporated by reference to
          plan                                 Exhibit 10 of the Company's 1994
                                               Annual Report on Form 10-K

10(c)     Fleet  Amended & Restated            Incorporated  by  reference  to
          Credit Facility Agreement            Exhibit 10(c) of the Company's
          dated September 30, 1998             Quarterly Report on Form 10-Q for
                                               the quarter ended 9/30/98

10(d)     Deferred Compensation Plan           Incorporated by reference to
          and Deferred Bonus Plan              Exhibit 10(c) to the Company's
                                               Quarterly Report on Form 10-Q,
                                               for the quarter ended 12/31/97

10(e)     1992 Restated Stock Option           Incorporated by reference to
          Plan                                 Exhibit 22 of the Company's 1995
                                               Annual Report on Form 10-K

10(f)     1997 Stock Option Plan               Incorporated by reference to
                                               Exhibit 10(o)of the Company's
                                               Registration Statement on Form S-
                                               2 (No. 333-31951) filed on
                                               7/24/97.

10(g)     Non-Employee Director Stock          Incorporated by reference to
          Option Plan                          Exhibit 10(m) of the Company's
                                               Quarterly Report on Form 10-Q for
                                               the quarter ended 9/30/98

10(h)     Executive Officer Cash               Incorporated by reference to
          Bonus Plan                           Exhibit 10(h)of this Annual
                                               Report on Form 10-K

10(i)     Executive employment                 Incorporated by reference to
          contract with Karl H.                Exhibit 10(j) of the Company's
          Kostusiak                            1998 Annual Report on Form 10-K

10(j)     Amendment #1 to executive            Incorporated by reference to
          employment contract with             Exhibit 10(i) of the Company's
          Karl H. Kostusiak                    Quarterly Report on Form 10-Q for
                                               the quarter ended 9/30/98

10(k)     Executive employment                 Incorporated by reference to
          contract with David B.               Exhibit 10(j) of the Company's
          Lederer                              Quarterly Report on Form 10-Q for
                                               the quarter ended 9/30/98

10(l)     Stock Purchase Agreements            Incorporated by reference to
          with Karl H. Kostusiak and           Exhibit 10(n) of the Company's
          David B. Lederer                     1997 Annual Report on Form 10-K

11        Statement re: Computation            Included as Exhibit 11 of this
          of Per Share Earnings                Annual Report on Form 10-K

13        Excerpts from Annual Report          Included as part of this Annual
          to Security Holders                  Report on Form 10-K

22        Proxy Statement                      To be filed within 120 days of
                                               the Company's fiscal year end

23        Consent of Independent               Included as Exhibit 23 of this
          Accountants                          Annual Report on Form 10-K

24        Powers of Attorney                   Included as Exhibit 24 of this
                                               Annual Report on Form 10-K

27        Financial Data Schedule              Included as Exhibit 27 of this
                                               Annual Report on Form 10-K

<PAGE>
                             DETECTION SYSTEMS, INC.
                           SCHEDULE V - VALUATION AND
                               QUALIFYING ACCOUNTS
                            (In thousands of dollars)

                            Year ended March 31, 1999
                            -------------------------
<TABLE>
<CAPTION>

                                         Additions
                         Balance at     charged to      Deduction:       Balance
                          beginning      costs and       Write-off        at end
Description                 of year       expenses       of assets       of year
-----------               ---------      ---------       ---------       -------
<S>                          <C>              <C>             <C>         <C>
Allowance for                $1,033           $376            $403        $1,006
doubtful accounts

Allowance for                 2,292          1,440             757         2,975
obsolete inventory
                              -----          -----           -----         -----
                             $3,325         $1,816          $1,160        $3,981
                              =====          =====           =====         =====
</TABLE>

<TABLE>
<CAPTION>

                            Year ended March 31, 1998
                            -------------------------
                                         Additions
                         Balance at     charged to      Deduction:       Balance
                          beginning      costs and       Write-off        at end
Description                 of year       expenses       of assets       of year
-----------               ---------      ---------       ---------       -------
<S>                            <C>            <C>             <C>         <C>
Allowance for
doubtful accounts              $314           $901            $182        $1,033

Allowance for
obsolete inventory            1,615          2,108           1,431         2,292
                              -----          -----           -----         -----
                             $1,929         $3,009          $1,613        $3,325
                              =====          =====           =====         =====

</TABLE>



                        Report of Independent Accountants



To the Board of Directors and
Shareholders of Detection Systems, Inc.

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing  under  Item  14(a)  (1) and (2) on  page 25  present  fairly,  in all
material respects,  the financial  position of Detection  Systems,  Inc. and its
subsidiaries at March 31, 1999 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended March 31, 1999,
in conformity with generally  accepted  accounting  principles.  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 of these  statements  in  accordance  with
generally accepted auditing standards which 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,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.




/s/ PRICEWATERHOUSECOOPERS LLP

Rochester, New York
May 24, 1999



<PAGE>
                             DETECTION SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEET
                      (in thousands, except per share data)
<TABLE>
<CAPTION>
At Year Ended March 31,                                        1999        1998
                                                               ----        ----
<S>                                                        <C>         <C>
Assets
Current assets:
Cash and cash equivalents                                  $  4,414    $  3,160
Accounts receivable, less allowance for doubtful
  accounts ($1,006 and $1,033, respectively)                 20,916      23,505
Inventories, net                                             37,762      38,154
Other current assets                                          3,249       3,701
                                                           --------    --------
                                                             66,341      68,520
                                                           --------    --------
Fixed assets, net                                            12,420      12,142
Goodwill, net                                                 9,381       8,907
Other assets                                                  4,670       4,475
                                                           --------    --------
                                                           $ 92,812    $ 94,044
                                                           ========    ========

Liabilities and Shareholders' Equity
Current liabilities:
Short term borrowings                                      $  1,416    $  4,002
Current portion of long term debt                               647         405
Accounts payable                                              7,076      12,368
Accrued payroll and benefits                                  1,863       1,636
Income taxes payable                                          2,108         661
Other current liabilities                                     4,134       4,504
                                                           --------    --------
                                                             17,244      23,576
                                                           --------    --------
Other liabilities                                             2,645       2,655
Long term debt                                               17,179      16,549

Shareholders' equity:
Common stock, par value $.05 per share
  Authorized - 24,000 shares
  Issued - 6,562 shares and 6,518 shares, respectively          328         326
Capital in excess of par value                               45,073      44,805
Other accumulated comprehensive loss                           (310)        (44)
Retained earnings                                            14,447       9,976
                                                           --------    --------
                                                             59,538      55,063
Less-Treasury stock, at cost - 227 shares
  and 229 shares, respectively                               (3,780)     (3,785)
Notes receivable for stock purchases                            (14)        (14)
                                                           --------    --------
                                                             55,744      51,264
                                                           --------    --------
                                                           $ 92,812    $ 94,044
                                                           ========    ========
</TABLE>
          See accompanying Notes to Consolidated Financial Statements.
<PAGE>

                            DETECTION SYSTEMS, INC.
           CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
                     (in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended March 31,                             1999         1998         1997
                                                 ----         ----         ----
<S>                                          <C>          <C>          <C>
Net sales                                    $138,045     $126,343     $101,251

Costs and expenses
 Production                                    85,163       82,893       64,916
 Research and development                       8,507        8,579        8,115
 Marketing, administrative and general         35,727       30,039       21,502
                                              -------      -------       ------
                                              129,397      121,511       94,533
                                              -------      -------       ------
Operating income                                8,648        4,832        6,718

Other income (expense)
  Net interest expense                         (1,504)      (2,035)      (1,634)
  Other income (expense)                          163         (460)         166
                                              -------      -------       ------
Income before income taxes                      7,307        2,337        5,250

Provision for income taxes                      2,836          955        1,525
                                              -------      -------       ------
Net income                                      4,471        1,382        3,725

Other comprehensive (loss) income
  Foreign currency translation adjustment        (266)        (39)            3
                                              -------      -------      -------
Total comprehensive income                      4,205        1,343        3,728

Retained earnings at beginning of year          9,976        8,594        4,869
Less: other comprehensive loss (income)           266           39           (3)
                                              -------      -------       ------
Retained earnings at end of year              $14,447      $ 9,976      $ 8,594
                                              =======      =======       ======
Earnings per share:
  Basic                                         $0.71        $0.25        $0.85
                                                 ====         ====         ====

  Diluted                                       $0.65        $0.24        $0.76
                                                 ====         ====         ====
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

<PAGE>
                             DETECTION SYSTEMS, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                      (in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31,                                1999       1998       1997
                                                    ----       ----       ----
<S>                                               <C>        <C>        <C>
Cash flows from operating activities
 Net income                                       $4,471     $1,382     $3,725

 Adjustments to reconcile net income to
  net cash provided by operating activities:
  Depreciation and amortization                    3,223      3,226      2,737
  Deferred compensation                                -        457          5
  Deferred income taxes                              627        501        178
  Stock based compensation                             -         87        147
 Changes in operating assets and liabilities:
  Accounts receivable                              2,704     (1,795)    (4,764)
  Inventories                                      1,022     (1,574)   (15,929)
  Accounts payable                                (5,642)    (4,711)     6,028
  Accrued payroll and benefits                       227     (1,449)     1,252
  Other assets and liabilities                       565     (2,177)        22
                                                  ------     ------     ------
  Total adjustments                                2,726     (7,435)   (10,324)
Net cash provided by (used in) operating
  activities                                       7,197     (6,053)    (6,599)
                                                  ------     ------     ------
Cash flows from investing activities
 Purchase of businesses net of cash acquired        (505)    (9,618)         -
 Capital expenditures                             (3,354)    (2,832)    (3,983)
                                                  ------     ------     ------
Net cash used in investing activities             (3,859)   (12,450)    (3,983)
                                                  ------     ------     ------
Cash flows from financing activities
 Short term borrowings                              (194)     2,741          -
 Proceeds from long term debt                      2,392          -     10,047
 Principal payments on long term debt and
  capital lease obligations                       (4,034)   (12,398)      (540)
 Issuance of common stock                              -     28,702      2,239
 Repurchase of common stock                            -     (3,767)         -
 Stock options exercised                              18      4,180        148
                                                  ------     ------     ------
Net cash (used in) provided by financing
  activities                                      (1,818)    19,458     11,894
                                                  ------     ------     ------
Effect of exchange rate changes on cash
  balances                                          (266)       (39)         2
Net increase in cash and cash equivalents          1,254        916      1,314
Cash and cash equivalents at beginning of year     3,160      2,244        930
                                                  ------     ------     ------
Cash and cash equivalents at end of year          $4,414     $3,160     $2,244
                                                  ======     ======     ======
Cash paid during the year for:
Interest                                          $1,745     $2,438     $1,575
                                                  ======     ======     ======
Income taxes                                      $2,426     $1,502     $1,096
                                                  ======     ======     ======
</TABLE>

                 See accompanying Notes to Consolidated Financial Statements.

<PAGE>
                             DETECTION SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          MARCH 31, 1999, 1998 AND 1997
                      (in thousands, except per share data)


NOTE 1-DESCRIPTION OF OPERATIONS AND ACCOUNTING POLICIES:

DESCRIPTION OF OPERATIONS -

Detection Systems,  Inc. ("the Company") designs,  manufactures and markets
electronic detection, control and communication equipment for the security, fire
protection, access control and CCTV industries.

PRINCIPLES OF CONSOLIDATION -

The   consolidated   financial   statements  of  the  Company  include  all
majority-owned   U.S.  and   non-U.S.   subsidiaries.   Intercompany   accounts,
transactions  and profits are  eliminated.  Certain  amounts in the prior years'
financial  statements have been  reclassified to conform with the current year's
presentation.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at year-end as well as the
reported  amounts of revenues and expenses during the reporting  period.  Actual
results could differ from those estimates.

CASH AND CASH EQUIVALENTS -

Cash  equivalents  include time  deposits  and highly  liquid  investments  with
original maturities of three months or less as of the date of purchase.

INVENTORIES -

Inventories,  which include materials,  labor and overhead,  are recorded at the
lower of cost,  determined by the first-in,  first-out  method, or market value.
The Company  provides  inventory  reserves for excess,  obsolete or  slow-moving
inventory based on changes in customer demand, technology developments, or other
economic factors.

FIXED ASSETS AND EQUIPMENT UNDER CAPITAL LEASE -

Buildings  and related  improvements  are  depreciated  using the  straight-line
method  over  an  estimated  useful  life  ranging  from  26 to 40  years.  Land
improvements,  machinery  and  equipment,  production  tooling and furniture are
depreciated on the straight-line method over estimated useful lives ranging from
three to ten years.  Expenditures  for  maintenance  and  repairs are charged to
expense as incurred. Major improvements are capitalized.

GOODWILL -

Goodwill  represents the excess of the cost of net tangible  assets  acquired in
business  combinations  over their fair value.  Goodwill is amortized  using the
straight-line  method  over  periods  ranging  from three to twenty  years.  The
Company evaluates  goodwill and all long-lived assets for impairment when events
or  changes  in  circumstances  indicate  their  carrying  amounts  may  not  be
recoverable,  in accordance  with  Statement of Financial  Accounting  Standards
(SFAS) No. 121. This is  accomplished  by comparing  the estimated  undiscounted
future  cash  flows  with  the  respective  carrying  amount  as of the  date of
assessment.  Should aggregate future cash flows be less than the carrying value,
a write-down would be required,  measured as the difference between the carrying
value and the discounted future cash flows. Accumulated amortization of goodwill
at  March  31,  1999  and  1998 was  approximately  $2,045,000  and  $1,141,000,
respectively.

RETIREMENT PLANS -

The Company has two defined  contribution  pension  plans which,  in  aggregate,
cover substantially all domestic employees.  The first plan requires the Company
to match 100% of an employee's  contribution up to one percent of the employee's
base salary and 25% of an employee's  contribution  between two and four percent
of the employee's base salary.  The second plan permits  employees to contribute
up to 20% of their eligible earnings. Annual contributions by the Company out of
its net profits are in amounts approved by the Company's Board of Directors. The
Company's contributions to these plans were approximately $231,000, $239,000 and
$155,000 in 1999, 1998 and 1997, respectively.

During the first  quarter of fiscal  1997,  the  Company  established  a defined
benefit pension plan for certain key executives. The plan provides for an annual
benefit of 20% of their  ending base  annual  compensation  and medical  expense
coverage for life after retirement. The liability is being recognized over their
remaining service periods.

REVENUE RECOGNITION -

Revenues  are  recognized  when  product is  shipped.  Revenue  is  reduced  for
estimated  customer  returns and allowances.  A provision for estimated  product
warranty cost is recorded for product shipments.

RESEARCH AND DEVELOPMENT COSTS -

All  product  development  costs are  charged  to  operations  during the period
incurred.

FOREIGN CURRENCY TRANSLATION -

Assets and  liabilities  of  non-U.S.  subsidiaries  are  translated  at current
exchange  rates,  and related  revenues and expenses are  translated  at average
exchange rates in effect during the period.  Resulting  translation  adjustments
are recorded as a separate component of shareholders' equity.

STOCK BASED COMPENSATION -

The  Company  applies  Accounting  Principles  Board  ("APB")  Opinion  No.  25,
"Accounting for Stock Issued to Employees," which requires  compensation cost to
be recognized  based on the difference,  if any, between the quoted market price
of the stock on the grant  date and the amount an  employee  must pay to acquire
the stock.

INCOME TAXES -

The Company  accounts  for  certain  income and expense  items  differently  for
financial  reporting  and  income  tax  purposes  in  accordance  SFAS No.  109,
"Accounting  for  Income  Taxes."   Deferred  tax  assets  and  liabilities  are
determined based on the difference between the financial statement and tax bases
of assets and  liabilities  applying  enacted  statutory rates in effect for the
year in which the differences are expected to reverse.

EARNINGS PER SHARE -

The  Company  calculates  earnings  per share in  accordance  with SFAS No. 128,
"Earnings Per Share."  There are no  significant  reconciling  items between net
income as presented in the  consolidated  statement of operations and net income
available to common  stockholders used in the calculation of earnings per share.
Reconciling  items between the number of shares used in the calculation of basic
and diluted earnings per share relate to deferred  compensation  plans,  options
and warrants, as follows:

Year ended March 31,                               1999         1998        1997
                                                   ----         ----        ----
Weighted average number of shares outstanding     6,319        5,433       4,359
Shares associated with deferred compensation,
  option and warrant plans                          508          290         575

CONCENTRATION OF CREDIT RISK -

Financial  instruments which potentially  expose the Company to concentration of
credit risk consist  principally of bank  deposits,  temporary  investments  and
accounts  receivable.  The Company  performs  ongoing credit  evaluations of its
customers'  financial  condition  and the Company  maintains  an  allowance  for
uncollectible accounts receivable based upon the expected  collectibility of all
accounts receivable.

FAIR VALUE OF FINANCIAL INSTRUMENTS -

The carrying amount of the Company's financial  instruments,  including cash and
cash equivalents,  short-term  investments,  accounts  receivable and short-term
borrowings,  approximates  their  fair  value at March 31,  1999 and 1998 as the
maturity  of these  instruments  is  short  term.  The  carrying  amount  of the
Company's  long-term  debt  obligations  approximates  their  fair  value as the
interest rates on such obligations approximate the market rate at March 31, 1999
and 1998.

CASH FLOW STATEMENT -

Non-cash transactions during 1999, 1998 and 1997 consisted of the acquisition of
certain businesses with shares of the Company's common stock. See Note 2.

NOTE 2-ACQUISITIONS

In 1995,  the Company  adopted a strategy which focused on expanding its product
offerings,   establishing  an  international  sales  presence,   increasing  its
manufacturing capacity and improving its overall cost structure. The Company has
since  made  nine  acquisitions  and  established  a  manufacturing  facility in
Asia.  These  initiatives  have  enabled the Company to significantly expand its
product catalog and market scope.

Fiscal 1999 Acquisitions
In June 1998,  the Company  acquired  all of the  outstanding  stock of Efsec AB
("Efsec")for approximately $1,250,000 comprised of cash and 28,161 shares of its
common stock.  Efsec is a Swedish  distributor of electronic  security equipment
and had annual net sales of approximately $3,000,000 prior to its acquisition.

In June 1998, the Company acquired all of the outstanding  stock of Alarm Center
Kft  ("Alarm  Center")  for  $135,000  in  cash.  Alarm  Center  is a  Hungarian
distributor  of  electronic  security  equipment  and had  annual  net  sales of
approximately $500,000 prior to its acquisition.

These  transactions have been accounted for as purchases and,  accordingly,  the
results of Efsec and Alarm  Center are  included in the  consolidated  financial
statements as of the date of acquisition.  The financial  statements reflect the
final allocation of purchase price for each business.

Fiscal 1998 Acquisitions
In May 1997, the Company acquired all of the outstanding  stock of Digital Audio
Ltd.  ("DA  Systems") in exchange for 221,738  shares of its common  stock.  The
shares were callable at the  Company's  option at $17 per share plus interest at
8.25% until June 30,  1998,  and could be put to the Company at that price after
that date. The Company  exercised its call option to repurchase  these shares in
connection with the issuance of common stock in September 1997. The cost of this
acquisition was approximately  $4,000,000.  DA Systems is a British manufacturer
of  security  control  equipment  and had  annual  net  sales  of  approximately
$10,800,000 prior to its acquisition.

In June 1997, the Company acquired 99.5% of the outstanding stock of Seriee S.A.
("Seriee") of France, in exchange for 34,141 shares of its common stock,  valued
at approximately  $600,000.  Seriee is a manufacturer of electronic  control and
communication  equipment  and had annual net sales of  approximately  $6,300,000
prior to its acquisition.

In  June  1997,  the  Company  acquired  98.7%  of  the  outstanding   stock  of
Radio-Active  Systems  N.V.("RAS")  of Belgium for  approximately  $3,600,000 in
cash.  RAS has one of the largest  security  equipment  distribution networks in
Belgium  and had  annual  net  sales of  approximately  $9,900,000  prior to its
acquisition.

In November 1997, the Company acquired all of the outstanding  stock of Security
Supplies NZ Ltd. ("Security  Supplies") of New Zealand for approximately $50,000
in cash.  Security  Supplies  provided the Company with  immediate  access to an
established  market  base in New Zealand  and good  growth  potential.  Security
Supplies had annual sales of approximately $800,000 prior to its acquisition.

In  January  1998,  the  Company  acquired  all  of  the  outstanding  stock  of
Electronics  Design & Manufacturing Pty Limited ("EDM") of Australia in exchange
for 186,667  shares of its common stock and  $2,800,000 in cash.  EDM is a major
Australian  manufacturer of security control  equipment and had annual net sales
of approximately $4,600,000 prior to its acquisition.

These  transactions have been accounted for as purchases and,  accordingly,  the
results  of  these  businesses  are  included  in  the  consolidated   financial
statements as of the date of acquisition.  The financial  statements reflect the
final allocation of purchase price for each business.

The following table summarizes,  on an unaudited, pro forma basis, the estimated
combined  results  of  operations  of the  Company  as though  the  fiscal  1998
acquisitions  were  made at the  beginning  of  fiscal  1998  and  fiscal  1997,
respectively.  The pro forma amounts do not necessarily reflect the results that
actually  would  have been  obtained  had the  transactions  taken  place at the
beginning of the period  indicated,  nor are they intended to be a projection of
future results:
<TABLE>
<CAPTION>


                                                        1998            1997
                                                        ----            ----
                                                           (Unaudited)
        <S>                                         <C>             <C>
        Net sales                                   $137,614        $136,155
        Costs and expenses                           134,965         131,305
        Income before taxes                            2,649           4,850
        Net income                                     1,544           3,447
        Net income per share
            Basic                                      $0.28           $0.79
            Diluted                                    $0.27           $0.70
</TABLE>

Fiscal 1997 Acquisition
In July 1996,  the Company  acquired  certain assets and patent rights of Senses
International,  Inc.  ("Senses"),  a manufacturer of  long range  wireless alarm
transmission equipment.  The  Company  paid  approximately  $600,000  for  these
assets.

NOTE 3-INVENTORIES:
<TABLE>
<CAPTION>

Major classifications of inventory are as follows.

Year Ended March 31,                                     1999              1998
                                                         ----              ----
<S>                                                     <C>             <C>
Component parts                                      $ 16,007          $ 23,386
Work in process                                         2,658             1,577
Finished products                                      22,072            15,483
                                                     --------          --------
                                                       40,737            40,446

Less-Reserve for obsolescence                          (2,975)           (2,292)
                                                     --------          --------
                                                     $ 37,762          $ 38,154
                                                     ========          ========
</TABLE>

NOTE 4-FIXED ASSETS:
<TABLE>

Major classifications of fixed assets are as follows.
<CAPTION>

Year Ended March 31,                                     1999             1998
                                                         ----             ----
<S>                                                  <C>               <C>
Land and improvements                                $    716          $    716
Building and improvements                               6,748             6,479
Machinery and equipment                                16,719            15,902
Production tooling                                      5,402             4,650
Furniture                                               2,737             1,849
                                                     --------          --------
                                                       32,322            29,596

Less-Accumulated depreciation                         (19,902)          (17,454)
                                                     --------          --------
                                                     $ 12,420          $ 12,142
                                                     ========          ========
</TABLE>

Total  depreciation  expense  on  fixed  assets  was  approximately  $3,133,000,
$3,393,000 and $2,373,000 in 1999, 1998, and 1997, respectively.

NOTE 5-INDEBTEDNESS
<TABLE>

A summary of the Company's borrowings is as follows:
<CAPTION>

Year Ended March 31,                                     1999              1998
                                                         ----              ----
<S>                                                  <C>               <C>
Revolving lines of credit                            $  1,416          $  4,002
Term loan-due 2005                                     14,350            13,359
Mortgage loan-due 2006                                  3,064             3,316
Other long term debt                                      248                 -
Capital lease obligations                                 164               279
                                                     --------          --------
                                                       19,242            20,956

Less-current portion                                   (2,063)           (4,407)
                                                     --------          --------
                                                     $ 17,179          $ 16,549
                                                     ========          ========
</TABLE>

The Company has a line of credit,  payable upon  demand,  secured by the general
business assets of the Company. This line allows borrowings of up to $17,000,000
bearing interest at a rate of approximately  8.1% at March 31, 1999. The maximum
amount  of  borrowings  on this  line of credit  during  1999 was  approximately
$5,784,000.  There were no borrowings  against this line at March 31, 1999. This
facility  matures July 31,  2000.  In addition,  two of the  Company's  European
subsidiaries  have  short term  borrowing  facilities,  the  largest of which is
payable on demand,  for borrowings up to  $2,000,000.  The interest rate on this
facility is equal to the day to day money rate plus 2.2%.  The maximum amount of
borrowings during 1999 was  approximately  $1,530,000.  Borrowings  against this
line were $1,093,000 at March 31, 1999.

In  connection  with  the  acquisition  of  Radionics,   the  Company   borrowed
$17,750,000,  of which  $14,350,000  is a term loan secured by general  business
assets and matures in 2005. The remaining  $3,400,000 is a mortgage loan secured
by certain  real estate and matures in 2006.  Interest on the  outstanding  debt
accrues based upon either the federal funds rate, the prime rate or LIBOR,  each
adjusted  by a factor  which  varies  based  upon the  rates of  funded  debt to
earnings before interest, tax, depreciation and amortization.  At March 31, 1999
and 1998, the interest rate on these borrowings was approximately 6.6% and 7.4%,
respectively.

Pursuant to the terms of the debt agreements for the  obligations  listed above,
the Company has certain  ratios and  covenants to maintain  with respect to such
items as working capital, funded debt and fixed charges.  Failure to comply with
these  guidelines  constitutes  a default  and  permits the lenders to cause the
obligations  to become  currently  due.  The Company is in  compliance  with all
covenants and requirements under the terms of the borrowing agreements.

Annual  maturities of the  Company's  long term debt for the next five years are
approximately: 2000-$536,000; 2001-$2,927,000; 2002-$2,927,000; 2003-$2,910,000;
2004-$2,861,000.

The Company has various  equipment under capital lease  agreements which require
payments   of   principal   and   interest  of   approximately:   2000-$111,000;
2001-$47,000; 2002-$4,000; 2003-$2,000.

NOTE 6-DEFERRED COMPENSATION PLANS:

The Company's  deferred  compensation plan allows certain employees to defer the
receipt  of salary  or  bonuses  which  they may be  entitled  to  receive.  The
compensation  is  normally  payable  at  retirement  and is  fully  vested  when
deferred.  For salaries or bonuses deferred, the employee elects, at the time of
deferral,  to be paid in either  stock or cash plus  interest  which has accrued
from the date of  deferral.  Unissued  common share  equivalents  are limited to
146,000  shares  under  provisions  of the plan.  As of March 31, 1999 and 1998,
unissued common share equivalents of 98,000 existed under the plan.

The Company's  stock bonus plan provided for bonuses payable in stock to certain
officers and key  personnel if specified  criteria was  attained.  The plan also
provided that  recipients  may defer receipt of stock bonuses until  retirement.
The bonus fully vests when deferred.  Unissued common share equivalents existing
under  the plan  were  279,000  in 1999  and  1998.  The  stock  bonus  plan was
terminated  during fiscal 1998. Stock bonuses deferred prior to termination will
be distributed in accordance with the terms of the plan.

NOTE 7-SHAREHOLDERS' EQUITY:

The following table presents the changes in shareholders' equity balances during
the three years ended March 31, 1999.
<TABLE>
<CAPTION>

                                             Common Stock         Treasury Stock        Capital
                                           ----------------       ----------------    in excess
                                           Shares      Amount     Shares    Amount       of par
                                           ------      ------     ------    ------      -------
<S>                                         <C>          <C>           <C>  <C>         <C>
Balance at March 31, 1996                   2,811        $141          2    $   12      $ 6,972

Distribution of stock bonuses                  11           1          -         -           84
Options and warrants exercised                 41           2         (8)      (12)         172
Treasury stock purchases                        -           -         10        53            -
Common stock issued                           134           6          -         -        2,232
Three-for-two stock split                   1,482          74          2         -          (74)
Other                                           -           -          -         -           63
                                            -----         ---        ---      ----       ------
Balance at March 31, 1997                   4,479         224          6        53        9,449

Distribution of stock bonuses                   5           -          -         -           86
Options and warrants exercised                 30           2         (3)      (33)         101
Treasury stock purchases                        -           -        226     3,765        3,755
Common stock issued                         2,004         100          -         -       31,387
Other                                           -           -          -         -           27
                                            -----         ---        ---      ----       ------
Balance at March 31, 1998                   6,518         326        229     3,785       44,805

Options and warrants exercised                 16           1         (2)       (5)          72
Common stock issued                            28           1          -         -          256
Other                                           -           -          -         -          (60)
                                            -----         ---        ---      ----       ------
Balance at March 31, 1999                   6,562        $328        227    $3,780      $45,073
                                            =====         ===        ===     =====       ======
</TABLE>

In September 1997, the Company sold 1,325,000  shares of common stock at $20 per
share in a public  offering.  The Company had granted the  underwriters a 30-day
option to purchase  up to 232,000  additional  shares of common  stock under the
same terms and conditions as the public offering to cover  over-allotments,  and
this  option  was  exercised  in October  1997.  Expenses  associated  with this
offering of approximately $2,700,000 were netted against proceeds.

On December  17,  1996,  the Company  distributed  a  three-for-two  stock split
effected in the form of a stock dividend to  shareholders  of record on November
27,  1996.  This  distribution  increased  the number of shares  outstanding  by
1,482,000.  The amount of $74,000 was transferred  from capital in excess of par
to common  stock.  All per share  amounts in this report  have been  restated to
reflect this stock split.

In October  1996,  the  Company  sold  114,000  shares from its  authorized  but
unissued  shares of common stock in a private  placement at a pre-split price of
$17.50 per share.  The Company  received  approximately  $2,000,000 in cash from
this transaction.

The Company  has two fixed stock  option  plans  whereby  options for a total of
625,000 shares of the Company's  common stock may be granted to key employees or
non-employees  of the Company by the Board of Directors.  The exercise  price of
the options must equal or exceed the market value of the Company's  common stock
on the date of grant. Options are generally  exercisable at a rate of 40% in the
first year after  grant,  60% in the second year after  grant,  80% in the third
year after grant and in full  thereafter.  Options  expire up to ten years after
the date of grant.

Pro forma net earnings and earnings per share  information,  as required by SFAS
No. 123,  "Accounting for Stock-Based  Compensation,"  has been determined as if
the Company had accounted  for employee  stock options under SFAS No. 123's fair
value  method.  The fair value of these  options was estimated at the grant date
using a Black-Scholes  option pricing model with the following  weighted-average
assumptions:  a risk-free  interest rate based on the anticipated length of time
until exercise  ranging from 5.06% to 5.43%;  expected life of 4 to 5 years; and
an  expected  volatility  of 75%.  For  purposes of pro forma  disclosures,  the
estimated  fair value of the options is  amortized  to expense over the options'
vesting period (generally 4 years). The Company's pro forma information follows:
<TABLE>
<CAPTION>

Year ended March 31,                         1999          1998          1997
                                             ----          ----          ----
<S>                                     <C>           <C>           <C>
Net earnings
    As reported                         $   4,471     $   1,382     $   3,725
    Pro forma                               3,683           594     $   3,255

Net earnings per diluted share
    As reported                             $0.65         $0.24         $0.76
    Pro forma                               $0.54         $0.11         $0.66
</TABLE>

This  disclosure is not likely to be  representative  of the effects on reported
net  earning  for  future  years,  because  options  vest  over  four  years and
additional awards generally are made each year.

<TABLE>
A summary of the status of the Company's stock option plan as of March 31, 1999,
1998 and 1997, and changes during the years ending on those dates,  is presented
below:
<CAPTION>

                                    1999                    1998                  1997
                             --------------------    ------------------    ------------------
                                         Weighted              Weighted              Weighted
                                          Average               Average               Average
                                         Exercise              Exercise              Exercise
                             Shares         Price    Shares       Price    Shares       Price
                             ------       -------    -----      -------    ------     -------
<S>                             <C>         <C>         <C>      <C>          <C>      <C>
Outstanding at
 beginning of year              387         $8.23       339      $ 5.95       362      $ 4.45
Granted                         164          9.75       110       14.41        50       14.54
Exercised                       (18)         4.46       (34)       4.31       (48)       4.65
Forfeited                       (14)         8.41       (28)       9.68       (25)       3.97
                                ---          ----       ---        ----       ---       -----
Outstanding at
 end of year                    519         $8.82       387       $8.23       339      $ 5.95
                                ===          ====       ===        ====       ===       =====
Options exercisable
  at year-end                   265         $6.95       181       $5.49       141      $ 4.51
                                ===          ====       ===        ====       ===        ====
Weighted-average
 fair value of
 options granted
 during the year                            $5.98                 $9.08                $ 8.18
                                             ====                  ====                 =====
</TABLE>


<TABLE>
<CAPTION>
                                   Options Outstanding                   Options Exercisable
                       --------------------------------------------    -------------------------
                                              Weighted     Weighted                     Weighted
                                 Number        Average      Average         Number       Average
             Range of       Outstanding      Remaining     Exercise    Outstanding      Exercise
      Exercise Prices      at March 31,    Contractual    Price Per       at March     Price Per
            Per Share              1999     Life Years        Share       31, 1999         Share
           ----------       -----------    -----------    ---------    -----------     ---------
<S>      <C>                        <C>            <C>         <C>             <C>          <C>
         $0.01- $4.99               155            1.2         4.29            138          4.32
         $5.00- $9.99               138            2.7         7.38             75          5.75
        $10.00-$14.99               191            3.9        11.55             35         13.52
        $15.00-$19.99                30            3.0        19.08             15         19.12
        $20.00-$24.99                 5            3.4        22.51              2         22.52
                                    ---            ---        -----            ---         -----
         $0.01-$24.99               519            2.7         8.82            265          6.95

</TABLE>

<TABLE>

A summary of changes in  outstanding  warrants  as of March 31,  1999,  1998 and
1997, and changes during the years ending on those dates is presented below:
<CAPTION>

                            1999                     1998                      1997
                     --------------------     --------------------     ----------------------
                                 Weighted                 Weighted                   Weighted
                                  Average                  Average                    Average
                                 Exercise                 Exercise                   Exercise
                      Shares        Price     Shares         Price     Shares           Price
                      ------     --------     ------      --------     ------        --------
<S>                       <C>       <C>           <C>        <C>           <C>          <C>
Outstanding at
 beginning of
 year                     17        $4.71         17         $4.71         23          $ 4.03
Granted                    -            -          -             -          2           13.50
Exercised                  -            -          -             -         (8)           4.40
                          --         ----         --          ----         --            ----
Outstanding at
 end of year              17        $4.71         17         $4.71         17          $ 4.71
                          ==         ====         ==          ====         ==           =====
</TABLE>

NOTE 8-INCOME TAXES:
<TABLE>

The provision (benefit) for income taxes consists of the following.
<CAPTION>

Year Ended March 31,                1999             1998                1997
                                    ----             ----                ----
<S>                               <C>                <C>               <C>
Federal
 Current                          $  876             $(39)             $1,184
 Deferred                            618              494                (314)

State
 Current                             448              (13)                416
 Deferred                            (78)             118                 (74)

Foreign
 Current                             885              506                 103
 Deferred                             87             (111)                210
                                    ----             ----               -----
                                  $2,836             $955              $1,525
                                    ====             ====               =====

</TABLE>

<TABLE>

A reconciliation  of the statutory federal income tax rate to the effective rate
is as follows.
<CAPTION>

Year Ended March 31,                           1999           1998         1997
                                               ----           ----         ----

<S>                                            <C>            <C>          <C>
Statutory federal rate                         34.0%          34.0%        34.0%
State taxes, net of federal benefit             3.3            3.0          4.5
Foreign tax rate differences                   (3.6)          (3.9)        (8.1)
Change in valuation allowances                    -              -          0.8
Research and development credits                  -              -         (3.1)
Goodwill amortization                           2.7            3.0         (1.0)
Other permanent items                           2.4            4.8          1.9
                                              -----          -----         ----
Effective income tax rate                      38.8%          40.9%        29.0%
                                              =====          =====         ====
</TABLE>


<TABLE>

Deferred tax assets (liabilities) are comprised of the following:
<CAPTION>

Year Ended March 31,                                         1999          1998
                                                             ----          ----
<S>                                                       <C>           <C>
Book accruals not currently
 deductible for tax                                       $   434       $   722
Deferred compensation                                         799           701
Inventory                                                     534           573
Accrued payroll and related costs                             436           578
Tax basis of intangibles in excess of book                  2,781         2,817
Tax credit carryforwards                                      607           602
Other                                                         215           553
                                                          -------       -------
Total deferred tax assets                                   5,806         6,546
                                                          -------       -------
Depreciation                                               (1,301)         (945)
Other                                                         (48)         (111)
                                                          -------       -------
Total deferred tax liabilities                             (1,349)       (1,056)
                                                          -------       -------
Deferred tax asset valuation reserve                         (407)         (589)
                                                          -------       -------
Net deferred tax asset                                    $ 4,050       $ 4,901
                                                          =======       =======
</TABLE>

Valuation  allowances  have been  recorded  for net  operating  loss and  credit
carryforwards which expire at various times between 2002 and 2011.

Deferred  income taxes have not been provided on the  undistributed  earnings of
foreign  subsidiaries.  The amount of such  earnings  included  in  consolidated
retained earnings at March 31, 1999 was approximately $5,002,000. These earnings
have been substantially reinvested and the Company does not plan to initiate any
action that would precipitate the payment of income taxes thereon.

NOTE 9-GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS

The Company's  operating  structure  includes  operating  segments in the United
States,  Asia Pacific and Europe.  Management  evaluates the  performance of its
operating  segments  separately  to  monitor  the  different  factors  affecting
financial performance in the different regions.  Segment profit or loss includes
substantially  all  of the  segment's  costs  of  production,  distribution  and
administration.  The Company  manages income taxes on a global basis,  thus, the
Company  evaluates  segment  performance  based on profit or loss before  income
taxes.

Net sales by the Company to  unaffiliated  customers  outside the United  States
represents 38.4%,  32.4% and 15.7% of consolidated net sales for the years ended
March 31, 1999, 1998 and 1997. Net sales by the Company's domestic operations to
unaffiliated  customers  outside the United States represent 2.3%, 4.3% and 7.0%
of the Company's consolidated net sales for the years ended March 31, 1999, 1998
and 1997, respectively.

The  following  table  presents net sales,  income  (loss)  before income taxes,
identifiable  assets,  capital  expenditures  and  depreciation  expense  of the
Company's  domestic and foreign  operations.  Net sales and income (loss) before
income taxes of the Company's  domestic  operations include the impact of export
sales.  Inter-area sales are presented on a basis intended to reflect the market
value of the  products  as nearly as  possible.  Identifiable  assets  are those
assets of the Company that are identified  with the operations in the respective
geographic area.

<TABLE>
<CAPTION>


Year Ended March 31,                           1999          1998          1997
                                               ----          ----          ----
<S>                                       <C>           <C>           <C>
Sales to unaffiliated customers
United States operations                  $  88,232     $  90,938     $  92,442
Asia Pacific operations                      20,023        12,501         8,326
European operations                          29,790        22,904           483
                                          ---------     ---------     ---------
                                          $ 138,045     $ 126,343     $ 101,251
                                          =========     =========     =========
Sales between affiliates
United States operations                  $   7,997     $   7,362     $  15,843
Asia Pacific operations                      40,966        32,018        18,114
European operations                             248            85             -
                                          ---------     ---------     ---------
                                          $  49,211     $  39,465     $  33,957
                                          =========     =========     =========
Income (loss) before income taxes
United States operations                  $   4,000     $   1,799     $   3,683
Asia Pacific operations                       5,605         1,614         2,295
European Operations                          (1,485)         (774)         (156)
Eliminations                                   (813)         (302)         (572)
                                          ---------     ---------     ---------
                                          $   7,307     $   2,337     $   5,250
                                          =========     =========     =========
Identifiable assets
United States operations                  $  45,514     $  46,802     $  48,238
Asia Pacific operations                      27,369        30,193        19,402
European operations                          19,929        17,049           636
                                          ---------     ---------     ---------
                                          $  92,812     $  94,044     $  68,276
                                          =========     =========     =========
Capital expenditures
United States operations                  $   1,081     $   1,336     $   1,890
Asia Pacific operations                       1,636         1,061         2,081
European operations                             637           435            12
                                          ---------     ---------     ---------
                                          $   3,354     $   2,832     $   3,983
                                          =========     =========     =========
Depreciation expense
United States operations                  $   1,721     $   2,186     $   2,008
Asia Pacific operations                       1,035           700           363
European operations                             377           507             2
                                          ---------     ---------     ---------
                                          $   3,133     $   3,393     $   2,373
                                          =========     =========     =========
</TABLE>

During 1999,  sales to the Company's two largest  customers  accounted for 11.3%
and 4.6% of net sales,  respectively.  During 1998,  sales to the  Company's two
largest customers accounted for 9.9% and 6.6% of net sales, respectively. During
1997, sales to the Company's two largest customers accounted for 10.7% and 10.6%
of net sales,  respectively.  Accounts  receivable  from the  Company's  largest
customers  represented  13.2% of the accounts  receivable  balances at March 31,
1999.

NOTE 10-COMMITMENTS AND CONTINGENCIES

Leases
The Company leases certain  facilities  pursuant to operating lease  agreements.
Operating  lease  expense  for  offices and other  equipment  was  approximately
$2,705,000,  $2,267,000  and  $1,208,000 in 1999,  1998 and 1997,  respectively.
Future minimum rental payments under  noncancelable  operating lease  agreements
are   as    follows:    2000-$2,269,000;    2001-$1,837,000;    2002-$1,715,000;
2003-$1,570,000; 2004-$1,455,000; thereafter-$1,551,000.

Restructuring

Consistent  with the  manufacturing  restructuring  plan undertaken in 1999, the
Company  recorded a restructuring  charge of  approximately  $400,000 during the
first quarter of fiscal 1999 for severance  costs related to the  termination of
employees at the Fairport, New York and Southall, England facilities. The charge
has been included in the results from  continuing  operations and had a material
impact on operating results in the first quarter of 1999.

The Company recorded a restructuring charge of approximately $400,000 during the
fourth quarter of fiscal 1998 for severance  costs related to the termination of
47 employees at the Salinas,  California facility.  The charge has been included
in the results from continuing operations and had a material impact on operating
results  in the fourth  quarter  of 1998.  These  manufacturing  employees  were
terminated during the first three quarters of 1999.

The restructurings of the Salinas,  California and Fairport, New York facilities
are substantially complete. The restructuring of the Southall,  England facility
is scheduled to be completed by December 31, 1999.

Legal Matters
The  Company  and  certain  of its  officers  and  directors  have been named as
defendants in six shareholder  class actions filed in the United States District
Court for the Western  District of New York. The  underwriters  of the Company's
September 19, 1997 public offering of common stock have been named as defendants
in three of these class actions.  The first of these  shareholder  class actions
was filed on February  26,  1998.  Four of the class  actions  purport to allege
claims on behalf of a class of purchasers  of the company's  common stock during
the period August 14, 1997 through  February 23, 1998, one class action purports
to allege  claims on behalf of a class of  purchasers  of the  Company's  common
stock during the period  September  19, 1997  through  February 23, 1998 and one
class action purports to allege claims on behalf of a class of purchasers of the
Company's  common  stock  pursuant to the  Company's  September  19, 1997 public
offering. Collectively, the class actions assert claims under Sections 10(b) and
15 of the Securities Exchange Act of 1934 and Sections 11, 12(a)(2) and 20(a) of
the Securities  Act of 1933. The class actions allege that the Company,  certain
of its officers and directors and the  underwriters  of the Company's  September
1997 public  offering  made or are  responsible  for alleged  misstatements  and
omissions in various press releases and public filings  concerning the Company's
business and financial condition.

Pursuant  to the  Private  Securities  Litigation  Reform  Act of 1995,  certain
putative class members have moved for  appointment as lead plaintiffs and sought
appointment of lead counsel.  Certain of these class members have also moved for
consolidation  and requested the  opportunity to file a consolidated  complaint.
The  Company  believes  these  suits to be without  merit and  intends to defend
against them vigorously.  However, it is possible that an unfavorable resolution
to such lawsuits  would have a material  adverse  impact on financial  condition
and/or results of operations of the Company.