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SECURITIES AND EXCHANGE COMMISSIONWashington D.C. 20549

FORM 20-F

|  |  |                                                                                                 
|- |  | ------------------------------------------------------------------------------------------------
|o |  | REGISTRATION STATEMENT PURSUANT TO
  SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|  |  | OR                                                                                              
|x |  | ANNUAL REPORT PURSUANT TO SECTION
  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934          
|  |  | For
  the fiscal year ended December 31, 2007                                                   
|  |  | OR                                                                                              
|o |  | TRANSITION REPORT PURSUANT TO
  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934      
|  |  | For
  the transition period from _________ to _________                                         
|  |  |                                                                                                 
|  |  | OR                                                                                              
|o |  | SHELL COMPANY REPORT PURSUANT TO
  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   
|  |  | Date
  of event requiring this shell company report __________                                  

Commission file number: 0-21388

MAGAL SECURITY SYSTEMS LTD.

(Exact name of Registrant as specified in its
charterand translation of Registrants name into
English)

Israel

(Jurisdiction of incorporation or
organization)

P.O. Box 70, Industrial Zone, Yehud 56100,
Israel (Address of
principal executive offices)

Securities
registered or to be registered pursuant to Section 12(b) of the Act:

|                                   |  |                                          
|---------------------------------- |  | -----------------------------------------
|Title of each class                |  | Name of each exchange on which registered
|Ordinary Shares, NIS 1.0 Par Value |  | NASDAQ Global Market                     
|                                   |  | Tel Aviv Stock Exchange                  

Securities
registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for
which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the
number of outstanding shares of each of the issuers classes of capital or
common stock as of the close of the period covered by the annual report:

Ordinary Shares, par value NIS 1.0 per share
.10,396,548

(as of December 31, 2007)

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

If this report
is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.

Yes o No x


Indicate by
check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes x No o


Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and
large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer oAccelerated
filer xNon-accelerated
filer o

Indicate by
check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:

|            |                                                       |        
|----------- | ----------------------------------------------------- | -------
|U.S. GAAP x | International Financial Reporting Standards as issued | Other o
|            | by the International Accounting Standards Board o     |        

If Other has
been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow:

Item 17     Item 18 x


If this is an
annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).

Yes o No x


This Annual
Report on Form 20-F is incorporated by reference into the Registrants
Registration Statements on Form S-8, File Nos. 333-96929 and 333-127340.

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INTRODUCTION

Magal
Security Systems Ltd. develops, manufactures, markets and sells complex
computerized security systems, including a line of perimeter security systems,
a hardware and software all in one security solution which integrates closed
circuit television, or CCTV, related applications such as outdoor and indoor
video motion detection systems, security management and control systems,
personal emergency location systems and a pipeline security system. Our
predecessor commenced operations in 1969 as a department specializing in
perimeter security systems within the electronics division of Israel Aircraft
Industries Ltd., or IAI. Effective April 1984, we purchased from IAI
substantially all of the assets, and assumed substantially all of the related
liabilities, of that department. In March 1993, we completed an initial
public offering of 1,380,000 ordinary shares, in February 1997, we
completed a public offering of an additional 2,085,000 ordinary shares and in
April 2005, we completed a public offering of an additional 1,700,000 ordinary
shares. Our ordinary shares are traded on the NASDAQ Global Market and on the
Tel Aviv Stock Exchange under the symbol MAGS.

Except
for the historical information contained in this annual report, the statements
contained in this annual report are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
our business, financial condition and results of operations. Actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including all the risks discussed in
Item 3.D. Key InformationRisk Factors and elsewhere in this annual report.

Statements
which use the terms believe, do not believe, expect, plan, intend,
estimate, anticipate and similar expressions are intended to identify
forward-looking statements. These statements reflect our current views with respect
to future events and are based on assumptions and are subject to risks and
uncertainties. Except as required by applicable law, including the securities
laws of the U.S., we do not intend to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.

We
have trademark rights in the United States and other national jurisdictions
arising out of our trademark registrations, applications, and/or use of the
following trademarks and service marks: SENSTAR-STELLAR logo, the S logos,
SENSTAR-STELLAR, SENSTAR-STELLAR (and design) SENSTAR, STELLAR, STELLAR
SYSTEMS, STELLAR SYSTEMS (and design), PANTHER, GUIDAR, REPELS, SENNET,
PERIMITRAX, INTELLI-FLEX, INTELLI-FIELD, X-FIELD, OMNITRAX, STARLED, STARNET,
FRONTLINE, E-FIELD, H-FIELD, E-FLEX, ARMOURFLEX, SIMPL, CROSSFIRE, ECHOCHECK,
FLASH, FLARE, SENTRAX, OMNITRAX, XFIELD, DTR, DreamBox, Magal logo and all
other marks used to identify particular products and services associated with
our businesses.

Any
other trademarks and trade names appearing in this annual report are owned by
their respective holders.

Our
address on the Internet is www.magal-ssl.com. The information on our website is
not incorporated by reference into this annual report.

Our
consolidated financial statements appearing in this annual report are prepared
in U.S. dollars and in accordance with U.S. generally accepted accounting
principles, or U.S. GAAP. All references in this annual report to dollars or
$are to U.S. dollars and all references in this annual report to NIS are to
New Israeli Shekels. The representative exchange rate between the NIS and the
dollar as published by the Bank of Israel on June 24, 2008 was NIS 3.373 per
$1.00.

As
used in this annual report, the terms we, us and our mean Magal Security
Systems Ltd. and its subsidiaries, unless otherwise indicated.

Statements
made in this annual report concerning the contents of any contract, agreement
or other document are summaries of such contracts, agreements or documents and
are not complete descriptions of all of their terms. If we filed any of these
documents as an exhibit to this annual report or to any registration statement
or annual report that we previously filed, you may read the document itself for
a complete description of its terms.

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TABLE OF CONTENTS

|       |          |    |                                                            |         
|------ | -------- | -- | ---------------------------------------------------------- | --------
|       |          |    |                                                            | Page No.
|       |          |    |                                                            |         
|       |          |    |                                                            |         
|PART I |          |    | 1                                                         
|       | ITEM 1.  |    | Identity of Directors, Senior Management and Advisers      | 1       
|       | ITEM 2.  |    | Offer Statistics and Expected Timetable                    | 1       
|       | ITEM 3.  |    | Key Information                                            | 1       
|       |          | A. | Selected Consolidated
  Financial Data.                    | 1       
|       |          | B. | Capitalization and
  Indebtedness.                         | 2       
|       |          | C. | Reasons for the Offer
  and Use of Proceeds.               | 2       
|       |          | D. | Risk Factors.                                              | 2       
|       | ITEM 4.  |    | Information on the Company                                 | 9       
|       |          | A. | History and Development
  of the Company.                  | 9       
|       |          | B. | Business Overview.                                         | 9       
|       |          | C. | Organizational
  Structure.                                | 20      
|       |          | D. | Property, Plants and
  Equipment.                          | 20      
|       | ITEM 4A. |    | Unresolved Staff Comments                                  | 21      
|       | ITEM 5.  |    | Operating and Financial Review and Prospects               | 21      
|       |          | A. | Operating Results.                                         | 28      
|       |          | B. | Liquidity and Capital Resources                            | 36      
|       |          | C. | Research and Development, Patents and Licenses.            | 39      
|       |          | D. | Trend Information.                                         | 40      
|       |          | E. | Off-Balance Sheet Arrangements.                            | 40      
|       |          | F. | Tabular Disclosure of Contractual Obligations.             | 41      
|       | ITEM 6.  |    | Directors, Senior Management and Employees                 | 41      
|       |          | A. | Directors and Senior
  Management.                         | 41      
|       |          | B. | Compensation.                                              | 43      
|       |          | C. | Board
  Practices                                          | 45      
|       |          | D. | Employees                                                  | 52      
|       |          | E. | Share Ownership.                                           | 53      
|       | ITEM 7.  |    | Major Shareholders and Related Party Transactions          | 54      
|       |          | A. | Major
  Shareholders                                       | 54      
|       |          | B. | Related
  Party Transactions.                              | 56      
|       |          | C. | Interests
  of Experts and Counsel.                        | 57      
|       | ITEM 8.  |    | Financial Information                                      | 57      
|       |          | A. | Consolidated
  Statements and Other Financial Information. | 57      
|       |          | B. | Significant
  Changes.                                     | 58      
|       | ITEM 9.  |    | The Offer and Listing                                      | 58      
|       |          | A. | Offer and Listing
  Details.                               | 58      
|       |          | B. | Plan of Distribution.                                      | 59      
|       |          | C. | Markets.                                                   | 59      
|       |          | D. | Selling Shareholders.                                      | 59      
|       |          | E. | Dilution.                                                  | 59      
|       |          | F. | Expenses of the Issue.                                     | 59      
|       | ITEM 10. |    | Additional Information                                     | 60      
|       |          | A. | Share Capital.                                             | 60      
|       |          | B. | Memorandum and Articles
  of Association.                  | 60      
|       |          | C. | Material
  Contracts.                                      | 63      
|       |          | D. | Exchange
  Controls.                                       | 63      
|       |          | E. | Taxation.                                                  | 64      
|       |          | F. | Dividends
  and Paying Agents.                             | 75      
|       |          | G. | Statements
  by Experts.                                   | 75      

i

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|          |           |    |                                                                                |   
|--------- | --------- | -- | ------------------------------------------------------------------------------ | --
|          |           | H. | Documents
  on Display.                                                        | 75
|          |           | I. | Subsidiary
  Information.                                                      | 76
|          | ITEM 11.  |    | Quantitative and Qualitative Disclosures about Market Risk                     | 76
|          | ITEM 12.  |    | Description of Securities Other Than Equity Securities                         | 77
|PART II   |           |    | 77                                                                            
|          | ITEM 13.  |    | Defaults, Dividend Arrearages and Delinquencies                                | 77
|          | ITEM 14.  |    | Material Modifications to the Rights of Security Holders and Use of
  Proceeds | 78
|          | ITEM 15.  |    | Controls and Procedures                                                        | 78
|          | ITEM 15T. |    | Controls and Procedures                                                        | 78
|          | ITEM 16A. |    | Audit Committee Financial Expert                                               | 79
|          | ITEM 16B. |    | Code of Ethics                                                                 | 79
|          | ITEM 16C. |    | Principal Accountant Fees and Services                                         | 79
|          | ITEM 16D. |    | Exemptions from the Listing Standards for Audit Committee                      | 80
|          | ITEM 16E. |    | Purchase of Equity Securities by the Issuer and Affiliated Purchasers          | 80
|PART III  |           |    | 80                                                                            
|          | ITEM 17.  |    | Financial Statements                                                           | 80
|          | ITEM 18.  |    | Financial Statements                                                           | 80
|          | ITEM 19.  |    | Exhibits                                                                       | 81
|SIGNATURE |           |    | 82                                                                            

ii

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PART I

|        |                                                      
|------- | -----------------------------------------------------
|ITEM 1. | Identity of Directors, Senior Management and Advisers
|        |                                                      
|        | Not
  applicable.                                    
|        |                                                      
|ITEM 2. | Offer Statistics and Expected Timetable              
|        |                                                      
|        | Not
  applicable.                                    
|        |                                                      
|ITEM 3. | Key Information                                      

|   |                                        
|-- | ---------------------------------------
|A. | Selected
  Consolidated Financial Data.

We
have derived the following selected consolidated financial data as of
December 31, 2006 and 2007 and for each of the years ended
December 31, 2005, 2006 and 2007 from our consolidated financial
statements set forth elsewhere in this annual report that have been prepared in
accordance with U.S. GAAP. We have derived the following selected consolidated
financial data as of December 31, 2003, 2004 and 2005 and for each of the
years ended December 31, 2003 and 2004 from our audited consolidated
financial statements not included in this annual report.

|                                                                                              |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 
|--------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | ---- | - | ------ | - | ---- | ------ | ---- | - | ------ | - | - | ------ | 
|                                                                                              |  | Year Ended December 31,              |       
|                                                                                              |  |                                      |       
|                                                                                              |  | 2003                                 |        | 2004 |   | 2005   |   | 2006 |        | 2007 |  
|                                                                                              |  |                                      |        |      |   |        |   |      |        |      |  
|                                                                                              |  | (in thousands except per share data) |       
|                                                                                              |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 
|Consolidated Statement of Income Data:                                                        |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 
|Revenues                                                                                      |  | $                                    | 58,252 |      | $ | 58,408 |   | $    | 58,385 |      | $ | 63,600 |   | $ | 72,375 | 
|Cost of revenues                                                                              |  |                                      | 31,852 |      |   | 30,532 |   |      | 36,658 |      |   | 37,236 |   |   | 43,510 | 
|                                                                                              |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 
|Gross profit                                                                                  |  |                                      | 26,400 |      |   | 27,876 |   |      | 21,727 |      |   | 26,364 |   |   | 28,865 | 
|                                                                                              |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 
|Operating expenses:                                                                           |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 
|Research and development, net                                                                 |  |                                      | 4,773  |      |   | 4,683  |   |      | 5,265  |      |   | 5,378  |   |   | 5,764  | 
|Selling and marketing, net                                                                    |  |                                      | 10,577 |      |   | 11,923 |   |      | 12,385 |      |   | 11,603 |   |   | 12,930 | 
|General and administrative                                                                    |  |                                      | 4,907  |      |   | 4,767  |   |      | 4,965  |      |   | 5,547  |   |   | 6,561  | 
|Special post employment benefit                                                               |  |                                      |       |      |   |       |   |      |       |      |   |       |   |   | 904    | 
|Award granted by principal shareholders                                                       |  |                                      |       |      |   | 1,172  |   |      |       |      |   |       |   |   |       | 
|                                                                                              |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 
|Total operating expenses                                                                      |  |                                      | 20,257 |      |   | 22,545 |   |      | 22,615 |      |   | 22,528 |   |   | 26,159 | 
|                                                                                              |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 
|Operating income (loss)                                                                       |  |                                      | 6,143  |      |   | 5,331  |   |      | (888   | )    |   | 3,836  |   |   | 2,706  | 
|Financial expenses, net                                                                       |  |                                      | 1,003  |      |   | 774    |   |      | 813    |      |   | 864    |   |   | 2,137  | 
|                                                                                              |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 
|Income (loss) before income taxes                                                             |  |                                      | 5,140  |      |   | 4,557  |   |      | (1,701 | )    |   | 2,972  |   |   | 569    | 
|                                                                                             
|Income taxes (tax benefit)                                                                    |  |                                      | 910    |      |   | 1,574  |   |      | (28    | )    |   | 943    |   |   | 373    | 
|                                                                                              |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 
|Income (loss) from continuing operations                                                      |  |                                      | 4,230  |      |   | 2,983  |   |      | (1,673 | )    |   | 2,029  |   |   | 196    | 
|Income (loss) from discontinued operations,
  net                                             |  |                                      | (1,826 | )    |   | (1,930 | ) |      | (1,538 | )    |   | (1,219 | ) |   | 1,686  | 
|                                                                                              |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 
|Net income (loss)                                                                             |  |                                      | 2,404  |      |   | 1,053  |   |      | (3,211 | )    |   | 810    |   |   | 1,882  | 
|                                                                                              |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 
|Basic net earnings (loss) per share from continuing operations                                |  | $                                    | 0.53   |      | $ | 0.35   |   | $    | (0.17  | )    | $ | 0.20   |   | $ | 0.02   | 
|Basic net earnings (loss) per share from
  discontinued operations                            |  |                                      | (0.23  | )    |   | (0.23  | ) |      | (0.15  | )    |   | (0.12  | ) |   | 0.16   | 
|                                                                                              |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 
|Basic net earnings (loss) per share                                                           |  | $                                    | 0.30   |      | $ | 0.12   |   | $    | (0.32  | )    | $ | 0.08   |   | $ | 0.18   | 
|                                                                                              |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 
|Diluted net earnings (loss) per share from
  continuing operations                            |  | $                                    | 0.53   |      | $ | 0.35   |   | $    | (0.17  | )    | $ | 0.20   |   | $ | 0.02   | 
|Diluted net earnings (loss) per share from
  discontinued operations                          |  |                                      | (0.23  | )    |   | (0.23  | ) |      | (0.15  | )    |   | (0.12  | ) |   | 0.16   | 
|                                                                                              |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 
|Diluted net earnings (loss) per share                                                         |  | $                                    | 0.30   |      | $ | 0.12   |   | $    | (0.32  | )    | $ | 0.08   |   | $ | 0.18   | 
|                                                                                              |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 
|Weighted average number of ordinary shares
  used in computing basic net earnings per share   |  |                                      | 7,948  |      |   | 8,581  |   |      | 9,883  |      |   | 10,384 |   |   | 10,395 | 
|Weighted average number of ordinary shares
  used in computing diluted net earnings per share |  |                                      | 8,029  |      |   | 8,636  |   |      | 9,900  |      |   | 10,442 |   |   | 10,431 | 
|Cash dividend per share                                                                       |  | $                                    | 0.05   |      | $ |       |   | $    |       |      | $ |       |   | $ |       | 
|                                                                                              |  |                                      |        |      |   |        |   |      |        |      |   |        |   |   |        | 

1

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Our
board of directors declared share dividend distributions of 3.0% and 5.0% in
May 2003 and July 2004, respectively. All per share data in the above table has
been adjusted to reflect the share dividends.

Effective
as of September 1, 2007, our consolidated financial statements include those of
the recently acquired European integration company. In December 2007, we
decided to dispose of our U.S. based video monitoring business operated by SIS
systems, Inc. (formerly Smart Interactive Systems Inc.,) or Smart. Accordingly,
the operating results, balance sheet and cash flows relating to the video
monitoring operations were presented in our statements of income, balance
sheets and cash flows as discontinued operations, and the comparative figures
were reclassified for all periods presented.

|                                                                                               |  |                    |        |      |   |        |  |      |         |      |   |         |  |   |         | 
|---------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ---- | - | ------ |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                                                                                               |  | As of December 31, |       
|                                                                                               |  |                    |       
|                                                                                               |  | 2003               |        | 2004 |   | 2005   |  | 2006 |         | 2007 |  
|                                                                                               |  |                    |        |      |   |        |  |      |         |      |  
|                                                                                               |  | (in thousands)     |       
|                                                                                               |  |                    |        |      |   |        |  |      |         |      |   |         |  |   |         | 
|Consolidated Balance Sheet Data:                                                               |  |                    |        |      |   |        |  |      |         |      |   |         |  |   |         | 
|Cash and cash equivalents                                                                      |  | $                  | 4,389  |      | $ | 11,964 |  | $    | 10,099  |      | $ | 4,908   |  | $ | 9,205   | 
|Short and long-term bank deposits,
  marketable securities structured notes and escrow deposit |  |                    | 12,051 |      |   | 5,994  |  |      | 18,853  |      |   | 22,053  |  |   | 26,972  | 
|Working capital                                                                                |  |                    | 21,608 |      |   | 21,504 |  |      | 35,071  |      |   | 39,884  |  |   | 41,526  | 
|Total assets                                                                                   |  |                    | 71,443 |      |   | 77,976 |  |      | 101,842 |      |   | 103,681 |  |   | 126,157 | 
|Short-term bank credit (including current
  maturities of long-term loans)                     |  |                    | 16,438 |      |   | 17,467 |  |      | 21,715  |      |   | 17,821  |  |   | 20,737  | 
|Long-term bank loans                                                                           |  |                    | 1,873  |      |   | 3,500  |  |      | 1,653   |      |   | 7,399   |  |   | 3,095   | 
|Total shareholders equity                                                                     |  |                    | 38,984 |      |   | 43,548 |  |      | 56,950  |      |   | 58,150  |  |   | 65,578  | 

|   |                                             
|-- | --------------------------------------------
|B. | Capitalization
  and Indebtedness.          
|   |                                             
|   | Not
  applicable                            
|   |                                             
|C. | Reasons
  for the Offer and Use of Proceeds.
|   |                                             
|   | Not
  applicable.                           
|   |                                             
|D. | Risk
  Factors.                             

Our
business, results of operations and financial condition could be seriously
harmed due to any of the following risks, among others. If we do not
successfully address the risks to which we are subject, our business, results
of operations and financial condition may be materially and adversely affected
and our share price may decline.

Risks Related to Our
Business

We depend on large orders from a relatively
small number of customers for a substantial portion of our revenues. As a
result, our revenues and operating results may vary from quarter to quarter.

We
receive large orders from a relatively small number of customers and our
revenues and operating results are subject to substantial periodic variations.
Individual orders from customers can represent a substantial portion of our
revenues in any one period and significant orders by a customer during one
period may not be followed by further orders from the same customer in
subsequent periods. As a result, our revenues and operating results for a
specific quarter may not be indicative of our future performance and
quarter-to-quarter comparisons of our operating results may not be meaningful,
making it difficult for investors to evaluate our future prospects based on the
results of any quarter. In addition, we have a limited order backlog, which
makes revenues in any quarter substantially dependent upon orders we deliver in
that quarter.

2

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Our revenues depend on government procurement
procedures and practices. A substantial decrease in our customers budgets
would adversely affect our results of operations.

Our
products are primarily sold to governmental agencies, governmental authorities
and government-owned companies, many of which have complex and time-consuming
procurement procedures. A substantial period of time often elapses from the
time we begin marketing a product until we actually sell that product to a
particular customer. In addition, our sales to governmental agencies,
authorities and companies are directly affected by these customers budgetary
constraints and the priority given in their budgets to the procurement of our
products. A decrease in governmental funding for our customers budgets would
adversely affect our results of operations.

The loss of one or more of our key customers,
in particular the Israeli Ministry of Defense, would result in a loss of a
significant amount of our revenues.

A
relatively few customers account for a large percentage of our revenues. For
the years ended December 31, 2005, 2006 and 2007, revenues generated from sales
to the Israeli Ministry of Defense, or MOD, accounted for 23.9%, 33.7% and 13.0%, respectively, of our
revenues. The loss of the MOD as a customer without replacement by a customer
or customers of similar volume would have a material adverse effect on our
financial results.

The level of our contracts may be reduced in
the future due to changes in governmental priorities and audits.

Governmental
purchases of our systems, products and services may decline in the future as
the governmental purchasing agencies may terminate, reduce or modify contracts
or subcontracts if:

| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| | · | Their
  requirements or budgetary constraints change;                             
| |   |                                                                                   
| | · | they cancel
  multi-year contracts and related orders if funds become unavailable;
| |   |                                                                                   
| | · | they shift
  spending priorities into other areas or for other products; and      
| |   |                                                                                   
| | · | they adjust
  contract costs and fees on the basis of audits.                     

Any
such event may have a material adverse affect on us.

If we do not receive MOD approvals necessary
for us to export the products we produce in Israel, our revenues may decrease.

Under
Israeli law, the export of products that we manufacture in Israel and the
export of certain of our know-how are subject to approval by the MOD. We must
obtain permits from the MOD to initiate sales proposals with regard to these
exports, as well as for actual export transactions. We may not be able to
receive all the required permits for which we may apply in the future. If we do
not receive the required permits for which we apply, our revenues may decrease.

The market for our products is characterized
by changing technology, requirements, standards and products, and we may be
adversely affected if we do not respond promptly and effectively to these
changes.

The
market for our products is characterized by evolving technologies, changing
industry standards, changing regulatory environments, frequent new product
introductions and rapid changes in customer requirements. The introduction of
products embodying new technologies and the emergence of new industry standards
and practices can render existing products obsolete and unmarketable. Our future
success will depend on our ability to enhance our existing products and to
develop and introduce, on a timely and cost-effective basis, new products and
product features that keep pace with technological developments and emerging
industry standards and address the increasingly sophisticated needs of our
customers. In the future:

| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | we may not
  be successful in developing and marketing new products or product features
  that respond to technological change or evolving industry standards;

3

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| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | we may
  experience difficulties that could delay or prevent the successful
  development, introduction and marketing of these new products and features;
  or
| |   |                                                                                                                                                               
| | · | our new
  products and product features may not adequately meet the requirements of the
  marketplace and achieve market acceptance.                          

If
we are unable to respond promptly and effectively to changing technology, we
will be unable to compete effectively in the future.

We face risks associated with doing business
in international markets.

A
large portion of our sales is to markets outside of Israel (58.5% of our sales
in 2006 and 78.4% of our sales in 2007) and a key component of our strategy is
to continue to expand in such markets. Our international sales efforts are
affected by costs associated with the shipping of our products and risks
inherent in doing business in international markets, including:

| |   |                                                                       
| | - | ----------------------------------------------------------------------
| | · | unexpected
  changes in regulatory requirements;                      
| |   |                                                                       
| | · | currency
  fluctuations;                                              
| |   |                                                                       
| | · | export
  restrictions, tariffs and other trade barriers;              
| |   |                                                                       
| | · | unexpected
  difficulties in staffing and managing foreign operations;
| |   |                                                                       
| | · | longer
  payment cycles;                                              
| |   |                                                                       
| | · | difficulties
  in collecting accounts receivable;                     
| |   |                                                                       
| | · | political
  instability; and                                          
| |   |                                                                       
| | · | seasonal
  reductions in business activities.                         

One or more of
such factors may have a material adverse effect on us.

We may be adversely affected by our long
sales cycles.

We
have in the past and expect in the future to experience long time periods
between initial sales contacts and the execution of formal contracts for our
products and completion of product installations. The cycle from first contact
to revenue generation in our business involves, among other things, selling the
concept of our technology and products, developing and implementing a pilot
program to demonstrate the capabilities and accuracy of our products,
negotiating prices and other contract terms, and, finally, installing and
implementing our products on a full-scale basis. This cycle entails a
substantial period of time, sometimes as much as one or more years, and the
lack of revenues during this cycle and the expenses involved in bringing new
sales to the point of revenue generation may put a substantial strain on our
resources.

We may not be able to implement our growth
strategy.

As
part of our growth strategy, we seek to acquire or invest in complementary,
including competitive, businesses, products and technologies. We currently have
no commitments or agreements with respect to any acquisitions or investments
and we may not be able to consummate any acquisition or investment. Even if we
do acquire or invest in these businesses, products or technology, the process
of integrating acquired assets into our operations may result in unforeseen
operating difficulties and expenditures and may absorb significant management
attention that would otherwise be available for the ongoing development of our
business.

In
addition, we have limited experience in making acquisitions and managing
growth. We may not be able to realize the anticipated benefits of any
acquisition. Moreover, future acquisitions by us could result in potentially
dilutive issuances of our equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to identifiable
intangible assets, any of which could materially adversely affect our operating
results and financial position. Acquisitions also involve other risks,
including risks inherent in entering markets in which we have no or limited
prior experience and the potential loss of key employees and the risk that we
may experience difficulty or delays in obtaining necessary permits.

4

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We may not be able to protect our proprietary
technology and unauthorized use of our proprietary technology by third parties
may impair our ability to compete effectively.

Our
success and ability to compete depend in large part upon protecting our
proprietary technology. We have approximately 46 patents and have patent
applications pending. We also rely on a combination of trade secret and
copyright law and confidentiality, non-disclosure and assignment-of-inventions
agreements to protect our proprietary technology. It is our policy to protect
our proprietary rights in our products and operations through contractual
obligations, including confidentiality and non-disclosure agreements with
certain employees, distributors and agents, suppliers and subcontractors. These
measures may not be adequate to protect our technology from third-party
infringement, and our competitors may independently develop technologies that
are substantially equivalent or superior to ours. Additionally, our products
may be sold in foreign countries that provide less protection to intellectual
property than that provided under U.S. or Israeli laws.

We could become subject to litigation
regarding intellectual property rights, which could seriously harm our
business.

Third
parties may in the future assert against us infringement claims or claims
asserting that we have violated a patent or infringed upon a copyright,
trademark or other proprietary right belonging to them. In addition, we
purchase components for our turnkey products from independent suppliers.
Certain of these components contain proprietary intellectual property of these
independent suppliers. Third parties may in the future assert claims against
our suppliers that such suppliers have violated a patent or infringed upon a
copyright, trademark or other proprietary right belonging to them. If such
infringement by our suppliers or us were found to exist, a party could seek an
injunction preventing the use of their intellectual property. In addition, if
an infringement by us were found to exist, we may attempt to acquire a license
or right to use such technology or intellectual property. Any infringement
claim, even if not meritorious, could result in the expenditure of significant
financial and managerial resources.

We depend on limited sources for components,
and if we are unable to obtain these components when needed, we will experience
delays in manufacturing our products and our financial results may be adversely
affected.

We
acquire most of the components utilized in our products, including, but not
limited to, our turnkey products and certain services from a limited number of
suppliers and subcontractors. We may not be able to obtain such items from
these suppliers and subcontractors on satisfactory terms in the future.
Temporary disruptions of our manufacturing operations would result if we were
required to obtain materials from alternative sources, which may have an
adverse effect on our financial results.

Undetected defects in our products may
increase our costs and impair the market acceptance of our products.

The
development, enhancement and implementation of our complex systems entail
substantial risks of product defects or failures. Despite testing by us and our
customers, errors may be found in existing or new products, resulting in delay
or loss of revenues, warranty expense, loss of market share or failure to
achieve market acceptance, or otherwise adversely affecting our business,
financial condition and results of operations. Moreover, the complexities
involved in implementing our systems entail additional risks of performance
failures. We may encounter substantial delays or other difficulties due to such
complexities. Any such occurrence could have a material adverse effect upon our
business, financial condition and results of operations. In addition, the
potential harm to our reputation that may result from product defects or
implementation errors could be damaging to us.

5

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We depend on our senior management and key
personnel, particularly Izhar Dekel, our president and chief executive officer,
and his loss would negatively affect our business.

Our
future success depends in large part on the continued services of our senior
management and key personnel. In particular, we depend on the services of Mr.
Dekel, our president and chief executive officer. We carry key
person life insurance for Mr. Dekel. Any loss of the services of Izhar Dekel,
other members of senior management or other key personnel would negatively
affect our business.

Our failure to retain and attract personnel
could harm our business, operations and product development efforts.

Our
products require sophisticated research and development, marketing and sales
and technical customer support. Our success depends on our ability to attract,
train and retain qualified research and development, marketing and sales and
technical customer support personnel. Competition for personnel in all of these
areas is intense and we may not be able to hire sufficient personnel to achieve
our goals or support the anticipated growth in our business. If we fail to
attract and retain qualified personnel, our business, operations and product
development efforts would suffer.

We may fail to maintain effective internal controls in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002, which could have an adverse
effect on our financial results and the market price of our ordinary shares.

The
Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and
directors. Our efforts to comply with the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 governing internal controls and procedures for
financial reporting, which started in connection with our Annual Report on Form
20-F for the year ended December 31, 2006, have resulted in increased general
and administrative expense and a diversion of management time and attention,
and we expect these efforts to require the continued commitment of significant
resources. We may identify material weaknesses or significant deficiencies in
our assessments of our internal controls over financial reporting. Failure to
maintain effective internal controls over financial reporting could result in
investigation or sanctions by regulatory authorities and could have a material
adverse effect on our operating results, investor confidence in our reported
financial information and the market price of our ordinary shares.

Risks Relating to
Our Ordinary Shares

Volatility of the market price of our
ordinary shares could adversely affect our shareholders and us.

The
market price of our ordinary shares has been, and is likely to be, highly
volatile and could be subject to wide fluctuations in response to numerous
factors, including the following:

| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| | · | political,
  economic and other developments in the State of Israel;                                 
| |   |                                                                                                      
| | · | terrorist
  attacks and other acts of war, and any response to them;                                 
| |   |                                                                                                      
| | · | actual or
  anticipated variations in our quarterly operating results or those of our
  competitors; 
| |   |                                                                                                      
| | · | announcements
  by us or our competitors of technological innovations or new and enhanced
  products;
| |   |                                                                                                      
| | · | developments
  or disputes concerning proprietary rights;                                            
| |   |                                                                                                      
| | · | introduction
  and adoption of new industry standards;                                               
| |   |                                                                                                      
| | · | changes in
  financial estimates by securities analysts;                                             
| |   |                                                                                                      
| | · | market
  conditions or trends in our industry;                                                       
| |   |                                                                                                      
| | · | changes in
  the market valuations of our competitors;                                               
| |   |                                                                                                      
| | · | announcements
  by us or our competitors of significant acquisitions;                                

6

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| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| | · | entry into
  strategic partnerships or joint ventures by us or our competitors; and
| |   |                                                                                    
| | · | additions or
  departures of key personnel.                                        

In
addition, the stock market in general, and the market for Israeli companies and
home defense companies in particular, has been highly volatile. Many of these
factors are beyond our control and may materially adversely affect the market
price of our ordinary shares, regardless of our performance.

Risks Relating to
Our Location in Israel

Political, economic and military instability in Israel may disrupt our
operations and negatively affect our business condition, harm our results of
operations and adversely affect our share price.

We
are incorporated under the laws of, and our principal executive offices and
manufacturing and research and development facilities are located in, the State
of Israel. As a result, political, economic and military conditions affecting
Israel directly influence us. Any major hostilities involving Israel, a full or
partial mobilization of the reserve forces of the Israeli army, the
interruption or curtailment of trade between Israel and its present trading
partners, or a significant downturn in the economic or financial condition of
Israel could have a material adverse effect on our business, financial
condition and results of operations.

Since
the establishment of the State of Israel in 1948, Israel and its Arab neighbors
have engaged in a number of armed conflicts. A state of hostility, varying from
time to time in intensity and degree, has led to security and economic problems
for Israel. Major hostilities between Israel and its neighbors may hinder
Israels international trade and lead to economic downturn. This, in turn,
could have a material adverse effect on our operations and business. There has
been an increase in unrest and terrorist activity in Israel, which began in
September 2000 and which has continued with varying levels of severity through
2007. The future effect of this deterioration and violence on the Israeli
economy and our operations is unclear. Recently, there was an escalation in
violence among Israel, Hamas, the Palestinian Authority and other groups, as
well as extensive hostilities along Israels northern border with Lebanon in
the summer of 2006, and extensive hostilities along Israels border with the
Gaza Strip since June 2007 when the Hamas effectively took control of the Gaza
Strip, which have intensified since February 2008. Ongoing violence between
Israel and the Palestinians as well as tension between Israel and the
neighboring Syria and Lebanon may have a material adverse effect on our
business, financial conditions and results of operations.

Furthermore,
there are a number of countries, primarily in the Middle East, as well as
Malaysia and Indonesia, that restrict business with Israel or Israeli
companies, and we are precluded from marketing our products to these countries.
Restrictive laws or policies directed towards Israel or Israeli businesses may
have an adverse impact on our operations, our financial results or the
expansion of our business.

Our results of operations may be negatively
affected by the obligation of our personnel to perform military service.

Many
of our executive officers and employees in Israel are obligated to perform
annual reserve duty in the Israeli Defense Forces, or IDF, and are subject to
being called for active duty under emergency circumstances at any time. If a
military conflict or war arises, these individuals could be required to serve
in the military for extended periods of time. Our operations could be disrupted
by the absence for a significant period of one or more of our executive
officers or key employees or a significant number of other employees due to
military service. Any disruption in our operations could adversely affect our
business.

We may be adversely affected by a change in
the exchange rate of the NIS against the dollar.

Because
exchange rates between the NIS, our functional currency, and the dollar
fluctuate continuously, exchange rate fluctuations, particularly larger
periodic devaluations, may have an impact on our profitability and
period-to-period comparisons of our results. In 2006 and 2007, the NIS
appreciated against the U.S. dollar by 8.2% and 9.0%, respectively, and the
Euro appreciated against the U.S. dollar by 10.2% and 10.5%, respectively. A
portion of our expenses, primarily labor expenses, is incurred in NIS and a
part of our revenues are quoted in NIS. Additionally, certain assets, as well
as a portion of our liabilities, are denominated in NIS. Our results may be
adversely affected by the devaluation of the NIS in relation to the dollar (or
if such devaluation is on lagging basis), if our revenues in NIS are higher
than our expenses in NIS and/or the amount of our assets in NIS are higher than
our liabilities in NIS. Alternatively, our results may be adversely affected by
an appreciation of the NIS in relation to the dollar (or if such appreciation
is on a lagging basis), if the amount of our expenses in NIS are higher than
the amount of our revenues in NIS and/or the amount of our liabilities in NIS
are higher than our assets in NIS.

7

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We currently benefit from government programs
and tax benefits that may be discontinued or reduced.

We
currently receive grants and tax benefits under Israeli government programs, we
must continue to meet specified conditions, including, but not limited to,
making specified investments from our equity in fixed assets and paying
royalties with respect to grants received. In addition, some of these programs
restrict our ability to manufacture particular products or transfer particular
technology outside of Israel. If we fail to comply with these conditions in the
future, the benefits we receive could be canceled and we could be required to
refund any payments previously received under these programs, including any
accrued interest, or pay increased taxes or royalties. The Israeli government
has reduced the benefits available under these programs in recent years and
these programs and benefits may be discontinued or curtailed in the future. If
the Israeli government ends these programs and benefits, our business,
financial condition, results of operations and net income could be materially
adversely affected.

Your rights and responsibilities as a
shareholder will be governed by Israeli law and differ in some respects from
the rights and responsibilities of shareholders under U.S. law.

We
are incorporated under Israeli law. The rights and responsibilities of holders
of our ordinary shares are governed by our memorandum of association, articles
of association and by Israeli law. These rights and responsibilities differ in
some respects from the rights and responsibilities of shareholders in typical
U.S. corporations. In particular, shareholder of an Israeli company has a duty
to act in good faith in exercising his or her rights and fulfilling his or her
obligations toward the company and other shareholders and to refrain from
abusing his power in the company, including, among other things, in voting at
the general meeting of shareholders on certain matters. Israeli law provides
that these duties are applicable in shareholder votes on, among other things,
amendments to a companys articles of association, increases in a companys
authorized share capital, mergers and interested party transactions requiring
shareholder approval. In addition, a controlling shareholder of an Israeli
company or a shareholder who knows that it possesses the power to determine the
outcome of a shareholder vote or who has the power to appoint or prevent the
appointment of a director or executive officer in the company has a duty of
fairness toward the company. However, Israeli law does not define the substance
of this duty of fairness. Because Israeli corporate law has undergone extensive
revision in recent years, there is little case law available to assist in
understanding the implications of these provisions that govern shareholder
behavior.

It may be difficult to enforce a non-Israeli
judgment against us, our officers and directors.

All
of our executive officers and directors are nonresidents of the United States,
and a substantial portion of our assets and the assets of these persons are
located outside the United States. Therefore, it may be difficult for an
investor, or any other person or entity, to enforce against us or any of those
persons in an Israeli court a U.S. court judgment based on the civil liability
provisions of the U.S. federal securities laws. It may also be difficult to
effect service of process on these persons in the United States. Additionally,
it may be difficult for an investor, or any other person or entity, to enforce
civil liabilities under U.S. federal securities laws in original actions filed
in Israel.

8

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As a foreign private issuer whose shares are
listed on the NASDAQ Global Market,
we may follow certain home country corporate governance practices instead of
certain NASDAQ requirements.

As
a foreign private issuer whose shares are listed on The NASDAQ Global Market,
we are permitted to follow certain home country corporate governance practices
instead of certain requirements of the NASDAQ Marketplace Rules. A foreign
private issuer that elects to follow a home country practice instead of such
requirements must submit to NASDAQ in advance a written statement from an
independent counsel in such issuers home country certifying that the issuers
practices are not prohibited by the home countrys laws. In addition, a foreign
private issuer must disclose in its annual reports filed with the Securities
and Exchange Commission or on its website each such requirement that it does not
follow and describe the home country practice followed by the issuer instead of
any such requirement. As a foreign private issuer listed on The NASDAQ Global
Market, we may follow home country practice with regard to, among other things,
composition of the board of directors, director nomination procedure,
compensation of officers, and quorum at shareholders meetings. In addition, we
may follow our home country law, instead of the NASDAQ Marketplace Rules, which
require that we obtain shareholder approval for certain dilutive events, such
as for the establishment or amendment of certain equity based compensation
plans, an issuance that will result in a change of control of the company,
certain transactions other than a public offering involving issuances of a 20%
or more interest in the company and certain acquisitions of the stock or assets
of another company.

|        |                           
|------- | --------------------------
|ITEM 4. | Information on the Company

|   |                                          
|-- | -----------------------------------------
|A. | History
  and Development of the Company.

We
were incorporated under the laws of the State of Israel on March 27, 1984
under the name Magal Security Systems Ltd. We are a public limited liability
company under the Israeli Companies Law, 5739-1999 and operate under this law
and associated legislation. Our principal executive offices and primary manufacturing
and research and development facilities are located near Tel Aviv, Israel, in
the Yehud Industrial Zone. Our mailing address is P.O. Box 70, Industrial Zone,
Yehud 56100, Israel and our telephone number is 972-3-539-1444. Our agent for
service of process in the U.S. is Magal Senstar Inc., 43184 Osgood Road,
Fremont, CA, 94539. Our address on the Internet is www.magal-ssl.com. The
information on our website is not incorporated by reference into this annual
report.

We
develop, manufacture, market and sell complex computerized security systems,
including a line of perimeter security systems, a hardware and software all in
one security solution which integrates CCTV, related applications such as
outdoor and indoor video motion detection systems, security management and
control systems, personal emergency location systems and a pipeline security
system.

On
August 31, 2007, we entered into an agreement to purchase all of the shares of
a European company engaged in the installation and integration of security
systems, in consideration for 6.8 million Euros (approximately $9.3 million).
Of such amount, three million Euros are being held in escrow and is payable
subject to the fulfillment of certain conditions. Additional amounts will be
paid over the next five years based on the European companys pre-tax income.
The European companys financial statements have been consolidated, effective
as of September 1, 2007, into our financial statements. This acquisition is in
line with our strategic plan. The company is active in geographic areas where
we have limited activity, and we expect it to contribute to our expansion in
the integration field, particularly in countries with strong growth potential
for our leading security solutions.

In
December 2007 we sold our U.S. based video monitoring business that was
operated by Smart, for $8.5 million. We recorded a gain of approximately $2.4
million on the sale in 2007. For a discussion of our capital expenditures and
divestitures, see Item 5.B. Operating and Financial Review and
ProspectsLiquidity and Capital Resources.

|   |                     
|-- | --------------------
|B. | Business
  Overview.

General

We
develop, manufacture, market and sell complex computerized security systems.
Our systems are used in more than 75 countries to protect sensitive facilities,
including national borders, military bases, power plant installations,
airports, postal facilities, prisons, industrial locations and municipalities
from terrorism, theft and other threats. Our revenues are principally derived
from:

| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| | · | installation
  of comprehensive security systems for which revenues are generated from
  long-term fixed price contracts;
| |   |                                                                                                                          
| | · | sales of
  security products; and                                                                                        
| |   |                                                                                                                          
| | · | services and
  maintenance, which are performed either on a fixed-price basis or as
  time-and-materials based contracts.

9

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Business and Marketing Strategy

Our
primary objective is to become a leading provider of security systems
worldwide. To achieve this objective, we have implemented a business strategy
incorporating the following key elements:

Refine
and Broaden Product Line. We have identified the
security needs of our customers and intend to enhance our current products and
develop new products to meet those needs. We intend to continue to focus on
developing new products, expanding the capabilities of existing products and
making custom enhancements for specific projects.

Enter
New Markets and Strengthen Presence in Existing Markets.
In 2008 we intend to continue to penetrate new geographic markets by various
means, including the establishment of alliances with local distributors and
international integrators of security systems. In September 2007, we acquired a
European company which is engaged in the installation and integration of security
systems, and is active in geographical areas where we had limited activity so
far. We believe that this newly acquired company will help us enter into new
geographical markets. We also intend to increase our marketing efforts in our
existing markets and to acquire or invest in complementary, including
competitive, businesses, products and technologies.

Leverage
Existing Customer Base; Cross-Market Products. We
believe that we have the capability to offer certain of our customers a comprehensive
security package. As part of our product development process, we seek to
maintain close relationships with our customers to identify market needs and to
define appropriate product specifications. We intend to expand the depth and
breadth of our existing customer relationships while initiating similar new
relationships

Offer
Comprehensive Turnkey Solutions. By broadening our
product range to include both indoor and outdoor security systems and by
developing our security management and control systems and Dreambox all in
one CCTV security solution, we now offer comprehensive turnkey security
solutions that provide a comprehensive security implementation process. This
process entails:

| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| | · | in-depth
  threat analysis;                                                                                      
| |   |                                                                                                                  
| | · | determination
  of the appropriate hardware and software solutions;                                              
| |   |                                                                                                                  
| | · | training
  sessions for systems operators; and                                                                   
| |   |                                                                                                                  
| | · | upon
  customer approval, integration of the required systems into our security
  management and control systems.

We
believe that the market for turnkey security solutions presents a significant
opportunity. In addition, we believe that we will be able to expend our
activities in the market for turnkey security solution through the European
company we acquired in 2007. We are emphasizing our ability to offer turnkey
solutions in keeping with our objective of becoming a leading provider of
comprehensive security solutions.

Products and Services

Perimeter
Security Systems

Perimeter
security systems enable customers to monitor, limit and control access by
unauthorized personnel to specific regions or areas. High-end perimeter systems
are sophisticated in nature and are used by correctional facilities, military
installations, power companies and other high-security installations. We believe
that we are a leading provider of security systems and maintenance in this
industry.

10

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Our
line of perimeter security systems utilizes sophisticated sensor devices to
detect and locate intruders and identify the nature of intrusions. Our
perimeter security systems have been installed along thousands of kilometers of
borders and facility boundaries throughout the world, including more than 600correctional institutions in the U.S. and
correctional institutions in several other countries. In addition, we have
installed several hundred miles of high security electronic perimeter systems
along Israels borders.

Our
line of perimeter security systems consists of the following:

| |   |                                                          
| | - | ---------------------------------------------------------
| | · | taut wire
  perimeter intrusion detection systems;       
| |   |                                                          
| | · | vibration
  detection systems;                           
| |   |                                                          
| | · | field
  disturbance sensors;                             
| |   |                                                          
| | · | video
  analytics and video motion detection systems; and
| |   |                                                          
| | · | theMTC-1500Eand theMSS-1500.                             

Taut Wire
Perimeter Intrusion Detection Systems

Our
taut wire systems consist of wire strung at high tension between anchor posts.
Sensor posts are located at the middle between anchor posts. These sensor posts
contain one or more devices that detect changes in the tension being exerted on
and by the taut wires. Any force applied against these wires, or released from
them, as by cutting, unless within the parameters designed into the sensors
themselves or programmed into the central control units, automatically triggers
an alarm. We use taut wire perimeter systems as both an integral component of
intruder detection systems and as a physical barrier to infiltration.

Our
sealed sensors are not affected by radio frequency interference, climatic or
atmospheric conditions, or electrical transients from power lines or passing
vehicles. The sensors self-adjust to, or remain unaffected by, extreme
temperature variations, minor soil movements and other similar environmental
changes that might trigger false alarms in less sophisticated systems. Our taut
wire perimeter systems are designed to discriminate automatically between fence
tension changes typically caused by small animals or violent weather and forces
more typically exerted by a human intruder.

Our
taut wire perimeter systems offer customers a wide range of installation
options. Sensor posts can be as far as 200 feet apart, with relatively
inexpensive ordinary fence anchor posts between them. These systems may stand
alone, be mounted on a variety of fence posts or added to an existing wall or
other structure, or mounted on short posts, with or without outriggers.

Taut
wire perimeter systems have been approved by various Israeli and U.S. security
and military authorities. We have installed several hundred kilometers of these perimeter systems along Israels
borders to assist in preventing unauthorized entry and infiltration. Our taut
wire perimeter systems are sold for approximately $50-$150 per meter.

Vibration
Detection Systems

We
offer various types of vibration detection systems. While less sensitive than
taut wire installations, the adaptability of these systems to a wide range of
pre-existing barrier structures makes these products viable alternatives for
cost-conscious customers. Our vibration detection devices are most effective
when installed on common metal fabric perimeter systems, such as chain link or
welded mesh. In our BARRICADE 500 system, pairs of electro-mechanical sensors
are attached to fence panels three meters apart on any of several common types
of fence structures. Once attached to the fence, each sensor detects vibrations
in the underlying structures. The sensor systems built-in electro-mechanical
filtering combines with system input from a weather sensor to minimize the rate
of false alarms from wind, hail or other sources of nuisance vibrations.

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Intelli-FLEX,
Intelli-FIBER and fence protection systems, or FPS, microprocessor-based
triboelectric and electric cable fence sensors are vibration sensitive
transducers. These systems detect any attempt to cut, climb or penetrate the
fence and have microphonic properties. The microphonic feature permits audio to
be used for low-cost alarm assessment, providing users with an additional tool
for determining the nature of an attempted intrusion. Our vibration detection
system is sold for between $9-$60 per meter.

Field
Disturbance Sensors

We
offer a number of types of field disturbance sensors that detect intrusions
before the intruder touches the sensor. Our line of field disturbance sensors
consists of the following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | The
  Intelli-Field volumetric electronic field disturbance sensor can be installed
  outdoors on perimeter systems, buildings or as free-standing units. The
  Intelli-Field system is sold for approximately $95-$160 per meter. The
  Perimitrax buried volumetric field disturbance sensor can be buried in most
  types of soil and paved areas and uses leaky coax technology to detect
  attempted perimeter penetrations. The Perimitrax system is sold for
  approximately $70-$180 per meter.                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | · | Omnitrax is
  a fifth generation, covert outdoor perimeter security intrusion detection
  sensor that generates an invisible radar detection field around buried sensor
  cables. An alarm is emitted and the exact location identified within one meter
  if an intruder disturbs the field. Targets are detected by their
  conductivity, size and movement and the digital processor is able to filter
  out common alarms caused by environmental conditions and small animals. The
  Omnitrax system is sold for approximately $57-$176 per meter.                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | · | X-Field is a
  terrain following, volumetric sensor that creates an electrostatic field
  around a set of 4 or 8 parallel field and sense wires. These wires can be
  mounted on free-standing poles, existing fences, walls or rooftops and will
  sense changes, via the processor, in the electrostatic field when events such
  as intruders penetrating through the wires take place. The systems tall,
  narrow, well contained detection zone allows the sensor to be installed in
  almost any application and minimizes nuisance alarms caused by nearby moving
  objects. The X-Field system is sold for approximately $114-$190 per meter.

We
have installed high-security taut wire electronic perimeter systems over
several hundred kilometers of Israels borders and have sold a number of our
high-security perimeter systems to protect other locations in Israel, including
Ben-Gurion International Airport, facilities of IAI and the Israel Electric
Company, industrial plants, prisons, refineries, ports and military bases. Outside Israel, our high-security
perimeter systems have been purchased to protect various sites, including
military installations, airports, ports, refineries, conventional and nuclear
power stations, oil tank farms, industrial facilities, storage areas and
warehouses, royal palaces and presidential residences in various European
countries, North America, South America, Africa and the Far East.

Currently,
airport security activities concentrate almost exclusively on screening
passengers and luggage within the airport terminal in connection with passenger
check-in. We are aware of only a few airports in the world which currently have
high-security perimeter protection systems to prevent infiltrators from
reaching the airports grounds from outside. Most of these airports utilize a
system manufactured by us. In marketing our high-security perimeter systems, we
target authorities responsible for airport security. To date, we have sold and
installed perimeter systems at certain airports in Israel, Europe, the U.S. and
the Far East. We are continuing to negotiate with authorities in several other
countries to install our perimeter systems around airports.However, we cannot assure you that any
revenues will result from these negotiations.

Our
high-security perimeter systems offer prison authorities the opportunity to
address an escape attempt in real-time, rather than at the next roll-call,
which may be several hours after the escape. Our high-security perimeter
systems have already been installed in prisons in Australia, Europe, Israel,
North America, South America and the Far East.

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The
IDF has tested our perimeter security products along with those of several of
our competitors and our system and two competitors systems were the only
systems to be approved for participation in the MODs bid for perimeter
security systems.

Video
analytics and video motion detection systems

The
DreamBox is a state-of-the-art embedded hardware and software product which
integrates a number of CCTV related applications into one box. The system is
designed to be economical, as well as compact to save space, by avoiding the
use of a complicated cable installation and integration. It contains twelve
different applications, including a digital video and audio recording, video
and audio matrix switcher, outdoor and indoor video motion detection system, or
VMD, security management system, or SMS, and a transmission system.

The
DreamBox, is sold at a substantially lower price than the cost of the other
product applications if sold separately, a factor which positions DreamBox as
the leading security solution for all strategic facilities. Its target markets
include governmental, institutional and other sensitive facilities, such as
airports, train stations, seaports, prisons, casinos and hospitals, all of
which require the use of high quality CCTV applications.

We
refer to the DreamBoxs target market as an add-on market for us, and believe
that this product is substantially broadening our target markets. As an
example, we entered the field of digital video recording, which is only one of
many DreamBox applications.

MTC-1500E

The
MTC-1500E is an integrated thermal/daylight camera, specially designed for
strategic sites and secured areas such as borders, airports, seaports,
pipelines, refineries, communication centers, prisons, special operations and
municipal surveillance. The all-weather sealed unit provides high resolution multi-sensor
monitoring, utilizing an electro-optical video system which combines a micro
bolometric thermal camera for night vision and a CCD camera for daylight use.
This solution is able to detect human targets from more then 1500 meters
under variable lighting, temperature and weather conditions- day or night, from
sub-zero to very high temperatures- in rain, dust, sand or fog.

MSS-1500

The
MSS-1500 is a rapidly-deployable, flexible, high-definition, surveillance
system for use by surveillance and security forces. It monitors situations and
detect intrusions and suspicious movements through high-quality optical and
thermal cameras having a continuous operating capability of over 4 hours. The
MSS-1500 is a stand-alone system consisting of a remote observation unit,
self-sufficient power supply and command center. The system may be set up and
be fully deployed in just 4 minutes. It is a vital resource in special
surveillance situations, including criminal investigation, crowd and riot control
and border patrol.

Security
Management and Control Systems

The
deployment of multiple security systems creates the need for a system that can
manage and control these systems through a single database. In response to this
need, we offer MagNet and Fortis, security management and control systems that
integrate the management, control and display of various security systems, both
outdoor, such as perimeter security systems, and indoor, such as fire
detection, entry monitoring and alarm systems, into a single, real-time
database, and support real-time decision making and wide area command and
control. These systems were developed to improve the response to real-time
security events by sharing video and geographical information between the control
center and security personnel acting in the field. Since their introduction, we
have sold our security management systems and provided turnkey projects to
several customers, including large international companies and international
airports.

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MagNet
Security Management System

MagNet,
our security management system, integrates the management, control and display
of various security systems into a single, real-time database. MagNet, which is
based on computer communications and controlled by a unique server developed by
us, converts real-time data received from field units, analyzes that data and
transmits operational commands accordingly. It also generates alarms to
indicate problems with any connected security system and provides explanations
as to the causes of the alarms. MagNet displays video pictures of the alarm
source, using an advanced video matrix with a user-friendly interface. The
operational commands transmitted by MagNet are routed back to the field units
or to operator workstations which then convert these commands to visual
information and allow the system operator to respond and influence the systems
operation.

MagNet
integrates various detection technologies, including infrared and microwave,
and enables multiple operators to simultaneously control the system. It can
serve and manage multiple security systems, sensors, detectors and controllers,
and is unaffected by the distance between the various system components under
its control. MagNet can integrate and control both outdoor security systems and
indoor security systems, and its open architecture enables operation with
systems manufactured by other manufacturers as well as those manufactured by
us. Data can be entered into the MagNet system from anywhere in the world
through the Internet, provided appropriate authorization exists. In addition,
MagNets TCP/IP protocol and Ethernet boards, using the Windows NT operating
system, allow the system to use a wide range of communications media, such as
telephone lines, fiber optics and wireless communication. MagNet operates with,
and can provide solutions for, various types of security configurations, as
well as adaptations for additional and new security systems.

Fortis
Integrated Command and Control System

Fortis,
our fully integrated command and control system, supports real-time decision
making and wide-area command and control. Fortis reduces the period of time
from intruder detection to intruder engagement to a minimum. Fortis was developed
to improve the response to real-time security events by sharing video and
geographical information between the control center and security personnel
acting in the field.

The
system creates a unified and interactive intelligence picture - drawing data
from all sensors, while displaying the movement of security personnel in the
field and adding other relevant information, such as video from various
sources, auxiliary services and weather conditions. This combined picture,
which is continuously updated, is sent by the central command to all security
personnel in the command chain, and serves as a unified basis for operational
planning and allocation of tasks. Using advanced technology, Fortis provides
the security officer with a graphical command tool, which updates the location
details and video view of the alerting area, while simultaneously enabling a
constant watch over security personnel movements, thus optimizing the
operational response.

Fortis
target markets include governmental, institutional and large sensitive
facilities, such as borders, airports, hospitals, power plants and water
sources, as well as large manufacturing facilities requiring real-time control
and protection.

Pipeline
Security Systems

As
of end of 2007, there were an estimated three million miles of unprotected oil
and gas pipelines worldwide. Although the need for securing these pipelines has
been strongly recognized by the oil and gas industry for years, and in spite of
increasing threats since the events of 9/11 and current instability in Iraq and
elsewhere in the Middle East, there was no effective solution for securing
buried pipes against damage caused by terror, sabotage, theft or other third
party threats. We have identified the demand and have implemented a technology
aimed at meeting this challenge. PipeGuard, our pipeline security system,
provides a solution for securing buried assets and infrastructure, including
oil and gas pipelines and buried communication lines such as fiber optic cables.

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PipeGuard
utilizes an innovative and unique technology to guard buried pipelines,
regardless of pipeline length, with the ability to detect potential attack and
alert authorities before potential harm or damage occurs. Its target market includes
oil and gas companies, owners and operators of pipelines or communication
cables and governmental agencies dealing with security and environment.

In
addition, since 2006 we market and sell PipeGuard to banks, to protect them
from underground intrusions. Following a long and thorough market study, we
determined that one of the major physical threats that banks worldwide
currently face, are robberies of valuables contained in safes located below
ground by the digging of tunnels beneath the banks building. PipeGuard has the
ability to prevent underground intrusions into bank buildings and break-ins
into banks safes and other secure areas.

PipeGuard
combines well proven sensors, geophones, with advanced edge of technology
recognition algorithm capabilities based on the analysis of seismic signals,
thus effectively filtering out false alarms. Using state of the art
communications, only predefined signals are transmitted to the control station.

PipeGuard
is suitable for all pipes or cables, from existing and operational pipelines,
to new pipelines under construction. The system can easily be integrated into a
full turnkey security solution, including perimeter protection, ground or air
patrol and others. By answering the challenge of securing pipelines, we offer a
total security solution for the oil and gas industry - from the oil field to
the refineries.

Personal
Emergency Location Systems

Our
products deliver high reliability personal portable duress alarm systems to
protect personnel in correctional facilities. These products identify
individuals in distress and can pinpoint the location of the distress signal
with an indoor-to-outdoor and floor-to-floor accuracy unmatched by any other
product.

Flash
Personal Emergency Alarm Systems, or Flash, and Flare Personal Emergency
Locating Systems, or Flare, use radio frequency technology to provide a one
touch emergency system that is so small it can be worn on a belt. The systems,
sold mainly to correctional facilities, consist of transmitters that send
distress signals to receivers mounted throughout the building. Receivers relay
the signal to a central location indicating someone requires assistance and
their location in the building. The systems employ automated testing procedures
that help to reduce maintenance costs. The hardware and software was developed
and researched in the U.S. and competes against infrared and ultrasonic
technologies.

Our
personal alarm system, or PAS, uses an ultrasonic based emergency notification
and communication system. The system, sold mainly to correctional facilities,
allows individuals moving throughout a facility to quickly indicate their exact
location in a crisis situation through a transmitter that is carried by them.

Marketing, Sales and Distribution

We
market products primarily to government agencies, government authorities and
government-owned companies. However, the activities of certain of these
government bodies are increasingly being privatized in jurisdictions throughout
the world. We believe that our reputation as a vendor of high-security products
in one of the worlds most security-conscious countries often provides us and
our sales representatives with direct access to senior government and corporate
officials in charge of security matters elsewhere.

We
also distribute perimeter intrusion detection systems to private corporations.
We attempt to initiate contacts with potential customers at trade shows, where
we demonstrate our products and distribute promotional materials. After initial
discussions, we generally seek to provide potential customers with products on
a trial basis or in a small-scale installation. We believe that this affords
prospective purchasers an opportunity to assess our products over a sustained
period of time under realistic conditions. We have sales offices in the United
Kingdom, Germany, Mexico, the United States, China, Romania and Poland.

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In
2006, our U.S. subsidiary opened a new marketing and sales office in Herndon,
VA, adjacent to Washington Dulles Airport. This office serves the growing needs
of local, state and federal Homeland Security requirements. This office focuses
exclusively on providing a comprehensive security architecture for perimeter
applications, which is comprised of command and control, physical security
sensors, and intelligent video. The office hosts a solution center
demonstrating several of our advanced sensor solutions for intrusion detection,
pipeline infiltration, intelligent video surveillance, multi-sensor command and
control, as well as integration of our leading perimeter sensors, with advanced
intelligent video for real time decision support on the response to possible
intrusions.

Perimeter
Intrusion Detection Systems

We
generally sell our perimeter intrusion detection systems to distributors for
various geographic territories or for specific projects. These distributors
then resell these products at prices negotiated with their respective customers.
In some cases, however, we pay commissions on these third-party sales either to
the distributor or to the sales representatives responsible for facilitating
the transaction. In addition to marketing activities, some of our distributors
also provide installation and maintenance services for our products. We
currently have over 50distributors
who resell these systems. We occasionally use agents to find suitable
distributors and pay finders fees to these agents for their services.

Security
Management and Control Systems, DreamBox and Turnkey Projects

Our
marketing efforts for our Security Management and Control Systems, DreamBox and
turnkey projects consists of direct contacts with potential customers. We offer
the MagNet, Fortis and DreamBox products primarily as part of comprehensive
turnkey project solutions or, at the customers preference, as stand-alone
products. We distribute our systems in the U.S. and Canada through our U.S. and
Canadian subsidiaries.

Pipeline
Security Systems

The
target markets for our pipeline security systems include oil and gas companies,
owners and operators of pipelines or communication cables and governmental
agencies engaged with security and environment issues.

Personal
Emergency Location Systems

We
market our personal emergency location systems directly to potential customers,
mainly correctional facilities in North America.

The
following table shows the breakdown of our consolidated revenues for the
calendar years 2005, 2006 and 2007 by operating segment:

|                     |  |                         |        |      |   |        |  |   |        | 
|-------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                     |  | Year Ended December 31, |       
|                     |  |                         |       
|                     |  | 2005                    |        | 2006 |   | 2007   | 
|                     |  |                         |        |      |   |        | 
|                     |  | (In thousands)          |       
|                     |  |                         |        |      |   |        |  |   |        | 
|Perimeter
  products |  | $                       | 40,143 |      | $ | 47,186 |  | $ | 43,781 | 
|Turnkey
  projects   |  |                         | 17,970 |      |   | 16,167 |  |   | 28,167 | 
|Other                |  |                         | 272    |      |   | 247    |  |   | 427    | 
|                     |  |                         |        |      |   |        |  |   |        | 
|Total                |  | $                       | 58,385 |      | $ | 63,600 |  | $ | 72,375 | 
|                     |  |                         |        |      |   |        |  |   |        | 

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Customers

The
following table shows the geographical breakdown of our consolidated revenues
for the calendar years 2005, 2006 and 2007:

|                        |  |                         |        |      |   |        |  |   |        | 
|----------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                        |  | Year Ended December 31, |       
|                        |  |                         |       
|                        |  | 2005                    |        | 2006 |   | 2007   | 
|                        |  |                         |        |      |   |        | 
|                        |  | (In thousands)          |       
|                        |  |                         |        |      |   |        |  |   |        | 
|Israel                  |  | $                       | 19,309 |      | $ | 26,385 |  | $ | 15,663 | 
|North America           |  |                         | 19,047 |      |   | 14,176 |  |   | 14,869 | 
|Europe                  |  |                         | 9,935  |      |   | 9,793  |  |   | 18,342 | 
|South and Latin America |  |                         | 3,165  |      |   | 7,456  |  |   | 6,818  | 
|Africa                  |  |                         | 700    |      |   | 321    |  |   | 10,879 | 
|Others                  |  |                         | 6,229  |      |   | 5,469  |  |   | 5,804  | 
|                        |  |                         |        |      |   |        |  |   |        | 
|Total                   |  | $                       | 58,385 |      | $ | 63,600 |  | $ | 72,375 | 
|                        |  |                         |        |      |   |        |  |   |        | 

For
the years ended December 31, 2005, 2006 and 2007, revenues generated from
sales to the MOD and the IDF, accounted for 23.9%, 33.7% and 13%, respectively, of our revenues. We cannot assure you
that the MOD, IDF, or any of our other major customers will maintain their
volume of business with us or that, if such volume is reduced, other customers
generating similar revenues will replace the lost business. The loss of one or
more of these existing customers without replacement by a customer or customers
of similar volume would have a material adverse effect on our financial results.

In
January 2008 we received a series of orders totaling approximately $45 million
for a turnkey project to protect critical infrastructure facilities. The
turnkey project incorporates fence perimeter protection systems, access control
systems and CCTV products. We expect to recognize income from these orders over
the next two years.

Support and Maintenance

Our
systems are installed by us or by the customer after appropriate training,
depending on the size of the specific project and the location of the
customers facilities, as well as on the customers prior experience with our
systems. We generally provide our customers with training on the use and
maintenance of our systems. This training is conducted either on-site or at our
facilities. In addition, some of our local perimeter security systems customers
have signed maintenance contracts with us. For systems installed outside of
Israel, maintenance is provided by an independent third party, by distributors
or by the end user. We also provide services, maintenance and support on an as
needed basis.

We
require distributors of our high-security perimeter systems to purchase a
demonstration kit that includes full-scale models of our perimeter products,
and to send technical personnel to Israel to participate in courses given by us
that focus on the marketing, installation and servicing of our products.

Similarly,
with regard to our subsidiaries products, customer personnel are trained in
product installation and maintenance either at the subsidiaries facilities or
at the customers facility. Installation supervision and assistance are
sometimes purchased along with the equipment. The life expectancy of a
high-security perimeter system is approximately ten years. Consequently, many
miles of perimeter systems need to be replaced each year.

During
2007, we derived approximately 6% of our total revenues from maintenance and
services. We generally provide a 12 to 24 months warranty on most of our
products.

Research and Development; Royalties

We
place considerable emphasis on research and development to improve our existing
products and technology and to develop new products and technology. We believe
that our future success will depend upon our ability to enhance our existing
products and technology and to introduce on a timely basis new commercially
viable products and technology addressing the needs of our customers. We intend
to continue to devote a significant portion of our personnel and financial resources
to research and development. As part of our product development process, we
seek to maintain close relationships with our customers to identify market
needs and to define appropriate product specifications. Our development
activities are a direct result of the input and guidance we receive from our
marketing personnel during our annual meetings with such personnel. In
addition, the heads of research and development for each of our development
centers discussed below meet annually to identify market needs for new
products.

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Our
research and development expenses during 2005, 2006 and 2007 were approximately
$5.4 million, $5.5 million and $5.9 million respectively, which were offset by
Canadian investment tax credits, of approximately $154,000, $162,000 and
$160,000 and a $8,000 grant form the OCS in 2005. In addition to our own
research and development activities, we also acquire know-how from external
sources. We cannot assure you that any of our research and development projects
will yield profitable results.

We
have the following three development centers, each of which develops various
products and technologies based on its area of expertise:

| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Israel - we
  develop a wide range of products including our taut wire, mechanical
  vibration, video and high-end SMS systems and PipeGuard;                                                                  
| |   |                                                                                                                                                                                                                
| | · | in
  California - we develop our microphonic fence sensors as well as our
  microwave detection, personal alarm and small/medium and control systems; and                                                      
| |   |                                                                                                                                                                                                                
| | · | Canada - we
  develop our leaky coax radar, triboelectric and fiber-optic fence sensors,
  electrostatic volumetric detection and medium to high-end control systems and
  personal emergency location systems.

Office
of the Chief Scientist of the Israel Ministry of Industry, Trade and Labor

We
have historically sought co-financing of our development projects from the
office of the OCS. We are obligated to pay royalties to the OCS, amounting to
3% to 4.5% of revenues derived from sales of the products funded with these grants,
up to an amount equal to 100% of the grants received, linked to the U.S.
dollar. All grants received after January 1, 1999 also bear interest at the
rate of LIBOR. The obligation to pay these royalties is contingent on actual
sales of the products, and in the absence of such sales, no payment is
required. We paid royalties amounting to $83,000, $79,000 and $143,000 in the years ended December
31, 2005, 2006 and 2007, respectively. As of December 31, 2007, our
aggregate contingent obligation to the OCS amounted to $1.5 million.

The
terms of these grants require that the manufacture of products developed with
these grants be performed in Israel and prohibit transferring technology
developed with grants without the prior consent of the Research Committee of
the OCS. We cannot assure you that, if requested, the OCS will grant such
consent. Each application to the OCS is reviewed separately, so we cannot
assure you that the Israeli Government will continue to support our research
and development.

Backlog

As of May
31, 2008, our backlog amounted to approximately $64.9 million of which
approximately $45.6 million is expected to be delivered by the end of 2008,
$18.7 million is expected to be delivered by the end of 2009 and $586,000
million is expected to be delivered thereafter.

Manufacturing and Supply

Our
manufacturing operations consist of designing and developing our products,
fabricating and assembling components and finished products, quality control
and final testing. Substantially all of our manufacturing operations are
currently performed at our plant in Yehud, Israel. See Property, Plants and
Equipment below.

We
acquire most of the components utilized in our products, including, but not
limited to, our turnkey products, and certain services from a limited number of
suppliers and subcontractors. We cannot assure you that we will continue to be
able to obtain such items from these suppliers on satisfactory terms.
Alternative sources of supply are available, and therefore, we are not
dependent upon these suppliers and subcontractors. We also maintain an
inventory of systems and spare parts in order to enable us to overcome
potential temporary supply shortages until an alternate source of supply is
available. Nevertheless, temporary disruptions of our manufacturing operations
would result if we were required to obtain materials from alternative sources,
which may have an adverse effect on our financial results.

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Our
Canadian manufacturing operations are located at our facility in Carp, Ontario,
Canada and consist of design and development, assembly, final testing and
quality control. We use local subcontractors for producing and mounting our
printed circuit board assemblies.

Our
U.S. manufacturing operations are located at our facility in Fremont,
California and consist of development and design, assembly, quality control and
final testing. We use local subcontractors for producing and mounting our
printed circuit board assemblies.

Competition

The
principal factors affecting competition in the market for security systems are
a systems high probability for detection and low probability of false and
nuisance alarms. We believe that a manufacturers reputation for reliable
equipment is a major competitive advantage, and that such a reputation will
usually be based on the performance of the manufacturers installed systems.
Additional competitive factors include quality of customer support, maintenance
and price. We believe that we are competitive with respect to these factors and
that we have a good reputation in the markets in which we compete.

Several
companies, including Elbit Systems Ltd., Elfar Ltd. and RB-Tec Ltd. in Israel,
and Detektion Security Systems Inc., Herras, Remsdaq, Del-Norte Security,
Geoquip Ltd., Southwest Microwave Inc., and Siemens AG outside of Israel,
produce high-security detection systems.

There
are a number of companies that have developed video motion detection systems,
including Geutebruck GmbH, Xtralis, Siemens AG, Ioimage Ltd., ObjectVideo Inc.,
Nice Systems Ltd. and Bosch.

We
believe that our principal competitors for Dreambox systems are Nice Systems
Ltd., Verint Systems Inc., Indigo and DVTel Inc.

We
believe that our principal competitors for security management and control
systems and turnkey project offerings include, among others, Honeywell Inc.,
Lockheed Martin Corporation, Raytheon Company, Siemens AG, Dornier, Elbit
Systems Ltd., Thales, 4D, EADS N.V. and Rafael Advanced Defense Systems Ltd.

We
believe that our principal competitor for the Pipeguard system is an Australian
company, Future Fibre Technologies Pty. Ltd.

We
believe that our principal competitors for personal emergency location systems
are Actall Corp. and Visonic Networks.

Some
of our competitors and potential competitors have greater research,
development, financial and personnel resources, including governmental support,
or more extensive business experience than we do. We cannot assure you that we
will be able to maintain the quality of our products relative to those of our
competitors or continue to develop and market new products effectively.

Intellectual Property Rights

We
have approximately 46 patents issued and patent applications pending in the
U.S. and in several other countries and have obtained licenses to use
proprietary technologies developed by third parties. We cannot assure you:

| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | that patents
  will be issued from any pending applications, or that the claims allowed
  under any patents will be sufficiently broad to protect our technology;

19

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| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| | · | that any
  patents issued or licensed to us will not be challenged, invalidated or
  circumvented; or
| |   |                                                                                                      
| | · | as to the
  degree or adequacy of protection any patents or patent applications may or
  will afford.

In
addition, we claim proprietary rights in various technologies, know-how, trade
secrets and trademarks relating to our principal products and operations. We
cannot assure you as to the degree of protection these claims may or will
afford. It is our policy to protect our proprietary rights in our products and
operations through contractual obligations, including confidentiality and
non-disclosure agreements with certain employees and distributors. We cannot
assure you as to the degree of protection these contractual measures may or
will afford. Although we are not aware that we are infringing upon the
intellectual property rights of others, we cannot assure you that an
infringement claim will not be asserted against us in the future. We believe
that our success is less dependent on the legal protection that our patents and
other proprietary rights may or will afford than on the knowledge, ability,
experience and technological expertise of our employees. We cannot provide any
assurance that we will be able to protect our proprietary technology. The
unauthorized use of our proprietary technology by third parties may impair our
ability to compete effectively. We could become subject to litigation regarding
intellectual property rights, which could seriously harm our business.

We
have trademark rights associated with our use of Flash and Intelli-FLEX, and
rights obtained by trademark registration for Flare, Perimitrax, Panther, Intelli-FIELD,
Senstar, Senstar-Stellar and the Senstar-Stellar logo, Sentrax, Omnitrax,
Xfield, DTR, DreamBox and the Magal logo.

In
September 2006, we signed a non exclusive agreement with a third party for the
right to use certain intangible assets such as know-how and patents for the
production, sale and marketing of a perimeter security system based on
fiber-optics that is primarily used to protect marine sites. The contract
period is two years and we have the right to extend the contract for additional
five years. The consideration for the license is approximately $548,000,
payable in 24 monthly installments. In addition, we will pay royalties based on
a formula as defined in the agreement.

Government Regulation of Certain Exports

Under
Israeli law, the export of products that we manufacture in Israel and/or
certain know-how is subject to approval by the MOD. We must obtain permits from
the MOD to initiate sales proposals with regard to such exports, as well as for
actual export transactions. We cannot assure you that we will receive all the
required permits for which we may apply in the future.

|   |                          
|-- | -------------------------
|C. | Organizational
Structure.

We, or one of our subsidiaries, own 100% of the outstanding capital stock of
our subsidiaries in Canada, United States, Germany, the Netherlands, Mexico,
United Kingdom, Switzerland, Cyprus, Romania and Poland.

|   |                                
|-- | -------------------------------
|D. | Property, Plants
and Equipment.

Our
principal facility in Israel is a two-story 2,533 square meter facility located
on a 4,352 square meter parcel in the Yehud Industrial Zone. Approximately 600
square meters are devoted to administrative, marketing and management functions
and approximately 700 square meters are used for engineering, system
integration and customer service. We use the remaining 1,233 square meters for
production management, production operations, including manufacturing,
assembly, testing, warehousing, shipping and receiving. In accordance with
Israeli law, this parcel of land is still registered in the name of the Israel
Land Authority. We will be entitled to have title to the property recorded in
our name when Israeli authorities subdivide the property into parcels. This
procedure is a statutory requirement for transferring land ownership in Israel.
In 2007, we leased a one-story 810 square meter facility located on a 1,820
square meter parcel in the Yehud Industrial Zone for $80,000 per year for use
in production and operations. The products that we manufacture at our
facilities in the Yehud Industrial Zone include our taut-wire intrusion
detection systems, our vibration detection systems, our video-motion detection
systems, MagNet, Fortis, DreamBox, PipeGuard, MTC- 1500, MSS-1500 and other
perimeter systems.

20

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We
own a 33,000 square foot facility in Carp, Ontario, Canada. Approximately 7,000
square feet are devoted to administrative, marketing and management functions
and approximately 8,000 square feet are used for engineering, system
integration and customer service. We use the remaining 18,000 square feet for
production operations, including cable manufacturing, assembly, testing,
warehousing, shipping and receiving. In December 2004, we purchased an
additional 182,516 square feet of vacant land adjacent to this property for
future expansion. We also lease 358,560 square feet of land near this facility,
for $2,500per year for use as an
outdoor sensor test and demonstration site for our products. The products
manufactured at this facility include the Perimitrax/Panther 2000 and Omnitrex
buried cable intrusion detection systems, the Intelli-Field electro static
detection system, the X-Field volumetric system the Intelli-FLEX microphonic
fence detection system, Flash and Flare, and various perimeter monitoring and
control systems.

We
own a 20,000 square foot facility in Fremont, California. The products
manufactured at this facility include Intelli-Wave, various sensors, the PAS
personal alarm system and the MX control and monitoring center.

We
lease 2,793 square feet of office space in Herndon, Virginia at a cost of
$5,754 per month. The lease commenced on December 1, 2006 and will end on
November 30, 2010. We utilize this space, which houses marketing demo rooms, as
a sales office for our US subsidiary.

Smart
leased 8,000 square feet of commercial space in College Point, New York at a
cost of $10,997 per month. The lease will terminate on September 30, 2008.On
April 15, 2008, Smart subleased the upper floor of the buildings for $5,000 per
month. The sublease will end in September 30, 2008. During the sublease period,
we are paying the landlord an additional $1,000 per month in addition to the
sublease amount.

We
also lease small offices in Germany, the United Kingdom, Mexico, Romania and
Poland for our sales and marketing entities.

We
believe that our facilities are suitable and adequate for our current
operations and the foreseeable future.

|         |                          
|-------- | -------------------------
|ITEM 4A. | Unresolved Staff Comments

Not
applicable.

|        |                                             
|------- | --------------------------------------------
|ITEM 5. | Operating and Financial Review and Prospects

The
following discussion of our results of operations and financial condition
should be read in conjunction with our consolidated financial statements and
the related notes thereto included elsewhere in this annual report. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth in Item 3.D. Key InformationRisk Factors.

Overview

We
develop, manufacture, market and sell complex computerized security systems.
Our systems are used in more than 75 countries
to protect aircraft, national borders and sensitive facilities, including
military bases, power plant installations, airports, postal facilities, prisons
and industrial locations from terrorism, theft and other security threats. Our
revenues are principally derived from:

| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| | · | installation
  of comprehensive security systems for which revenues are generated from
  long-term fixed price contracts;

21

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| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| | · | sales of
  security products; and                                                                                        
| |   |                                                                                                                          
| | · | services and
  maintenance, which are performed either on a fixed-price basis or as
  time-and-materials based contracts.

Business
Challenges/Areas of Focus

Our
primary business challenges and areas of focus include:

| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| | · | continuing
  the growth of revenues and profitability of our perimeter security system
  line of products;
| |   |                                                                                                           
| | · | enhancing
  the introduction and recognition of our new products into the markets;                        
| |   |                                                                                                           
| | · | penetrating
  into new markets and strengthening our presence in existing markets;                        
| |   |                                                                                                           
| | · | succeeding
  in selling our comprehensive turnkey solutions; and                                          

Seam
-Line Perimeter System

The
continued state of hostility between the State of Israel and the Palestinian
Authority has caused the State of Israel to increase its efforts to protect its
facilities and installations from unauthorized intrusions. In 2002, the Israeli
Government announced the construction of a perimeter system to seal off parts
of the West Bank to prevent Palestinian terrorists from entering Israel. In
September 2002, we won 80% of the bids published by the MOD for the
installation of intrusion detection systems along the seam-line between Israel
and the West Bank. We received orders having a value of approximately $19
million to install intrusion detection systems along approximately 150
kilometers. As of December 31, 2004, this project was completed. In 2003, the
Israeli Government resolved to extend the perimeter system and to continue
construction along most of the remaining parts of the seam-line. However,
following the UN resolution to refer the question of the legality of the
seam-line perimeter systems to the International Court of Justice in Hague, an
international opposition to the route selected by the Israeli government arose,
causing the Israeli Government to change and shorten the route of the seam-line
perimeter system. This opposition, as well as certain decisions of the Israeli
Supreme Court, caused a halt in the building of the seam-line fence during
2004. In 2005 the Israeli Government approved a new seam-line fence route and
the MOD renewed the work on the southern portion of the seam line. According to
recent reports in the Israeli press, the majority of the remaining segments of
the fence will be completed during 2008. Although we believe that we will
record revenues from the seam line project in 2008, we cannot assure you that
Israel will follow through with its decision to build the perimeter system
along the seam-line, or if such perimeter system is constructed or rebuilt,
that our products will be utilized.

Key Performance
Indicators and Sources of Revenues

Our
management believes that our revenues, sources of revenues and operating income
are among the key performance indicators for our business. Our revenues from
our principal lines of business for the three years ended December 31, 2005,
2006 and 2007 were as follows:

|                     |  |                         |        |      |   |        |  |   |        | 
|-------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                     |  | Year Ended December 31, |       
|                     |  |                         |       
|                     |  | 2005                    |        | 2006 |   | 2007   | 
|                     |  |                         |        |      |   |        | 
|                     |  | (In thousands)          |       
|                     |  |                         |        |      |   |        |  |   |        | 
|Perimeter
  products |  | $                       | 40,143 |      | $ | 47,186 |  | $ | 43,781 | 
|Turnkey
  projects   |  |                         | 17,970 |      |   | 16,167 |  |   | 28,167 | 
|Other                |  |                         | 272    |      |   | 247    |  |   | 427    | 
|                     |  |                         |        |      |   |        |  |   |        | 
|                     |  |                         |        |      |   |        |  |   |        | 
|Total                |  | $                       | 58,385 |      | $ | 63,600 |  | $ | 72,375 | 
|                     |  |                         |        |      |   |        |  |   |        | 

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Our
operating income from our principal lines of business for the three years ended
December 31, 2005, 2006 and 2007 were as follows:

|                     |  |                         |        |      |   |       |   |   |       |  
|-------------------- |  | ----------------------- | ------ | ---- | - | ----- | - | - | ----- | -
|                     |  | Year Ended December 31, |       
|                     |  |                         |       
|                     |  | 2005                    |        | 2006 |   | 2007  |  
|                     |  |                         |        |      |   |       |  
|                     |  | (In thousands)          |       
|                     |  |                         |        |      |   |       |   |   |       |  
|Perimeter
  products |  | $                       | 4,334  |      | $ | 3,070 |   | $ | 2,421 |  
|Turnkey
  projects   |  |                         | (5,290 | )    |   | 935   |   |   | 506   |  
|Other                |  |                         | 53     |      |   | (138  | ) |   | (193  | )
|Eliminations         |  |                         | 15     |      |   | (31   | ) |   | (28   | )
|                     |  |                         |        |      |   |       |   |   |       |  
|Total                |  | $                       | (888   | )    | $ | 3,836 |   | $ | 2,706 |  
|                     |  |                         |        |      |   |       |   |   |       |  

Cost and
Expenses

Cost
of revenues.Our cost of revenues for perimeter
products consists of component and material costs, direct labor costs, shipping
expenses, overhead related to manufacturing and depreciation. Our cost of
revenues for turnkey projects consists primarily of component and material
costs, subcontractor costs, direct labor costs and overhead related to the
turnkey projects. Our cost of revenues for other consists primarily of direct
labor costs and material costs relating to our maintenance services.

Our
gross margin is affected by the proportion of our revenues generated from
perimeter products, turnkey projects and other. Our revenues from perimeter
products, generally have higher gross margins than our other segments.

Research
and development expenses, net. Research and
development expenses, net consists primarily of expenses for on-going research
and development activities and other related costs.

Selling
and marketing expenses.Selling and marketing
expenses consist primarily of commission payments, compensation and related
expenses of our sales teams, attendance at trade shows and advertising expenses
and related costs for facilities and equipment.

General
and administrative expenses. Our general and
administrative expenses consist primarily of salary and related costs
associated with our executive and administrative functions, legal and
accounting expenses, allowances for doubtful accounts and bad debts and other
miscellaneous expenses. Staff costs include direct salary costs and related
costs such as severance pay, social security and retirement fund contributions,
vacation and other pay.

Depreciation
and Amortization.The amount of depreciation
and amortization attributable to our business segments for the years ended
December 31, 2005, 2006 and 2007 are as follows:

|                     |  |                         |       |      |   |       |  |   |       | 
|-------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | ----- | 
|                     |  | Year Ended December 31, |      
|                     |  |                         |      
|                     |  | 2005                    |       | 2006 |   | 2007  | 
|                     |  |                         |       |      |   |       | 
|                     |  | (In thousands)          |      
|                     |  |                         |       |      |   |       |  |   |       | 
|Perimeter
  products |  | $                       | 1,228 |      | $ | 1,070 |  | $ | 1,087 | 
|Turnkey
  projects   |  |                         | 19    |      |   | 133   |  |   | 966   | 
|Other                |  |                         | 4     |      |   |      |  |   | 2     | 
|                     |  |                         |       |      |   |       |  |   |       | 
|Total                |  | $                       | 1,251 |      | $ | 1,203 |  | $ | 2,055 | 
|                     |  |                         |       |      |   |       |  |   |       | 

Financial
Expenses, Net. Financial expenses, net include exchange
rate differences arising from changes in the value of monetary assets and
monetary liabilities stated in currencies other than the functional currency of
each entity, interest charged on loans from banks as well as interest income on
our cash and cash equivalents and short term investments.

Tax
expense. Tax
expense consists of federal, state and local taxes on the income of our
business. On July 25, 2005, the Knesset, the Israeli parliament, passed the
Law for the Amendment of the Income Tax Ordinance (No. 147 and Temporary
Order) - 2005, or the 2005 Amendment, which provides for a gradual reduction
in the company tax rate in the following manner: in 2007, the tax rate was 29%,
in 2008, the tax rate will be 27%, in 2009, the tax rate will be 26% and from
2010 onward the tax rate will be 25%. Furthermore, from 2010, upon reduction of
our tax rate to 25%, real capital gains will be subject to tax of 25%.

23

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Discussion of Critical Accounting Policies

The
preparation of financial statements in conformity with U.S. GAAP requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates
and the use of different assumptions would likely result in materially
different results of operations. Critical accounting policies are those that
are both most important to the portrayal of our financial position and results
of operations, and require managements most difficult, subjective or complex
judgments. Although not all of our significant accounting policies require
management to make difficult, subjective or complex judgments or estimates, the
following policies and estimates are those that we deem most critical:

Revenue
Recognition

We
generate our revenues mainly from (1) installation of comprehensive security
systems for which revenues are generated from long-term fixed price contracts;
(2) sales of security products; and (3) services and maintenance, which are
performed either on a fixed-price basis or as time-and-materials based
contracts.

Revenues
from installation of comprehensive security systems are generated from
fixed-price contracts according to which the time between the signing of the
contract and the final customer acceptance is usually over one year. Such
contracts require significant customization for each customer specific needs
and, as such, revenues from these types of contracts are recognized using
contract accounting on a percentage of completion method. Accounting for
long-term contracts using the percentage-of-completion method stipulates that
revenue and expense are recognized throughout the life of the contract, even
though the project is not completed and the purchaser does not have possession
of the project. Percentage of completion is calculated based on the Input
Method.

Project
costs include materials purchased to produce the system, related labor and
overhead expenses and subcontractors costs. The percentage to completion is
measured by monitoring costs and efforts devoted using records of actual costs
incurred to date in the project compared to the total estimated project
requirement, which corresponds to the costs related to earned revenues. The
amounts of revenues recognized are based on the total fees under the agreements
and the percentage to completion achieved. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are first
determined, in the amount of the estimated loss on the entire contract. Until
2006, we did not experience any material cancellations for any of our projects.

Estimated
gross profit or loss from long-term contracts may change due to changes in
estimates resulting from differences between actual performance and original
forecasts. Such changes in estimated gross profit are recorded in results of
operations when they are reasonably determinable by management, on a cumulative
catch-up basis.

We
believes that the use of the percentage of completion method is appropriate as
we has the ability to make reasonably dependable estimates of the extent of
progress towards completion, contract revenues and contract costs. In addition,
contracts executed include provisions that clearly specify the enforceable
rights regarding services to be provided and received by the parties to the
contracts, the consideration to be exchanged and the manner and the terms of
settlement, including in cases of terminations for convenience. In all cases we
expect to perform our contractual obligations and our customers are expected to
satisfy their obligations under the contract.

Fees
are payable upon completion of agreed upon milestones and subject to customer
acceptance. Amounts of revenues recognized in advance of contractual billing,
are recorded as unbilled accounts receivable. The period between most instances
of advanced recognition of revenues and the customers billing generally ranges
between one to six months. At December 31, 2007, we recorded $4.1 million of
such unbilled receivables.

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We
sell security products to customers according to customers orders without
installation work. The customers are not entitled to return the products.
Revenues from security product sales are recognized when delivery has occurred,
persuasive evidence of an agreement exists, the vendors fee is fixed or
determinable, no further obligation exists and collectibility is probable.

Services
and maintenance are performed under either fixed-price based or
time-and-materials based contracts. Under fixed-price contracts, we agree to
perform certain work for a fixed price. Under time-and-materials contracts, we
are reimbursed for labor hours at negotiated hourly billing rates and for
materials. Related revenues from such service contracts are recognized as those
services are performed or over the term of the related agreements provided
that, an evidence of an arrangement has been obtained, fees are fixed and
determinable and collectibility is reasonably assured.

Deferred
revenue includes unearned amounts under installation services, service
contracts and maintenance agreements.

Inventories

Inventories
are stated at the lower of cost or market value. We periodically evaluate the
quantities on hand relative to historical and projected sales volumes, current
and historical selling prices and contractual obligations to maintain certain
levels of parts. Based on these evaluations, inventory write-offs are provided
to cover risks arising from slow-moving items, discontinued products, excess
inventories, market prices lower than cost and adjusted revenue forecasts. Cost
is determined as follows:

| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Raw
  materials, parts and supplies - using the first-in, first-out method.                                                                       
| |   |                                                                                                                                                     
| | · | Work-in-progress
  and finished products - on the basis of direct manufacturing costs with the
  addition of allocable indirect manufacturing costs.

During
2005, 2006 and 2007, we recorded inventory write-offs from continuing
operations in the amounts of $420,000, $760,000 and $646,000, respectively.
Such write-offs were included in cost of revenues.

Income
taxes

We
account for income taxes in accordance with Statement of Financial Accounting
Standard No. 109 Accounting for Income Taxes. This statement prescribes
the use of the liability method whereby deferred tax asset and liability
account balances are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. We provide a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value.

As
part of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating our actual current tax exposure
together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within our consolidated
balance sheet. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and we must establish a valuation
allowance to reduce our deferred tax assets to the amount that is more likely
than not to be realized. Increases in the valuation allowance result in
additional expense to be reflected within the tax provision in the consolidated
statement of income. At December 31, 2007, we had a deferred tax asset of
$602,000. We have total estimated available carry forward tax losses of $7
million. As of December 31, 2007, we recorded a valuation allowance on carry
forward tax losses of $4.4 million due to the uncertainty of their future
realization. Our subsidiaries in the United States and the United Kingdom have
estimated total available carry-forward tax losses of $5.3 million and
$930,000, respectively that may be used as an offset against future taxable
profit for 16-20 years and an indefinite period, respectively. As of December
31, 2007, we recorded a full valuation allowance of our subsidiaries tax
assets due to the uncertainty of their future realization.

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Utilization
of U.S. net operating losses may be subject to a substantial annual limitation
due to the change in ownership provisions of the Internal Revenue Code of
1986 and similar state provisions. The annual limitation may result in the
expiration of net operating losses before utilization.

Goodwill

Goodwill
represents the excess of the costs over the net fair value of the assets of the
businesses acquired. Goodwill is tested for impairment at least annually or
between annual tests in certain circumstances, and written down when impaired,
rather than being amortized.

We
test goodwill impairment on acquisition and at least annually thereafter or
between annual tests in certain circumstances, we write down goodwill when
impaired, Goodwill attributable to each of the reporting units is tested for
impairment by comparing the fair value of each reporting unit with its carrying
value. Fair value is determined using discounted cash flow.

Significant
estimates used in these methodologies include estimates of future cash flows,
future short-term and long-term growth rates and weighted average cost of
capital for each of the reportable units. During 2005, 2006 and 2007, no
impairment losses were identified. As of December 31, 2007, our goodwill
amounted to $5.6 million of which $4.6 million and $1.0 million relate to our
perimeter security systems segment and project segment, respectively.

Impairment
of long lived assets

Our
Groups long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of a group of assets may not be recoverable. Recoverability of
a group of assets to be held and used is measured by a comparison of the
carrying amount of the group of assets to the future undiscounted cash flows
expected to be generated by the group of assets. If such group of assets is
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the group of assets exceeds their fair
value. During 2005, 2006 and 2007, no impairment losses were identified.

Functional
Currency and Financial Statements in U.S. Dollars

We
have determined that our reporting currency is the dollar. We determined that
as of October 1, 2006 our functional currency changed from the U.S. dollar to
NIS. Translation adjustments resulting from translating our financial
statements from the NIS to the dollar are reported as a separate component in
shareholders equity. As of December 31, 2006 and 2007 our foreign currency
translation totaled $297,000 and $2.6 million respectively.

Accordingly,
we had accumulated foreign currency translation income of approximately $2.4
million and $5.8 million that was included as part of accumulated other
comprehensive income within our balance sheets at December 31, 2006 and
2007, respectively. During 2005, 2006 and 2007, foreign currency translation
adjustments, net of $87,000, ($72,000) and $3.5 million, respectively, were
included under accumulated other comprehensive income. Had we determined that
the functional currency of our subsidiaries (not including our U.S.
subsidiaries) was the U.S. dollar, these gains would have increased our income
for each of the years presented.

The
first step in the translation process is to identify the functional currency
for each entity included in the financial statements. The accounts of each
entity are then re-measured in its functional currency. All transaction gains
and losses from the re-measurement of monetary balance sheet items are reflected
in the statement of operations as financial income or expenses, as appropriate.

After
the re-measurement process is complete the financial statements are translated
into the reporting currency, which is the dollar, using the current rate method.
Equity accounts are translated using historical exchange rates. All other
balance sheet accounts are translated using the exchange rates in effect at the
balance sheet date. Statement of operations amounts have been translated using
the average exchange rate for the year. The resulting translation adjustments
are reported as a component of shareholders equity in accumulated other
comprehensive income (loss).

26

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Concentrations
of credit risk

Financial
instruments that are potentially subject to concentrations of credit risk
consist principally of cash and cash equivalents, short and long-term bank
deposits, marketable securities, unbilled accounts receivable, trade
receivables, long-term trade receivables and long-term loans.

Of
our cash and cash equivalents, marketable securities and short-term and
long-term bank deposits at December 31, 2007, $19.9 million is invested in
major Israeli and U.S. banks, approximately $16.3 million is invested in other
banks, mainly with Deutsche Bank, RBC Royal Bank, Leutkircher Bank, Commerzbank
and Natwest Bank. Cash and cash equivalents invested in the United States may
be in excess of insured limits and are not insured in other jurisdictions. We
believe that the financial institutions that hold our investments are
financially sound and, accordingly, minimal credit risk exists with respect to
these investments. Our marketable securities include investments in U.S. government debentures,
foreign banks shares, mutual funds and money market funds. Our management believes that those securities are
financially sound and that the portfolios are well-diversified, and accordingly, moderate credit risk
exists with respect to these
marketable securities. Moreover, our investment policy, limits the amount we may invest. During the
recent turmoil in capital markets, we have tightened our control and monitoring
over our marketable securities portfolio.

The
short term and long term trade receivables and the unbilled accounts receivable
of our company and our subsidiaries are derived from sales to large and solid
organizations located mainly in Israel, the United States, Canada, Mexico and
Europe. We perform ongoing credit evaluations of our customers and to date have
not experienced any material losses. An allowance for doubtful accounts is
determined with respect to those amounts that we have determined to be doubtful
of collection and in accordance with an aging policy. In certain circumstances,
we may require letters of credit, other collateral or additional guarantees.
During the years ended December 31, 2005, 2006 and 2007, we recorded ($54,000),
$138,000 and ($68,000) of expenses (income) related to doubtful accounts,
respectively. As of December 31, 2007, the allowance for doubtful accounts
amounted to $343,000. The loan granted to a third party is secured by a
personal guarantee of the beneficial owner. We believe that the loan is well
secured, and accordingly, minimal credit risk exists with respect to this loan.

We
have no significant off-balance sheet concentration of credit risks, such as
foreign exchange contracts or foreign hedging arrangements, except derivative
instruments, which are detailed below.

Derivative
instruments

We
recognize our derivative instruments as either assets or liabilities in our
statement of financial position at fair value. The accounting for changes in
the fair value (i.e., gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and further, on the type of hedging relationship. For those derivative
instruments that are designated and qualify as hedging instruments, a company
must designate the hedging instrument, based upon the exposure being hedged.

To
protect against the change in the forecasted foreign currency cash flows of
certain sale arrangements resulting from changes in the exchange rate during
2003, 2005 and 2006, we entered into forward contracts, to hedge portions of
our forecasted revenue and unbilled accounts receivable denominated in Euros
and Polish Zlotys. We have designated the forward instruments as cash flow
hedges for accounting purposes.

For
derivative instruments designated as cash flow hedges (i.e., hedging the exposure
to variability in expected future cash flows that is attributable to a
particular risk), the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same line item associated with the forecasted
transaction in the same period or periods during which the hedged transaction
affects earnings.

27

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In
2005 a sales arrangement in Polish Zlotys that was to take place from 2005 to 2007 was canceled.
Accordingly, changes in the fair value of the forward contracts were recorded
as financial expenses in the years ended December 31, 2005, 2006 and 2007.

On
October 1, 2006, we changed our functional currency from the dollar to NIS.
From the date of change in functional currency, the hedge of the revenues in
Euros is no longer effective. Changes in the fair value of the forward
contracts from October 1, 2006 were charged to financial expenses. We recorded
$110,000, $915,000 and $666,000 as financial expenses related to forward
contracts transactions, in 2005, 2006 and 2007, respectively.

Fair
value of financial instruments

The
following methods and assumptions were used by us and our subsidiaries in
estimating the fair value of our financial instruments:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | the carrying
  amounts of cash and cash equivalents, marketable securities, short-term bank
  deposits, trade receivables, unbilled accounts receivable, short-term bank
  credit and trade payables approximate their fair value due to the short-term
  maturity of such instruments.                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | · | the carrying
  amount of our long-term trade receivables and long-term bank deposits
  approximate their fair value. The fair value was estimated using discounted
  cash flows analyses, based on our investment rates for similar types of
  investment arrangements.                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | · | the carrying
  amounts of our long-term bank debt are estimated by discounting the future
  cash flows using current interest rates for loans of similar terms and
  maturities. As of December 31, 2006, the fair value of our long-term
  borrowings was approximately $8.2 million, compared to the carrying amount of
  approximately $8.2 million. As of December 31, 2007, the fair value of
  our long-term borrowings was approximately $7.5 million, compared to the
  carrying amount of $7.4 million.

|   |                   
|-- | ------------------
|A. | Operating Results.

Due
to the nature of our customers and products, our revenues are often generated
from a relatively small number of large orders. Consequently, individual orders
from individual customers can represent a substantial portion of our revenues
in any one period and significant orders by any customer during one period may
not be followed by further orders from the same customer in subsequent periods.
Our revenues and operating results may, therefore, vary substantially from
period to period. Consequently, we do not believe that our revenues and
operating results should necessarily be judged on a quarter-to-quarter
comparative basis.

The
following table presents, for the periods indicated, certain financial data
expressed as a percentage of revenues:

|                                                                          |  |                         |     |      |  |      |   |      |     |      |  |     |   |  |     |  
|------------------------------------------------------------------------- |  | ----------------------- | --- | ---- |  | ---- | - | ---- | --- | ---- |  | --- | - |  | --- | -
|                                                                          |  | Year Ended December 31, |    
|                                                                          |  |                         |    
|                                                                          |  | 2003                    |     | 2004 |  | 2005 |   | 2006 |     | 2007 | 
|                                                                          |  |                         |     |      |  |      |   |      |     |      | 
|                                                                          |  |                         |     |      |  |      |   |      |     |      |  |     |   |  |     |  
|Revenues                                                                  |  |                         | 100 | %    |  | 100  | % |      | 100 | %    |  | 100 | % |  | 100 | %
|Cost of revenues                                                          |  |                         | 55  |      |  | 52   |   |      | 63  |      |  | 59  |   |  | 60  |  
|                                                                          |  |                         |     |      |  |      |   |      |     |      |  |     |   |  |     |  
|Gross profit                                                              |  |                         | 45  |      |  | 48   |   |      | 37  |      |  | 41  |   |  | 40  |  
|                                                                          |  |                         |     |      |  |      |   |      |     |      |  |     |   |  |     |  
|Operating
  expenses:                                                     |  |                         |     |      |  |      |   |      |     |      |  |     |   |  |     |  
|Research and development, net                                             |  |                         | 8   |      |  | 8    |   |      | 9   |      |  | 8   |   |  | 8   |  
|Selling and marketing, net                                                |  |                         | 18  |      |  | 21   |   |      | 21  |      |  | 18  |   |  | 18  |  
|General and administrative                                                |  |                         | 8   |      |  | 8    |   |      | 9   |      |  | 9   |   |  | 9   |  
|Special post employment benefit Award
  granted by principal shareholders |  |                         |    |      |  | 2    |   |      |    |      |  |    |   |  | 1   |  
|                                                                          |  |                         |     |      |  |      |   |      |     |      |  |     |   |  |     |  
|Operating
  income (loss)                                                 |  |                         | 11  |      |  | 9    |   |      | (2  | )    |  | 6   |   |  | 4   |  
|Financial
  expenses, net                                                 |  |                         | (2  | )    |  | (1   | ) |      | (1  | )    |  | (1  | ) |  | (3  | )
|                                                                          |  |                         |     |      |  |      |   |      |     |      |  |     |   |  |     |  
|Income
  (loss) before income taxes                                       |  |                         | 9   |      |  | 8    |   |      | (3  | )    |  | 5   |   |  | 1   |  
|Income taxes
  (tax benefit)                                              |  |                         | 2   |      |  | 3    |   |      |    |      |  | 2   |   |  | 1   |  
|                                                                          |  |                         |     |      |  |      |   |      |     |      |  |     |   |  |     |  
|Income
  (loss) from continuing operations                                |  |                         | 7   |      |  | 5    |   |      | (3  | )    |  | 3   |   |  | 0   |  
|Income
  (loss) from discontinued operations, net                         |  |                         | (3  | )    |  | (3   | ) |      | (2  | )    |  | (2  | ) |  | 3   |  
|                                                                          |  |                         |     |      |  |      |   |      |     |      |  |     |   |  |     |  
|Net income
  (loss)                                                       |  |                         | 4   | %    |  | 2    | % |      | (5  | )%   |  | 1   | % |  | 3   | %
|                                                                          |  |                         |     |      |  |      |   |      |     |      |  |     |   |  |     |  

28

---

---



Years ended December 31, 2006 and 2007

Revenues.
Revenues increased by 13.8% from $63.6 million in the year ended
December 31, 2006 to $72.4 million in the year ended December 31,
2007. Revenues from sales of perimeter systems decreased from $47.2 million in
2006 to $43.8 million in 2007, a
decrease of 7.2% mainly as a result in decrease in orders from the Israeli MOD,
which was partly offset by orders from clients outside of Israel.Revenues from security turnkey projects
increased by 74.2% from $16.2 million in 2006 to $28.2 million in 2007,
primarily due to a $5.7 million project performed for the Israeli government
and the acquisition of a European integration company. Other revenues, mainly from services for screening
pallets and newly developed products, increased by 72.9% from $247,000
in the year ended December 31, 2006 to $427,000 in the year ended
December 31, 2007.

Based
on our backlog of approximately $64.9 million as of May 30, 2008, our revenues
in the first quarter of 2008 and our assessment of the market, we anticipate
that our revenues will increase in 2008 compared to our revenues in 2007.

Cost
of revenues. Cost of revenues increased from $37.2
million in the year ended December 31, 2006 to $43.5 million in the year
ended December 31, 2007. Cost of revenues as a percentage of revenues increased
from 58.5% in 2006 to 60.1% in 2007, primarily as a result of the increase in
the turnkey projects segment of our business which has a lower profit margin.
In addition, we recorded a loss provision for one of the projects performed for
the Israeli government. In our perimeter segment, our cost of sales was
adversely affected by an increase in production costs. We anticipate that our
cost of revenues as a percentage of revenues will remain at the same level in
2008 as in 2007.

Gross
profit. Gross profit increased from $26.4 million in
the year ended December 31, 2006 to $28.9 million for the year ended December
31, 2007, primarily as a result of the increase in revenues.

Research
and development expenses, net. Research and
development expenses, net increased from $5.4million for the year ended December 31, 2006, to $5.8 million
for the year ended December 31, 2007, an increase of 7.2%. Research and
development expenses, net amounted to 8.5% of revenues in 2006, compared to
8.0% in 2007. Investment tax credits with respect to our Canadian subsidiary
totaled $162,000 in 2006 and $160,000 in 2007. We expect that our net research
and development expenditures as a percentage of revenues will remain at the
same level in 2008 as in 2007.

Selling
and marketing expenses, net.Selling and marketing
expenses, increased from $11.6 million for the year ended December 31,
2006 to $12.9 million for the year ended December 31, 2007, an increase of
11.4%. The increase in selling and marketing expenses in 2007 was primarily due
to the amortization of customer related assets attributable to the acquisition
of the European integration company. Selling and marketing expenses amounted to
18.2% and 17.9% of revenues in each of 2006 and 2007, respectively. We expect
that our selling and marketing expenses as a percentage of revenues will remain
at the same level in 2008 as in 2007.

General
and administrative expenses. General and
administrative expenses increased from $5.5 million for the year ended
December 31, 2006 to $6.6 million for the year ended December 31,
2007, an increase of 18.3%. The increase in general
and administrative expenses was due to expenses associated with our compliance
with the requirements of the Sarbanes-Oxley Act, increase in salaries and legal
expenses. General and administrative expenses amounted to 8.7% of revenues in
2006 compared to 9.1% in 2007.We
expect that our general and administrative expenses will remain at the same
level in 2008 as in 2007.

29

---

---



Special
post employment benefit.In the year ended December 31, 2007 we recorded a special post employment
expense of $904,000, 1.2% of our total revenues, related to benefits
payable to our retired chairman.

Operating
income (loss). Our operating income declined from $3.8
million for the year ended December 31, 2006 to $2.7 million for the year
ended December 31, 2007. The operating income of our three business
segments for the years ended December 31, 2006 and 2007 are as follows:

|                     |  |                            |       |      |   |       |  
|-------------------- |  | -------------------------- | ----- | ---- | - | ----- | -
|                     |  | Year Ended 
  December 31, |      
|                     |  |                            |      
|                     |  | 2006                       |       | 2007 |  
|                     |  |                            |       |      |  
|                     |  | (In thousands)             |      
|                     |  |                            |       |      |   |       |  
|Perimeter
  products |  | $                          | 3,070 |      | $ | 2,421 |  
|Turnkey
  projects   |  |                            | 935   |      |   | 506   |  
|Other                |  |                            | (138  | )    |   | (193  | )
|Eliminations         |  |                            | (31   | )    |   | (28   | )
|                     |  |                            |       |      |   |       |  
|Total                |  | $                          | 3,836 |      | $ | 2,706 |  
|                     |  |                            |       |      |   |       |  

The
operating income of our perimeter products segment decreased from $3.1 million
in the year ended December 31, 2006 to $2.4 million in the year ended December
31, 2007, primarily as a result of the increase in production costs and the
devaluation of the U.S. dollar against the NIS and the Canadian dollar. The
operating results for our turnkey projects segment declined from an operating
income of $935,000 in the year ended December 31, 2006 to operating income of $506,000 in the year ended December 31, 2007,
primarily as a result of a loss incurred in one of our major projects and the
amortization of the customer related assets attributable to the acquisition of
the European integration company. The operating loss from our other
operations increased from $138,000 in
the year ended December 31, 2006 to $193,000 in the year ended December 31,
2007.

Financial
expenses, net. Financial expenses, net increased from
$864,000 for the year ended December 31, 2006 to $2.1 million for the year
ended December 31, 2007, an increase of 147.3%. Our financial expenses
increased by $1.3 million, mainly due to
the devaluation of the U.S. dollar against the NIS and the Canadian dollar,
which caused an increase of foreign exchange losses, net of $1.1 million. In
addition, interest on short term bank credits increased by $648,000 due to the
higher level of short term loans incurred in 2007, which was offset in part by
a decease in forward contracts loss of $249,000.

Income
taxes. We
recorded an income tax expenses of $943,000 for the year ended December 31,
2006 compared to a $373,000 for the year ended December 31, 2007, primarily as
a result of the decrease in our income
before taxes. The effective tax rate
increased to 65.6% for 2007 compared to 31.7% in 2006 due to the fact that we recorded a valuation allowance on losses
of $765,000, due to the low likelihood that our deferred tax assets will
be recovered from future taxable income.

Years ended December 31, 2005 and 2006

Revenues.
Revenues increased by 8.9% from $58.4 million in the year ended
December 31, 2005 to $63.6 million in the year ended December 31,
2006. Revenues from sales of perimeter systems increased from $40.1 million in
2005 to $47.2million in 2006, an
increase of 17.5%, mainly due to a $10.1 million order from the Israeli MOD to
protect the Northern border of Israel, which was partly offset by a $2.2
million decrease in orders from the Israeli MOD to protect the seam-line.Revenues from security turnkey projects
decreased by 10% from $18.0 million in 2005 to $16.2 million in 2006, primarily
due to a $4.7 million decrease in revenues from a project in Romania that for
which we provided less services in 2006 and a $3.3 million decrease in revenues
from projects in Canada. These declines were offset by a $5.0 million increase
in revenues from projects in Mexico and by a $1.2 million increase in revenues
from an Eastern European customer. Other revenues, primarily from the maintenance of pallet screening machines
decreased by 9.2% from $272,000 in the year ended December 31, 2005
to $247,000 in the year ended December 31, 2006.

30

---

---



Cost
of revenues. Cost of revenues increased from $36.7
million in the year ended December 31, 2005 to $37.2 million in the year
ended December 31, 2006. Cost of revenues as a percentage of revenues declined
from 62.8% in 2005 to 58.5% in 2006 primarily as a result of the expenses we
incurred in 2005 in connection with a project in Eastern Europe that was
cancelled. Due to the uncertainty in preventing the forfeiture of a performance
bank guarantee, we included a provision of $1.4 million in respect of this
guarantee in our financial statements for the year ended December 31, 2005. On
April 28, 2006, we commenced arbitration proceedings against the customer and
on July 11, 2006, the customer made a demand for the payment of the full amount
of a $1.4 million performance. Under the terms of a settlement reached in the
District Court in Haifa, we paid the customer approximately $700,000 of the
disputed amount and the balance will be paid only if we are found liable for
damages exceeding the amount previously paid by us. Based on the opinion of our
legal counsel, we believe that it is probable that the ongoing arbitration in
this matter will result in a favorable decision for us, resulting in the
dismissal of all claims raised by the customer. In view of the above and due to
the uncertainty of our preventing the forfeiture of the bank performance
guarantee, we included a $1.4 million provision in respect of this guarantee in
our financial statements for the year ended December 31, 2005. Based on the
settlement, we cancelled the balance of the provision made in our financial
statements in 2006.

Gross
profit. Gross profit increased from $21.7 million in
the year ended December 31, 2005 to $26.4 million for the year ended December
31, 2006, primarily as a result of the expenses we incurred in 2005 in
connection with the cancellation of the project in Eastern Europe.

Research
and development expenses, net. Research and
development expenses, net for the year ended December 31, 2006 increased
to $5.4 million from $5.3million
for the year ended December 31, 2005, an increase of 2.1%, Research and
development expenses, net amounted to 9.0% of revenues in 2005, compared to
8.5% in 2006. Investment tax credits with respect to our Canadian subsidiary
totaled $154,000 in 2005 and $162,000 in 2006.

Selling
and marketing expenses, net.Selling and marketing expenses,
decreased from $12.4 million for the year ended December 31, 2005 to $11.6
million for the year ended December 31, 2006, a decrease of 6.3%. The
decrease in selling and marketing expenses in 2006 was primarily due to a
decrease in commissions paid in connection with our turnkey projects. Selling
and marketing expenses amounted to 21.2% and 18.2% of revenues in 2005 and
2006, respectively.

General
and administrative expenses. General and
administrative expenses increased from $5.0 million for the year ended
December 31, 2005 to $5.5 million for the year ended December 31,
2006, an increase of 11.7%. The increase in general
and administrative expenses was due to a $138,000 increase in expenses related
to doubtful accounts and due to expenses associated with our compliance with
the requirements of the Sarbanes-Oxley Act. General and administrative expenses
amounted to 8.5% of revenues in 2005 compared to 8.7 % in 2006.

Operating
income (loss). Our operating results improved from an
operating loss of $888,000 for the year ended December 31, 2005 to
operating income of $3.8 million for the year ended December 31, 2006. The
operating income (loss) of our business segments for the years ended December
31, 2005 and 2006 are as follows:

|                     |  |                            |        |      |   |       |  
|-------------------- |  | -------------------------- | ------ | ---- | - | ----- | -
|                     |  |                            |        |      |  
|                     |  | Year Ended 
  December 31, |       
|                     |  |                            |       
|                     |  | 2005                       |        | 2006 |  
|                     |  |                            |        |      |  
|                     |  | (In thousands)             |       
|                     |  |                            |        |      |   |       |  
|Perimeter
  products |  | $                          | 4,334  |      | $ | 3,070 |  
|Projects             |  |                            | (5,290 | )    |   | 935   |  
|Other                |  |                            | 53     |      |   | (138  | )
|Eliminations         |  |                            | 15     |      |   | (31   | )
|                     |  |                            |        |      |   |       |  
|Total                |  | $                          | (888   | )    | $ | 3,836 |  
|                     |  |                            |        |      |   |       |  

31

---

---



The
operating income of our perimeter products segment declined from $4.3 million
in the year ended December 31, 2005 to $3.1 million in the year ended December
31, 2006, principally as a result of a change in the product mix of perimeter
products sold. The operating results for our projects segment rebounded from an
operating loss of $5.3 million in the year ended December 31, 2005 to operating
income of $935,000 in the year ended December 31, 2006, primarily as a result
of the impact of expenses we incurred in 2005 in connection with the
cancellation of an Eastern European project. The operating
results of our other segment went from operating income of $53,000 in the year ended December 31, 2005 to an
operating loss of $138,000 in the year ended December 31, 2006, primarily as a
result of the decrease in revenues in 2006 and the higher cost of revenues,
primarily materials.

Financial
expenses, net. Financial expenses, net increased from
$813,000 for the year ended December 31, 2005 to $864,000 for the year ended
December 31, 2006, an increase of 6.3%. Our financial expenses increased
by $963,000 mainly due to a forward contract loss, which was offset by a
$912,000 increase in financial income, mainly due to increased interest income
and foreign exchange gains. We determined that as of October 1, 2006 our
functional currency changed from the U.S. dollar to NIS. The U.S. dollar
remains our reporting currency. This change resulted in our incurring
additional financial expenses in the fourth quarter of 2006.

Income
taxes (tax benefit). We recorded a tax benefit of $28,000 for the year ended December 31,
2005, primarily as a result of the loss incurred in 2005, compared to income
tax expenses of $943,000 for the year ended December 31, 2006.

Quarterly Results of Operations

The
following tables set forth certain unaudited quarterly financial information
for the two years ended December 31, 2007 The data has been prepared on a basis
consistent with our audited consolidated financial statements included
elsewhere in this annual report and include all necessary adjustments,
consisting only of normal recurring adjustments that we consider necessary for
a fair presentation. The operating results for any quarter are not necessarily
indicative of results for any future periods.

|                                         |  |                    |        |          |   |           |   |          |        |          |   |          |   |           |        |          |   |        |   |   |        |   |   |        |  
|---------------------------------------- |  | ------------------ | ------ | -------- | - | --------- | - | -------- | ------ | -------- | - | -------- | - | --------- | ------ | -------- | - | ------ | - | - | ------ | - | - | ------ | -
|                                         |  | Three months ended |       
|                                         |  |                    |       
|                                         |  | 2006               |        | 2007     |  
|                                         |  |                    |        |          |  
|                                         |  | Mar. 31,           |        | Jun. 30, |   | Sept. 30, |   | Dec. 31, |        | Mar. 31, |   | Jun. 30, |   | Sept. 30, |        | Dec. 31, |  
|                                         |  |                    |        |          |   |           |   |          |        |          |   |          |   |           |        |          |  
|                                         |  | (In thousands)     |       
|                                         |  |                    |        |          |   |           |   |          |        |          |   |          |   |           |        |          |   |        |   |   |        |   |   |        |  
|Consolidated Statement of Income Data:   |  |                    |        |          |   |           |   |          |        |          |   |          |   |           |        |          |   |        |   |   |        |   |   |        |  
|Revenues                                 |  | $                  | 12,712 |          | $ | 13,965    |   | $        | 15,288 |          | $ | 21,635   |   | $         | 14,113 |          | $ | 14,091 |   | $ | 21,016 |   | $ | 23,155 |  
|Cost of revenues                         |  |                    | 7,064  |          |   | 7,931     |   |          | 8,593  |          |   | 13,648   |   |           | 7,732  |          |   | 7,650  |   |   | 13,291 |   |   | 14,837 |  
|                                         |  |                    |        |          |   |           |   |          |        |          |   |          |   |           |        |          |   |        |   |   |        |   |   |        |  
|Gross profit                             |  |                    | 5,648  |          |   | 6,034     |   |          | 6,695  |          |   | 7,987    |   |           | 6,381  |          |   | 6,441  |   |   | 7,725  |   |   | 8,318  |  
|                                         |  |                    |        |          |   |           |   |          |        |          |   |          |   |           |        |          |   |        |   |   |        |   |   |        |  
|Operating expenses:                      |  |                    |        |          |   |           |   |          |        |          |   |          |   |           |        |          |   |        |   |   |        |   |   |        |  
|Research and development, net            |  |                    | 1,200  |          |   | 1,450     |   |          | 1,152  |          |   | 1,576    |   |           | 1,454  |          |   | 1,148  |   |   | 1,283  |   |   | 1,879  |  
|Selling and marketing, net               |  |                    | 2,383  |          |   | 2,608     |   |          | 2,751  |          |   | 3,861    |   |           | 2,709  |          |   | 3,028  |   |   | 3,794  |   |   | 3,399  |  
|General and administrative               |  |                    | 1,147  |          |   | 1,253     |   |          | 1,474  |          |   | 1,673    |   |           | 1,316  |          |   | 1,407  |   |   | 1,505  |   |   | 2,333  |  
|Special post employment benefit          |  |                    |        |          |   |           |   |          |        |          |   |          |   |           |        |          |   |        |   |   | 960    |   |   | (56    | )
|Total operating expenses                 |  |                    | 4,730  |          |   | 5,311     |   |          | 5,377  |          |   | 7,110    |   |           | 5,479  |          |   | 5,583  |   |   | 7,542  |   |   | 7,555  |  
|                                         |  |                    |        |          |   |           |   |          |        |          |   |          |   |           |        |          |   |        |   |   |        |   |   |        |  
|Operating income (loss)                  |  |                    | 918    |          |   | 723       |   |          | 1,318  |          |   | 877      |   |           | 902    |          |   | 858    |   |   | 183    |   |   | 763    |  
|Financial expenses, net                  |  |                    | (157   | )        |   | (229      | ) |          | (262   | )        |   | (216     | ) |           | (303   | )        |   | (141   | ) |   | (983   | ) |   | (710   | )
|                                         |  |                    |        |          |   |           |   |          |        |          |   |          |   |           |        |          |   |        |   |   |        |   |   |        |  
|Income (loss) before income taxes        |  |                    | 761    |          |   | 494       |   |          | 1,056  |          |   | 661      |   |           | 599    |          |   | 717    |   |   | (800   | ) |   | 53     |  
|Income taxes (tax benefit)               |  |                    | 153    |          |   | 118       |   |          | 345    |          |   | 327      |   |           | 148    |          |   | 280    |   |   | 749    |   |   | (804   | )
|                                         |  |                    |        |          |   |           |   |          |        |          |   |          |   |           |        |          |   |        |   |   |        |   |   |        |  
|Income (loss) from continuing operations |  |                    | 608    |          |   | 376       |   |          | 711    |          |   | 334      |   |           | 451    |          |   | 437    |   |   | (1,549 | ) |   | 857    |  
|Loss from discontinued operations, net   |  |                    | (459   | )        |   | (107      | ) |          | (88    | )        |   | (565     | ) |           | (153   | )        |   | (95    | ) |   | (88    | ) |   | 2,022  |  
|                                         |  |                    |        |          |   |           |   |          |        |          |   |          |   |           |        |          |   |        |   |   |        |   |   |        |  
|Net income (loss)                        |  |                    | 149    |          |   | 269       |   |          | 623    |          |   | (231     | ) |           | 298    |          |   | 342    |   |   | (1,637 | ) |   | 2,879  |  
|                                         |  |                    |        |          |   |           |   |          |        |          |   |          |   |           |        |          |   |        |   |   |        |   |   |        |  

32

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|                                                                                |  |                                     |       |          |  |           |   |          |       |          |  |          |    |           |       |          |  |       |   |  |       |    |  |       |  
|------------------------------------------------------------------------------- |  | ----------------------------------- | ----- | -------- |  | --------- | - | -------- | ----- | -------- |  | -------- | -- | --------- | ----- | -------- |  | ----- | - |  | ----- | -- |  | ----- | -
|                                                                                |  | Three months ended                  |      
|                                                                                |  |                                     |      
|                                                                                |  | 2006                                |       | 2007     | 
|                                                                                |  |                                     |       |          | 
|                                                                                |  | Mar. 31,                            |       | Jun. 30, |  | Sept. 30, |   | Dec. 31, |       | Mar. 31, |  | Jun. 30, |    | Sept. 30, |       | Dec. 31, | 
|                                                                                |  |                                     |       |          |  |           |   |          |       |          |  |          |    |           |       |          | 
|                                                                                |  | (As a percentage of total revenues) |      
|                                                                                |  |                                     |       |          |  |           |   |          |       |          |  |          |    |           |       |          |  |       |   |  |       |    |  |       |  
|Consolidated Statement of Income Data,
  expressed as a percentage of revenues: |  |                                     |       |          |  |           |   |          |       |          |  |          |    |           |       |          |  |       |   |  |       |    |  |       |  
|Revenues                                                                        |  |                                     | 100.0 | %        |  | 100.0     | % |          | 100.0 | %        |  | 100.0    | %  |           | 100.0 | %        |  | 100.0 | % |  | 100.0 | %  |  | 100.0 | %
|Cost of revenues                                                                |  |                                     | 55.6  |          |  | 56.8      |   |          | 56.2  |          |  | 63.1     |    |           | 54.8  |          |  | 54.3  |   |  | 63.2  |    |  | 64.1  |  
|                                                                                |  |                                     |       |          |  |           |   |          |       |          |  |          |    |           |       |          |  |       |   |  |       |    |  |       |  
|Gross profit                                                                    |  |                                     | 44.4  |          |  | 43.2      |   |          | 43.8  |          |  | 36.9     |    |           | 45.2  |          |  | 45.7  |   |  | 36.8  |    |  | 35.9  |  
|                                                                                |  |                                     |       |          |  |           |   |          |       |          |  |          |    |           |       |          |  |       |   |  |       |    |  |       |  
|Operating expenses:                                                             |  |                                     |       |          |  |           |   |          |       |          |  |          |    |           |       |          |  |       |   |  |       |    |  |       |  
|Research and development, net                                                   |  |                                     | 9.4   |          |  | 10.4      |   |          | 7.5   |          |  | 7.3      |    |           | 10.3  |          |  | 8.1   |   |  | 6.1   |    |  | 8.1   |  
|Selling and marketing, net                                                      |  |                                     | 18.7  |          |  | 18.7      |   |          | 18.0  |          |  | 17.9     |    |           | 19.2  |          |  | 21.5  |   |  | 18.0  |    |  | 14.7  |  
|General and administrative                                                      |  |                                     | 9.0   |          |  | 9.0       |   |          | 9.7   |          |  | 7.7      |    |           | 9.3   |          |  | 10.0  |   |  | 7.2   |    |  | 10.0  |  
|Special post employment benefit                                                 |  |                                     |      |          |  |          |   |          |      |          |  |         |    |           |      |          |  |      |   |  | 4.6   |    |  | (0.2  | )
|                                                                                |  |                                     |       |          |  |           |   |          |       |          |  |          |    |           |       |          |  |       |   |  |       |    |  |       |  
|Total operating expenses                                                        |  |                                     | 37.1  |          |  | 38.1      |   |          | 35.2  |          |  | 32.9     |    |           | 38.8  |          |  | 39.6  |   |  | 35.9  |    |  | 32.6  |  
|                                                                                |  |                                     |       |          |  |           |   |          |       |          |  |          |    |           |       |          |  |       |   |  |       |    |  |       |  
|Operating income (loss)                                                         |  |                                     | 7.3   |          |  | 5.1       |   |          | 8.6   |          |  | 4.0      |    |           | 6.4   |          |  | 6.1   |   |  | 0.9   |    |  | 3.3   |  
|Financial expenses, net                                                         |  |                                     | (1.2  | )        |  | (1.6      | ) |          | (1.7  | )        |  | (1.0     | )  |           | 2.2   |          |  | 1     |   |  | 4.7   |    |  | 3.1   |  
|                                                                                |  |                                     |       |          |  |           |   |          |       |          |  |          |    |           |       |          |  |       |   |  |       |    |  |       |  
|Income (loss) before income taxes                                               |  |                                     | 6.1   |          |  | 3.5       |   |          | 6.9   |          |  | 3.0      |    |           | 4.2   |          |  | 5.1   |   |  | (3.8  | )  |  | 0.2   |  
|Income taxes (tax benefit)                                                      |  |                                     | 1.2   |          |  | 0.8       |   |          | 2.3   |          |  | 1.5      |    |           | 1     |          |  | 2     |   |  | 3.6   |    |  | (3.5  | )
|                                                                                |  |                                     |       |          |  |           |   |          |       |          |  |          |    |           |       |          |  |       |   |  |       |    |  |       |  
|Income (loss) from continuing operations                                        |  |                                     | 4.9   |          |  | 2.7       |   |          | 4.6   |          |  | 1.5      |    |           | 3.2   |          |  | 3.1   |   |  | (7.4  | )  |  | 3.7   |  
|Loss from discontinued operations, net                                          |  |                                     | (3.6  | )        |  | (0.8      | ) |          | (0.5  | )        |  | (2.6     | )  |           | (1.1  | )        |  | (0.7  | ) |  | (0.4  | )  |  | 8.7   |  
|                                                                                |  |                                     |       |          |  |           |   |          |       |          |  |          |    |           |       |          |  |       |   |  |       |    |  |       |  
|Net income (loss)                                                               |  |                                     | 1.3   | %        |  | 1.9       | % |          | 4.1   | %        |  | (1.1     | )% |           | 2.1   | %        |  | 2.4   | % |  | (7.8  | )% |  | 12.4  | %
|                                                                                |  |                                     |       |          |  |           |   |          |       |          |  |          |    |           |       |          |  |       |   |  |       |    |  |       |  

Seasonality

Our
operating results are characterized by a seasonal pattern, with a higher volume
of revenues towards the end of the year and lower revenues in the first part of
the year. This pattern, which is expected to continue, is mainly due to two
factors:

| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| | · | our
  customers are mainly budget-oriented organizations with lengthy decision
  processes which tend to mature late in the year; and
| |   |                                                                                                                                      
| | · | due to
  weather and other conditions, payments are often postponed from the first
  quarter to subsequent quarters.                 

See
also Item 3.D. Key InformationRisk Factors. Our revenues are dependent on
government procurement procedures and practices, and because we receive large
product orders from a relatively small number of customers, our revenues and
operating results are subject to substantial periodic variations.

Impact of Inflation and Devaluation on
Results of Operations, Liabilities and Assets

Exchange
rate fluctuations between the NIS and the dollar, particularly larger periodic
devaluations, may have an impact on our profitability and period-to-period
comparison of our results. In 2005, the rate of devaluation of the NIS against
the dollar was 6.8%, while in 2003, 2004, 2006 and 2007 the NIS appreciated in
value in relation to the dollar by 7.6%, 1.6%, 8.2% and 9% respectively. A
portion of our expenses, primarily labor expenses, is incurred in NIS and a
part of our revenues are quoted in NIS. Additionally, certain assets, as well
as a portion of our liabilities, are denominated in NIS. Our results may be
adversely affected by the devaluation of the NIS in relation to the dollar (or
if such devaluation is on lagging basis), if our revenues in NIS are higher
than our expenses in NIS and/or the amount of our assets in NIS are higher than
our liabilities in NIS. Alternatively, our results may be adversely affected by
an appreciation of the NIS in relation to the dollar (or if such appreciation
is on a lagging basis), if the amount of our expenses in NIS are higher than
the amount of our revenues in NIS and/or the amount of our liabilities in NIS
are higher than our assets in NIS.

33

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The
following table presents information about the rate of devaluation of the NIS
against the dollar:

|                          |      |                            |  |                          |   |                                              |  |      |   |  |  |      |   | 
|------------------------- | ---- | -------------------------- |  | ------------------------ | - | -------------------------------------------- |  | ---- | - |  |  | ---- | - | 
|Year ended
  December 31, |      | Israeli inflation
  rate % |  | NIS devaluation
  rate % |   | Israeli inflation adjusted for devaluation % | 
|                          |      |                            |  |                          |   |                                              | 
|                          |      |                            |  |                          |   |                                              |  |      |   |  |  |      |   | 
|                          | 2003 |                            |  | (1.9                     | ) |                                              |  | (7.6 | ) |  |  | 5.7  |   | 
|                          | 2004 |                            |  | 1.2                      |   |                                              |  | (1.6 | ) |  |  | 2.8  |   | 
|                          | 2005 |                            |  | 2.4                      |   |                                              |  | 6.8  |   |  |  | (4.4 | ) | 
|                          | 2006 |                            |  | (0.1                     | ) |                                              |  | (8.2 | ) |  |  | 8.1  |   | 
|                          | 2007 |                            |  | 3.4                      |   |                                              |  | (9.0 | ) |  |  | 12.4 |   | 

Because
exchange rates between the NIS and the dollar fluctuate continuously, exchange rate
fluctuations, particularly larger periodic devaluations, may have an impact on
our profitability and period-to-period comparisons of our results. We are also
subject to exchange rate fluctuations related to our activities in Canada.
During the year ended December 31, 2005, foreign currency fluctuations had an
adverse impact on our results of operations, and our foreign exchange losses,
net were $145,000. During the year ended December 31, 2006, our foreign
exchange gains, net were $276,000. During the year ended December 31, 2007, our
foreign exchange losses, net were $792,000. We cannot assure you that in the
future our results of operations may not be materially adversely affected by
currency fluctuations.

To
protect against the change in the forecasted foreign currency cash flows of
certain sale arrangements resulting from changes in the exchange rate, during
2003, 2005 and 2006 we entered into forward contracts in order to hedge
portions of our forecasted revenue and unbilled accounts receivable denominated
in Euros and Polish Zlotys. We have designated the forward instruments as cash
flow hedges for accounting purposes.

For
derivative instruments designated as cash flow hedges (i.e., hedging the
exposure to variability in expected future cash flows that is attributable to a
particular risk), the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same line item associated with the forecasted
transaction in the same period or periods during which the hedged transaction
affects earning.

In
2005 a sales arrangement in Polish Zlotys that was to take place from 2005 to 2007 was canceled.
Accordingly, changes in the fair value of the forward contracts were recorded
as financial expenses in the years ended December 31, 2005, 2006 and 2007.

On
October 1, 2006, we changed our functional currency from the dollar to NIS.
From the date of change in functional currency, the hedge of the revenues in
Euros is no longer effective. Changes in the fair value of the forward
contracts from October 1, 2006 were charged to financial expenses.

We
recorded $110,000, $915,000 and $666,000 in financial expenses related to
forward contracts transactions in 2005, 2006 and 2007, respectively.

Effective Corporate Tax Rate

Israeli
companies are generally subject to income tax on their worldwide taxable
income. The applicable rate for 2007 was 29%, which was reduced to 27% in 2008,
and will be further reduced to 26% in 2009 and 25% in 2010 and thereafter. However, certain of our manufacturing facilities
have been granted approved enterprise status under the Law for the
Encouragement of Capital Investments, 1959, as amended, commonly referred to as
the Investment Law, and, consequently, are eligible, subject to compliance with
specified requirements, for tax benefits beginning when such facilities first
generate taxable income. The tax benefits under the Investment Law are not
available with respect to income derived from products manufactured outside of
Israel. We have derived, and expect to continue to derive, a substantial
portion of our income from our approved enterprise facilities. Subject to
certain restrictions, we are entitled to a tax exemption in respect of
income derived from our approved facilities for a period of two years,
commencing in the first year in which such income is earned, and will be
entitled to a reduced tax rate of 10% to 25% for an additional five to eight
years if we qualify as a foreign investors company. If we do not qualify as a
foreign investors company, we will instead be entitled to a reduced rate of
25% for an additional five years, rather than eight years. A foreign investors
company is defined in the Investment Law as a company in which more than 25% of
its shareholders are non-Israeli residents. Pursuant to the Investment Law, a
foreign investors company may enjoy benefits for a period of up to ten years,
(the actual length of the benefits period is graduated based on the percentage
of foreign ownership).

34

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Our
effective corporate tax rate may substantially exceed the Israeli tax rate. Our
U.S. subsidiaries will generally be subject to applicable federal, state, local
and foreign taxation, and we may also be subject to taxation in the other
foreign jurisdictions in which we own assets, have employees or conduct
activities. Because of the complexity of these local tax provisions, it is not
possible to anticipate the actual combined effective corporate tax rate, which
will apply to us.

As
of December 31, 2007, we had a deferred tax asset of $602,000. We have total
estimated available carry forward tax losses of $7 million. As of December 31,
2007, we recorded a valuation allowance on carry forward tax losses of $4.4
million due to the uncertainty of their future realization.

As of
December 31, 2007, our subsidiaries in the United States and the United
Kingdom had estimated total available carry forward tax losses of $5.3 million and $0.9 million, respectively, to
offset against future taxable income for 16 to 20 years and an indefinite
period, respectively. A full valuation
allowance was recorded due to the uncertainty of the tax assets future
realization. Utilization of U.S. net operating losses may be subject to a
substantial annual limitation due to the change in ownership provisions of
the Internal Revenue Code of 1986 and similar state tax law provisions. The
annual limitation may result in the expiration of net operating losses before
utilization.

On December
2007 we entered into a tax assessment agreement with the Israeli Tax Authority,
with respect to the years 2001 to 2004. According to the agreement we paid
$402,000. Since one of our approved enterprises has not receive final approval
as of yet, the tax assessment agreement determined that if we will not get such
approval within two years we will pay an additional amount of $467,000 to the
tax authority.

Recently Issued Accounting Standards

In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value Measurements (SFAS 157) which defines fair value, establishes
a framework for measuring fair value, and expands disclosures about fair value
measurements. SFAS 157 applies to other accounting pronouncements that require
or permit fair value measurements and, accordingly, does not require any new
fair value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 for financial assets and liabilities, as well as for any
other assets and liabilities that are carried at fair value on a recurring
basis, and should be applied prospectively. The adoption of the provisions of
SFAS 157 related to financial assets and liabilities and other assets and
liabilities that are carried at fair value on a recurring basis is not
anticipated to materially impact our consolidated financial position and
results of operations. Subsequently, the FASB provided for a one-year deferral of
the provisions of SFAS 157 for non-financial assets and liabilities that are
recognized or disclosed at fair value in the consolidated financial statements
on a non-recurring basis. We are currently evaluating the impact of adopting
the provisions of SFAS 157 for non-financial assets and liabilities that are
recognized or disclosed on a non-recurring basis.

In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). Under this Standard, we may elect to report financial instruments
and certain other items at fair value on a contract-by-contract basis with
changes in value reported in earnings. This election is irrevocable. SFAS 159
provides an opportunity to mitigate volatility in reported earnings that is
caused by measuring hedged assets and liabilities that were previously required
to use a different accounting method than the related hedging contracts when
the complex provisions of SFAS 133 hedge accounting are not met. SFAS 159 is
effective for years beginning after November 15, 2007. As we did not elect the
fair value option in the date of adoption, we do not expect the adoption of
SFAS 159 will have a material impact on our consolidated financial.

35

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In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (Revised 2007) (SFAS 141R), Business Combinations. SFAS 141R will change
the accounting for business combinations. Under SFAS 141R, an acquiring entity
will be required to recognize all the assets acquired and liabilities assumed
in a transaction at the acquisition-date fair value with limited exceptions.
SFAS 141R will change the accounting treatment and disclosure for certain
specific items in a business combination. SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. SFAS 141R will have an impact on our accounting for future business
combinations once adopted and not on prior acquisitions.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS 160). SFAS 160 establishes
accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parents ownership interest and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. SFAS 160 also establishes
reporting requirements that provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. This standard is effective for fiscal years
beginning after December 15, 2008and should be applied prospectively. However, the presentation
and disclosure requirements of the statement shall be applied retrospectively
for all periods presented. The adoption of the provisions of Statement No. 160
is not anticipated to materially impact our consolidated financial position and
results of operations.

In
December 2007, the SEC staff issued Staff Accounting Bulletin (SAB) 110,
Share-Based Payment, which amends SAB 107, Share-Based Payment, to permit
public companies, under certain circumstances, to use the simplified method in
SAB 107 for employee option grants after December 31, 2007. Use of the
simplified method after December 2007 is permitted only for companies whose
historical data about their employees exercise behavior does not provide a
reasonable basis for estimating the expected term of the options. Based on the
significant restrictions on employee trading during the restatement periods, we
have not experienced regular employee exercise behavior since the
implementation of SFAS No. 123R on January 20, 2006. We do not
expects to continue to use the simplified method as allowed under SAB 110.

|   |                                
|-- | -------------------------------
|B. | Liquidity and Capital Resources

General

Our ongoing
liquidity requirements arise primarily from our need to service debt and
provide working capital. From our inception until our initial public offering
in March 1993, we financed our activities mainly through cash flow from
operations and bank loans. In March 1993, we received proceeds of $9.8
million from an initial public offering of 1,380,000 ordinary shares. In
February 1997, we raised $9.4 million from a follow-on offering of
2,085,000 ordinary shares and in April 2005, we raised an additional $14.9
million from a follow-on offering of 1,700,000 ordinary shares. The proceeds
from these offerings together with cash flow from operations and our credit
facilities are our main sources of working capital.

36

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Our
working capital increased from $39.9 million at December 31, 2006 to $41.5 million
at December 31, 2007. Cash and cash equivalents amounted to $4.9 million at
December 31, 2006 compared to $9.2 million at December 31, 2007.
Short-term and long-term bank deposits, marketable securities and escrow
deposits amounted to $22.1 million at December 31, 2006 compared to $26.9million at December 31, 2007. Our
cash and cash equivalents, short and long-term bank deposits and marketable
securities are held mainly in U.S. dollars and Euros.

We
expect to fund our short-term liquidity needs, including our obligations under
our credit facilities, other contractual agreements and any other working
capital requirements, from cash and cash equivalents, operating cash flow and
our credit facilities. We believe that our current cash and cash equivalents,
including bank deposits, marketable securities and our expected cash flow from
operations in 2008 will be sufficient to meet our cash requirements through
2008.

Cash Flows

The following
table summarizes our cash flows for the periods presented:

|                                                               |  |                         |         |      |   |        |   |   |        |  
|-------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------ | - | - | ------ | -
|                                                               |  | Year ended December 31, |        
|                                                               |  |                         |        
|                                                               |  | 2005                    |         | 2006 |   | 2007   |  
|                                                               |  |                         |         |      |   |        |  
|                                                               |  | (in thousands)          |        
|                                                               |  |                         |         |      |   |        |   |   |        |  
|Net cash
  provided by (used in) continuing operations         |  | $                       | (2,915  | )    | $ | (2,019 | ) |   | 10,420 |  
|Net cash
  provided by (used in) discontinued operations       |  |                         | (1,224  | )    |   | 643    |   |   | (519   | )
|                                                               |  |                         |         |      |   |        |   |   |        |  
|Net cash
  provided by (used in) operating activities          |  |                         | (4,139  | )    |   | (1,376 | ) |   | 9,901  |  
|Net cash
  provided by (used in) investing activities          |  |                         | (15,248 | )    |   | (5,248 | ) |   | (464   | )
|Net cash
  provided by financing activities                    |  |                         | 17,269  |      |   | 1,688  |   |   | (5,477 | )
|Effect of
  exchange rate changes on cash and cash equivalents |  |                         | 253     |      |   | (255   | ) |   | 337    |  
|Increase
  (decrease) in cash and cash equivalents             |  |                         | (1,865  | )    |   | (5,191 | ) |   | 4,297  |  
|Cash and
  cash equivalents at the beginning of the year       |  |                         | 11,964  |      |   | 10,099 |   |   | 4,908  |  
|                                                               |  |                         |         |      |   |        |   |   |        |  
|Cash and
  cash equivalents at the end of the year             |  | $                       | 10,099  |      | $ | 4,908  |   | $ | 9,205  |  
|                                                               |  |                         |         |      |   |        |   |   |        |  

Net cash
used in operating activities was approximately $4.1 million and
$1.4 million in the years ended December 31, 2005 and 2006, respectively,
compared to $9.9 million in the year ended December 31, 2007.

Net
cash used in operating activities in the year ended December 31, 2005, was
primarily attributable to a net loss of $3.2 million, an increase in trade receivables
of $8.7 million an increase in deferred income taxes of $1 million, an increase
in unbilled accounts receivable of $2.8 million and an increase in other
accounts receivable and prepaid expenses of $580,000 which was offset in part
by an increase in customer advances of $4.0 million for turnkey projects, a
$3.2 million increase in trade payables, an increase in other accounts payable
and accrued expenses of $2 million, depreciation and amortization of $1.3
million and a $1.7 million decrease in inventories for our perimeter security
systems segment.

Net
cash used in operating activities in the year ended December 31, 2006, was
primarily attributable to an increase in trade receivables of $4.4 million, an
increase in inventories of $2.7 million, a return of $2.8 million of customer
advances and a decrease in trade payables of $666,000, which was offset in part
by net income of $810,000, depreciation and amortization of $1.2 million, a
decrease in unbilled accounts receivable of $3.5 million, an increase in other
accounts payable and accrued expenses of $717,000 and a $437,000 decrease in
other accounts receivable and prepaid expenses.

Net
cash provided by operating activities in the year ended December 31, 2007, was
primarily attributable to an increase in customer advances of $10.4 million, an
increase of $4.3 million and $1.8 million in trade receivables and unbilled
accounts receivable, respectively, an increase of $1.8 million in accrued
interest on marketable securities and short and long term bank deposits and
depreciation and amortization of $2.1 million, which was offset in part by
decrease in trade payables of $6.3 million, a decrease in other accounts
payable and accrued expenses of $1.8 million, an increase in long term trade
receivable of $1.8 million and a gain from discontinued operation of $1.7
million.

37

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Net
cash used in investing activities was approximately $15.2 million and $5.2
million for the years ended December 31, 2005 and 2006, respectively, compared
to $464,000 in the year ended December 31, 2007. In the year ended December 31,
2005,we purchased $16.7 million of short-term deposits and $750,000 of property
and equipment, which purchases were offset by proceeds of $3.0 million from the
redemption of structured notes and $1.2 million from the sale of long-term
deposits. In the year ended December 31, 2006, we purchased $906,000 of
property and equipment, $8.2 million of marketable securities, invested
$622,000 in a long term loan and purchased know how and patents for $148,000
with the proceeds from the sale of marketable securities of $5.2 million. In
the year ended December 31, 2007 we acquired a European integration company for
$4 million and purchased $10.8 million of marketable securities, $4.4 million
of escrow deposit and $890,000 of property and equipment purchases which were
offset by proceeds of $8.5 million from the sale of the assets and business of
a subsidiary, proceeds of $5.6 million from the sale of marketable securities
and $5.7 million from the sale of short term bank deposits.

In
the year ended December 31, 2005, net cash provided by financing activities of
$17.3 million was primarily attributable to the receipt of net proceeds of
$14.9 million from the issuance of ordinary shares, $2.4 million from
short-term bank credit to finance the operations of our video monitoring
segment and $1.8 million from proceeds of long-term loans that we used to
refinance the loan we incurred to finance the purchase of a building in Fremont
CA, which was offset in part by the repayment of $1.8 million of long-term bank
loans. In the year ended December 31, 2006, net cash provided by financing
activities of $1.7 million was primarily attributable to $3.2 million from
proceeds of long-term loans that we incurred to finance the costs incurred in
connection with the cancellation of a project in Eastern Europe and our receipt
of $163,000 from the exercise of employee stock options, which was offset in
part by $1.4 million from short-term bank credits to finance the operations of
our video monitoring segment and the repayment of $306,000 of long-term bank
loans. In the year ended December 31, 2007, net cash used in financing
activities of $5.5 million was primarily due to the repayment of $4.7 million of
short term bank credits and repayment of $796,000 of long term bank loans which
was offset in part by receipt of $43,000 from the exercise of employee stock
options.

We
had capital expenditures of approximately $750,000, $906,000 and $890,000 in
2005, 2006 and 2007, respectively. These capital expenditures were principally
for computers, other machinery and equipment and
for expanding our facilities. We estimate
that our capital expenditures for 2008 will total approximately $1.6 million,
substantially all of which will relate to our perimeter security and project
segments. We expect to finance these expenditures primarily from our cash and
cash equivalents, operating cash flow and our credit facilities. However, the
actual amount of our capital expenditures will depend on a variety of factors,
including general economic conditions, changes in the demand for our products.

Credit Lines and Other Debt

We
currently have credit lines with Bank Leumi Le-Israel B.M., or BLL, Union Bank
of Israel Ltd., or Union Bank, Mizrahi Tefahot Bank B.M., or MTB, and Bank
Hapoalim B.M. totaling $54.4 million in the aggregate. There are no
restrictions as to our use of any of these credit lines. We agreed not to
pledge any of our assets without the consent of these banks. In addition, in
connection with two of these credit lines, a fixed charge was placed on our
physical plant in Israel by each of BLL and Union Bank, each of which ranks
pari-passu with the other.

As
of December 31, 2007 we are not under any obligation to maintain financial
ratios or other terms in respect of our credit lines. Our loans under these
credit lines are denominated in dollars and NIS.

In
addition, our subsidiaries currently have credit lines with Bank Leumi USA,
Royal Bank of Canada and Deutsche Bank, totaling $9.2 million in the aggregate.

38

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Our
Canadian subsidiary, which is primarily engaged in sale of perimeter products
and turnkey projects, has undertaken to maintain general covenants and the following
financial ratios and terms in respect of its outstanding credit lines:

| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| | · | A quick
  ratio of not less than 1.25;                                            
| |   |                                                                                   
| | · | A ratio of
  total liabilities to tangible net worth of not greater than 0.75; and
| |   |                                                                                   
| | · | Tangible net
  worth of at least $9.0 million.                                    

As
of December 31, 2007, our Canadian subsidiary was in compliance with these
ratios and terms.

As
of December 31, 2007, we had approximately $26 million available under our
credit lines. In addition, our subsidiaries had approximately $2.8 million
available under their credit lines.

As
of December 31, 2007, our outstanding balances under our credit lines
consisted of:

| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| | · | Short-term
  NIS-denominated loans of approximately $8.2 million, bearing an average interest
  at a rate of 5.58%;             
| |   |                                                                                                                                 
| | · | Short-term
  dollar-denominated loans of approximately $8.1 million, bearing an average
  interest at a rate of 5.82%;          
| |   |                                                                                                                                 
| | · | Long-term
  dollar-denominated loans of approximately $2.4 million, bearing an average
  interest at a rate of 5.50%; and       
| |   |                                                                                                                                 
| | · | Several bank
  performance and advance payment guarantees totaling approximately $9.8
  million, at an annual cost of 0.5%-1.0%.

As
of December 31, 2007, our subsidiaries had an aggregate of $145,000 in
short term bank credit and $5 million in long-term loans primarily relating to
our perimeter security segment as follows:

| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | $2.5
  million, bearing interest at a fixed annual rate of 6.06%. This loan is due
  in July 2008;                                                                                                   
| |   |                                                                                                                                                                                                      
| | · | $500,000,
  bearing interest at an annual rate of 6.19% and collateralized by the assets
  of our US subsidiary, Magal Senstar Inc., or MSI. This loan is due in July
  2008;                        
| |   |                                                                                                                                                                                                      
| | · | $500,000,
  bearing interest at an annual rate of 5.8% and collateralized by MSIs
  assets. This loan is due in July 2008;                                                                          
| |   |                                                                                                                                                                                                      
| | · | $518,000
  bearing interest at a fixed rate of 5.45%. The loan is payable in 20
  quarterly installments of $47,200, commencing February 2006. We have
  guaranteed the full amount of this loan; and
| |   |                                                                                                                                                                                                      
| | · | $980,000,
  bearing interest at a fixed rate of 5.45%. The loan is due in one installment
  in November 2010. We have guaranteed the full amount of this loan.                                       

In
connection with the related loans listed immediately above, Bank Leumi USA
placed a $3 million fixed charge on our deposits with that bank.

The
two $500,000 promissory notes issued to Bank Leumi USA both contain covenants
that require us to maintain $1 million in deposits at all times, otherwise the
interest rate on the notes become the banks rate plus 0.25% until the minimum
deposit is maintained.

|   |                                                
|-- | -----------------------------------------------
|C. | Research and Development, Patents and Licenses.

Government Grants

We
participate in programs sponsored by the Israeli Government for the support of
research and development activities. In the year ended December 31, 2005, we
obtained $8,000, of royalty-bearing grants from the OCS for certain of our
research and development projects for perimeter
security products. We did not obtain any grants form the OCS for the years
ended December 31, 2006 and 2007. We are obligated to pay royalties to
the OCS amounting to 3%-4.5% of revenues derived from sales of the products
funded with these grants, up to 100% of the grants received, linked to the U.S.
dollar. All grants received after January 1, 1999 will also bear interest at
the rate of LIBOR. The obligation to pay these royalties is contingent on
actual sales of the products, and in the absence of such sales no payment is
required.

39

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Royalties
paid to the OCS amounted to $83,000, $79,000 and $143,000 in the years ended
December 31, 2005, 2006 and 2007, respectively. These royalties related to
sales of perimeter security products
and management security system.

As
of December 31, 2007, we had a contingent obligation to pay royalties of
approximately $1.5, million to the OCS upon the successful sale of perimeter security products developed using
research and development programs sponsored by the OCS.

The
Israeli Government, through the Fund for the Encouragement of Marketing
Activities, or the Fund, awarded us grants for overseas marketing expenses. We
are obligated to pay royalties to this fund at the rate of 3% of the increase
in export sales, up to the amount of the grants we received. To date, we have
received $253,000 in grants from the
Fund and, during the years ended December 31, 2005, 2006 and 2007, we did not
pay any royalties. As of December 31, 2007, we had a remaining contingent
obligation to the Fund of $82,000.

Investment Tax Credit

Our
Canadian and U.S subsidiaries are eligible
for investment tax credits on their research and development activities and on
certain current and capital expenditures. During the years ended December 31,
2005, 2006 and 2007, our Canadian
subsidiary recognized $154,000, $162,000 and $160,000, respectively, of
investment tax credits as a reduction of research and development expenses. In
addition, our Canadian and U.S subsidiaries
have available investment tax credits of approximately $738,000to reduce future federal income taxes
payable. These credits will expire in 2014 through 2027. See also Item
4.B. Information on the CompanyBusiness OverviewResearch and Development;
Royalties.

|   |                   
|-- | ------------------
|D. | Trend Information.

We
cannot assure you that the MOD, IDF or any of our other major customers will
maintain their volume of business with us or that, if such volume is reduced,
other customers of similar volume will replace the lost business. The loss of
one or more of these existing customers without replacement by a customer or
customers of similar volume would have a material adverse effect on our
financial results.

For
additional discussion of the information required by this item see Operating
and Financial Review and ProspectsOperating Results and Operating and
Financial Review and ProspectsLiquidity and Financial Resources above.

|   |                                
|-- | -------------------------------
|E. | Off-Balance Sheet Arrangements.

At
December 31, 2007, we have guaranteed the advance payments and the performance
of our work to certain of our customers (usually government entities). Such
guarantees are required by contract for our performance during the installation
and operational period of projects throughout Israel and the rest of the world.
The guarantees for installation typically expire soon after certain milestones
are met and guarantees for operations typically expire proportionally over the
contract period. The maximum potential amount of future payments we could be
required to make under our guarantees at December 31, 2007 and March 31, 2008
were $9.8 million and $8.9 million, respectively. We have not recorded any
liability for such amounts, as we expect that our performance will be
acceptable and to date, no performance bank guarantees have been exercised
against us except with respect to our dispute relating to the project in
Eastern Europe. See Item 8.A - Consolidated Statements and Other Financial
Information-Legal Proceedings.

40

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|   |                                               
|-- | ----------------------------------------------
|F. | Tabular Disclosure of Contractual Obligations.

The
following table summarizes our minimum contractual obligations and commercial
commitments as of December 31, 2007 and the effect we expect them to have on
our liquidity and cash flow in future periods.

|                                                                             |  |                                       |        |                  |   |           |  |           |       |                   |   |       |  |   |     | 
|---------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ---------------- | - | --------- |  | --------- | ----- | ----------------- | - | ----- |  | - | --- | 
|Contractual Obligations                                                      |  | Payments due by Period (in thousands) |       
|                                                                             |  |                                       |       
|                                                                             |  | Total                                 |        | less than 1 year |   | 1-2 years |  | 3-5 years |       | more than 5 years |  
|                                                                             |  |                                       |        |                  |   |           |  |           |       |                   |  
|                                                                             |  |                                       |        |                  |   |           |  |           |       |                   |   |       |  |   |     | 
|Long-term bank debt obligations                                              |  | $                                     | 7,398  |                  | $ | 4,303     |  | $         | 813   |                   | $ | 1,802 |  | $ | 480 | 
|                                                                             |  |                                       |        |                  |   |           |  |           |       |                   |   |       |  |   |     | 
|Operating lease obligations                                                  |  |                                       | 1,619  |                  |   | 693       |  |           | 562   |                   |   | 301   |  |   | 63  | 
|Purchase obligations                                                         |  |                                       | 184    |                  |   | 184       |  |           |      |                   |   |      |  |   |    | 
|Other long-term liabilities reflected on
  our balance sheet under U.S. GAAP |  |                                       | 3,873  |                  |   |          |  |           |      |                   |   | 3,873 |  |   |    | 
|Total                                                                        |  | $                                     | 13,074 |                  | $ | 5,180     |  | $         | 1,375 |                   | $ | 5,976 |  | $ | 543 | 

|        |                                           
|------- | ------------------------------------------
|ITEM 6. | Directors, Senior Management and Employees

|   |                                 
|-- | --------------------------------
|A. | Directors and Senior Management.

Set
forth below are the name, age, principal position and a biographical
description of each of our directors and executive officers:

|                         |  |     |  |                                                                  
|------------------------ |  | --- |  | -----------------------------------------------------------------
|Name                     |  | Age |  | Position                                                         
|                         |  |     |  |                                                                  
|Jacob Perry              |  | 64  |  | Chairman of
  the Board                                          
|Izhar Dekel              |  | 56  |  | President,
  Chief Executive Officer and Director                
|Lian
  Goldstein         |  | 33  |  | Vice
  President  Finance, Chief Financial Officer and Secretary
|Yehezkel
  Farber        |  | 67  |  | Vice
  President  Operations                                    
|Zvi Dank                 |  | 58  |  | Vice
  President  Research and Development                      
|Asaf
  Even-Ezra         |  | 42  |  | Executive
  Vice President Sales & Marketing                    
|Dany Pizen               |  | 56  |  | Vice
  President  East European and CIS Marketing               
|Raffi Netzer             |  | 45  |  | Vice
  President  Africa and Latin America Marketing            
|Yehonatan
  Ben- Hamozeg |  | 49  |  | Vice
  President  Integrated Systems Development                
|Jacob
  Even-Ezra        |  | 77  |  | Director                                                         
|Nathan Kirsh             |  | 76  |  | Director                                                         
|Zeev Livne               |  | 63  |  | Director                                                         
|Jacob Nuss               |  | 60  |  | Director                                                         
|Shaul
  Kobrinsky        |  | 56  |  | Outside
  Director                                               
|Anat Winner              |  | 49  |  | Outside
  Director                                               

Messrs.
Perry, Even-Ezra, Dekel, Kirsh, Nuss, and Livne will serve as directors until
our 2008 Annual General Meeting of Shareholders. Mr. Kobrinsky and Mrs. Winner
will serve as outside directors pursuant to the provisions of the Israeli
Companies Law for three-year terms until our 2010 annual general meeting of
shareholders.

Jacob
Even-Ezra and Asaf Even-Ezra are father and son. Izhar Dekel is Jacob
Even-Ezras son-in-law and Asaf Even-Ezras brother-in-law. Other than these
relationships, there are no other family relationships among our directors and
senior executives.

41

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Jacob
Perry has served as chairman of our board since
January 2008, as deputy chairman of the board since 2006, and as a director
since December 2002,. From 1995 to December 2002, Mr. Perry was President and
CEO of Cellcom Israel Ltd., Israels largest cellular phone operator. Mr. Perry
served 29 years with the Israeli General Security Service, and served as its
chief from 1988 until 1995. Mr. Perry has also served as a coordinator to the
Israeli Prime Minister on the subject of prisoners of war and missing persons.
He was a board member of El-Al Israel Airlines and a member of the management
of many public organizations. Mr. Perry is also a chairman of the board of
directors of various companies, including Mizrahi Tefahot Bank, Pinpoint
Advanced Corp., Inc., a blank check company traded in the U.S. and Keren Mor, a
real estate fund. Mr. Perry serves as a director of Tamarind Technologies and
New Kopel Israels largest vehicle and car service group. Mr. Perry holds an
A.M.P. from Harvard Business School and a B.A. in Oriental Studies and History
of the Jewish People from Tel-Aviv University.

Izhar
Dekel has served as our chief executive officer since
2006, as our president since 1990, and as a director since 1993. Mr. Dekel
served as our finance manager from 1984 to 1990. Mr. Dekel holds an M.B.A. and
a B.A. in Economics and International Relations from the Hebrew University of
Jerusalem.

Lian
Goldstein has served as our chief financial officer
and secretary since January 2008. Before joining us, from 2002 to 2007, Ms.
Goldstein served as chief financial officer of Johnson & Johnson Medical
Israel Ltd. Prior to that, from 1999 to 2002, Ms. Goldstein served as a senior
audit manager with Kost Forer Gabbay & Kasierer, a member of Ernst &
Young Global. Ms. Goldstein holds an M.B.A. and a B.A. in Accounting and
Business from the Israel College of Management, and has been a Certified Public
Accountant (Israel) since 2000.

Yehezkel
Farber has served as our vice president - operations
since 1986. Mr. Farber previously served as the manager of the customer
systems department of IAI.

Zvi
Dank has served as our vice president - research and
development since 1984. Before joining us, Mr. Dank worked as an
electronic engineer in the electronics division of IAI. Mr. Dank holds a B.Sc.
in Electrical Engineering from the Israel Institute of Technology, or the
Technion.

Asaf
Even-Ezra has served as our executive vice-president for
sales and marketing since July 2007. Mr. Even-Ezra joined us in 1995 and served
as our vice president - Israel and West European marketing since 1998.
Mr. Even-Ezra also heads our video motion detection division and is in
charge of Israel and West European marketing. Mr. Even-Ezra holds an M.B.A. and
a B.A. in Business from the New York Institute of Technology.

Dany
Pizen has served as our vice president - East European
and CIS marketing since 1995. Before joining us, Mr. Pizen served as vice
president of business development of Eldor Electronics Ltd., before which he
served for 20 years in the IDF and retired as a Lieutenant Colonel. Mr. Pizen
holds a B.A. in Social Science from Bar Ilan University.

Rafi
Nezer has served as our vice president - Africa and
Latin America marketing since 2004. Before joining us and since 1999, Mr. Nezer
acted as director of marketing for Rada Electronic Industries Ltd. Mr. Nezer
holds an M.B.A. in Business Administration from INSEAD and an L.L.B. from the
Tel Aviv University.

Yehonatan
Ben- Hamozeghas served as our vice president 
Integrated Systems Development since 2002. Before joining us, Mr. Ben
Hamozeg served in the IDF for 24 years and retired as a Colonel. Mr. Ben
Hamozeg holds an M.B.A. in Business Management and a B.A. in Economics and
Statistics from Haifa University.

Jacob
Even-Ezra has served as a director since 1984. From
1984 until December 2007, Mr. Even-Ezra served as the chairman of our board.
From 1984 until 2006, he also served as our chief executive officer, and from
1987 until 1990 he served as our president as well. He is currently a member of
the Executive Council and the Management Committee of Tel-Aviv University. From
1985 to 1988, Mr. Even-Ezra was also chairman of the Israel Export
Institute. Mr. Even-Ezra holds a B.Sc. in Electrical Engineering from the
Technion.

Nathan
Kirsh has served as a director since 1984.
Mr. Kirsh is an independent investor. Mr. Kirsh serves as one of the
trustees of the Eurona Foundation, the beneficial owner of 100% of the ordinary
shares of our company that are held by Mira Mag Inc. Mr. Kirsh holds a B.S. in
Commerce from the University of Witwatersrand, Johannesburg.

42

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Zeev
Livne has
served as a director since July 2004. Mr. Livne has served as the chairman of Livne Strategic
Consultants LTD.since 2001.Mr. Livne served 39 years with the
IDF until 2001. During his long military career with the IDF, Mr. Livne served
as the Defense Attaché to the U.S. and
Canada from 1997 to 2001, Military Secretary to the Prime Minister of
Israel from 1996 to 1997 and Ground Force Commander from 1994 to 1996. From
1992 to 1994 Mr. Livne established the IDF Home Front Command and served as its
first Commander. Mr. Livne serves on the board of directors of PAZKAR, a
private Israeli company. Mr. Livne holds a B.A. in History from the Tel Aviv
University, and an M.A. in Geography from the University of Haifa.

Jacob
Nuss has served as a director since 1993.
Mr. Nuss currently serves as the vice president - internal auditing of
IAI, and served as IAIs deputy vice president - internal auditing from 1999 to
2003. From 1993 to 1999, Mr. Nuss served as the director of finance of
IAIs electronics group. From 1991 to 1993, Mr. Nuss served as assistant
to the chairman of the board of IAI. Mr. Nuss has served in various
financial management capacities at IAI since 1975. Mr. Nuss holds an M.B.A. in
Business from the Tel Aviv University and a B.A. in Economics and Business
Management from Bar Ilan University. Mr. Nuss holds a certificate in internal
auditing.

Shaul
Kobrinsky has served as an outside director
since July 2004. Mr. Kobrinsky has served as the President and Chief Executive Officer of Urdan
Industries Ltd., an investment and holding company since 1997. Since 2003, Mr.
Kobrinsky has served as senior managing director of Alagem Capital Group a
Beverly Hills based investment group. From 1989 to 1997, Mr. Kobrinsky served
as chief executive officer of
Cargal Ltd., an Israeli company that manufactures corrugates. Previously, and
since 1984, Mr. Kobrinsky served as deputy managing director of Clal Industries
Ltd., a holding and investment company. Mr. Kobrinsky serves as an outside
director and a member of the audit committee of Scope Metal Trading Ltd. Mr.Kobrinsky holds a B.A. in Economics from
Tel Aviv University. Mr. Kobrinsky is a member of the anti-trust court of the
State of Israel.

Anat
Winner has
served as an outside director since July 2004. Mrs. Winner has been a
business advisor since 2003. Mrs. Winner served
from October 2001 to May 2003 as Chief Executive Officer and Chief
Financial Officer of Israel News Ltd. From
1999 to October 2001, Mrs. Winner served as Chief Financial Officer of DBS
Satellite Services (1998) Ltd. (YES), an Israeli company that is engaged in
setting up and operating DBS television systems. From 1998 to 2000 Mrs. Winner
served as an outside Director and chairman of the audit committee of Memsar
Ltd. Previously, from 1995 to 1998, Mrs. Winner served as chief financial
officer of Eurocom Cellular Communications Ltd., an Israeli company that is
engaged in importing and marketing cellular phones. From 1989 to 1995, Mrs.
Winner served in various finance positions, including Chief Financial Officer
of the Seed company (1939) Ltd. From 1984 to 1989 Mrs. Winner served as a
senior audit manager with Ronel Stetner & Co., Certified Public Accountants
in Israel. Mrs. Winner also serves as a director of Internet Gold-Golden Lines
Ltd and 012 Smile.Communications Ltd. Mrs. Winner holds a B.A. degree in
Accounting and Economics from Haifa University and has been a Certified Public
Accountant (Israel) since 1987.

Ofer
Katz, our vice president - aviation security, retired in April 2008.

|   |              
|-- | -------------
|B. | Compensation.

During
the fiscal year ended December 31, 2007, we paid aggregate compensation to
all of our executive officers and directors as a group (consisting then of 16
persons) of approximately $1.8 million. In addition, we have provided
automobiles to our executive officers at our expense. We have two key-man life
insurance policies for Izhar Dekel and are the beneficiary of one of these
policies and certain of Mr. Dekels family members are the beneficiaries
of the other policy. We bear the cost of both of these insurance policies.

43

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During
the year ended December 31, 2007 and until March 6, 2008, our outside directors
and our independent directors (directors who are not employees of our company
or officers or employees of any entity that beneficially owns 5% or more of our
ordinary shares), received an annual fee of $5,600 and an additional fee of
$300 for each board or committee meeting that they attend. Effective as of
March 6, 2008 our audit committee and board of directors approved an increase
of the annual fees payable to our outside and independent directors, to NIS
59,100 (approximately $17,382) and an additional fee of NIS 2,000
(approximately $588) for each board or committee meeting that they attend. The
outside directors compensation was approved without shareholder approval in
accordance with the Companies Regulations (Rules for Compensation and Expenses
of Outside Director) 5760-2000, promulgated under the Israeli Companies Law.
The independent directors compensation was approved without shareholder
approval in accordance with the Companies Regulations (Relief from Related
Party Transactions) 5760-2000, promulgated under the Israeli Companies Law. In
the event that within 14 days from the date of the disclosure of the resolution
of the audit committee and the board of directors to increase the independent
directors compensation, shareholders holding at least 1% of our voting rights
will so request, this resolution will be subject to the approval of the general
meeting of the shareholders of our company.

We
follow Israeli law and practice, instead of the NASDAQ Marketplace
requirements, regarding the compensation of our chief executive office and
other executive officers. Under the Israeli Companies Law, arrangements as to
compensation of office holders who are not directors require approval by the
board of directors, provided that they are not deemed extraordinary
transactions. Any compensation arrangement with an office holder who is not a
director that is deemed an extraordinary transaction, the exemption of such
office holder from liability, the insurance of such office holder and the
indemnification of such office holder, or an undertaking to indemnify such
office holder, require both board of directors and audit committee approval.
The compensation, exemption, indemnification and insurance of office holders
who are directors must be approved by our audit committee, board of directors
and shareholders, unless an exemption applies. If the office holder is a
controlling shareholder or a relative of a controlling shareholder, any
extraordinary transaction, compensation, exemption, indemnification and
insurance of the office holder must be approved by our audit committee, board
of directors and shareholders, supported by the vote of at least one-third of
the shares of the non-controlling shareholders voting on the matter, or
provided that the total number of shares held by non-controlling shareholders
that voted against the proposal did not exceed one percent of all of the voting
rights in the company. See below in this Item 6.C. Directors, Senior
Management and Employees - Board Practices - NASDAQ Exemptions for Foreign
Private Issuers.

As
of December 31, 2007, our directors and executive officers as a group,
consisting of 16 persons, held options to purchase an aggregate of 256,800
ordinary shares, having exercise prices ranging from $7.66 to $13.00.
Generally, the options vest over a two years period. The options will expire
between 2009 to 2012 or earlier upon termination of
employment as an executive officer or service as a director of our company. All
of such options were granted under our 2003 Stock Option Plan. See this Item
6E. Directors, Senior Management and Employees - Share Ownership - Stock
Option Plans.

We
entered into a retirement agreement with Mr. Jacob Even-Ezra who retired from
his position as the chairman of our Board of Directors as of on January 1,
2008, based on the terms that were approved by our shareholders in August 2007.
Pursuant to the retirement agreement, Mr. Even- Ezra has undertaken not to
compete with our company for a period of three years following his retirement.
In consideration we agreed to pay Mr. Even-Ezra $360,000. In addition, and as
gratitude for his long and outstanding efforts in furthering our business and
interests, we agreed to provide him with certain benefits and services, the
value thereof are presently estimated to be $50,000 per year, for the rest of
his life. As of December 31, 2007, the actuarial value of these perquisites is
estimated by approximately $544,000.

We
entered into an employment agreement with Izhar Dekel, effective
January 1993. This agreement contain certain non-competition and
confidentiality provisions. In addition, this agreement establishes a base
salary and a package of benefits with an aggregate value of approximately 20%
of the base salary, as well as a car and a possible bonus. In
December 2000, our board of directors extended the term of Mr. Dekels
employment until such time as it is terminated by us or by Mr. Dekel
pursuant to the terms of the agreement. Under the Israeli Companies Law, the
terms of employment of Mr. Dekel, who is also a member of our board of
directors requires shareholders approval. Our shareholders approved Mr.
Dekels terms in July 2004 and August 2007.

44

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Mr.
Jacob Perry served as deputy chairman of our board of directors since September
6, 2006. Our audit committee, board of directors and shareholders approved the
payment to Mr. Perry, in addition to the directors fees, of an additional
compensation for his services as deputy chairman, in the amount of NIS 25,000
per month (approximately $7,500), payable as of the date of his appointment as
deputy chairman. Since January 1, 2008, Mr. Perry has served as the chairman of
our board of directors. Our audit committee and board of directors approved,
subject to our shareholder approval, to enter into an agreement with Mr. Perry
pursuant to which Mr. Perry will be entitled to receive a monthly payment of
NIS 50,000, (approximately $15,000), customary social benefits and an annual
bonus based on our performance. In addition Mr. Perry will be entitled to
receive, subject to our shareholders approval, options to purchase 300,000
ordinary shares of our company. Such options will vest over four year period.

|   |                
|-- | ---------------
|C. | Board Practices

Introduction

According
to the Israeli Companies Law and our Articles of Association, the management of
our business is vested in our board of directors. The board of directors may
exercise all powers and may take all actions that are not specifically granted
to our shareholders. Our executive officers are responsible for our day-to-day
management. The executive officers have individual responsibilities established
by our chief executive officer and board of directors. Executive officers are
appointed by and serve at the discretion of the board of directors, subject to
any applicable agreements.

Election of Directors

Our
articles of association provide for a board of directors of not less than three
and not more than eleven members as may be determined from time to time at our
annual general meeting. Our board of directors is currently composed of eight
directors.

Our
directors (except the outside directors as detailed below), are elected by our
shareholders at our annual general meeting and hold office until the next
annual general meeting. All the members of our board of directors (except the
outside directors as detailed below), may be reelected upon completion of their
term of office. Our annual general meetings are held at least once every
calendar year, but not more than fifteen months after the last preceding annual
general meeting. In the intervals between our annual general meetings, the
board of directors may appoint new directors to fill vacancies. All of our
current directors, including the outside directors, were elected by our
shareholders at our annual general meeting of shareholders of August 2007. Our
outside directors will hold office until our 2010 annual general meeting of
shareholders.

Under
the Israeli Companies Law, our board of directors is required to determine the
minimum number of directors who must have accounting and financial expertise,
as such term is defined in regulations promulgated under the Israeli Companies
Law. Our board of directors has determined that our board of directors will
include at least one director who has accounting and financial expertise,
within the meaning of the regulations promulgated under the Israeli Companies
Law. Our board of directors has further determined that Ms. Anat Winner has the
requisite accounting and financial expertise.

We
do not follow the requirements of the NASDAQ Marketplace Rules with regard to
the nomination process of directors, and instead, we follow Israeli law and
practice, in accordance with which our directors are recommended by our board
of directors for election by our shareholders. See below in this Item 6.C. Directors,
Senior Management and Employees - Board Practices - NASDAQ Exemptions for
Foreign Private Issuers.

Outside and Independent Directors

Outside
Directors. The Israeli Companies Law requires Israeli
companies with shares that have been offered to the public in or outside of
Israel to appoint at least two outside directors. Outside directors must be
Israeli residents who are qualified to be appointed as directors, unless the
companys shares have been offered to the public outside of Israel or have been
listed on a stock exchange outside of Israel. The Israeli Companies Law
provides that a person may not be appointed as an outside director if the
person, or the persons relative, partner, employer or an entity under that
persons control, has or had during the two years preceding the date of
appointment any affiliation with the company, or any entity controlling,
controlled by or under common control with the company. The term relative
means a spouse, sibling, parent, grandparent, child or child of spouse or
spouse of any of the above. The term affiliation includes an employment
relationship, a business or professional relationship maintained on a regular
basis, control and service as an office holder, excluding service as an outside
director of a company that is offering its shares to the public for the first
time.

45

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In
addition, no person may serve as an outside director if the persons position
or other activities create, or may create, a conflict of interest with the
persons responsibilities as director or may otherwise interfere with the
persons ability to serve as director. If, at the time an outside director is
appointed, all current members of the board of directors are of the same
gender, then that outside director must be of the other gender. A director of
one company may not be appointed as an outside director of another company if a
director of the other company is acting as an outside director of the first
company at such time.

At
least one of the elected outside directors must have accounting and financial
expertise and any other outside director must have accounting and financial
expertise or professional qualification, as such terms are defined by
regulations promulgated under the Israeli Companies Law. However, Israeli
companies listed on certain stock exchanges outside Israel, including The
NASDAQ Global Market, are not required to appoint an outside director with
accounting and financial expertise if a director with accounting and
financial expertise who qualifies as an independent director for purposes of
audit committee membership under the laws of the foreign country in which the
stock exchange is located serves on its board of directors. All of the outside
directors of such a company must have professional qualification.

The
outside directors are elected by shareholders at a general meeting. The
shareholders voting in favor of their election must include at least one-third
of the shares of the non-controlling shareholders of the company who voted on
the matter. This minority approval requirement need not be met if the total
shareholdings of those non-controlling shareholders who vote against their
election represent 1% or less of all of the voting rights in the company.

In
general, outside directors serve for a three-year term and may be reelected to
one additional three-year term. However, Israeli companies listed on certain
stock exchanges outside Israel, including The NASDAQ Global Market, may appoint
an outside director for additional terms of not more than three years subject
to certain conditions. Such conditions include the determination by the audit
committee and board of directors, that in view of the directors professional
expertise and special contribution to the companys board of directors and its
committees, the appointment of the outside director for an additional term is
in the best interest of the company. Outside directors can be removed from
office only by the same special percentage of shareholders that can elect them,
or by a court, and then only if the outside directors cease to meet the
statutory qualifications with respect to their appointment or if they violate
their duty of loyalty to the company.

Any
committee of the board of directors that is authorized to exercise powers
vested in the board of directors must include at least one outside director and
the audit committee must include all the outside directors. All outside
directors are members of the audit committee of our company. An outside
director is entitled to compensation as provided in regulations adopted under
the Israeli Companies Law and is otherwise prohibited from receiving any other
compensation, directly or indirectly, in connection with such service.

Independent
Directors. In general, NASDAQ Marketplace Rules
require that the board of directors of a NASDAQ-listed company have a majority
of independent directors and its audit committee must have at least three
members and be comprised only of independent directors, each of whom satisfies
the respective independence requirements of NASDAQ and the Securities and
Exchange Commission. However, foreign private issuers, such as our company, may
follow certain home country corporate governance practices instead of certain requirements
of the NASDAQ Marketplace Rules. On June 27, 2006, we provided NASDAQ with a
notice of non-compliance with respect to the requirement to maintain a majority
of independent directors, as defined under NASDAQ Marketplace Rules. Instead,
we follow Israeli law and practice which requires that we appoint at least two
outside directors, within the meaning of the Israeli Companies Law, to our
board of directors. (See below in this Item 6C. Directors, Senior Management
and Employees - Board Practices - NASDAQ Marketplace Rules and Home Country
Practices.) In addition, in accordance with the rules of the Securities and
Exchange Commission and NASDAQ, we have the mandated three independent
directors, as defined by the rules of the Securities and Exchange Commission
and NASDAQ, on our audit committee.

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Our
board of directors has determined that Ms. Winner and Mr. Kobrinsky qualify
both as independent directors under the requirements of the Securities and
Exchange Commission and NASDAQ and as outside directors under the requirements
of the Israeli Companies Law. Our board of directors has further determined
that Messrs. Nuss and Livne qualify as independent directors under the
requirements of the Securities and Exchange Commission and NASDAQ.

Audit Committee

Our
audit committee, which was established in accordance with Section 114 of the
Israeli Companies Law and Section 3(a)(58)(A) of the Securities Exchange Act of
1934, assists our board of directors in overseeing the accounting and financial
reporting processes of our company and audits of our financial statements,
including the integrity of our financial statements, compliance with legal and
regulatory requirements, our independent public accountants qualifications and
independence, the performance of our internal audit function and independent
public accountants, finding any defects in the business management of our
company for which purpose the audit committee may consult with our independent
auditors and internal auditor, proposing to the board of directors ways to
correct such defects, and such other duties as may be directed by our board of
directors.

The
responsibilities of the audit committee also include approving related-party
transactions as required by law. Under Israeli law an audit committee may not
approve an action or a transaction with a controlling shareholder, or with an
office holder, unless at the time of approval two outside directors are serving
as members of the audit committee and at least one of the outside directors was
present at the meeting in which an approval was granted.

Our
audit committee consists of three board members who satisfy the respective
independence requirements of the Securities and Exchange Commission, NASDAQ
and Israeli Law for audit committee members. Our audit committee is currently
composed of Ms. Anat Winner and Messrs. Shaul Kobrinsky and Jacob Nuss. Our
board of directors has determined that Ms.
Winner has financial expertise within the meaning of the Israeli Companies
Law. The audit committee meets at least once each quarter. Our audit committee
charter is available on our website at www.magal-ssl.com.

Our
Board has appointed an investment committee composed of Mr. Jacob Even-Ezra,
Mr. Kobrinsky, and Ms. Winner, and authorized it to receive resolutions in
connection with the investment of our cash, including hedging transactions.

Internal Auditor

Under
the Israeli Companies Law, the board of directors of a public company must
appoint an internal auditor nominated by the audit committee. The role of the
internal auditor is to examine whether the companys actions comply with the
law, integrity and orderly business procedure. Under the Israeli Companies Law,
the internal auditor may not be an interested party, an office holder, or an
affiliate, or a relative of an interested party, office holder or affiliate,
nor may the internal auditor be the companys independent accountant or its
representative. Mr. Daniel Spira, CPA (Isr.) is our internal auditor.

Directors Service Contracts

We
have entered into employment agreements with Mr. Izhar Dekel, our president and
chief executive officer and Mr. Jacob Perry, the chairman of our board of
directors. In addition we have entered into a retirement agreement with Mr.
Jacob Even- Ezra regarding his retirement from his position of the chairman of
our board of directors. See Item 6B. Directors, Senior Management and
Employees - Compensation.

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Other than
as described in Item 6B, there are no arrangements or understandings between us
and any of our subsidiaries, on the one hand, and any of our directors, on the
other hand, providing for benefits upon termination of their employment or
service as directors of our company or any of our subsidiaries.

Approval of Related Party Transactions Under Israeli Law

The
Israeli Companies Law regulates the approval procedures for transactions of a
company with its controlling shareholders or transactions in which an office
holders or the controlling shareholders or their relative have personal
interest. For this purpose, a controlling shareholder is defined as a
shareholder that holds either solely or with others at least 25% of the issued
share capital of the company unless another shareholder holds more than 50% of
the issued share capital. The holdings of two or more shareholders, each having
personal interest in the approval of the same transaction will be aggregated
for this purpose.

Fiduciary Duties of Office Holders

The
Israeli Companies Law codifies the fiduciary duties that office holders,
including directors and executive officers, owe to a company. An office
holder is defined in the Israeli Companies Law as a director, general manager,
chief business manager, deputy general manager, vice general manager, other
manager directly subordinate to the general manager or any other person
assuming the responsibilities of any of the foregoing positions without regard
to such persons title. An office holders fiduciary duties consist of a duty
of care and a duty of loyalty. The duty of care requires an office holder to
act at a level of care that a reasonable office holder in the same position
would employ under the same circumstances. This includes the duty to utilize reasonable
means to obtain (i) information regarding the appropriateness of a given action
brought for his approval or performed by him by virtue of his position and (ii)
all other information of importance pertaining to the foregoing actions. The
duty of loyalty includes (i) avoiding any conflict of interest between the
office holders position in the company and any other position he holds or his
personal affairs, (ii) avoiding any competition with the companys business,
(iii) avoiding exploiting any business opportunity of the company in order to
receive personal gain for the office holder or others, and (iv) disclosing to
the company any information or documents relating to the companys affairs that
the office holder has received due to his position as an office holder.

Disclosure of Personal Interests of an Office
Holder

The
Israeli Companies Law requires that an office holder promptly, and no later
than the first board meeting at which such transaction is considered, disclose
any personal interest that he or she may have and all related material
information known to him or her and any documents in their position, in
connection with any existing or proposed transaction by us. In addition, if the
transaction is an extraordinary transaction, that is, a transaction other than
in the ordinary course of business, other than on market terms, or likely to
have a material impact on the companys profitability, assets or liabilities,
the office holder must also disclose any personal interest held by the office
holders spouse, siblings, parents, grandparents, descendants, spouses
descendants and the spouses of any of the foregoing, or by any corporation in
which the office holder or a relative is a 5% or greater shareholder, director
or general manager or in which he or she has the right to appoint at least one
director or the general manager.

Approval of Transactions with Office Holders

Under
the Israeli Companies Law, all arrangements as to compensation of office
holders who are not directors require approval by the board of directors, and
exculpation, insurance and indemnification of, or an undertaking to, indemnify
an office holder who is not a director requires both board of directors and
audit committee approval. The compensation of office holders who are directors
must be approved by our audit committee, board of directors and shareholders.

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Some
transactions, actions and arrangements involving an office holder (or a third
party in which an office holder has an interest) must be approved by the board
of directors or as otherwise provided for in a companys articles of
association, however, a transaction that is adverse to the companys interest
may not be approved. In some cases, such a transaction must be approved by the
audit committee and by the board of directors itself, and under certain
circumstances shareholder approval may be required. A director who has a
personal interest in a transaction that is considered at a meeting of the board
of directors or the audit committee may not be present during the board of
directors or audit committee discussions and may not vote on the transaction,
unless the transaction is not an extraordinary transaction or the majority of
the members of the board or the audit committee have a personal interest, as
the case may be. In the event the majority of the members of the board of
directors or the audit committee have a personal interest, then the approval of
the general meeting of shareholders is also required.

Disclosure of Personal Interests of a
Controlling Shareholder; Approval of Transactions with Controlling Shareholders

The
disclosure requirements which apply to an office holder also apply to a
controlling shareholder with respect to his or her personal interest in any
existing or proposed transaction by us. The Israeli Companies Law provides that
an extraordinary transaction with a controlling shareholder or an extraordinary
transaction with another person in whom the controlling shareholder has a
personal interest or a transaction with a controlling shareholder or his
relative regarding terms of service and employment, must be approved by the
audit committee, the board of directors and shareholders. The shareholder
approval for such a transaction must include at least one-third of the
shareholders who have no personal interest in the transaction who voted on the
matter (not including abstentions). The transaction can be approved by
shareholders without this one-third approval if the total shareholdings of
those shareholders who have no personal interest and voted against the
transaction do not represent more than one percent of the voting rights in the
company.

Under
the Companies Regulations (Relief from Related Party Transactions), 5760-2000,
promulgated under the Israeli Companies Law, as amended, certain extraordinary
transactions between a public company and its controlling shareholder(s) do not
require shareholder approval. In addition, under such regulations, directors
compensation and employment arrangements in a public company do not require the
approval of the shareholders if both the audit committee and the board of
directors agree that such arrangements are solely for the benefit of the
company. Also, employment and compensation arrangements for an office holder
that is a controlling shareholder of a public company do not require
shareholder approval if certain criteria are met. The foregoing exemptions from
shareholder approval will not apply if one or more shareholders holding at
least 1% of the issued and outstanding share capital of the company or of the
companys voting rights, objects to the use of these exemptions provided that
such objection is submitted to the company in writing not later than fourteen
days from the date of the filing of a report regarding the adoption of such
resolution by the company pursuant to the requirements of the Israeli
Securities Law, 5328-1968. If such objection is duly and timely submitted, then
the transaction or compensation arrangement of the directors will require shareholders
approval as detailed above.

In addition, a private placement of securities that will (i) cause a person to
become a controlling shareholder, as defined above, or (ii) increase the
relative holdings of a shareholder that holds 5% or more of the companys
outstanding share capital, or (iii) will cause any person to become, as a
result of the issuance, a holder of more than 5% of the companys outstanding
share capital in a private placement in which 20% or more of the companys
outstanding share capital prior to the placement are offered, the payment for
which (in whole or in part) is not in cash or not under market terms, requires
approval by the board of directors and the shareholders of the company.

The
Israeli Companies Law provides that an acquisition of shares in a public
company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% or greater shareholder of the
company. This rule does not apply if there is already another 25% or greater
shareholder of the company. Similarly, the Israeli Companies Law provides that
an acquisition of shares in a public company must be made by means of a tender
offer if as a result of the acquisition the purchaser would hold greater than a
45% interest in the company, unless there is another shareholder holding more
than a 45% interest in the company. These requirements do not apply if, in
general, (i) the acquisition was made in a private placement that received
shareholder approval, (ii) was from a 25% or greater shareholder of the company
which resulted in the acquirer becoming a 25% or greater shareholder of the
company, if there is not already a 25% or greater shareholder of the company,
or (iii) was from a shareholder holding a 45% interest in the company which
resulted in the acquirer becoming a holder of a 45% interest in the company if
there is not already a 45% or greater shareholder of the company.

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If,
as a result of an acquisition of shares, the acquirer will hold more than 90%
of a public companys outstanding shares or a class of shares, the acquisition
must be made by means of a tender offer for all of the outstanding shares or a
class of shares. If less than 5% of the outstanding shares are not tendered in
the tender offer, all the shares that the acquirer offered to purchase will be
transferred to the acquirer. The Israeli Companies Law provides for appraisal
rights if any shareholder files a request in court within three months
following the consummation of a full tender offer. If more than 5% of the
outstanding shares are not tendered in the tender offer, then the acquirer may
not acquire shares in the tender offer that will cause his shareholding to
exceed 90% of the outstanding shares.

Indemnification of Directors and Officers and
Limitations of Liability

Exculpation
of Office Holders. The Israeli Companies Law provides
that an Israeli company cannot exculpate an office holder from liability with
respect to a breach of his or her duty of loyalty. If permitted by its articles
of association, a company may exculpate in advance an office holder from his or
her liability to the company, in whole or in part, with respect to a breach of
his or her duty of care. However, a company may not exculpate in advance a
director from his or her liability to the company with respect to a breach of
his duty of care in the event of distributions.

Office
Holders Insurance. Israeli law provides that a
company may, if permitted by its articles of association, enter into a contract
to insure its office holders for liabilities incurred by the office holder with
a respect to an act performed in his or her capacity as an office holder, as a
result of: (i) a breach of the office holders duty of care to the company or another
person; (ii) a breach of the office holders duty of loyalty to the company,
provided that the office holder acted in good faith and had reasonable cause to
assume that the act would not prejudice the companys interests; and (iii) a
financial liability imposed upon the office holder in favor of another person.

Indemnification
of Office Holders. Under Israeli law a company may, if
permitted by its articles of association, indemnify an office holder for acts
performed by the office holder in such capacity for (a) monetary liability
imposed upon the office holder in favor of another person by any court
judgment, including a settlement or an arbitration award approved by a court;
(b) reasonable litigation expenses, including attorneys fees, actually
incurred by the office holder as a result of an investigation or proceeding
instituted against him by a competent authority, provided that such
investigation or proceeding concluded without the filing of an indictment
against the office holder or the imposition of any monetary liability in lieu
of criminal proceedings, or concluded without the filing of an indictment
against the office holder and a monetary liability was imposed on him or her in
lieu of criminal proceedings with respect to a criminal offense that does not
require proof of criminal intent; and (c) reasonable litigation expenses,
including attorneys fees, actually incurred by the office holder or imposed
upon the office holder by a court: (i) in an action, suit or proceeding brought
against the office holder by or on behalf of the company or another person,
(ii) in connection with a criminal action in which the office holder was
acquitted, or (iii) in connection with a criminal action in which the office
holder was convicted of a criminal offence that does not require proof of
criminal intent.

Israeli
law provides that a companys articles of association may permit the company to
(a) indemnify an office holder retroactively, following a determination to this
effect made by the company after the occurrence of the event in respect of
which the office holder will be indemnified; and (b) undertake in advance to
indemnify an office holder, except that with respect to a monetary liability
imposed on the office holder by any judgment, settlement or court-approved
arbitration award, the undertaking must be limited to types of occurrences,
which, in the opinion of the companys board of directors, are, at the time of
the undertaking, foreseeable due to the companys activities and to an amount
or standard that the board of directors has determined is reasonable under the
circumstances.

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Limitations
on Exculpation, Insurance and Indemnification. These
provisions are specifically limited in their scope by Israeli law, which provides
that neither a provision of the articles of association permitting the company
to enter into a contract to insure the liability of an office holder, nor a
provision in the articles of association or a resolution of the board of
directors permitting the indemnification of an office holder, nor a provision
in the articles of association exculpating an office holder from duty to the
company shall be valid, where such insurance, indemnification or exculpation
relates to any of the following: (1) a breach by the office holder of his duty
of loyalty unless, with respect to insurance coverage or indemnification, the
office holder acted in good faith and had a reasonable basis to believe that
the act would not prejudice the company; (2) a breach by the office holder of
his duty of care if such breach was committed intentionally or recklessly,
unless the breach was committed only negligently; (3) any act or omission done
with the intent to unlawfully yield a personal benefit; or (4) any fine or
forfeiture imposed on the office holder. Pursuant to the Israeli Companies Law,
exculpation of, procurement of insurance coverage for, and an undertaking to
indemnify or indemnification of, our office holders must be approved by our
audit committee and our board of directors and, if the office holder is a
director, also by our shareholders.

Our
Articles of Association allow us to insure, indemnify and exempt our office
holders, subject to the provisions of the Israeli Companies Law. We maintain a
directors and officers liability insurance policy with a per claim and
aggregate coverage limit of $5 million, including legal costs incurred in
Israel. In addition, our audit committee, board of directors and shareholders
resolved to indemnify our office holders, pursuant to a standard
indemnification agreement that provides for indemnification of an office holder
in an amount up to $5 million. We have not to date provided letters of
indemnification to our officers or directors.

NASDAQ Exemptions and Home Country Practices

Under
NASDAQ Marketplace Rule 4350, or Rule 4350, foreign private issuers, such as
our company, are permitted to follow certain home country corporate governance
practices instead of certain provisions of Rule 4350. A foreign private issuer
that elects to follow a home country practice instead of any of such provisions
of Rule 4350, must submit to NASDAQ, in advance, a written statement from an
independent counsel in such issuers home country certifying that the issuers
practices are not prohibited by the home countrys laws.

On
July 7, 2005 and June 26, 2006, we provided NASDAQ with notices of
non-compliance with Rule 4350. We informed NASDAQ that we do not comply with
the following requirements of Rule 4350, and instead follow Israeli law and
practice in respect of such requirements:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | the
  requirement regarding the process of nominating directors. Instead, we follow
  Israeli law and practice in accordance with which our directors are
  recommended by our board of directors for election by our shareholders. See
  above in this Item 6.C. Directors, Senior Management and Employees - Board
  Practices - Election of Directors.                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | the
  requirement regarding the compensation of our chief executive officer and all
  other executive officers. Instead, we follow Israeli law and practice in
  accordance with which our board of directors must approve all compensation
  arrangements for our chief executive officer and all compensation
  arrangements for officers are subject to the chief executive officers
  approval. See above in this Item 6.C. Directors, Senior Management and
  Employees - Compensation.                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | the
  requirement that our independent directors have regularly scheduled meetings
  at which only independent directors are present. Under Israeli law
  independent directors are not required to hold executive sessions.                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | the
  requirement that we distribute to shareholders, and file with NASDAQ, copies
  of an annual report containing audited financial statements of our company
  and its subsidiaries within a reasonable period of time prior to our annual
  meeting of shareholders. Under Israeli law, as a company that is publicly
  traded both in Israel and outside of Israel, we are not required to
  distribute such annual reports to our shareholders. Our annual report on Form
  20-F and audited financial statements are available on our website (www.magal-ssl.com),
  and we will send it to shareholders upon written request.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | the
  requirement to maintain a majority of independent directors, as defined under
  the NASDAQ Marketplace Rules. Instead, we follow Israeli law and practice
  which requires that we appoint at least two outside directors, within the
  meaning of the Israeli Companies Law, to our Board of Directors. In addition,
  we have the mandated three independent directors that meet the independent
  standards contained in the rules of the Securities and Exchange Commission
  and NASDAQ on our audit committee. See above in this Item 6C. Directors,
  Senior Management and Employees - Board Practices - Independent and Outside
  Directors.

|   |          
|-- | ---------
|D. | Employees

As
of December 31, 2007, we employed 303 full-time employees, of whom 38 were
employed in general management and administration, 42 in marketing, 22 in
production management, 149 in production, installation and maintenance, and 52
in engineering and research and development. Of our 303 full-time employees,
143 were employed in Israel, 34 were employed in the U.S., 81 were employed in
Canada and 45 were employed in various other countries.

As
of December 31, 2006, we employed 294 full time employees, of whom 34 were
employed in general management and administration, 43in marketing, 23 in
production management, 143 in production, installation and maintenance, and 51
in engineering and research and development. Of our 294 full time employees,
135 were employed in Israel, 49 were employed in the U.S., 78 were employed in
Canada and 32 were employed in various other countries.

As
of December 31, 2005, we employed 309 full time employees, of whom 34 were
employed in general management and administration, 47 in marketing, 20 in
production management, 155 in production, installation and maintenance, and 53
in engineering and research and development. Of our 309 full time employees, 129
were employed in Israel, 56 were employed in the U.S., 89 were employed in
Canada and 35 were employed in various other countries.

We
are subject to various Israeli labor laws, collective bargaining agreements
entered into from time to time between the Manufacturers Association and the
Histadrut, as well as collective bargaining arrangements. These laws,
agreements and arrangements cover a wide range of areas, including minimum
employment standards, such as working hours, minimum wages, vacation, severance
pay and pension plans, and special issues, such as equal pay for equal work,
equal opportunity in employment and employment of youth and army veterans.
Certain of our employees are parties to individual employment agreements. We
generally provide our employees with benefits and working conditions beyond the
required minimums. Each of our subsidiaries provides a benefits package and
working conditions which are competitive with other firms in their area of
operations.

Israeli
law generally requires severance pay upon the retirement or death of an
employee or termination of employment without due cause. Furthermore, Israeli
employees and employers are required to pay predetermined sums to the National
Insurance Institute, which is similar to the U.S. Social Security
Administration, which amounts also include payments for national health
insurance.

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|   |                 
|-- | ----------------
|E. | Share Ownership.

The
following table sets forth certain information regarding the ownership of our
ordinary shares by our directors and executive officers as of June 23, 2008.

|                                                               |  |                                    |           |                                                |  |  |       |   | 
|-------------------------------------------------------------- |  | ---------------------------------- | --------- | ---------------------------------------------- |  |  | ----- | - | 
|Name                                                           |  | Number of Ordinary Shares Owned(1) |           | Percentage of Outstanding Ordinary
  Shares(2) | 
|                                                               |  |                                    |           |                                                | 
|                                                               |  |                                    |           |                                                |  |  |       |   | 
|Jacob Perry                                                    |  |                                    |          |                                                |  |  |      |   | 
|Izhar Dekel
  (3)(4)                                           |  |                                    | 154,427   |                                                |  |  | 1.47  | % | 
|Lian Goldstein                                                 |  |                                    |          |                                                |  |  |      |   | 
|Yehezkel
  Farber                                              |  |                                    | *         |                                                |  |  | *     |   | 
|Zvi Dank                                                       |  |                                    | *         |                                                |  |  | *     |   | 
|Asaf
  Even-Ezra (5)(6)                                        |  |                                    | 124,926   |                                                |  |  | 1.19  | % | 
|Dany Pizen                                                     |  |                                    | *         |                                                |  |  | *     |   | 
|Raffi Netzer                                                   |  |                                    | *         |                                                |  |  | *     |   | 
|Yehonatan
  Ben- Hamozeg                                       |  |                                    | *         |                                                |  |  | *     |   | 
|Nathan Kirsh
  (7)                                             |  |                                    | 2,277,728 |                                                |  |  | 21.91 | % | 
|Jacob
  Even-Ezra (4)(5)(8)                                    |  |                                    | 432,242   |                                                |  |  | 4.03  | % | 
|Jacob Nuss                                                     |  |                                    |          |                                                |  |  |      |   | 
|Zeev Livne                                                     |  |                                    |          |                                                |  |  |      |   | 
|Shaul
  Kobrinsky                                              |  |                                    |          |                                                |  |  |      |   | 
|Anat Winner                                                    |  |                                    |          |                                                |  |  |      |   | 
|All
  directors and executive officers as a group (15 persons) |  |                                    | 3,135,912 |                                                |  |  | 29.74 | % | 

---

*Less than 1%


|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Beneficial
  ownership is determined in accordance with the rules of the Securities and
  Exchange Commission and generally includes voting or investment power with
  respect to securities. Ordinary shares relating to options or convertible
  debenture notes currently exercisable or exercisable within 60 days of the
  date of this table are deemed outstanding for computing the percentage of the
  person holding such securities but are not deemed outstanding for computing
  the percentage of any other person. Except as indicated by footnote, the
  persons named in the table above have sole voting and investment power with
  respect to all shares shown as beneficially owned by them.
|(2) | The
  percentages shown are based on 10,396,548 ordinary shares issued and
  outstanding as of June 23, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(3) | Includes (i)
  42,000 ordinary
  shares issuable upon the exercise of currently exercisable options, having an
  exercise price of $7.66 per share and which expire in January 2009; and
  (ii) 112,427 ordinary shares held by Mr. Dekels wife, Ornit Dekel.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(4) | Izhar Dekel
  is Jacob Even-Ezras son- in-law and Asaf Even-Ezras brother-in-law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(5) | Asaf
  Even-Ezra is Jacob Even-Ezras son and Izhar Dekels brother-in-law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(6) | Includes
  9,000 ordinary shares issuable upon the exercise of currently exercisable
  options, having an exercise price of $8.56 per share and expire in December
  2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(7) | Includes Mr.
  Kirshs beneficial ownership of 1,485,852 ordinary shares held by Mira Mag
  Inc. and 445,501 shares held by KI Corporation Limited. The Eurona Foundation
  holds 100% of Ki Corporation Limited. Ki Corporation Limited holds 100% of
  the shares of Mira Mag Inc. The Eurona Foundation is a Lichtenstein trust
  controlled by Nathan Kirsh, who is also the trustee of such entity.                                                                                                                                                                                                                                                                                                         
|(8) | Includes (i)
  76,915 ordinary shares held by a trustee; and (ii) 52,500 ordinary shares
  issuable upon the exercise of currently exercisable options, having an
  exercise price of $7.66 per share and expire in January 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

As
of June 23, 2008, the 15 directors
and executive officers listed above, as a group, held options to purchase
273,200 of our ordinary shares at a weighted average exercise price of $ 7.94
per share. Out of such options 94,500 options expire in January 2009, 48,700
options expire in December 2010, 100,000 optionsexpire in August 2012 and 30,000 options expire in January
2015.

53

---

---



Stock
Option Plan

On
October 27, 2003, our board of directors approved the 2003 Israeli Share Option
Plan (the 2003 Plan) which was approved by our shareholders in July 2004. The
Board has elected to allot the options under Israels capital gain tax
treatment.

Under
the 2003 Plan, stock options will be periodically granted to our employees,
directors, officers and consultants, in accordance with the decision of our
board of directors. Our board of directors has the authority to determine the
number of options, if any, which will be granted to each of the recipients, the
dates of the grant of such options, the date of their exercise as well as their
rate of conversion into shares in respect of each stock option, and the
purchase price thereof. Subject to shareholder approval, the 2003 Plan will be
effective for ten years and shall terminate in October 2013.

Under
the 2003 Plan, no option may be exercised before the second anniversary of the
date on which it was granted, and each option expires on or before the fifth
anniversary of the date on which it was granted. Pursuant to the plan, any
options that are cancelled or not exercised within the option period will
become available for future grants.

Pursuant
to the provisions of the 2003 Plan, if we issue a stock dividend, the number of
shares purchasable by any grantee upon the exercise of options that were granted
prior to the issuance of the stock dividend will be correspondingly increased.

As
of December 31, 2007, options to purchase 403,500
shares were outstanding and additional options to purchase 215,075 shares were available for grant.

In
May 2008, our board of directors approved, subject to shareholders approval, to
increase the number of options available for grant by 1 million, and to extend
the termination of the 2003 Plan to October 2018.

Grants
of stock options under the 2003 Plan are accounted for by us over the exercise
periods thereof as a compensation expense with a corresponding credit to our
contributed capital. Ordinary shares subject to options under the 2003 Plan are
to be valued for this purpose at their market value at the time the options are
granted.

|        |                                                  
|------- | -------------------------------------------------
|ITEM 7. | Major Shareholders and Related Party Transactions

|   |                   
|-- | ------------------
|A. | Major
Shareholders

The
following table sets forth certain information regarding the beneficial
ownership of our ordinary shares as of June
23, 2008, by each person or entity known to own beneficially more than 5% of
our outstanding ordinary shares based on the information provided to us by the
holders or disclosed in public filings with the Securities and Exchange
Commission. The voting rights of the shareholders listed below are not
different from the voting rights of our other shareholders.

|                                   |  |                                                     |           |                                                  |  |       |  
|---------------------------------- |  | --------------------------------------------------- | --------- | ------------------------------------------------ |  | ----- | -
|Name                               |  | Number of
  Ordinary Shares
  Beneficially Owned(1) |           | Percentage of
  Outstanding
  Ordinary Shares(2) | 
|                                   |  |                                                     |           |                                                  | 
|                                   |  |                                                     |           |                                                  |  |       |  
|Nathan Kirsh
  (3)                 |  |                                                     | 2,277,728 |                                                  |  | 21.91 | %
|Diker
  Management LLC (4)         |  |                                                     | 1,014,425 |                                                  |  | 9.76  | %
|Clough
  Capital Partners L.P. (5) |  |                                                     | 712,269   |                                                  |  | 6.85  | %
|Grace &
  White, Inc. (6).         |  |                                                     | 574,254   |                                                  |  | 5.52  | %
|Prescot
  Group (7)                |  |                                                     | 539,097   |                                                  |  | 5.19  | %

---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Beneficial
  ownership is determined in accordance with the rules of the Securities and
  Exchange Commission and generally includes voting or investment power with
  respect to securities. Ordinary shares relating to options or convertible
  debenture notes currently exercisable or exercisable within 60 days of the
  date of this table are deemed outstanding for computing the percentage of the
  person holding such securities but are not deemed outstanding for computing
  the percentage of any other person. Except as indicated by footnote, the
  persons named in the table above have sole voting and investment power with
  respect to all shares shown as beneficially owned by them.

54

---

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The
  percentages shown are based on 10,396,548 ordinary shares issued and
  outstanding as of June 23, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(3) | Includes Mr.
  Kirshs beneficial ownership of 1,485,852 ordinary shares held by Mira Mag
  Inc. and 445,501 shares held by KI Corporation Limited. The Eurona Foundation
  holds 100% of Ki Corporation Limited. Ki Corporation Limited holds 100% of
  the shares of Mira Mag Inc. The Eurona Foundation is a Lichtenstein trust
  controlled by Nathan Kirsh, who is also the trustee of such entity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(4) | Based solely upon, and qualified in its entirety with reference to, a
  Schedule 13G/A filed with the Securities and Exchange Commission on February
  12, 2008. The Schedule 13G indicates that as the sole general partner of
  certain Diker partnerships with respect to stock directly owned by certain
  Diker funds, or the Diker Funds, Diker GP, has the power to vote and dispose
  of the shares owned by the Diker Funds and, accordingly, may be deemed the
  beneficial owner of such shares. Pursuant to investment advisory agreements,
  Diker Management serves as the investment manager of the Diker Funds.
  Accordingly, Diker Management may be deemed the beneficial owner of shares
  held by the Diker Funds. Charles M. Diker and Mark N. Diker are the managing
  members of each of Diker GP and Diker Management, and in that capacity direct
  their operations. Therefore, Charles M. Diker and Mark N. Diker may be deemed
  the beneficial owners of shares beneficially owned by Diker GP and Diker
  Management. The foregoing reporting persons disclaim all beneficial
  ownership, however, as affiliates of a registered investment adviser, and in any
  case disclaim beneficial ownership except to the extent of their pecuniary
  interest in the shares.
|(5) | Based solely upon, and qualified in its entirety with reference to, a
  Schedule 13G/A filed with the Securities and Exchange Commission on February
  11, 2008. The Schedule 13G/A indicates that the shares include shares
  beneficially owned by investment companies, pooled investment vehicles and
  other accounts for which Clough Capital Partners L.P. serves as investment
  adviser. Such shares may be deemed beneficially owner by (a) Clough Capital
  Partners L.P., (b) Clough Capital Partners LLC, the general partner of Clough
  Capital Partners L.P., and (c) Messrs. Clough, Canty and Brock, the managing
  members of Clough Capital Partners LLC. Each such reporting person disclaims
  beneficial ownership of such shares except to the extent of its respective
  pecuniary interest therein.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(6) | Based solely upon, and qualified in its entirety with reference to, a
  Schedule 13G filed with the Securities and Exchange Commission on February
  4, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(7) | Based solely upon, and qualified in its entirety with reference to, a
  Schedule 13G filed with the Securities and Exchange Commission on February
  14, 2008. The Prescott Group includes Prescott Group Capital Management, L.L.C.
  (Prescott Capital), Prescott Group Aggressive Small Cap, L.P. (Prescott
  Small Cap), Prescott Group Aggressive Small Cap II, L.P. (Prescott Small
  Cap II and together with Prescott Small Cap, the Small Cap Funds), and
  Mr. Phil Frohlich.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

55

---

---



Significant Changes in the Ownership of Major
Shareholders

On
April 19, 2005, Mr. Kirsh, a trustee of the Eurona Foundation, Mira Mag Inc.s
controlling shareholder, and Mr. Jacob Even-Ezra participated in the follow-on
offering of our ordinary shares and purchased 346,375 and 78,625 ordinary
shares, respectively, at a purchase price of $9.92 per ordinary share, the
closing price of our ordinary shares at the date of the offering.

On
February 12, 2008, Diker GP, LLC, Diker Management LLC, or Diker Management,
Messrs. Charles M. Diker and Mark N. Diker filed an amendment to its Schedule
13G with the Securities and Exchange Commission reflecting beneficial ownership
of 1,014,425, or 9.76%, of our ordinary shares.

On
February 11, 2008 Clough Capital
Partners, L.P.filed an
amendment to its Schedule 13G with the Securities and Exchange Commission
reflecting beneficial ownership of 712,269 or 6.85% of our ordinary shares.

On
February 4, 2008 Grace & White, Inc.filed
a Schedule 13G with the Securities and Exchange Commission reflecting
beneficial ownership of 574,254 or 5.52% of our ordinary shares.

On
February 14, 2008 Prescott Capital, Prescott Small Cap, Prescott Group
Aggressive Small Cap II, L.P., and Mr. Phil Frohlich filed a Schedule 13G with
the Securities and Exchange Commission reflecting beneficial ownership of
539,097 or 5.19% of our ordinary shares.

Major Shareholders Voting Rights

The
voting rights of our major shareholders do not differ from the voting rights of
other holders of our ordinary shares.

Record Holders

Based
on a review of the information provided to us by our transfer agent, as of June
23, 2008, there were 57 holders of record of our ordinary shares, of which 45 record
holders holding approximately 78.00%
of our ordinary shares had registered addresses in the United States and 10
record holders holding approximately 17.50% of our ordinary shares had
registered addresses in Israel. These numbers are not representative of the
number of beneficial holders of our shares nor is it representative of where
such beneficial holders reside since many of these ordinary shares were held of
record by brokers or other nominees, including CEDE & Co., the nominee for
the Depositary Trust Company (the central depositary for the U.S. brokerage
community), which held approximately 72.43% of our outstanding ordinary shares
as of said date.

|   |                            
|-- | ---------------------------
|B. | Related
Party Transactions.

On
April 19, 2005 Mr. Kirsh, a trustee of the Eurona Foundation, Mira Mag Inc.s
controlling shareholder, and Mr. Even-Ezra participated in the follow-on
offering of our ordinary shares and purchased 346,375 and 78,625 ordinary
shares, respectively, at a purchase price of $9.92 per ordinary share, the closing
price of our ordinary shares at the date of the offering.

We
have entered into a retirement agreement with Mr. Jacob Even-Ezra in January
2008, based on the terms that were approved by our shareholders in August 2007.
Pursuant to the retirement agreement, Mr. Even- Ezra has undertaken not to
compete with our company for a period of three years following his retirement
on January 1, 2008. In consideration we agreed to pay Mr. Even-Ezra $360,000.
In addition, in gratitude for his long and outstanding efforts to further our
business and interests, we agreed to provide to Mr. Even-Ezra with certain
benefits and services, the value thereof presently estimated to be $50,000 per
year, for the rest of his life. As of December 31, 2007, the actuarial value of
these perquisites is estimated by approximately $544,000.

56

---

---



The
chairman of our board of directors, Mr. Jacob Perry is also the chairman of the
board of directors of Mizrahi Tefahot Bank B.M. We have a credit line with
Mizrahi Tefahot Bank B.M., totaling approximately $3 million since July 2006.
Our board of directors determined that this a transaction in the ordinary cause
of business, that was made on an arms-length basis and is in the best interest
of our company.

Sales to a Principal Shareholder

Our
former U.S. subsidiary, Smart, provided video monitoring services to companies
controlled by Mr. Kirsh. The terms of the contracts under which we made sales
to these companies were negotiated on an arms-length basis and the terms of
such contracts were no more favorable to these companies than those it could
have obtained from an unaffiliated third party. Our sales to these companies
during the years ended December 31, 2005, 2006 and 2007 were $671,000, $765,000
and $781,000 respectively. In December 2007, we disposed of our U.S. based
video monitoring business.

Employment Agreements

We
have entered into employment agreements with Mr. Izhar Dekel, our chief
executive officer and Mr. Jacob Perry, the chairman of our board of directors,
and to a retirement agreement with Mr. Jacob Even-Ezra, our director and our
former chief executive officer and chairman of the board of directors. See Item
6B. Directors, Senior Management and Employees - Compensation.

|   |                                  
|-- | ---------------------------------
|C. | Interests
of Experts and Counsel.

Not
applicable.

|        |                      
|------- | ---------------------
|ITEM 8. | Financial Information

|   |                                                         
|-- | --------------------------------------------------------
|A. | Consolidated
Statements and Other Financial Information.

The
Financial Statements required by this item are found at the end of this annual
report, beginning on page F-1.

In
2007, the total amount of our revenues from our facilities located outside of
Israel to customers outside of Israel was approximately $49.1 million, or 67.9%
of our total revenues. The total amount of our export revenues from our Israeli
facilities to countries outside of Israel was approximately $7.6 million, or
10.5% of our total revenues.

Legal Proceedings

In
May 2005 we entered into an agreement to supply comprehensive security
solutions for a sensitive site in Eastern Europe. As part of the agreement, we
received an advance payment, secured by a bank advanced payment guarantee that
was to be reduced proportionally as execution of the project progressed. In
addition, we issued the customer a performance bank guarantee. We commenced the
project and delivered some of the equipment and other deliverables to the
customer in 2005. In April 2006, the customer informed us that it was canceling
the agreement due to errors in the design documents that we submitted. In
addition, the customer did not make payments required under the agreement.
Based on its cancellation of the agreement, the customer collected $3.2 million
under the advanced payment guarantee on June 20, 2006. Due to this uncertainty,
we did not recognize any revenues from this project.

On
July 11, 2006 the customer made a demand for additional $1.4 million payment
under a bank performance guarantee for. Upon our motion, the District Court in
Haifa, Israel issued a temporary injunction against the payment of such
guarantee pending a hearing in August 2006. At the hearing, we reached a
settlement with the customer pursuant to which we paid the customer
approximately $700,000 of the disputed amount and the balance will be repaid
only if we are found liable for damages exceeding the amount paid by us. In
view of the above and due to the uncertainty of our preventing the forfeiture
of the bank performance guarantee, we included a $1.4 million provision in
respect of this guarantee in our financial statements for the year ended
December 31, 2005. Based on the settlement, we cancelled the balance of the
provision made in our financial statements in 2006.

57

---

---



On
June 6, 2007 the Court of Arbitration gave its award in the arbitration and
stated that the agreement concluded between us and the customer is void due to
legal mistakes made by the customer in the tender process. As a result of this
award and as agreed in the settlement agreement the performance guarantee was
cancelled on February 2008. Based on the above we decided to institute a new
legal action against the customer and seek compensation for the damages we
incurred. We initiated the following motions: (1) on December 10, 2007 a motion
for reconciliation was submitted with a Public Court; and (2) on December 11,
2007 a claim for compensation was submitted in the Court of Arbitration. In
both actions the claim was in the amount of $21,533,998. On February 2008, the
customer denied our request for reconciliation and as a result this process has
been concluded. The arbitration proceeding is still pending.

In
addition, we are subject to legal proceedings arising in the normal course of
business. Based on the advice of our legal counsel, management believes that
these proceedings will not have a material adverse effect on our financial
position or results of operations.

Dividend Distribution Policy

On
January 27, 2004 we paid a cash dividend to our shareholders of $0.05 per
ordinary share, representing approximately 17.0% of our net income in 2003. In
August 2004, we paid a 5.0% stock dividend to our shareholders as a final
dividend for 2003.

|   |                       
|-- | ----------------------
|B. | Significant
  Changes.

In
January 2008 we received a series of orders totaling approximately $45 million
for a turnkey project to protect critical infrastructure facilities. The
turnkey project incorporates fence perimeter protection systems, access control
systems and CCTV products. We expect to recognize income from these orders over
the next two years.

|        |                        
|------- | -----------------------
|ITEM 9. | The Offer
  and Listing

|   |                           
|-- | --------------------------
|A. | Offer and Listing Details.
|   |                           
|   | AnnualStock
  Information 

Our
shares have traded on the NASDAQ Global Market since our initial public
offering in 1993 and on the Tel Aviv Stock Exchange since July 2001.

The
following table sets forth, for each of the years indicated, the range of high
ask and low bid prices of our ordinary shares on the NASDAQ Global Market and
the Tel Aviv Stock Exchange:

|     |  |                        |       |                           |  |      |  |     |        |  |  |       | 
|---- |  | ---------------------- | ----- | ------------------------- |  | ---- |  | --- | ------ |  |  | ----- | 
|     |  | NASDAQ
  Global Market |       | Tel Aviv
  Stock Exchange | 
|     |  |                        |       |                           | 
|     |  | High                   |       | Low                       |  | High |  | Low |       
|     |  |                        |       |                           |  |      |  |     |       
|     |  |                        |       |                           |  |      |  |     |        |  |  |       | 
|2003 |  |                        | 9.97  |                           |  | 4.74 |  |     | 42.68  |  |  | 22.69 | 
|2004 |  |                        | 40.35 |                           |  | 6.75 |  |     | 156.68 |  |  | 32.25 | 
|2005 |  |                        | 12.22 |                           |  | 7.87 |  |     | 53.45  |  |  | 35.74 | 
|2006 |  |                        | 14.2  |                           |  | 8.51 |  |     | 64.78  |  |  | 36.10 | 
|2007 |  |                        | 12.00 |                           |  | 6.26 |  |     | 51.00  |  |  | 23.50 | 

58

---

---



Quarterly
Stock Information

The
following table sets forth, for each of the full financial quarters in the two
most recent full financial years and any subsequent period, the range of high
ask and low bid prices of our ordinary shares on the NASDAQ Global Market and
the Tel Aviv Stock Exchange:

|               |  |                        |       |                           |   |      |  |     |             |  |  |             | 
|-------------- |  | ---------------------- | ----- | ------------------------- | - | ---- |  | --- | ----------- |  |  | ----------- | 
|               |  | NASDAQ
  Global Market |       | Tel Aviv
  Stock Exchange |  
|               |  |                        |       |                           |  
|               |  | High                   |       | Low                       |   | High |  | Low |            
|               |  |                        |       |                           |   |      |  |     |            
|               |  |                        |       |                           |   |      |  |     |             |  |  |             | 
|2006           |  |                        |       |                           |   |      |  |     |             |  |  |             | 
|First Quarter  |  | $                      | 14.20 |                           | $ | 8.75 |  |     | NIS
  64.78 |  |  | NIS
  40.61 | 
|Second Quarter |  |                        | 13.36 |                           |   | 9.01 |  |     | 61.15       |  |  | 40.57       | 
|Third Quarter  |  |                        | 11.70 |                           |   | 8.96 |  |     | 51.50       |  |  | 39.40       | 
|Fourth Quarter |  |                        | 10.60 |                           |   | 8.51 |  |     | 44.00       |  |  | 36.10       | 
|               |  |                        |       |                           |   |      |  |     |             |  |  |             | 
|2007           |  |                        |       |                           |   |      |  |     |             |  |  |             | 
|First Quarter  |  | $                      | 12.00 |                           | $ | 8.53 |  |     | NIS
  51.00 |  |  | NIS
  36.25 | 
|Second Quarter |  |                        | 11.18 |                           |   | 9.91 |  |     | 46.06       |  |  | 40.20       | 
|Third Quarter  |  |                        | 10.49 |                           |   | 7.50 |  |     | 43.95       |  |  | 34.01       | 
|Fourth Quarter |  |                        | 9.15  |                           |   | 6.26 |  |     | 36.99       |  |  | 23.50       | 
|               |  |                        |       |                           |   |      |  |     |             |  |  |             | 
|2008           |  |                        |       |                           |   |      |  |     |             |  |  |             | 
|First Quarter  |  |                        | 7.70  |                           |   | 5.09 |  |     | 28.20       |  |  | 19.00       | 

Monthly
Stock Information

The
following table sets forth, for each of the most recent six months, the range
of high ask and low bid prices of our ordinary shares on the NAS DAQ Global
Market and the Tel Aviv Stock Exchange:

|         |  |                        |      |                           |   |      |  |     |             |  |  |             | 
|-------- |  | ---------------------- | ---- | ------------------------- | - | ---- |  | --- | ----------- |  |  | ----------- | 
|         |  | NASDAQ
  Global Market |      | Tel Aviv
  Stock Exchange |  
|         |  |                        |      |                           |  
|         |  | High                   |      | Low                       |   | High |  | Low |            
|         |  |                        |      |                           |   |      |  |     |            
|         |  |                        |      |                           |   |      |  |     |             |  |  |             | 
|2007     |  |                        |      |                           |   |      |  |     |             |  |  |             | 
|December |  | $                      | 8.15 |                           | $ | 6.26 |  |     | NIS
  31.98 |  |  | NIS
  23.50 | 
|         |  |                        |      |                           |   |      |  |     |             |  |  |             | 
|2008     |  |                        |      |                           |   |      |  |     |             |  |  |             | 
|January  |  | $                      | 7.50 |                           | $ | 5.09 |  |     | NIS
  27.30 |  |  | NIS
  19.00 | 
|February |  |                        | 7.70 |                           |   | 6.72 |  |     | 28.20       |  |  | 22.30       | 
|March    |  |                        | 7.25 |                           |   | 6.08 |  |     | 25.49       |  |  | 22.49       | 
|April    |  |                        | 7.19 |                           |   | 6.12 |  |     | 25.25       |  |  | 21.51       | 
|May      |  |                        | 6.65 |                           |   | 5.84 |  |     | 22.59       |  |  | 19.00       | 

|   |                      
|-- | ---------------------
|B. | Plan of Distribution.
|   |                      
|   | Not applicable.      
|   |                      
|C. | Markets.             

Our
ordinary shares have traded on the NASDAQ Global Market under the symbol MAGS
since our initial public offering in 1993. Our ordinary shares have also traded
on the Tel Aviv Stock Exchange under the symbol MAGS since July 1, 2001.

|   |                       
|-- | ----------------------
|D. | Selling Shareholders. 
|   |                       
|   | Not applicable.       
|   |                       
|E. | Dilution.             
|   |                       
|   | Not applicable.       
|   |                       
|F. | Expenses of the Issue.
|   |                       
|   | Not applicable.       

59

---

---



|         |                         
|-------- | ------------------------
|ITEM 10. | Additional
  Information

|   |                                        
|-- | ---------------------------------------
|A. | Share Capital.                         
|   |                                        
|   | Not applicable.                        
|   |                                        
|B. | Memorandum and Articles of Association.

Purposes and Objects of the Company

We
are registered with the Israeli Companies Registry and have been assigned
company number 52-003892-8. Section 2 of our memorandum of association
provides, among other things, that we were established for the purposes of
acquiring from IAI a plant, known as the Magal Plant, engaged in the
development, manufacture, sale and support of alarm devices and dealing in the
development, manufacturing and support of security alarm devices and other
similar products. In addition, the purpose of our company is to be eligible to
perform and act in connection with any right or obligation of whatever kind or
nature permissible under Israeli law.

Board of Directors

The
strategic management of our business (as distinguished from the daily
management of the our business affairs) is vested in our board of directors,
which may exercise all such powers and do all such acts as our company is
authorized to exercise and do, and which are not required to be exercised by a
resolution of the general meeting of our shareholders. The board of directors
may, subject to the provisions of the Israeli Companies Law, delegate some of
its powers to committees, each consisting of one or more directors, provided
that at least one member of such committee is an outside director.

According
to the Israeli Companies Law, we may stipulate in our articles of association
that the general meeting of shareholders is authorized to assume the
responsibilities of the board of directors. In the event the board of directors
is unable to act or exercise its powers, the general meeting of shareholders is
authorized to exercise the powers of the board of directors, although the
articles of association do not stipulate so. Our board of directors has the
power to assume the responsibilities of our chief executive officer if he is
unable to act or exercise his powers or if he fails to fulfill the instructions
of the board of directors with respect to a specific matter.

Our
articles of association do not impose any mandatory retirement or age-limit
requirements on our directors and our directors are not required to own shares
in our company in order to qualify to serve as directors.

For
a discussion of the Israeli Companies Law regulations concerning a directors
duty of care and duty of loyalty, see Item 6.C. Directors, Senior Management
and Employees-Board PracticesApproval of Specific Related-Party Transactions.
For a discussion of the Israeli Companies Law regulations regarding
indemnification of directors, see Item 6.C. Directors, Senior Management and
Employees-Board PracticesIndemnification of Directors and Officers and
Limitations of Liability. For a discussion regarding approval of director and
office compensation see Item 6.C. Directors, Senior Management and
Employees-Board Practices - Approval of Related-Party Transactions under
Israeli Law.

Rights Attached to Shares

Our
authorized share capital consists of NIS 19,748,000 ordinary shares, par
value NIS 1.00 each. All our ordinary shares have the same rights,
preferences and restrictions, some of which are detailed below. At the general
meeting of shareholders, our shareholders may, subject to certain provisions
detailed below, create different classes of shares, each class bearing
different rights, preferences and restrictions.

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The
rights attached to the ordinary shares are as follows:

Dividends
Rights

Holders
of ordinary shares are entitled to participate in the payment of dividends in
accordance with the amounts paid-up or credited as paid up on the nominal value
of such ordinary shares at the time of payment (without taking into account any
premium paid thereon). However, under article 13 of our articles of association
no shareholder shall be entitled to receive any dividends until he shall have
paid all calls then currently due and payable on each ordinary share held by
such shareholder.

Declaration
of a final dividend requires the approval by ordinary resolution of our
shareholders at a general meeting of shareholders. Such resolution may reduce
but not increase the dividend amount recommended by the board of directors.
Dividends may be paid, in whole or in part, by way of distribution of dividends
in kind.

Dividends
may be paid only out of our distributable earnings, as defined in the Israeli
Companies Law. Prior to any distribution of dividends, our board of directors
has to determine that there is no reasonable concern that such distribution
will prevent us from executing our existing and foreseeable obligations as they
become due.

Voting Rights

Holders
of ordinary shares are entitled to one vote for each share held of record on
all matters submitted to a vote of shareholders. Voting is done by a show of
hands, unless a poll is demanded prior to a vote by a show of hands. Generally,
resolutions are adopted at the general meeting of shareholders by an ordinary
resolution, unless the Israeli Companies Law or the articles of association
require an extraordinary resolution.

An
ordinary resolution, such as a resolution approving the declaration of
dividends or the appointment of auditors, requires approval by the holders of a
simple majority of the shares represented at the meeting, in person or by
proxy, and voting thereon. An extraordinary resolution requires approval by the
holders of at least 75% of the shares represented at the meeting, in person or
by proxy, and voting thereon.

The
primary resolutions required to be adopted by an extraordinary resolution of
the general meeting of shareholders are resolutions to:

| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| | · | amend the memorandum or
  the articles of association;                                                                                         
| |   |                                                                                                                                                
| | · | change the share capital,
  for example, increasing or canceling the authorized share capital or
  modifying the rights attached to shares; and
| |   |                                                                                                                                                
| | · | approve mergers,
  consolidations or winding up of our company.                                                                                

Our
articles of association do not contain any provisions regarding a classified
board of directors or cumulative voting for the election of directors. Pursuant
to our articles of association, our directors (except the outside directors)
are elected at our annual general meeting of shareholders by a vote of the
holders of a majority of the voting power represented and voting at such
meeting and hold office until the next annual general meeting of shareholders
and until their successors have been elected. All the members of our board of
directors (except the outside directors) may be reelected upon completion of
their term of office. For information regarding the election of outside
directors, see Item 6C. Directors, Senior Management and Employees  Directors
and Senior Management - Board Practices - Election of Directors.

Rights to
Share in the Companys Profits

Our
shareholders have the right to share in our profits distributed as a dividend
or any other permitted distributions. See this Item 10B. Additional Information 
Memorandum and Articles of Association  Rights Attached to Shares  Dividend
Rights.

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Liquidation Rights

Article
111 of our articles of association provides that upon any liquidation,
dissolution or winding-up of our company, our remaining assets shall be
distributed pro-rata to our ordinary shareholders.

Redemption

Under
Article 38 of our articles of association, we may issue redeemable stock and
redeem the same.

Transfer of shares

The
transfer of a fully paid-up ordinary share does not require the approval of our
board of directors. However, according to Article 17 of our articles of
association, any transfer of an ordinary share requires an instrument of
transfer in the form designated by the board of directors together with any
other evidence of title as the board of directors may reasonably request.

Substantial limitations on
shareholders

See
Item 6.C. Directors, Senior Management and Employees-Board PracticesApproval
of Related Party Transactions.

Capital Calls

Under
our memorandum of association and the Israeli Companies Law, the liability of
our shareholders is limited to the par value of the shares held by them.

Modifications of Share Rights

Shares
which confer preferential or subordinate rights relating to, among other
things, dividends, voting, and payment of capital may be created only by an
extraordinary resolution of the general meeting of shareholders. The rights
attached to a class of shares may be altered by an extraordinary resolution of
the general meeting of shareholders, provided the holders of 75% of the issued
shares of that class approve such change by the adoption of an extraordinary
resolution at a separate meeting of such class, subject to the terms of such
class. The provisions of the articles of association pertaining to general
meetings of shareholders also apply to a separate meeting of a class of
shareholders.

General Meetings of Shareholders

Under
the Israeli Companies Law a company must convene an annual meeting of
shareholders at least once every calendar year and within fifteen months of the
last annual meeting. Depending on the matter to be voted upon, notice of at
least 21 days or 35 days prior to the date of the meeting is required. Our
board of directors may, in its discretion, convene additional meetings as
special general meetings. In addition, the board must convene a special
general meeting upon the demand of two of the directors, 25% of the nominated
directors, one or more shareholders having at least 5% of the outstanding share
capital and at least 1% of the voting power in the company, or one or more
shareholders having at least 5% of the voting power in the company. See this
Additional Information - Memorandum and Articles of Association- Rights Attached to
Shares-Voting Rights.

A
shareholder present, in person or by proxy, at the commencement of a general
meeting of shareholders may not seek the cancellation of any proceedings or
resolutions adopted at such general meeting of shareholders on account of any
defect in the notice of such meeting relating to the time or the place thereof.
Shareholders who are registered in our register of shareholders at the record
date may vote at the general meeting of shareholders. The record date is set in
the resolution to convene the general meeting of shareholders, provided,
however, that such record date must be between fourteen to twenty-one days or,
in the event of a vote by ballots, between twenty eight to forty days prior the
date the general meeting of shareholders is held.

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The
quorum required for a general meeting of shareholders consists of at least two
record shareholders, present in person or by proxy, who hold, in the aggregate,
at least one third of the voting power of our outstanding shares. A general
meeting of shareholders will be adjourned for lack of a quorum after half an
hour from the time appointed for such meeting to the same day in the following
week at the same time and place or any other time and place as the board of
directors designates in a notice to the shareholders. At such reconvened
meeting, if a quorum is not present within half an hour from the time appointed
for such meeting, two or more shareholders, present in person or by proxy, will
constitute a quorum. The only business that may be considered at an adjourned
general meeting of shareholders is the business that might have been lawfully
considered at the general meeting of shareholders originally convened and the
only resolutions that may be adopted are the resolutions that could have been
adopted at the general meeting of shareholders originally convened.

Limitations on the Right to Own Our Securities

Neither
our memorandum or articles of association nor the laws of the State of Israel restrict
in any way the ownership or voting of our ordinary shares by non-residents,
except that the laws of the State of Israel may restrict the ownership of
ordinary shares by residents of countries that are in a state of war with
Israel.

Provisions Restricting a Change in Control of Our Company

The
Israeli Companies Law requires that mergers between Israeli companies be
approved by the board of directors and general meeting of shareholders of both
parties to the transaction. The approval of the board of directors of both
companies is subject to such boards confirmation that there is no reasonable
doubt that after the merger the surviving company will be able to fulfill its
obligations towards its creditors. Each company must notify its creditors about
the contemplated merger. Under our
articles of association, such merger must be approved by a resolution of the shareholders, as
explained above. The approval of the merger by the general meetings of
shareholders of the companies is also subject to additional approval
requirements as specified in the Israeli Companies Law and regulations
promulgated thereunder. See also Item 6C. Directors, Senior Management and
Employees  Board
Practices  Approval of Related Party Transactions Under Israeli Law.

Disclosure of Shareholders Ownership

The
Israeli Securities Law, 5728-1968 and regulations promulgated thereunder
contain various provisions regarding the ownership threshold above which
shareholders must disclose their share ownership. However, these provisions do
not apply to companies, such as ours, whose shares are publicly traded in
Israel as well as outside of Israel. As a result of the listing of our ordinary
shares on the Tel Aviv Stock Exchange, we are required pursuant to the Israeli
Securities Law and the regulations promulgated thereunder to deliver to the
Israeli Share Registrar, the Israeli Securities Exchange Commission and the Tel
Aviv Stock Exchange, all reports, documents, forms and information received by
us from our shareholders regarding their shareholdings, provided that such
information was published or required to be published under applicable foreign
law.

|   |                    
|-- | -------------------
|C. | Material Contracts.
|   |                    
|   | None.              
|   |                    
|D. | Exchange Controls. 

Israeli
law and regulations do not impose any material foreign exchange restrictions on
non-Israeli holders of our ordinary shares. In May 1998, a new general
permit was issued under the Israeli Currency Control Law, 1978, which removed
most of the restrictions that previously existed under such law, and enabled
Israeli citizens to freely invest outside of Israel and freely convert Israeli
currency into non-Israeli currencies.

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Non-residents
of Israel who purchase our ordinary shares will be able to convert dividends,
if any, thereon, and any amounts payable upon our dissolution, liquidation or
winding up, as well as the proceeds of any sale in Israel of our ordinary
shares to an Israeli resident, into freely repatriable dollars, at the exchange
rate prevailing at the time of conversion, provided that the Israeli income tax
has been withheld (or paid) with respect to such amounts or an exemption has
been obtained.

|   |          
|-- | ---------
|E. | Taxation.

The
following is a discussion of Israeli and United States tax consequences
material to us and to our shareholders. To the extent that the discussion is
based on new tax legislation which has not been subject to judicial or
administrative interpretation, the views expressed in the discussion might not
be accepted by the tax authorities in question. The discussion is not intended,
and should not be construed, as legal or professional tax advice and does not
exhaust all possible tax considerations.

Holders of our ordinary shares
should consult their own tax advisors as to the United States, Israeli or other
tax consequences of the purchase, ownership and disposition of ordinary shares,
including, in particular, the effect of any foreign, state or local taxes.

ISRAELI TAX CONSIDERATIONS

The
following is a summary of the material Israeli tax laws applicable to us, and
some Israeli Government programs benefiting us. This section also contains a
discussion of material Israeli tax consequences concerning the ownership of and
disposition of our ordinary shares. This summary does not discuss all the acts
of Israeli tax law that may be relevant to a particular investor in light of
his or her personal investment circumstances or to some types of investors
subject to special treatment under Israeli law. Examples of this kind of
investor include residents of Israel or traders in securities who are subject
to special tax regimes not covered in this discussion. Since some parts of this
discussion are based on new tax legislation that has not yet been subject to
judicial or administrative interpretation, we cannot assure you that the
appropriate tax authorities or the courts will accept the views expressed in
this discussion.

The
discussion below should not be construed as legal or professional tax advice
and does not cover all possible tax considerations. Potential investors are
urged to consult their own tax advisors as to the Israeli or other tax
consequences of the purchase, ownership and disposition of our ordinary shares,
including in particular, the effect of any foreign, state or local taxes.

General Corporate Tax Structure

Israeli companies
are subject to income tax on their worldwide income regardless of the
territorial source of such income. Pursuant to tax reform legislation that came
into effect in 2003, the corporate tax rate is to undergo staged reductions to
25% by the year 2010. In order to implement these reductions, the corporate tax
rate declined from 31% in 2006, to 29% in 2007 and scheduled to decline to 27%
in 2008, and 26% in 2009. Capital gains derived after January 1, 2003 (other
than gains derived from the sale of listed securities that are taxed at the
prevailing corporate tax rates) are subject to tax at a rate of 25%.

However,
the effective tax rate payable by a company that derives income from an approved
enterprise, discussed further below, may be considerably less. See Tax
Benefits under the Law for the Encouragement of Capital Investments, 1959.

Encouragement of Capital Investments Law, 5719-1959

General

The
Encouragement of Capital Investments Law, 5719-1959, commonly referred to as
the Investment Law, provides that a proposed capital investment in eligible
facilities may, upon application to the Investment Center of the Ministry of
Industry, Trade and Labor of the State of Israel, commonly referred to as the
Investment Center, be designated as an approved enterprise. Each certificate of
approval for an approved enterprise relates to a specific investment program
delineated both by its financial scope, including its capital sources, and by
its physical characteristics, for example, the equipment to be purchased and
utilized under the program. The tax benefits derived from any certificate of
approval relates only to taxable income attributable to the specific approved
enterprise. If a company has more than one approval or only a portion of its
capital investments is approved, its effective tax rate is the result of a
weighted average of the applicable rates.

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The
tax benefits under the Investment Law also apply to income generated by a
company from the grant of a usage right with respect to know-how developed by
the approved enterprise, income generated from royalties, and income derived
from a service which is ancillary to such usage right or royalties, provided
that such income is generated within the approved enterprises ordinary course
of business. Income derived during the benefit period from sources other than
the approved enterprise, will be subject to tax at the regular corporate tax
rate.

If
a company has more than one approval or only a portion of its capital
investments is approved, its effective tax rate is the result of a weighted
average of the applicable rates. The tax benefits under the Investments Law are not, generally,
available with respect to income derived from products manufactured outside of
Israel.

Certain
of our production facilities have been granted approved enterprise status
pursuant to the Investment Law, which provides certain tax and financial
benefits to investment programs that have been granted this status.

Tax
Benefits

Taxable
income of a company derived from an approved enterprise is generally subject to
company tax at the maximum rate of 25%, rather than 29%, for the benefit
period. This period is ordinarily seven years, or ten years if the company
qualifies as a foreign investors company as described below, commencing with
the year in which the approved enterprise first generates taxable income.
However, this period is limited to the earlier of twelve years from
commencement of production or fourteen years from the date of approval.

A
company that owns an approved enterprise may elect to receive an alternative
package of benefits. Under the alternative package of benefits, a companys undistributed
income derived from an approved enterprise will be exempt from company tax for
a period of between two and ten years from the first year of taxable income,
depending on the geographic location of the approved enterprise within Israel,
and the company will be eligible for a reduced tax rate for the remainder of
the benefits period.

A
company that has an approved enterprise program is eligible for further tax
benefits if it qualifies as a foreign investors company. A foreign investors
company is a company more than 25% of whose share capital and combined share
and loan capital is owned by non-Israeli residents. A company that qualifies as
a foreign investors company and has an approved enterprise program is eligible
for tax benefits for a ten year benefit period. Income derived from the
approved enterprise program will be exempt from tax for a period of two years
and will be subject to a reduced tax rate for an additional eight years,
provided that the company qualifies as a foreign investors company. The tax
rate for the additional eight-year period is 25%. However, if the level of
foreign investment exceeds 49% but is less than 74%, then the tax rate for the
additional eight-year period is 20%. If the level of foreign investment exceeds
74% but is less than 90%, then the tax rate for the additional eight-year
period is 15%. If the level of foreign investment exceeds 90%, then the tax
rate for the additional eight-year period is 10%. If the company does not
qualify as a foreign investors company, the period of the reduced tax rate
will be five years.

A
company that has elected the alternative package of benefits and that
subsequently pays a dividend out of income derived from the approved enterprise
during the tax exemption period will be subject to tax on the amount
distributed at the rates mentioned above. The tax rate will be the rate that
would have been applicable had the company not elected the alternative package
of benefits. This rate is generally 10%-25%, depending on the percentage of the
companys shares held by foreign shareholders. The dividend recipient is taxed
at the reduced rate applicable to dividends from approved enterprises, which is
15% if the dividend is distributed during the tax benefit period and within 12
years after the period. The company must withhold this tax at the source.

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Subject
to applicable provisions concerning income under the alternative package of
benefits, all incomes are considered to be attributable to the entire enterprise
and their effective tax rate is the result of a weighted average of the various
applicable tax rates. Under the Investment Law, a company that has elected the
alternative package of benefits is not obliged to distribute exempt retained
profits, and may generally decide from which years profits to declare
dividends.

The
benefits available to an approved enterprise program are dependent upon the
fulfillment of conditions stipulated in applicable law and in the certificate
of approval. If we fail to comply with these conditions with regard to our
approved enterprises, the tax and other benefits we receive could be rescinded,
in whole or in part, and we may be required to refund the amount of previously
received benefits in addition to Israeli CPI linkage adjustments and interest
costs. We believe that our approved enterprises currently substantially comply
with all such conditions.

On
April 1, 2005, comprehensive amendment to the Investments Law came into force.
Pursuant to the amendment, a companys facility will be granted the status of
approved enterprise only if it is proven to be an industrial facility (as
defined in the Investments Law) that contributes to the economic independence
of the Israeli economy and is a competitive facility that contributes to the
Israeli gross domestic product. The amendment provides that the Israeli Tax
Authority and not the Investment Center will be responsible for an approved
enterprise under the alternative package of benefits, referred to as a benefiting
facility. A company wishing to receive the tax benefits afforded to a
benefiting facility is required to select the tax year from which the period of
benefits under the Investment Law are to commence by simply notifying the
Israeli Tax Authority within 12 months of the end of that year. In order to be
recognized as owning a benefiting facility, a company is required to meet a
number of conditions set forth in the amendment, including making a minimal
investment in manufacturing assets for the benefiting facility and having
completed a cooling-off period of no less than two to four years from the
companys previous year of commencement of benefits under the Investments Law.

The
amended Investment Law specifies certain conditions that a privileged enterprise, which
is either an Approved Enterprise or a company with a benefiting facility, has
to comply with in order to be entitled to benefits. These conditions include
among others:

| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | That the privileged
  enterprises revenues during the applicable tax year from any single market
  (i.e. country or a separate customs territory) do not exceed 75% of the
  privileged enterprises aggregate revenues during such year; or 
| |  
| | · | That 25% or more of the
  privileged enterprises revenues during the applicable tax year are generated
  from sales into a single market (i.e. country or a separate customs
  territory) with a population of at least 12 million residents.

Pursuant
to the amendment, a company with a benefiting facility is entitled, in each tax
year, to accelerated depreciation for the manufacturing assets used by the
benefiting facility and to certain tax benefits, provided that no more than 12
years have passed since the beginning of the year of commencement of benefits
under the Investments Law. The tax benefits granted to a Benefiting Factory are
determined according one of the following new tax routes:

(a)          Similar
to the currently available alternative route, exemption from corporate tax on
undistributed income for a period of two to ten years, depending on the
geographic location of the Benefiting Facility within Israel, and a reduced
corporate tax rate of 10% to 25% for the remainder of the benefits period,
depending on the level of foreign investment in each year. Benefits may be
granted for a term of from seven to ten years, depending on the level of
foreign investment in the company. If the company pays a dividend out of income
derived from the Benefiting Facility during the tax exemption period, such
income will be subject to corporate tax at the applicable rate (10%-25%). The
company is required to withhold tax at the source at a rate of 15% from any
dividends distributed from income derived from the Benefiting Facility.

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(b)          A
special tax route enabling companies owning facilities in certain geographical
locations in Israel to pay corporate tax at the rate of 11.5% on income of the
Benefiting Facility. The benefits period is ten years. Upon payment of
dividends, the company is required to withhold tax at source at a rate of 15%
for Israeli residents and at a rate of 4% for foreign residents.

(c)          A
special tax route that provides a full exemption from corporate tax and from
tax with respect to dividends for companies with an annual income of at least
NIS 13-20 billion that have invested a total of between NIS 600900 million in
facilities in certain geographical locations in Israel.

Generally,
a company that is Abundant in Foreign Investment (as defined in the Investments
Law) is entitled to an extension of the benefits period by an additional five
years, depending on the rate of its income that is derived in foreign currency.

The
amendment changes the definition of foreign investment in the Investments Law
so that instead of an investment of foreign currency in the company, the
definition now requires a minimal investment of NIS 5 million by foreign
investors. Furthermore, such definition now also includes the purchase of
shares of a company from another shareholder; provided that the companys
outstanding and paid-up share capital exceeds NIS 5 million. Such changes to
the aforementioned definition will take effect retroactively from 2003.

As
a result of the amendment, tax-exempt income generated under the provisions of
the Investment Law, will subject us to taxes upon distribution of such income,
purchase of shares from shareholder by the company or liquidation, and we may
be required to record a deferred tax liability with respect to such tax-exempt income.

The
amendment will apply to approved enterprise programs in which the year of
commencement of benefits under the Investments Law is 2004 or later, unless
such programs received approval from the Investment Center on or prior to
December 31, 2004 in which case the provisions of the amendment will not apply.

Pursuant
to the amendment to the Investment Law, only approved enterprises receiving
cash grants require the approval of the Investment Center. The Investment
Center is entitled, to approve such programs only until December 31, 2007.
Approved enterprises which do not receive benefits in the form of governmental
cash grants, such as benefits in the form of tax benefits, are no longer
required to obtain this approval (such enterprises are referred to as
privileged enterprises). However, a privileged enterprise is required to comply
with certain requirements and make certain investments as specified in the
amended Investment Law.

A
privileged enterprise may, at its discretion, in order to provide greater
certainty, elect to apply for a pre-ruling from the Israeli tax authorities
confirming that it is in compliance with the provisions of the amended
Investment Law and is therefore entitled to receive such benefits provided under
the amended Investment Law. The amendment to the Investment Law addresses
benefits that are being granted to privileged enterprises and the length of the
benefits period.

On
March 3, 2007, we received a pre-ruling from the Israeli Tax Authority for our
request for a Benefiting Facility, regarding eligibility for benefits under the
Amendment. Our income from this program is tax-exempt for a period of two
years, and is subject to a reduced tax rate of 10%-25 for a period of five to
eight years (depending upon the percentage of foreign ownership of the
Company). We did not enjoy from tax benefits in this program yet.

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Financial Benefits

An
approved enterprise is also entitled to a grant from the Government of Israel
for investments in certain production facilities located in designated areas
within Israel, provided it did not elect the alternative benefits program.
Grants are available for enterprises situated in development areas and for
high-technology or skill-intensive enterprises in Jerusalem. The investment
grant is computed as a percentage of the original cost of the fixed assets for
which the approved enterprise has been granted.

From
time to time, the Government of Israel has discussed reducing the benefits
available to companies under the Investment Law. In 1996, the investment grant
was decreased from 38% to 34% and in January 1997 the grant was reduced to
20%. Currently, grants generally range between 10% and 20%. If the benefits
available under the Investment Law are terminated or substantially reduced, it
could have a material adverse effect on our future investments in Israel.

For
companies such as ours, whose foreign shareholders hold more than 25% of the
companys outstanding ordinary shares, future approved enterprises would
entitle such companies to receive reduced tax rates for up to ten tax years,
rather than the maximum seven tax years applicable to companies with a smaller
foreign investment.

As
long as we are in compliance with the conditions set forth in the certificates
of approval granted to us, our income derived from our approved enterprise
expansion programs will be tax exempt for the prescribed period and thereafter
will enjoy reduced tax rates as detailed above. If we violate these conditions,
we may be required to refund the amount of tax benefits we previously received
in addition to Israeli CPI linkage adjustments and interest costs.

We
currently have two approved enterprise expansion programs which were approved
in 1997 and 2001, and under which we are entitled to tax benefits. The periods
of benefits for two of our approved enterprise programs will expire in 2007 and
in 2012, respectively. The
benefits we receive in connection with our approved enterprise programs are
conditioned upon the fulfillment of a marketing plan filed by us with the
Investment Center.

There
can be no assurance that we will comply with the above conditions or any other
conditions of the amended Investment Law in the future or that we will be
entitled to any additional benefits under the amended Investment Law.

Encouragement of Industry (Taxes) Law, 5729-1969

Under
the Encouragement of Industry (Taxes) Law, 5729-1969, or the Industry
Encouragement Law, Industrial Companies are entitled to certain corporate tax
benefits, including, among others:

| |   |                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Amortization, under
  certain conditions, of purchases of know-how and patents and of rights to use
  a patent and know-how which are used for the development or advancement of
  the company, over an eight-year period for tax purposes;
| |   |                                                                                                                                                                                                                                            
| | · | Right to elect, under
  specified conditions, to file a consolidated tax return with additional
  related Israeli industrial companies; and                                                                                                
| |   |                                                                                                                                                                                                                                            
| | · | Accelerated depreciation
  rates on equipment and buildings; and                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                            
| | · | Deductions over a
  three-year period of expenses in connection with the issuance and listing of
  shares on the Tel Aviv Stock Exchange, or TASE
  or, following January 1, 2003, on a recognized stock market outside of
  Israel.       

Eligibility
for benefits under the Industry Encouragement Law is not subject to the prior
approval of any governmental authority. Under the Industry Encouragement Law,
an Industrial Company is a company resident in Israel, at least 90% of the
income of which, in any tax year, determined in Israeli currency, exclusive of
income from government loans, capital gains, interest and dividends, is derived
from an Industrial Enterprise owned by it. An Industrial Enterprise is an
enterprise owned by an Industrial Company, whose major activity in a given tax
year is industrial production activity.

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We
believe that we currently qualify as an industrial company as defined by the
Industry Encouragement Law. We cannot assure you that we will continue to
qualify as an industrial company or that the benefits described above will be
available to us in the future.

Encouragement of Industrial Research and Development Law,
5744-1984

Under
the Encouragement of Industrial Research and Development Law, 5744-1984, or the
Research Law, research and development programs that meet specified criteria
and are approved by a governmental committee of the OCS are eligible for grants
between 20%-50% of certain of the projects expenditures, as determined by the
research committee.

In
exchange, the recipient of such grants is required to pay the OCS royalties
from the revenues derived from products incorporating technology developed
within the framework of the approved research and development program or
derived from such program (including ancillary services in connection with such
program), usually up to100% of the U.S. dollar-linked value of the total grants
received in respect of such program, plus LIBOR interest.

The
terms of the Israeli government participation also require that products
developed with government grants be manufactured in Israel. However, under the
regulations of the Research Law, upon the approval of the OCS, some of the
manufacturing volume may be performed outside Israel, provided that the grant
recipient pays royalties at an increased rate. The Research Law also allows for
the approval of grants in cases in which the applicant declares that part or
all of the manufacturing will be performed outside of Israel or by foreign
residents and the research committee is convinced that this is essential for
the execution of the program. The Research Law also provides that know-how
developed under an approved research and development program may not be
transferred to third parties in Israel without the prior approval of the
research committee. The Research Law further provides that the know-how
developed under an approved research and development program may not be
transferred to any third parties outside Israel. No approval is required for
the sale or export of any products resulting from such research and
development.

However,
In June 2005, an amendment to the Research Law became effective, which
amendment was intended to make the Research Law more compatible with the global
business environment by, among other things, relaxing restrictions on the
transfer of manufacturing rights outside Israel and on the transfer of
OCS-funded know-how outside of Israel. The amendment permits the OCS, among
other things, to approve the transfer of manufacturing rights outside Israel in
exchange for an import of different manufacturing into Israel as a substitute,
in lieu of demanding the recipient to pay increased royalties as described
above. The amendment further permits, under certain circumstances and subject
to the OCSs prior approval, the transfer outside Israel of know-how that has
been funded by OCS, generally in the following cases: (a) the grant recipient
pays to the OCS a portion of the consideration paid for such funded know-how
(according to certain formulas), (b) the grant recipient receives know-how from
a third party in exchange for its funded know-how, or (c) such transfer of
funded know-how arises in connection with certain types of cooperation in
research and development activities.

The
Research Law imposes reporting requirements with respect to certain changes in
the ownership of a grant recipient. The law requires the grant recipient and
its controlling shareholders and interested parties to notify the OCS and
obtaining the approval of the OCS for, any change in control of the recipient
or a change in the holdings of the means of control of the recipient that
results in a foreign resident becoming an interested party directly in the
recipient and requires the new interested party to undertake to the OCS to
comply with the Research Law. In addition, the rules of the OCS may require
prior approval of the OCS or additional information or representations in
respect of certain of such events. For this purpose, control is defined as
the ability to direct the activities of a company other than any ability
arising solely from serving as an officer or director of the company. A person
is presumed to have control if such person holds 50% or more of the means of control
of a company. Means of control refers to voting rights or the right to
appoint directors or the chief executive officer. An interested party of a
company includes a holder of 5% or more of its outstanding share capital or
voting rights, its chief executive officer and directors, someone who has the
right to appoint its chief executive officer or at least one director, and a
company with respect to which any of the foregoing interested parties owns 25%
or more of the outstanding share capital or voting rights or has the right to
appoint 25% or more of the directors. Accordingly, any foreign resident who
acquires 5% or more of our ordinary shares will be required to notify the OCS
that it has become an interested party and to sign an undertaking to comply
with the Research Law.

69

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The
funds generally available for grants by the OCS were reduced as of 2003, and
the Israeli authorities have indicated that the government may further reduce
or abolish grants from the OCS in the future. Even if these grants are
maintained, we cannot assure you that we will receive OCS grants in the future.
In addition, each application to the OCS is reviewed separately, and grants are
based on the program approved by the research committee. Generally, expenditures
supported under other incentive programs of the State of Israel are not
eligible for grants from the OCS.

Taxation under Inflationary Conditions

The
Income Tax (Inflationary Adjustments) Law, 5745- 1985, generally referred to as
the Inflationary Adjustments Law, represents an attempt to overcome the
problems presented to a traditional tax system by an economy undergoing rapid
inflation. The Inflationary Adjustments Law is highly complex. Its features
which are material to us can be described as follows:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | There is a special tax
  adjustment for the preservation of equity whereby some corporate assets are
  classified broadly into fixed assets and non-fixed assets.                                                                                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | · | Where a companys equity,
  as defined in such law, exceeds the depreciated cost of fixed assets, a
  deduction from taxable income that takes into account the effect of the
  applicable annual rate of inflation on such excess is allowed up to a ceiling
  of 70% of taxable income in any single tax year, with the unused portion
  permitted to be carried forward on a linked basis. If the depreciated cost of
  fixed assets exceeds a companys equity, then such excess multiplied by the
  applicable annual rate of inflation is added to taxable income.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | · | Subject to specified
  limitations, depreciation deductions on fixed assets and losses carried
  forward are adjusted for inflation based on the increase in the Israeli CPI.                                                                                                                                                                                                                                                                                                                                                                                           

The
Minister of Finance may, with the approval of the Knesset Finance Committee,
determine by decree, during a certain fiscal year (or until February 28th of
the following year) in which the rate of increase of the Israeli consumer price
index would not exceed or did not exceed, as applicable, 3%, that some or all
of the provisions of the Inflationary Adjustments Law shall not apply with
respect to such fiscal year, or, that the rate of increase of the Israeli
consumer price index relating to such fiscal year shall be deemed to be 0%, and
to make the adjustments required to be made as a result of such determination.

Inflationary
Adjustments Law was abolished, effective as of January 1 2008, and subject to
transitional provisions and special provisions to prevent a distortion in the
tax calculations. In February 2008, the Knesset passed an amendment to the Income
Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law
with effect from 2008 and thereafter. From 2008, the results for tax purposes
will be measured in nominal values, excluding certain adjustments for changes
in the Israeli CPI carried out in the period up to December 31, 2007. The
amended law includes, among other things, the elimination of the inflationary
additions and deductions and the additional deduction for depreciation with
effect from 2008.

Stamp Tax

Documents
signed following January 1, 2006, are not subject to stamp tax.

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Capital Gains Tax on Sales of Our Ordinary Shares

Under
income tax regulations foreign residents, who sell shares of an Israeli company
publicly traded on a recognized stock exchange outside of Israel, will be
exempt from tax subject to the satisfaction of all following conditions:

| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| | · | The capital gain is not attributable to a permanent
  establishment in Israel.                                         
| |   |                                                                                                                        
| | · | The shares were purchased after the first initial public
  offering on the recognized stock exchange outside of Israel.
| |   |                                                                                                                        
| | · | The provisions of the Income Tax Law (inflationary
  adjustments), 1985 do not apply to such gain.                     

However,
non-Israeli corporations will not be entitled to the foregoing exemptions if an
Israeli resident (i) has a controlling interest of 25% or more in such
non-Israeli corporation, or (ii) is the beneficiary of or is entitled to 25% or
more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly.

Under
the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our ordinary
shares by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel
Tax Treaty) holding the ordinary shares as a capital asset is exempt from Israeli
capital gains tax unless either (i) the shareholder holds, directly or
indirectly, shares representing 10% or more of our voting capital during any
part of the 12-month period preceding such sale, exchange or disposition or
(ii) the capital gains arising from such sale are attributable to a permanent
establishment of the shareholder located in Israel. However, under the
U.S.-Israel Tax Treaty,
such Treaty U.S. Resident would be permitted to claim a credit for such taxes
against the U.S.federal
income tax imposed with respect to such sale, exchange or disposition, subject
to the limitations in U.S. laws applicable to foreign tax credits. The Treaty does not relate to U.S. state or local
taxes.

Taxation ofForeignHolders of Shares

Foreign
residents of Israel are
subject to income tax on income accrued or derived from sources in Israel. Such
sources of income include passive income such as dividends, royalties and
interest, as well as non-passive income from
services rendered in Israel. On distributions of dividends after January 1,
2006 other than bonus shares or stock dividends, income tax at the rate of 20%
will be withheld on dividends distributed to Israeli individual shareholders or
to foreign
residents, unless a different
rate is provided in a treaty between Israel and the shareholders country of
residence. With respect to a person who is a substantial shareholder at the
time receiving the dividend or on any date in the twelve months preceding it,
the applicable tax rate is 25%. A substantial shareholder is generally a
person who alone or together with such persons relative or another person who
collaborates with such person on a permanent basis, holds, directly or
indirectly, at least 10% of any of the means of control of the corporation.
Means of control generally include the right to vote, receive profits,
nominate a director or an officer, receive assets upon liquidation, or order
someone who holds any of the aforesaid rights how to act, and all regardless of
the source of such right. Under the U.S.-Israel Tax Treaty, the maximum rate of
tax withheld in Israel on dividends paid to a holder of our ordinary shares who
is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) is 25%.
However, generally, the maximum rate of withholding tax on dividends, not
generated by our approved enterprise, that are paid to a U..S. corporation
holding 10% or more of our outstanding voting capital throughout the tax year
in which the dividend is distributed as well as the previous tax year, is
12.5%. Furthermore, dividends paid from income derived from our approved
enterprise are subject, under certain conditions, to withholding at the rate of
15%. We cannot assure you that we will designate the profits that are being
distributed in a way that will reduce shareholders tax liability.

A
non-resident of Israel who receives dividends from which tax was withheld is
generally exempt from the duty to file returns in Israel in respect of such
income, provided such income was not derived from a business conducted in
Israel by the taxpayer, and the taxpayer has no other taxable sources of income
in Israel.

Controlled Foreign Corporation

In
general, and subject to the provisions of all relevant legislation, an Israeli
resident who holds, directly of indirectly, 10% or more of the rights in a
foreign corporation whose shares are not publicly traded, in which more than
50% of the rights are held directly or indirectly by Israeli residents, and a
majority of whose income in a tax year is considered passive income (generally
referred to as a Controlled Foreign Corporation, or CFC), is liable for tax on
the portion of his income attributed to holdings in such corporation, as if
such income was distributed to him as a dividend.

71

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Share Allocation to Employees

In
general, section 102 of the Tax Ordinance that deals with taxation of share
allocations to employees and/or officers (excluding controlling members)
provides that a company may choose one of three courses of taxation which course
must be approved by the assessing officer: (i) work income course for shares
held 12 months in trust; (ii) capital gains course for shares held 24 months in
trust; and (iii) allocation not through a trustee. Each of these courses has
different tax consequences.

As
of January 1, 2006, the periods mentioned in the first two courses commence as
of the date of grant and not as of the end of the tax year in which the shares
were granted.

United States Federal Income Tax Consequences

The
following is a summary of certain material U.S. federal income tax consequences
that apply to U.S. Holders who hold ordinary shares as capital assets. This
summary is based on the United States Internal Revenue Code of 1986, as amended
(the Code), Treasury regulations promulgated thereunder, judicial and
administrative interpretations thereof, and the U.S.-Israel Tax Treaty, all as
in effect on the date hereof and all of which are subject to change either
prospectively or retroactively. This summary does not address all tax
considerations that may be relevant with respect to an investment in ordinary
shares. This summary does not discuss all the tax consequences that may be
relevant to a U.S. Holder in light of such holders particular circumstances or
U.S. Holders subject to special rules, including persons that are non-U.S.
Holders, broker-dealers, financial institutions, certain insurance companies,
investors liable for alternative minimum tax, tax-exempt organizations,
regulated investment companies, taxpayers whose functional currency is not the
U.S. dollar, persons who hold the ordinary shares through partnerships or other
pass-through entities, persons who acquired their ordinary shares through the
exercise or cancellation of employee stock options or otherwise as compensation
for services, investors that actually or constructively own 10 percent or more
of our voting shares, and investors holding ordinary shares as part of a
straddle or appreciated financial position or as part of a hedging or conversion
transaction.

If
a partnership or an entity treated as a partnership for U.S. federal income tax
purposes owns ordinary shares, the U.S. federal income tax treatment of a
partner in such a partnership will generally depend upon the status of the
partner and the activities of the partnership. A partnership that owns ordinary
shares and the partners in such partnership should consult their tax advisors
about the U.S. federal income tax consequences of holding and disposing of
common shares.

This
summary does not address the effect of any U.S. federal taxation other than
U.S. federal income taxation. In addition, this summary does not include any
discussion of state, local or foreign taxation.

You
are urged to consult your tax advisors regarding the foreign and United States
federal, state and local tax considerations of an investment in ordinary
shares.

For
purposes of this summary, the term U.S. Holder means an individual who is a
citizen or, for U.S. federal income tax purposes, a resident of the United
States, a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or any political
subdivision thereof, an estate whose income is subject to U.S. federal income
tax regardless of its source, or a trust that (a) is subject to the primary
supervision of a court within the United States and the control of one or more
U.S. persons or (b) has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a U.S. person.

Taxation of Dividends

Subject
to the discussion below under the heading Passive Foreign Investment
Companies, the gross amount of any distributions received with respect to
ordinary shares, including the amount of any Israeli taxes withheld therefrom,
will constitute dividends for U.S. federal income tax purposes, to the extent
of our current and accumulated earnings and profits as determined for U.S.
federal income tax purposes. You will be required to include this amount of
dividends in gross income as ordinary income. Distributions in excess of our
current and accumulated earnings and profits will be treated as a non taxable
return of capital to the extent of your tax basis in the ordinary shares and
any amount in excess of your tax basis will be treated as gain from the sale of
ordinary shares. See Disposition of Ordinary Shares below for the discussion
on the taxation of capital gains. Dividends will not qualify for the dividends
received deduction generally available to corporations under Section 243 of the
Code.

72

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Dividends
that we pay in NIS, including the amount of any Israeli taxes withheld
therefrom, will be included in your income in a U.S. dollar amount calculated
by reference to the exchange rate in effect on the day such dividends are
received. A U.S. Holder who receives payment in NIS and converts NIS into U.S.
dollars at an exchange rate other than the rate in effect on such day may have
a foreign currency exchange gain or loss that would be treated as ordinary
income or loss. U.S. Holders should consult their own tax advisors concerning
the U.S. tax consequences of acquiring, holding and disposing of NIS.

Subject
to complex limitations, any Israeli withholding tax imposed on such dividends
will be a foreign income tax eligible for credit against a U.S. Holders U.S.
federal income tax liability (or, alternatively, for deduction against income
in determining such tax liability). The limitations set out in the Code include
computational rules under which foreign tax credits allowable with respect to
specific classes of income cannot exceed the U.S. federal income taxes
otherwise payable with respect to each such class of income. Dividends
generally will be treated as foreign source passive category income or, in the
case of certain U.S. Holders, general category income for United States foreign
tax credit purposes. Further, there are special rules for computing the foreign
tax credit limitation of a taxpayer who receives dividends subject to a reduced
rate of tax, see discussion below. A U.S. Holder will be denied a foreign tax
credit with respect to Israeli income tax withheld from dividends received on
the ordinary shares to the extent such U.S. Holder has not held the ordinary
shares for at least 16 days of the 31-day period beginning on the date which is
15 days before the ex-dividend date or to the extent such U.S. Holder is under
an obligation to make related payments with respect to substantially similar or
related property. Any days during which a U.S. Holder has substantially
diminished its risk of loss on the ordinary shares are not counted toward
meeting the 16-day holding period required by the statute. The rules relating
to the determination of the foreign tax credit are complex, and you should
consult with your personal tax advisors to determine whether and to what extent
you would be entitled to this credit.

Subject
to certain limitations, qualified dividend income received by a noncorporate
U.S. Holder in tax years beginning on or before December 31, 2010 will be
subject to tax at a reduced maximum tax rate of 15 percent. Distributions
taxable as dividends paid on the ordinary shares should qualify for the 15
percent rate provided that either: (i) we are entitled to benefits under the
income tax treaty between the United States and Israel (the Treaty) or (ii)
the ordinary shares are readily tradable on an established securities market in
the United States and certain other requirements are met. We believe that we
are entitled to benefits under the Treaty and that the ordinary shares
currently are readily tradable on an established securities market in the
United States. However, no assurance can be given that the ordinary shares will
remain readily tradable. The rate reduction does not apply unless certain
holding period requirements are satisfied. With respect to the ordinary shares,
the U.S. Holder must have held such shares for at least 61 days during the
121-day period beginning 60 days before the ex-dividend date. The rate
reduction also does not apply to dividends received from a passive foreign
investment company see discussion below, or in respect of certain hedged
positions or in certain other situations. The legislation enacting the reduced
tax rate contains special rules for computing the foreign tax credit limitation
of a taxpayer who receives dividends subject to the reduced tax rate. U.S.
Holders of ordinary shares should consult their own tax advisors regarding the
effect of these rules in their particular circumstances.

Dispositionof Ordinary Shares

If
you sell or otherwise dispose of ordinary shares, you will recognize gain or
loss for U.S. federal income tax purposes in an amount equal to the difference
between the amount realized on the sale or other disposition and your adjusted
tax basis in the ordinary shares. Subject to the discussion below under the
heading Passive Foreign Investment Companies, such gain or loss generally
will be capital gain or loss and will be long-term capital gain or loss if you
have held the ordinary shares for more than one year at the time of the sale or
other disposition. In general, any gain that you recognize on the sale or other
disposition of ordinary shares will be U.S.-source for purposes of the foreign
tax credit limitation; losses will generally be allocated against U.S. source
income. Deduction of capital losses is subject to certain limitations under the
Code.

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In
the case of a cash basis U.S. Holder who receives NIS in connection with the
sale or disposition of ordinary shares, the amount realized will be based on
the U.S. dollar value of the NIS received with respect to the ordinary shares
as determined on the settlement date of such exchange. A U.S. Holder who receives
payment in NIS and converts NIS into United States dollars at a conversion rate
other than the rate in effect on the settlement date may have a foreign
currency exchange gain or loss that would be treated as ordinary income or
loss.

An
accrual basis U.S. Holder may elect the same treatment required of cash basis
taxpayers with respect to a sale or disposition of ordinary shares, provided
that the election is applied consistently from year to year. Such election may
not be changed without the consent of the Internal Revenue Service (the IRS).
In the event that an accrual basis U.S. Holder does not elect to be treated as
a cash basis taxpayer (pursuant to the Treasury regulations applicable to
foreign currency transactions), such U.S. Holder may have a foreign currency
gain or loss for U.S. federal income tax purposes because of differences
between the U.S. dollar value of the currency received prevailing on the trade
date and the settlement date. Any such currency gain or loss would be treated as
ordinary income or loss and would be in addition to gain or loss, if any,
recognized by such U.S. Holder on the sale or disposition of such ordinary
shares.

Passive
Foreign Investment Companies

For
U.S. federal income tax purposes, we will be considered a passive foreign
investment company (PFIC) for any taxable year in which either (i) 75% or
more of our gross income is passive income, or (ii) at least 50% of the average
value of all of our assets for the taxable year produce or are held for the
production of passive income. For this purpose, passive income includes
dividends, interest, royalties, rents, annuities and the excess of gains over
losses from the disposition of assets which produce passive income. If we were
determined to be a PFIC for U.S. federal income tax purposes, highly complex
rules would apply to U.S. Holders owning ordinary shares. Accordingly, you are
urged to consult your tax advisors regarding the application of such rules.

Based
on our current and projected income, assets and activities, we believe that we
are not currently a PFIC nor do we expect to become a PFIC in the foreseeable
future. However, because the determination of whether we are a PFIC is based
upon the composition of our income and assets from time to time, there can be
no assurances that we will not become a PFIC in this or any future taxable
year.

If
we are treated as a PFIC for any taxable year, dividends would not qualify for
the reduced maximum tax rate, discussed above, and, unless you elect either to
treat your investment in ordinary shares as an investment in a qualified
electing fund (a QEF election) or to mark to market your ordinary shares,
as described below:

| |   |                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | you would be required to
  allocate income recognized upon receiving certain dividends or gain
  recognized upon the disposition of ordinary shares ratably over the holding
  period for such ordinary shares,                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                   
| | · | the amount allocated to
  each year during which we are considered a PFIC other than the year of the
  dividend payment or disposition would be subject to tax at the highest
  individual or corporate tax rate, as the case may be, in effect for that year
  and an interest charge would be imposed with respect to the resulting tax
  liability allocated to each such year,
| |   |                                                                                                                                                                                                                                                                                                                                                                                   
| | · | the amount allocated to
  the current taxable year and any taxable year before we became a PFIC would
  be taxable as ordinary income in the current year, and                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                   
| | · | you would be required to
  file an annual return on IRS Form 8621 regarding distributions received with
  respect to ordinary shares and any gain realized on your ordinary shares.                                                                                                                                                                                               

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If
you make either a timely QEF election or a timely mark-to-market election in
respect of your ordinary shares, you would not be subject to the rules
described above. If you make a timely QEF election, you would be required to
include in your income for each taxable year your pro rata share of our
ordinary earnings as ordinary income and your pro rata share of our net capital
gain as long-term capital gain, whether or not such amounts are actually
distributed to you. You would not be eligible to make a QEF election unless we
comply with certain applicable information reporting requirements.

Alternatively,
if the ordinary shares are considered marketable stock and if you elect to
mark-to-market your ordinary shares, you will generally include in income any
excess of the fair market value of the ordinary shares at the close of each tax
year over your adjusted basis in the ordinary shares. If the fair market value
of the ordinary shares had depreciated below your adjusted basis at the close
of the tax year, you may generally deduct the excess of the adjusted basis of
the ordinary shares over its fair market value at that time. However, such
deductions generally would be limited to the net mark-to-market gains, if any,
that you included in income with respect to such ordinary shares in prior
years. Income recognized and deductions allowed under the mark-to-market
provisions, as well as any gain or loss on the disposition of ordinary shares
with respect to which the mark-to-market election is made, is treated as
ordinary income or loss (except that loss on a disposition of ordinary shares
is treated as capital loss to the extent the loss exceeds the net
mark-to-market gains, if any, that you included in income with respect to such
ordinary shares in prior years). Gain
or loss from the disposition of ordinary shares (as to which a mark-to-market
election was made) in a year in which we are no longer a PFIC, will be capital
gain or loss.

Backup
Withholding and Information Reporting

Payments
in respect of ordinary shares may be subject to information reporting to the
U.S. Internal Revenue Service and to U.S. backup withholding tax at a rate
equal to the third highest income tax rate applicable to individuals (which,
under current law, is 28%). Backup withholding will not apply, however, if you
(i) are a corporation or come within certain exempt categories, and demonstrate
the fact when so required, or (ii) furnish a correct taxpayer identification
number and make any other required certification.

Backup
withholding is not an additional tax. Amounts withheld under the backup
withholding rules may be credited against a U.S. Holders U.S. tax liability,
and a U.S. Holder may obtain a refund of any excess amounts withheld under the
backup withholding rules by filing the appropriate claim for refund with the
IRS.

Any
U.S. holder who holds 10% or more in vote or value of our ordinary shares will
be subject to certain additional United States information reporting
requirements.

U.S.
Gift and Estate Tax

An
individual U.S. Holder of ordinary shares will be subject to U.S. gift and
estate taxes with respect to ordinary shares in the same manner and to the same
extent as with respect to other types of personal property.

|   |                               
|-- | ------------------------------
|F. | Dividends and
  Paying Agents.
|   |                               
|   | Not applicable.               
|   |                               
|G. | Statements by
  Experts.      
|   |                               
|   | Not applicable.               
|   |                               
|H. | Documents on
  Display.       

We
are subject to the informational requirements of the Securities Exchange Act of
1934, as amended, applicable to foreign private issuers and fulfill the
obligations with respect to such requirements by filing reports with the Securities
and Exchange Commission. You may read and copy any document we file with the
Securities and Exchange Commission without charge at the Securities and
Exchange Commissions public reference room at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549, and on the Securities and Exchange Commission Internet
site (http://www.sec.gov) and on our website www.magal-ssl.com. Copies of such
material may be obtained by mail from the Public Reference Branch of the
Securities and Exchange Commission at such address, at prescribed rates. Please
call the Securities and Exchange Commission at l-800-SEC-0330 for further
information on the public reference room.

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As
a foreign private issuer, we are exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements, and our officers,
directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the
Exchange Act. In addition, we are not required under the Exchange Act to file
periodic reports and financial statements with the Securities and Exchange
Commission as frequently or as promptly as U.S. companies whose securities are
registered under the Exchange Act. A copy of each report submitted in accordance
with applicable U.S. law is available for public review at our principal
executive offices.

In
addition, since we are also listed on the TASE, we submit copies of all our
filings with the SEC to the Israeli Securities Authority and TASE. Such copies
can be retrieved electronically through the TASE internet messaging system
(www.maya.tase.co.il) and, in addition, with respect to filings made as of
November 2003, through the MAGNA distribution site of the Israeli Securities
Authority (www.magna.isa.gov.il).

|   |                          
|-- | -------------------------
|I. | Subsidiary
  Information.
|   |                          
|   | Not applicable.          

|         |                                                             
|-------- | ------------------------------------------------------------
|ITEM 11. | Quantitative
  and Qualitative Disclosures about Market Risk

We
are exposed to a variety of risks, including changes in interest rates and
foreign currency fluctuations.

Interest Rate Risk

Our
exposure to market risk for changes in interest rates is related to our
long-term and short-term loans.

Our
financial expenses are sensitive to the LIBOR and the Prime, since our
short-term loans bear a LIBOR and Prime -based interest rate.

The
table below presents principal amounts and related weighted average interest
rates by date of maturity for our loans:

Interest Rate Sensitivity
  Principal Amount by Expected MaturityWeighted Average Interest Rate(U.S. dollars in thousands)

|                                 |  |      |        |      |   |      |   |              |       |       |   |                                     |   |   |        |   |   |        | 
|-------------------------------- |  | ---- | ------ | ---- | - | ---- | - | ------------ | ----- | ----- | - | ----------------------------------- | - | - | ------ | - | - | ------ | 
|Liabilities:                     |  | 2008 |        | 2009 |   | 2010 |   | 2011-
  2012 |       | Total |   | Fair
  Value at
  December 31, 2007 |  
|                                 |  |      |        |      |   |      |   |              |       |       |   |                                     |  
|                                 |  |      |        |      |   |      |   |              |       |       |   |                                     |   |   |        |   |   |        | 
|Short Term Loans                 |  | $    | 16,434 |      |   |     |   |              |      |       |   |                                    |   | $ | 16,434 |   | $ | 16,434 | 
|Weighted Average Interest
  Rate |  |      | 5.72   | %    |   |     |   |              |      |       |   |                                    |   |   | 5.72   | % |   |       | 
|Long Term Loans                  |  | $    | 4,303  |      | $ | 813  |   | $            | 1,802 |       | $ | 480                                 |   | $ | 7,398  |   | $ | 7,439  | 
|Weighted Average Interest
  Rate |  |      | 5.94   | %    |   | 5.49 | % |              | 5.47  | %     |   | 5.5                                 | % |   | 6.04   | % |   |       | 

Foreign Currency Exchange Risk

We
sell most of our products in North America, Europe and Israel. A portion of our
revenues in Israel are made in NIS, and we expect to make NIS denominated
revenues in 2008 as well. Our foreign currency exposure with respect to our
revenues is mitigated, and we expect it will continue to be mitigated, through
salaries, materials and support operations, in which part of these costs are
denominated in NIS. Since the beginning of 2008, the NIS has appreciated by
approximately 12.8% against the dollar. We are also subject to exchange rate
fluctuations related to our activities in Canada.

76

---

---



Because
exchange rates between the NIS and the dollar fluctuate continuously, exchange
rate fluctuations, particularly larger periodic devaluations, may have an
impact on our profitability and period-to-period comparisons of our results. In
2005, the rate of devaluation of the NIS against the dollar was 6.8%, while in
2003, 2004, 2006 and 2007 the NIS was revaluated in relation to the dollar by
7.6%, 1.6%, 8.2% and 9.0%, respectively. A portion of our expenses, primarily
labor expenses, is incurred in NIS and a part of our revenues are quoted in
NIS. Additionally, certain assets especially trade receivables, as well as part
of our liabilities are denominated in NIS. Our results may be adversely
affected by devaluation of the NIS in relation to the dollar (or if such
devaluation is on lagging basis), if our revenues in NIS are higher than our
expenses in NIS and/or the amount of our assets in NIS are higher than our
liabilities in NIS. On the contrary, our results may be adversely affected by
the revaluation of the NIS in relation to the dollar (or if such revaluation is
on a lagging basis), if the amount of our expenses in NIS are higher than the
amount of our revenues in NIS and/or the amount of our liabilities in NIS are
higher than our assets in NIS.

We
are also subject to exchange rate fluctuations related to our activities in
Canada.

During
the years ended December 31, 2005 and 2007, foreign currency fluctuations had
an adverse impact on our results of operations, and our foreign exchange
losses, net were $145,000 and $792,000 respectively. During the year ended December 31, 2006, our
foreign exchange gains, net were $276,000. We cannot assure you that in the
future our results of operations may not be materially adversely affected by
currency fluctuations.

To
protect against the change in the forecasted foreign currency cash flows of
certain sale arrangements resulting from changes in the exchange rateduring
2003, 2005 and 2006 we entered into forward contracts in order to hedge
portions of our forecasted revenue and unbilled accounts receivable denominated
in Euros and Polish Zlotys. We designated the forward instruments as cash flow
hedges for accounting purposes.

For
derivative instruments designated as cash flow hedges (i.e., hedging the
exposure to variability in expected future cash flows that is attributable to a
particular risk), the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same line item associated with the forecasted
transaction in the same period or periods during which the hedged transaction
affects earnings.

In
2005 a sales arrangement in Polish Zlotys that was to take place from 2005 to 2007 was canceled.
Accordingly, changes in the fair value of the forward contracts were recorded
as financial expenses in the years ended December 31, 2005, 2006 and 2007.

On
October 1, 2006, we changed our functional currency from the dollar to the NIS.
From the date of change in functional currency, the hedge of the revenues in
Euros is no longer effective. Changes in the fair value of the forward contracts
from October 1, 2006 were charged to financial expenses.

We
recorded $110,000, $915,000 and $666,000 as financial expenses related to
forward contracts transactions, in 2005, 2006 and 2007, respectively.

|         |                                                         
|-------- | --------------------------------------------------------
|ITEM 12. | Description
  of Securities Other Than Equity Securities

Not
applicable.

PART II

|         |                                                  
|-------- | -------------------------------------------------
|ITEM 13. | Defaults,
  Dividend Arrearages and Delinquencies

Not
applicable.

77

---

---



|         |                                                                               
|-------- | ------------------------------------------------------------------------------
|ITEM 14. | Material
  Modifications to the Rights of Security Holders and Use of Proceeds

Not
applicable.

|         |                        
|-------- | -----------------------
|ITEM 15. | Controls and Procedures

Not
applicable.

|          |                        
|--------- | -----------------------
|ITEM 15T. | Controls and Procedures

Disclosure Controls
and Procedures

Our
principal executive officer and chief financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of
December 31, 2007, have concluded that, as of such date, our disclosure
controls and procedures were effective and ensured that information required to
be disclosed by us in reports that we file or submit under the Securities
Exchange Act is accumulated and communicated to our management, including our
principal executive officer and chief financial officer, to allow timely
decisions regarding required disclosure and is recorded, processed, summarized
and reported within the time periods specified by the rules of the Securities
and Exchange Commission.

Managements Annual
Report on Internal Control over Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal
control over our financial reporting. Internal control over financial reporting
is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities
Exchange Act of 1934 as a process designed by, or under the supervision of, the
companys principal executive and principal financial officers and effected by
the companys board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:

| |   |                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Pertain
  to the maintenance of records that in reasonable detail accurately and fairly
  reflect the transaction and dispositions of the assets of the company;                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                      
| | · | Provide
  reasonable assurance that transactions are recorded as necessary to permit
  preparation of financial statements in accordance with generally accepted
  accounting principles, and that receipts and expenditures of the company are
  being made only in accordance with authorizations of management and directors
  of the company; and
| |   |                                                                                                                                                                                                                                                                                                                                                      
| | · | Provide
  reasonable assurance regarding prevention or timely detection of unauthorized
  acquisition, use of disposition of the companys assets that could have a
  material effect on the financial statements.                                                                                                                                   

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

Our
management assessed the effectiveness of our internal control over financial
reporting, as of December 31, 2007. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based
on that assessment, our management concluded that as of December 31,
2007, our internal control over financial reporting is effective.

78

---

---



Our
independent auditors, Kost Forer Gabbay & Kasierer, a member of Ernst &
Young Global, have issued an audit report on the effectiveness of our internal
control over financial reporting. The report is included in page F-3 of this
Annual Report on Form 20-F.

Changes in Internal
Control over Financial Reporting

During
the period covered by this Annual Report on Form 20-F, no changes in our
internal control over financial reporting have occurred that materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

|          |                                   
|--------- | ----------------------------------
|ITEM 16A. | Audit
  Committee Financial Expert

Our
board of directors has determined that Mrs. Anat Winner, an independent
director, meets the definition of an audit committee financial expert, as
defined by rules of the Securities and Exchange Commission. For a brief
description of Mrs. Winners relevant experience, see Item 6.A. Directors,
Senior Management and Employees - Directors and Senior Management.

|          |                 
|--------- | ----------------
|ITEM 16B. | Code of
  Ethics

We
have adopted a code of ethics that applies to our chief executive officer and
all senior financial officers of our company, including our chief financial
officer, chief accounting officer or controller, or persons performing similar
functions. The code of ethics is publicly available on our website at www.magal-ssl.com.
Written copies are available upon request. If we make any substantive amendment
to the code of ethics or grant any waivers, including any implicit waiver, from
a provision of the codes of ethics, we will disclose the nature of such
amendment or waiver on our website.

|          |                                         
|--------- | ----------------------------------------
|ITEM 16C. | Principal
  Accountant Fees and Services

Fees
Paid to Independent Public Accountants

The
following table sets forth, for each of the years indicated, the fees paid to
our principal independent registered public accounting firm,Kost
Forer Gabbay & Kasierer. All of such fees were pre-approved by our Audit
Committee.

|                  |  |                         |         |      |   |         | 
|----------------- |  | ----------------------- | ------- | ---- | - | ------- | 
|                  |  | Year Ended December 31, |        
|                  |  |                         |        
|Services Rendered |  | 2006                    |         | 2007 |  
|                  |  |                         |         |      |  
|                  |  |                         |         |      |   |         | 
|Audit (1)         |  | $                       | 359,013 |      | $ | 405,201 | 
|Audit-related     |  |                         |        |      |   |        | 
|Tax (2)           |  |                         | 25,169  |      |   | 125,908 | 
|Other (3)         |  |                         | 19,393  |      |   | 6,845   | 
|                  |  |                         |         |      |   |         | 
|Total             |  | $                       | 403,575 |      | $ | 537,954 | 

---

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Audit fees are for audit
  services for each of the years shown in the table, including fees associated
  with the annual audit (including audit of our internal control over financial
  reporting) and reviews of our quarterly financial results submitted to the
  Securities and Exchange Commission on Form 6-K, consultations on various
  accounting issues and audit services provided in connection with other
  statutory or regulatory filings.
| | (2) | Tax fees are for
  professional services rendered by our auditors for tax compliance, tax
  planning and tax advice on actual or contemplated transactions, tax
  consulting associated to international taxation and employee benefits                                                                                                                                                                                                                    
| | (3) | Other fees in 2007 relate
  to consultation in connection with a tax return for a subsidiary based in
  Germany.                                                                                                                                                                                                                                                                                                                                           

79

---

---



Pre-Approval Policies and Procedures

Our
audit committee has adopted a policy and procedures for the pre-approval of
audit and non-audit services rendered by our independent public accounting
firm, Kost Forer Gabbay & Kasierer and their affiliates. Pre-approval of an
audit or non-audit service may be given as a general pre-approval, as part of
the audit committees approval of the scope of the engagement of our
independent auditor, or on an individual basis. Any proposed services exceeding
general pre-approved levels also requires specific pre-approval by our audit
committee. The policy prohibits retention of the independent public accountants
to perform the prohibited non-audit functions defined in Section 201 of the
Sarbanes-Oxley Act or the rules of the SEC, and also requires the audit committee
to consider whether proposed services are compatible with the independence of
the public accountants.

|          |                                                            
|--------- | -----------------------------------------------------------
|ITEM 16D. | Exemptions
  from the Listing Standards for Audit Committee

Not
applicable.

|          |                                                                        
|--------- | -----------------------------------------------------------------------
|ITEM 16E. | Purchase
  of Equity Securities by the Issuer and Affiliated Purchasers

Issuer Purchase of Equity
Securities

Neither
we nor any affiliated purchaser has purchased any of our securities during
2007.

PART III

|         |                       
|-------- | ----------------------
|ITEM 17. | Financial
  Statements

We
have responded to Item 18 in lieu of this item.

|         |                       
|-------- | ----------------------
|ITEM 18. | Financial
  Statements

The
Financial Statements required by this item are found at the end of this annual
report, beginning on page F-1.

Consolidated Financial
Statements

|                                                             |             
|------------------------------------------------------------ | ------------
|Index to Financial Statements                                | F-1         
|                                                            
|Reports of Independent
  Registered Public Accounting Firm   | F-2
  - F-3 
|                                                            
|Consolidated Balance
  Sheets                                | F-4
  - F-4 
|                                                            
|Consolidated Statements of
  Income                          | F-6         
|                                                            
|Consolidated Statements of
  Changes in Shareholders Equity | F-7         
|                                                            
|Consolidated Statements of
  Cash Flows                      | F-8
  -F-9  
|                                                            
|Notes to Consolidated
  Financial Statements                 | F-10-
  F-47
|                                                            
|Report of Independent
  Auditors with Respect to Subsidiary  | F-48        

80

---

---



|         |         
|-------- | --------
|ITEM 19. | Exhibits

The
exhibits filed with or incorporated into this annual report are listed on the
index of exhibits below:

|              |  |                                                                                                                                              
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
  No. |  | Description                                                                                                                                  
|              |  |                                                                                                                                              
|              |  |                                                                                                                                              
|1.1*          |  | Memorandum of Association
  of the Registrant                                                                                                
|              |  |                                                                                                                                              
|1.2**         |  | Articles of Association of
  the Registrant                                                                                                  
|              |  |                                                                                                                                              
|2.1***        |  | Specimen Share Certificate
  for Ordinary Share                                                                                              
|              |  |                                                                                                                                              
|2.2****       |  | The Registrants Stock
  Option Plan (1993), as amended                                                                                      
|              |  |                                                                                                                                              
|12.1          |  | Certification of Chief
  Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
  Securities Exchange Act, as amended        
|              |  |                                                                                                                                              
|12.2          |  | Certification of Chief
  Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
  Securities Exchange Act, as amended        
|              |  |                                                                                                                                              
|13.1          |  | Certification of Chief
  Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
  906 of the Sarbanes-Oxley Act of 2002
|              |  |                                                                                                                                              
|13.2          |  | Certification of Chief
  Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
  906 of the Sarbanes-Oxley Act of 2002
|              |  |                                                                                                                                              
|15.1          |  | Schedule of Valuation and
  Qualifying Accounts                                                                                              
|              |  |                                                                                                                                              
|15.2          |  | Consent of Kost Forer
  Gabbay & Kasierer                                                                                                    
|              |  |                                                                                                                                              
|15.3          |  | Consent of Salles, Sáinz -
  Grant Thornton, S. C.                                                                                           

---

*          Previously
filed as an exhibit to our Registration Statement on Form F-1
(No. 33-57438), filed with the Commission on January 26, 1993, as
amended, and incorporated herein by reference.


**        Previously
filed as an exhibit to our Registration Statement on Form F-1
(No. 33-57438), filed with the Commission on January 26, 1993, as
amended, and incorporated herein by reference and an amendment thereto
previously filed as an exhibit to our Registration Statement on Form S-8 (No.
333-6246), filed with the Commission on January 7, 1997 and incorporated
herein by reference and further amendments thereto previously filed as an
exhibit to our Annual Report on Form 20-F for the fiscal year ended December 31,
2000, filed with the Commission on June 29, 2001 and incorporated herein
by reference.

***      Previously filed as an exhibit
to our Registration Statement on Form 8-A, filed with the Commission on
March 18, 1993, as amended, and incorporated herein by reference.

****     Previously
filed as an exhibit to our Registration Statement on Form S-8 (No. 333-6246),
filed with the Commission on January 7, 1997 and incorporated herein by
reference and further amendments thereto previously filed as an exhibit to our
Annual Report on Form 20-F for the fiscal year ended December 31, 2000,
filed with the Commission on June 29, 2001 and incorporated herein by
reference.

81

---

---



MAGAL SECURITY SYSTEMS LTD. AND ITS
SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2007

IN U.S. DOLLARS

INDEX

|                                                           |            
|---------------------------------------------------------- | -----------
|                                                           | Page       
|                                                           |            
|                                                           |            
|Reports of Independent Registered Public
  Accounting Firm | F-2 - F-3  
|                                                           |            
|Consolidated Balance Sheets                                | F-4 - F-5  
|                                                           |            
|Consolidated Statements of Operations                      | F-6        
|                                                           |            
|Statements of Changes in Shareholders
  Equity            | F-7        
|                                                           |            
|Consolidated Statements of Cash Flows                      | F-8 - F-9  
|                                                           |            
|Notes to Consolidated Financial Statements                 | F-10 - F-47

F - 1

---

---

|                     |                                                                                                                              
|-------------------- | -----------------------------------------------------------------------------------------------------------------------------
|(ERNST & YOUNG LOGO) | Kost Forer
  Gabbay & Kasierer3 Aminadav St.
  Tel-Aviv 67067, IsraelTel:972 (3)6232525
  Fax: 972 (3)5622555
  www.ey.com/il

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

MAGAL SECURITY SYSTEMS LTD.

We
have audited the accompanying consolidated balance sheets of Magal Security
Systems Ltd. (the Company) and its subsidiaries as of December 31, 2006 and
2007, and the related consolidated statements of operations, changes in
shareholders equity and cash flows for each of the three years in the period
ended December 31, 2007. 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
did not audit the financial statements of a certain subsidiary, whose assets
constitute approximately 4.1% and 4% of total consolidated assets as of
December 31, 2006 and 2007, respectively, and whose revenues constitute
approximately 5.2%, 11.1% and 9.4% of total consolidated revenues for the years ended
December 31, 2005, 2006, and 2007, respectively. The financial statements of this
company were audited by other auditors, whose report has been furnished to us,
and our opinion, insofar as it relates to amounts included for this subsidiary,
is based solely on the report of the other auditors.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The 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 and the report of the other
auditors provide a reasonable basis for our opinion.

In
our opinion, based on our audits and the report of the other auditors, the consolidated
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2006 and 2007, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2007, in conformity with accounting principles
generally accepted in the United States.

As
discussed in Note 2n to the consolidated financial statements, in 2006 the
Company adopted Statement of Financial Accounting Standard Board No. 123
(revised 2004) Share Based Payment.

We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Companys internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated June 29, 2008
expressed an unqualified opinion thereon.

|                   |                                                                 
|------------------ | ----------------------------------------------------------------
|Tel-Aviv,
  Israel | /s/ Kost Forer
  Gabbay & KasiererKOST FORER
  GABBAY & KASIERER
|June 29,
  2008    | A Member of
  Ernst & Young Global                              

F - 2

---

---

|                     |                                                                                                                              
|-------------------- | -----------------------------------------------------------------------------------------------------------------------------
|(ERNST & YOUNG LOGO) | Kost Forer
  Gabbay & Kasierer3 Aminadav St.
  Tel-Aviv 67067, IsraelTel:972 (3)6232525
  Fax: 972 (3)5622555
  www.ey.com/il

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Board
of Directors and Shareholders of

MAGAL SECURITY
SYSTEMS LTD.

We
have audited Magal Security Systems Ltd. (the Company) internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Companys
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Managements
Report on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the Companys internal control over financial reporting based on
our audit.

We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.

A
companys internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A companys internal control
over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial
statements.

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

In
our opinion, the Company maintained in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on the
COSO criteria.

We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company and its subsidiaries as of December 31, 2006 and 2007, and the
related consolidated statements of operations, changes in shareholders equity
and cash flows for each of the three years in the period ended
December 31, 2007 and our report dated June 29, 2008 expressed an
unqualified opinion thereon.

|                   |                                                                 
|------------------ | ----------------------------------------------------------------
|Tel-Aviv,
  Israel | /s/ Kost Forer
  Gabbay & KasiererKOST FORER
  GABBAY & KASIERER
|June 29,
  2008    | A Member of
  Ernst & Young Global                              

F - 3

---

---

|                                                     
|-----------------------------------------------------
|MAGAL SECURITY
  SYSTEMS LTD. 
  AND ITS SUBSIDIARIES
|                                                     
|CONSOLIDATED BALANCE SHEETS                          
|                                                     
|U.S. dollars in thousands                            

|                                                                                                                              |  |              |         |      |   |         | 
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- | - | ------- | 
|                                                                                                                              |  | December 31, |        
|                                                                                                                              |  |              |        
|                                                                                                                              |  | 2006         |         | 2007 |  
|                                                                                                                              |  |              |         |      |  
|                                                                                                                              |  |              |         |      |   |         | 
|ASSETS                                                                                                                        |  |              |         |      |   |         | 
|                                                                                                                              |  |              |         |      |   |         | 
|CURRENT ASSETS:                                                                                                               |  |              |         |      |   |         | 
|Cash and cash equivalents                                                                                                     |  | $            | 4,908   |      | $ | 9,205   | 
|Marketable securities (Note 3)                                                                                                |  |              | 3,067   |      |   | 9,464   | 
|Short-term bank deposits                                                                                                      |  |              | 14,186  |      |   | 11,220  | 
|Trade receivables (net of allowance for
  doubtful accounts of $ 384 and $ 343 at December 31, 2006 and 2007,
  respectively) |  |              | 27,754  |      |   | 26,775  | 
|Unbilled accounts receivable                                                                                                  |  |              | 5,389   |      |   | 4,053   | 
|Other accounts receivable and prepaid
  expenses (Note 4)                                                                     |  |              | 3,821   |      |   | 5,753   | 
|Deferred income taxes                                                                                                         |  |              | 1,604   |      |   | 1,936   | 
|Inventories (Note 5)                                                                                                          |  |              | 13,971  |      |   | 23,785  | 
|                                                                                                                              |  |              |         |      |   |         | 
|                                                                                                                              |  |              |         |      |   |         | 
|Total
  current assets                                                                                                        |  |              | 74,700  |      |   | 92,191  | 
|                                                                                                                              |  |              |         |      |   |         | 
|                                                                                                                              |  |              |         |      |   |         | 
|LONG-TERM INVESTMENTS AND RECEIVABLES:                                                                                        |  |              |         |      |   |         | 
|Long-term trade receivables                                                                                                   |  |              | 40      |      |   | 2,019   | 
|Long-term loan (Note 11i)                                                                                                     |  |              | 622     |      |   | 808     | 
|Long-term bank deposits                                                                                                       |  |              | 4,800   |      |   | 1,846   | 
|Escrow deposit (Note 1b)                                                                                                      |  |              |        |      |   | 4,442   | 
|Severance pay fund                                                                                                            |  |              | 2,401   |      |   | 2,765   | 
|                                                                                                                              |  |              |         |      |   |         | 
|                                                                                                                              |  |              |         |      |   |         | 
|Total
  long-term investments and receivables                                                                                 |  |              | 7,863   |      |   | 11,880  | 
|                                                                                                                              |  |              |         |      |   |         | 
|                                                                                                                              |  |              |         |      |   |         | 
|PROPERTY AND EQUIPMENT, NET (Note 6)                                                                                          |  |              | 7,707   |      |   | 8,429   | 
|                                                                                                                              |  |              |         |      |   |         | 
|                                                                                                                              |  |              |         |      |   |         | 
|DEFERRED INCOME TAXES                                                                                                         |  |              | 686     |      |   | 763     | 
|                                                                                                                              |  |              |         |      |   |         | 
|                                                                                                                              |  |              |         |      |   |         | 
|OTHER INTANGIBLE ASSETS, NET (Note 7)                                                                                         |  |              | 1,031   |      |   | 7,040   | 
|                                                                                                                              |  |              |         |      |   |         | 
|                                                                                                                              |  |              |         |      |   |         | 
|GOODWILL                                                                                                                      |  |              | 4,285   |      |   | 5,610   | 
|                                                                                                                              |  |              |         |      |   |         | 
|                                                                                                                              |  |              |         |      |   |         | 
|ASSETS ATRIBUTED TO DISCONTINUED OPERATIONS                                                                                   |  |              | 7,409   |      |   | 244     | 
|                                                                                                                              |  |              |         |      |   |         | 
|                                                                                                                              |  |              |         |      |   |         | 
|Total
  assets                                                                                                                |  | $            | 103,681 |      | $ | 126,157 | 
|                                                                                                                              |  |              |         |      |   |         | 

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

F - 4

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY
  SYSTEMS LTD. 
  AND ITS SUBSIDIARIES      
|                                                           
|CONSOLIDATED BALANCE SHEETS                                
|                                                           
|U.S. dollars in thousands (except share and per share data)

|                                                                                                                                                                      |  |              |         |      |   |         | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- | - | ------- | 
|                                                                                                                                                                      |  | December 31, |        
|                                                                                                                                                                      |  |              |        
|                                                                                                                                                                      |  | 2006         |         | 2007 |  
|                                                                                                                                                                      |  |              |         |      |  
|                                                                                                                                                                      |  |              |         |      |   |         | 
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                  |  |              |         |      |   |         | 
|                                                                                                                                                                      |  |              |         |      |   |         | 
|CURRENT LIABILITIES:                                                                                                                                                  |  |              |         |      |   |         | 
|Short-term bank credit (Note 8)                                                                                                                                       |  | $            | 17,026  |      | $ | 16,434  | 
|Current maturities of long-term bank debt
  (Note 10)                                                                                                                 |  |              | 795     |      |   | 4,303   | 
|Trade payables                                                                                                                                                        |  |              | 5,954   |      |   | 7,344   | 
|Customer advances                                                                                                                                                     |  |              | 1,230   |      |   | 11,703  | 
|Other accounts payable and accrued expenses
  (Note 9)                                                                                                                |  |              | 9,215   |      |   | 10,881  | 
|Forward contracts                                                                                                                                                     |  |              | 596     |      |   |        | 
|                                                                                                                                                                      |  |              |         |      |   |         | 
|                                                                                                                                                                      |  |              |         |      |   |         | 
|Total current liabilities                                                                                                                                             |  |              | 34,816  |      |   | 50,665  | 
|                                                                                                                                                                      |  |              |         |      |   |         | 
|                                                                                                                                                                      |  |              |         |      |   |         | 
|LONG-TERM LIABILITIES:                                                                                                                                                |  |              |         |      |   |         | 
|Long-term bank debt (Note 10)                                                                                                                                         |  |              | 7,399   |      |   | 3,095   | 
|Long-term accounts payable                                                                                                                                            |  |              | 178     |      |   |        | 
|Deferred income taxes                                                                                                                                                 |  |              |        |      |   | 2,097   | 
|Accrued severance pay                                                                                                                                                 |  |              | 2,524   |      |   | 3,873   | 
|                                                                                                                                                                      |  |              |         |      |   |         | 
|                                                                                                                                                                      |  |              |         |      |   |         | 
|Total
  long-term liabilities                                                                                                                                         |  |              | 10,101  |      |   | 9,065   | 
|                                                                                                                                                                      |  |              |         |      |   |         | 
|                                                                                                                                                                      |  |              |         |      |   |         | 
|LIABILITIES ATRIBUTED TO DISCONTINUED
  OPERATIONS                                                                                                                    |  |              | 614     |      |   | 849     | 
|                                                                                                                                                                      |  |              |         |      |   |         | 
|                                                                                                                                                                      |  |              |         |      |   |         | 
|COMMITMENTS AND CONTINGENT LIABILITIES
  (Note 11)                                                                                                                    |  |              |         |      |   |         | 
|                                                                                                                                                                      |  |              |         |      |   |         | 
|SHAREHOLDERS EQUITY (Note 12):                                                                                                                                       |  |              |         |      |   |         | 
|Share capital -                                                                                                                                                       |  |              |         |      |   |         | 
|Ordinary shares of NIS 1 par value
  -                                                                                                                                |  |              |         |      |   |         | 
|Authorized: 19,748,000 shares at December 31, 2006 and 2007; Issued and
  outstanding: 10,391,548 and 10,396,548 shares at December 31, 2006 and
  2007, respectively |  |              | 3,224   |      |   | 3,225   | 
|Additional paid-in capital                                                                                                                                            |  |              | 47,681  |      |   | 47,806  | 
|Accumulated other comprehensive income                                                                                                                                |  |              | 2,314   |      |   | 5,671   | 
|Foreign currency translation (Companys
  stand alone financial statements)                                                                                           |  |              | 297     |      |   | 2,589   | 
|Retained earnings                                                                                                                                                     |  |              | 4,634   |      |   | 6,287   | 
|                                                                                                                                                                      |  |              |         |      |   |         | 
|                                                                                                                                                                      |  |              |         |      |   |         | 
|Total
  shareholders equity                                                                                                                                          |  |              | 58,150  |      |   | 65,578  | 
|                                                                                                                                                                      |  |              |         |      |   |         | 
|                                                                                                                                                                      |  |              |         |      |   |         | 
|Total
  liabilities and shareholders equity                                                                                                                          |  | $            | 103,681 |      | $ | 126,157 | 
|                                                                                                                                                                      |  |              |         |      |   |         | 

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

F - 5

---

---

|                                                     
|-----------------------------------------------------
|MAGAL SECURITY
  SYSTEMS LTD. 
  AND ITS SUBSIDIARIES
|                                                     
|CONSOLIDATED STATEMENTS OF OPERATIONS                
|                                                     
|U.S. dollars in thousands (except per share data)    

|                                                                     |  |                         |        |      |   |        |   |   |        | 
|-------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | 
|                                                                     |  | Year ended December 31, |       
|                                                                     |  |                         |       
|                                                                     |  | 2005                    |        | 2006 |   | 2007   |  
|                                                                     |  |                         |        |      |   |        |  
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|Revenues                                                             |  | $                       | 58,385 |      | $ | 63,600 |   | $ | 72,375 | 
|Cost of revenues                                                     |  |                         | 36,658 |      |   | 37,236 |   |   | 43,510 | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|Gross profit                                                         |  |                         | 21,727 |      |   | 26,364 |   |   | 28,865 | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|Operating expenses:                                                  |  |                         |        |      |   |        |   |   |        | 
|Research and development, net (Note 17a)                             |  |                         | 5,265  |      |   | 5,378  |   |   | 5,764  | 
|Selling and marketing, net                                           |  |                         | 12,385 |      |   | 11,603 |   |   | 12,930 | 
|General and administrative                                           |  |                         | 4,965  |      |   | 5,547  |   |   | 6,561  | 
|Special post employment benefit (Note 15c)                           |  |                         |       |      |   |       |   |   | 904    | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|Total operating
  expenses                                           |  |                         | 22,615 |      |   | 22,528 |   |   | 26,159 | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|Operating income (loss)                                              |  |                         | (888   | )    |   | 3,836  |   |   | 2,706  | 
|Financial expenses, net (Note 17b)                                   |  |                         | 813    |      |   | 864    |   |   | 2,137  | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|Income (loss) before income taxes                                    |  |                         | (1,701 | )    |   | 2,972  |   |   | 569    | 
|Income taxes (tax benefit) (Note 14)                                 |  |                         | (28    | )    |   | 943    |   |   | 373    | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|Income (loss) from continuing operations                             |  |                         | (1,673 | )    |   | 2,029  |   |   | 196    | 
|Income (loss) from discontinued operations,
  net (Note 18)          |  |                         | (1,538 | )    |   | (1,219 | ) |   | 1,686  | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|Net income (loss)                                                    |  | $                       | (3,211 | )    | $ | 810    |   | $ | 1,882  | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|Basic net earnings (loss) per share from
  continuing operations     |  | $                       | (0.17  | )    | $ | 0.20   |   | $ | 0.02   | 
|Basic net earnings (loss) per share from
  discontinued operations   |  |                         | (0.15  | )    |   | (0.12  | ) |   | 0.16   | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|Basic net earnings (loss) per share (Note
  13)                      |  | $                       | (0.32  | )    | $ | 0.08   |   | $ | 0.18   | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|Diluted net earnings (loss) per share from
  continuing operations   |  | $                       | (0.17  | )    | $ | 0.20   |   | $ | 0.02   | 
|Diluted net earnings (loss) per share from
  discontinued operations |  |                         | (0.15  | )    |   | (0.12  | ) |   | 0.16   | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 
|Diluted net earnings (loss) per share (Note
  13)                    |  | $                       | (0.32  | )    | $ | 0.08   |   | $ | 0.18   | 
|                                                                     |  |                         |        |      |   |        |   |   |        | 

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

F - 6

---

---

|                                                     
|-----------------------------------------------------
|MAGAL SECURITY
  SYSTEMS LTD. 
  AND ITS SUBSIDIARIES
|                                                     
|STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY        
|                                                     
|U.S. dollars in thousands (except share data)        

|                                                                                                               |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|-------------------------------------------------------------------------------------------------------------- |  | ---------------- | ---------- | --------------- | - | ---------------------------- |  | ----------------------------- | ------ | ----------------------------------------------- | - | ------------------------------------------ | - | ----------------- | ----- | --------------------------------- | - | -------------------------- | - | - | ------ | - | - | ------ | - | - | ------ | -
|                                                                                                               |  | Number of shares |            | Ordinary shares |   | Additional paid-in
  capital |  | Deferred
  stock compensation |        | Accumulated other comprehensive
  income (loss) |   | Foreign currency translation - the Company |   | Retained earnings |       | Total comprehensive income (loss) |   | Total shareholders equity |  
|                                                                                                               |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |  
|                                                                                                               |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|Balance as of January 1, 2005                                                                                  |  |                  | 8,672,448  |                 | $ | 2,825                        |  | $                             | 32,526 |                                                 | $ | (477                                       | ) | $                 | 1,639 |                                   | $ |                           |   | $ | 7,035  |   |   |        |   | $ | 43,548 |  
|Issuance of share capital, net                                                                                 |  |                  | 1,700,000  |                 |   | 395                          |  |                               | 14,793 |                                                 |   |                                           |   |                   |      |                                   |   |                           |   |   |       |   |   |        |   |   | 15,188 |  
|Amortization of deferred stock-based compensation                                                              |  |                  |           |                 |   |                             |  |                               |       |                                                 |   | 439                                        |   |                   |      |                                   |   |                           |   |   |       |   |   |        |   |   | 439    |  
|Deferred taxes on stock options                                                                                |  |                  |           |                 |   |                             |  |                               | 190    |                                                 |   |                                           |   |                   |      |                                   |   |                           |   |   |       |   |   |        |   |   | 190    |  
|Comprehensive income (loss):                                                                                   |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|Net loss                                                                                                       |  |                  |           |                 |   |                             |  |                               |       |                                                 |   |                                           |   |                   |      |                                   |   |                           |   |   | (3,211 | ) | $ | (3,211 | ) |   | (3,211 | )
|Unrealized gains on forward contracts, net                                                                     |  |                  |           |                 |   |                             |  |                               |       |                                                 |   |                                           |   |                   | 709   |                                   |   |                           |   |   |       |   |   | 709    |   |   | 709    |  
|Foreign currency translation adjustments                                                                       |  |                  |           |                 |   |                             |  |                               |       |                                                 |   |                                           |   |                   | 87    |                                   |   |                           |   |   |       |   |   | 87     |   |   | 87     |  
|                                                                                                               |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|Total comprehensive loss                                                                                       |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   | $ | (2,415 | ) |   |        |  
|                                                                                                               |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|                                                                                                               |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|Balance as of December 31, 2005                                                                                |  |                  | 10,372,448 |                 |   | 3,220                        |  |                               | 47,509 |                                                 |   | (38                                        | ) |                   | 2,435 |                                   |   |                           |   |   | 3,824  |   |   |        |   |   | 56,950 |  
|Reclassification of deferred stock compensation into additional
  paid-in capital upon adoption of SFAS 123(R) |  |                  |           |                 |   |                             |  |                               | (38    | )                                               |   | 38                                         |   |                   |      |                                   |   |                           |   |   |       |   |   |        |   |   |       |  
|Amortization of deferred stock-based compensation                                                              |  |                  |           |                 |   |                             |  |                               | 51     |                                                 |   |                                           |   |                   |      |                                   |   |                           |   |   |       |   |   |        |   |   | 51     |  
|Exercise of stock options                                                                                      |  |                  | 19,100     |                 |   | 4                            |  |                               | 159    |                                                 |   |                                           |   |                   |      |                                   |   |                           |   |   |       |   |   |        |   |   | 163    |  
|Comprehensive income (loss):                                                                                   |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|Net income                                                                                                     |  |                  |           |                 |   |                             |  |                               |       |                                                 |   |                                           |   |                   |      |                                   |   |                           |   |   | 810    |   | $ | 810    |   |   | 810    |  
|Unrealized losses on forward contracts, net                                                                    |  |                  |           |                 |   |                             |  |                               |       |                                                 |   |                                           |   |                   | (36   | )                                 |   |                           |   |   |       |   |   | (36    | ) |   | (36    | )
|Unrealized loss from available-for-sale securities, net                                                        |  |                  |           |                 |   |                             |  |                               |       |                                                 |   |                                           |   |                   | (13   | )                                 |   |                           |   |   |       |   |   | (13    | ) |   | (13    | )
|Foreign currency translation adjustments from change of functional
  currency, net                             |  |                  |           |                 |   |                             |  |                               |       |                                                 |   |                                           |   |                   |      |                                   |   | (355                       | ) |   |       |   |   |       |   |   | (355   | )
|Foreign currency translation adjustments                                                                       |  |                  |           |                 |   |                             |  |                               |       |                                                 |   |                                           |   |                   | (72   | )                                 |   | 652                        |   |   |       |   |   | (72    | ) |   | 580    |  
|                                                                                                               |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|Total comprehensive income                                                                                     |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   | $ | 689    |   |   |        |  
|                                                                                                               |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|                                                                                                               |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|Balance as of December 31, 2006                                                                                |  |                  | 10,391,548 |                 |   | 3,224                        |  |                               | 47,681 |                                                 |   |                                            |   |                   | 2,314 |                                   |   | 297                        |   |   | 4,634  |   |   |        |   |   | 58,150 |  
|Cumulative impact of change in accounting for uncertainty in income
  taxes (Fin 48)                           |  |                  |           |                 |   |                             |  |                               |       |                                                 |   |                                           |   |                   |      |                                   |   |                           |   |   | (229   | ) |   | (229   | ) |   | (229   | )
|Amortization of deferred stock-based compensation                                                              |  |                  |            |                 |   |                              |  |                               | 83     |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   | 83     |  
|Exercise of stock options                                                                                      |  |                  | 5,000      |                 |   | 1                            |  |                               | 42     |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   | 43     |  
|Comprehensive income (loss):                                                                                   |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|Net income                                                                                                     |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   | 1,882  |   | $ | 1,882  |   |   | 1,882  |  
|Unrealized gain on forward contracts, net                                                                      |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   | 31    |                                   |   |                            |   |   |        |   |   | 31     |   |   | 31     |  
|Unrealized gain from available-for-sale securities, net                                                        |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   | (134  | )                                 |   |                            |   |   |        |   |   | (134   | ) |   | (134   | )
|Foreign currency translation adjustments                                                                       |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   | 3,460 |                                   |   | 2,292                      |   |   |        |   |   | 3,460  |   |   | 5,752  |  
|                                                                                                               |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|Total comprehensive income                                                                                     |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   | $ | 5,010  |   |   |        |  
|                                                                                                               |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|                                                                                                               |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|Balance as of December 31, 2007                                                                                |  |                  | 10,396,548 |                 | $ | 3,225                        |  | $                             | 47,806 |                                                 | $ |                                           |   | $                 | 5,671 |                                   | $ | 2,589                      |   | $ | 6,287  |   |   |        |   | $ | 65,578 |  
|                                                                                                               |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|                                                                                                               |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|Accumulated unrealized losses from available for sale securities,
  net                                        |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   | (151  | )                                 |   |                            |   |   |        |   |   |        |   |   |        |  
|Accumulated foreign currency translation adjustments                                                           |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   | 5,822 |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|                                                                                                               |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|Accumulated other comprehensive income as of December 31, 2006                                                 |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   | $                 | 5,671 |                                   |   |                            |   |   |        |   |   |        |   |   |        |  
|                                                                                                               |  |                  |            |                 |   |                              |  |                               |        |                                                 |   |                                            |   |                   |       |                                   |   |                            |   |   |        |   |   |        |   |   |        |  

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

F - 7

---

---

|                                                     
|-----------------------------------------------------
|MAGAL SECURITY
  SYSTEMS LTD. 
  AND ITS SUBSIDIARIES
|                                                     
|CONSOLIDATED STATEMENTS OF CASH FLOWS                
|                                                     
|U.S. dollars in thousands                            

|                                                                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                                                                                          |  | Year ended December 31, |        
|                                                                                                                                                          |  |                         |        
|                                                                                                                                                          |  | 2005                    |         | 2006 |   | 2007    |  
|                                                                                                                                                          |  |                         |         |      |   |         |  
|                                                                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|Cash flows from operating activities:                                                                                                                     |  |                         |         |      |   |         |   |   |         |  
|Net income (loss)                                                                                                                                         |  | $                       | (3,211  | )    | $ | 810     |   | $ | 1,882   |  
|Adjustments required to reconcile net
  income (loss) to net cash provided by (used in) operating activities:                                             |  |                         |         |      |   |         |   |   |         |  
|Loss (income) from discontinued operations                                                                                                                |  |                         | 1,538   |      |   | 1,219   |   |   | (1,686  | )
|Depreciation and amortization                                                                                                                             |  |                         | 1,251   |      |   | 1,203   |   |   | 2,055   |  
|Gain on sale of property and equipment                                                                                                                    |  |                         | (10     | )    |   | (40     | ) |   | (2      | )
|Decrease (increase) in accrued interest and
  exchange differences on marketable securities, short-term and long-term bank
  deposits and long term loans |  |                         | (322    | )    |   | 293     |   |   | 1,811   |  
|Accrued interest and exchange rate changes
  of long-term loans                                                                                           |  |                         |        |      |   | (58     | ) |   | (300    | )
|Amortization of deferred stock compensation                                                                                                               |  |                         | 439     |      |   | 51      |   |   | 83      |  
|Decrease (increase) in trade receivables, net                                                                                                             |  |                         | (8,672  | )    |   | (4,402  | ) |   | 4,273   |  
|Decrease (increase) in unbilled accounts
  receivable                                                                                                     |  |                         | (2,819  | )    |   | 3,482   |   |   | 1,805   |  
|Decrease (increase) in other accounts
  receivable and prepaid expenses                                                                                   |  |                         | (580    | )    |   | 437     |   |   | (210    | )
|Decrease (increase) in deferred income
  taxes                                                                                                            |  |                         | (1,020  | )    |   | (134    | ) |   | 1,081   |  
|Decrease (increase) in inventories                                                                                                                        |  |                         | 1,676   |      |   | (2,728  | ) |   | (874    | )
|Decrease (increase) in long-term trade
  receivables                                                                                                      |  |                         | 54      |      |   | 66      |   |   | (1,848  | )
|Increase (decrease) in trade payables                                                                                                                     |  |                         | 3,190   |      |   | (666    | ) |   | (6,332  | )
|Increase in other accounts payable and
  accrued expenses                                                                                                 |  |                         | 1,991   |      |   | 717     |   |   | (1,807  | )
|Increase (decrease) in customer advances                                                                                                                  |  |                         | 3,990   |      |   | (2,760  | ) |   | 10,473  |  
|Accrued severance pay, net                                                                                                                                |  |                         | 31      |      |   | 60      |   |   | 581     |  
|Losses (gains) on hedging forward contract,
  net                                                                                                         |  |                         | (441    | )    |   | 431     |   |   | (565    | )
|                                                                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|                                                                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|Net cash provided by (used in) continuing
  operations                                                                                                    |  |                         | (2,915  | )    |   | (2,019  | ) |   | 10,420  |  
|Net cash provided by (used
  in) discontinued operations                                                                                                  |  |                         | (1,224  | )    |   | 643     |   |   | (519    | )
|                                                                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|                                                                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|Net cash provided by (used
  in) operating activities                                                                                                     |  |                         | (4,139  | )    |   | (1,376  | ) |   | 9,901   |  
|                                                                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|                                                                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|Cash flows from investing
  activities:                                                                                                                   |  |                         |         |      |   |         |   |   |         |  
|Purchase of short-term deposits                                                                                                                           |  |                         | (16,731 | )    |   | (13,726 | ) |   |        |  
|Proceeds from sale of short-term bank
  deposits                                                                                                          |  |                         |        |      |   | 13,645  |   |   | 5,714   |  
|Escrow deposit                                                                                                                                            |  |                         |        |      |   |        |   |   | (4,442  | )
|Purchase of long-term bank deposits                                                                                                                       |  |                         |        |      |   | (3,000  | ) |   |        |  
|Proceeds from sale of long-term deposits                                                                                                                  |  |                         | 1,194   |      |   | 3,000   |   |   |        |  
|Purchase of marketable securities                                                                                                                         |  |                         |        |      |   | (8,219  | ) |   | (10,771 | )
|Proceeds from sale of marketable securities                                                                                                               |  |                         |        |      |   | 5,202   |   |   | 5,570   |  
|Redemption of structured notes                                                                                                                            |  |                         | 3,000   |      |   |        |   |   |        |  
|Investment in long-term loan                                                                                                                              |  |                         |        |      |   | (622    | ) |   | (97     | )
|Proceeds from sale of property and
  equipment                                                                                                            |  |                         | 71      |      |   | 215     |   |   | 86      |  
|Purchase of property and equipment                                                                                                                        |  |                         | (750    | )    |   | (906    | ) |   | (890    | )
|Purchase of know-how and patents                                                                                                                          |  |                         | (46     | )    |   | (148    | ) |   | (28     | )
|Acquisition of subsidiary (a)                                                                                                                             |  |                         |        |      |   |        |   |   | (4,081  | )
|                                                                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|                                                                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|Net cash used in continuing activities                                                                                                                    |  |                         | (13,262 | )    |   | (4,559  | ) |   | (8,939  | )
|Net cash provided by (used
  in) discontinued operations                                                                                                  |  |                         | (1,986  | )    |   | (689    | ) |   | 8,475   |  
|                                                                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|                                                                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|Net cash used in investing
  activities                                                                                                                   |  |                         | (15,248 | )    |   | (5,248  | ) |   | (464    | )
|                                                                                                                                                          |  |                         |         |      |   |         |   |   |         |  

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

F - 8

---

---

|                                                     
|-----------------------------------------------------
|MAGAL SECURITY
  SYSTEMS LTD. 
  AND ITS SUBSIDIARIES
|                                                     
|CONSOLIDATED STATEMENTS OF CASH FLOWS                
|                                                     
|U.S. dollars in thousands                            

|                                                                                |  |                         |        |      |   |        |   |   |        |  
|------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                                |  | Year ended December 31, |       
|                                                                                |  |                         |       
|                                                                                |  | 2005                    |        | 2006 |   | 2007   |  
|                                                                                |  |                         |        |      |   |        |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|Cash flows from financing
  activities:                                         |  |                         |        |      |   |        |   |   |        |  
|Short-term bank credit, net                                                     |  |                         | 2,402  |      |   | (1,369 | ) |   | (4,724 | )
|Proceeds from long-term bank loans                                              |  |                         | 1,800  |      |   | 3,200  |   |   |       |  
|Principal payment of long-term bank loans                                       |  |                         | (1,849 | )    |   | (306   | ) |   | (796   | )
|Proceeds from exercise of employee stock
  options                              |  |                         |       |      |   | 163    |   |   | 43     |  
|Proceeds from issuance of shares, net                                           |  |                         | 14,916 |      |   |       |   |   |       |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|Net cash provided by (used in) financing
  activities                           |  |                         | 17,269 |      |   | 1,688  |   |   | (5,477 | )
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|Effect of exchange rate changes on cash and
  cash equivalents                  |  |                         | 253    |      |   | (255   | ) |   | 337    |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|Increase (decrease) in cash and cash
  equivalents                              |  |                         | (1,865 | )    |   | (5,191 | ) |   | 4,297  |  
|Cash and cash equivalents at the beginning
  of the year                        |  |                         | 11,964 |      |   | 10,099 |   |   | 4,908  |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|Cash and cash equivalents at the end of the
  year                              |  | $                       | 10,099 |      | $ | 4,908  |   | $ | 9,205  |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|Supplemental disclosures of
  cash flows activities:                            |  |                         |        |      |   |        |   |   |        |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|Cash paid during the year for:                                                  |  |                         |        |      |   |        |   |   |        |  
|Interest                                                                        |  | $                       | 828    |      | $ | 1,518  |   | $ | 1,736  |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|Income taxes                                                                    |  | $                       | 887    |      | $ | 1,486  |   | $ | 1,189  |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|Non-cash activities:                                                            |  |                         |        |      |   |        |   |   |        |  
|Purchase of know-how                                                            |  | $                       |       |      | $ | 430    |   | $ |       |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|a. Acquisition of Subsidiary                                                    |  |                         |        |      |   |        |   |   |        |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|Fair value of assets acquired and
  liabilities assumed at date of acquisition; |  |                         |        |      |   |        |   |   |        |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|Working capital, net                                                            |  |                         |        |      |   |        |   | $ | (119   | )
|Property and equipment                                                          |  |                         |        |      |   |        |   |   | (254   | )
|Customer related intangible assets                                              |  |                         |        |      |   |        |   |   | (6,423 | )
|Deferred taxes                                                                  |  |                         |        |      |   |        |   |   | 2,387  |  
|Accrued severance pay                                                           |  |                         |        |      |   |        |   |   | 328    |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                                |  |                         |        |      |   |        |   | $ | 4,081  |  
|                                                                                |  |                         |        |      |   |        |   |   |        |  

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

F - 9

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |        
|-------- | -------
|NOTE 1:- | GENERAL

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Magal
  Security Systems Ltd. (the Company) and its subsidiaries (together - the
  Group) are engaged in the development, manufacture, marketing and sale of
  complex computerized security systems used to automatically detect and deter
  human intrusion for both civilian and military markets. The Groups systems
  are used in more than 75 countries around the world.                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | As for major
  customer data, see Note 16b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | b. | On August
  31, 2007, the Company entered into an agreement to purchase all of the shares
  of a European company engaged in the installation and integration of security
  systems (Hereinafter - the European subsidiary), in consideration for 6.8
  million Euros (approximately $9.3 million). Of such amount 3 million Euros
  are payable subject to the fulfillment of certain conditions. The unpaid
  portion is held in an Escrow deposit. Additional consideration is payable
  over the next five years, based on the European subsidiarys pre-tax income.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The
  financial statements of the European subsidiary have been consolidated with
  the Companys financial statements effective September 1, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The acquisition was accounted for using the
  purchase method of accounting as determined in Statement of Financial
  Accounting Standards (SAFS) No. 141, Business Combinations (SFAS No.
  141) and, accordingly, the purchase price was allocated to the assets
  acquired and liabilities assumed based on their estimated fair values at the
  date of acquisition.                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Based upon a valuation of tangible and
  intangible assets acquired and liabilities assumed, the Company allocated the
  total cost of the acquisition, as follows:                                                                                                                                                                                                                                                                                                                                                                                                     

|                                      |  |                             |         |  
|------------------------------------- |  | --------------------------- | ------- | -
|                                      |  | U.S. dollars in
  thousands |        
|                                      |  |                             |         |  
|Working
  capital, net                |  | $                           | 119     |  
|Property and
  equipment              |  |                             | 254     |  
|Customers
  related intangible assets |  |                             | 6,423   |  
|Deferred
  taxes                      |  |                             | ( 2,387 | )
|Accrued
  severance pay, net          |  |                             | (328    | )
|                                      |  |                             |         |  
|                                      |  |                             |         |  
|                                      |  |                             | 4,081   |  
|                                      |  |                             |         |  

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Additional
  amounts paid upon the fulfillment of the abovementioned conditions will be
  allocated to goodwill. As of December 31, 2007, the Company accrued an amount of $1,065 in respect of the earn out provision.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | In
  accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS
  No. 142), goodwill will not be amortized. In lieu of amortization, the
  Company is required to perform an annual impairment review. If the Company
  will determine, through the impairment review process, that goodwill has been
  impaired, it will record the impairment charge in its statement of
  operations. The Company will also assess the impairment of goodwill whenever
  events or changes in circumstances indicate that the carrying value may not
  be recoverable. As of December 31, 2007, the Company has determined that no
  impairment with respect to goodwill exists.

F - 10

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.                                
|AND ITS SUBSIDIARIES                                       
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                                
|-------- | -------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES

| |                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ----------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
  consolidated financial statements have been prepared in accordance with
  United States generally accepted accounting principles (U.S. GAAP).
| |                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | a.                                                                                                                                                    | Use of
  estimates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                       | The
  preparation of financial statements in conformity with generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the amounts reported in the financial statements and accompanying
  notes. Actual results could differ from those estimates.                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | b.                                                                                                                                                    | Financial
  statements in U.S. dollars:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                       | Statement of
  the Financial Accounting Standards Board (SFAS) No. 52, Foreign Currency
  Translation sets the standards for translating foreign currency financial
  statements of consolidated subsidiaries. The first step in the translation
  process is to identify the functional currency for each entity included in
  the financial statements. The accounts of each entity are then remeasured
  in its functional currency. All transaction gains and losses from the
  remeasurement of monetary balance sheet items are reflected in the statement
  of operations as financial income or expenses, as appropriate.
| |                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                       | After the
  remeasurement process is complete the financial statements are translated
  into the reporting currency, which is the U.S. dollar (dollar), using the
  current rate method. Equity accounts are translated using historical exchange
  rates. All other balance sheet accounts are translated using the exchange
  rates in effect at the balance sheet date. Statement of operations amounts
  have been translated using the average exchange rate for the year. The
  resulting translation adjustments are reported as a component of
  shareholders equity in accumulated other comprehensive income (loss).      
| |                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                       | In
  accordance with U.S. Securities and Exchange Commission Regulation S-X 3-20
  (SX 3-20), the Company has determined its reporting currency to be the
  dollar. The measurement process of SX 3-20 is conceptually consistent with
  that of SFAS 52.                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                       | The Company
  has determined that as of October 1, 2006 its functional currency changed
  from the dollar to the New Israeli Shekel (NIS). Translation adjustments
  resulting from translating the Companys financial statements from the NIS to
  the dollar are reported as a separate component in shareholders equity.                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | c.                                                                                                                                                    | Principles
  of consolidation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                       | The
  consolidated financial statements include the accounts of the Company and its
  subsidiaries. Intercompany transactions and balances including profits from
  intercompany sales not yet realized outside the Group, have been eliminated
  upon consolidation.                                                                                                                                                                                                                                                                                                                                                                  

F - 11

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | d. | Cash
  equivalents:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Cash
  equivalents are short-term highly liquid investments that are readily
  convertible into cash with original maturities of three months or less at the
  date acquired.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | e. | Marketable
  securities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The Company
  accounts for investments in debt securities in accordance with Statement of
  Financial Accounting Standard 115, Accounting for Certain Investments in
  Debt and Equity Securities (FAS 115). Management determines the
  appropriate classification of its investments in debt and equity securities
  at the time of purchase and reevaluates such determinations at each balance
  sheet date. The debt securities are classified as available-for-sale since
  the Company does not have the intent to hold the securities to maturity, and
  are stated at fair value. Available-for-sale securities are carried at fair
  value with unrealized gains, and losses as reported in accumulated other
  comprehensive income as a separate component of shareholders equity.                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | FASB Staff
  Position (FSP) No. 115-1, The Meaning of Other-Than-Temporary Impairment
  and Its Application to Certain Investment (FSP 115-1) and SAB Topic 5M
  Other Than Temporary Impairment Of Certain Investments In Debt And Equity
  Securities provides guidance for determining when an investment is
  considered impaired, whether impairment is other-than temporary, and
  measurement of an impairment loss. An investment is considered impaired if
  the fair value of the investment decreased below its cost in an other-than
  temporary manner. If, after consideration of all available evidence to
  evaluate the realizable value of its investment, impairment is determined to
  be other than - temporary, then an impairment loss should be recognized equal
  to the difference between the investments cost and its fair value.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | f. | Short-term
  and long-term bank deposits:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Short-term
  bank deposits are deposits with maturities of more than three months and less
  than one year, and presented at their cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | A bank
  deposit with maturities of more than one year is included in long-term bank
  deposits, and presented at cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | g. | Inventories:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Inventories
  are stated at the lower of cost or market value. The Group periodically
  evaluates the quantities on hand relative to historical and projected sales
  volumes, current and historical selling prices and contractual obligations to
  maintain certain levels of parts. Based on these evaluations, inventory
  write-offs are provided to cover risks arising from slow-moving items, discontinued
  products, excess inventories, market prices lower than cost and adjusted
  revenue forecasts.                                                                                                                                                                                                                                                                                                                                                   

F - 12

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |    |                                                                                                                                                                                                                      
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Cost is
  determined as follows:                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                      
| |    | Raw
  materials, parts and supplies - using the first-in, first-out method.                                                                                                                                        
| |    |                                                                                                                                                                                                                      
| |    | Work in
  progress and finished products - on the basis of direct manufacturing costs
  with the addition of allocable indirect manufacturing costs.                                                                 
| |    |                                                                                                                                                                                                                      
| |    | During 2005,
  2006 and 2007, the Group recorded inventory write-offs from continued
  operations in the amount of $420, $760 and $646, respectively. Such write-offs
  were included in cost of revenues.           
| |    |                                                                                                                                                                                                                      
| | h. | Long-term
  trade receivables:                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                      
| |    | Long-term
  trade receivables derive from long-term payment arrangements.                                                                                                                                            
| |    |                                                                                                                                                                                                                      
| | i. | Property and
  equipment:                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                      
| |    | Property and
  equipment are stated at cost, net of accumulated depreciation. Depreciation
  is calculated by the straight-line method over the estimated useful lives of
  the assets at the following annual rates:

|                                 |  |   |                                                                            | 
|-------------------------------- |  | - | -------------------------------------------------------------------------- | 
|                                 |  | % |                                                                           
|                                 |  |   |                                                                           
|                                 |  |   |                                                                            | 
|Buildings                        |  |   | 3
  - 4                                                                    | 
|Machinery
  and equipment        |  |   | 10 - 33 (mainly 10%)                                                       | 
|Motor
  vehicles                 |  |   | 15                                                                         | 
|Promotional
  displays           |  |   | 25 - 50                                                                    | 
|Office
  furniture and equipment |  |   | 6 - 33                                                                     | 
|Leasehold
  improvements         |  |   | By the shorter of the term of the lease or the useful life of the
  assets | 

| |    |                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | j. | Intangible
  assets:                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                              
| |    | Intangible
  assets are amortized over their useful lives using a method of amortization
  that reflects the pattern in which the economic benefits of the intangible
  assets are consumed or otherwise used up, in accordance with SFAS No. 142,
  Goodwill and Other Intangible Assets (SFAS No. 142).
| |    |                                                                                                                                                                                                                                                                                                              
| |    | Know-how is
  amortized over 5 to 10 years, patents are amortized over a period of 10 years
  and technology is amortized over 8 years. Customer related assets is
  amortized based on the related revenues.                                                                                                

F - 13

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | k. | Impairment
  of long-lived assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The Groups
  long-lived assets and certain identifiable intangibles are reviewed for
  impairment in accordance with SFAS No. 144, Accounting for the Impairment or
  Disposal of Long-Lived Assets whenever events or changes in circumstances
  indicate that the carrying amount of a group of assets may not be
  recoverable. Recoverability of a group of assets to be held and used is
  measured by a comparison of the carrying amount of the group to the future
  undiscounted cash flows expected to be generated by the group. If such group
  of assets is considered to be impaired, the impairment to be recognized is
  measured by the amount by which the carrying amount of the assets exceeds
  their fair value. During 2005, 2006 and 2007, no impairment losses have been
  identified.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | l. | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Goodwill
  represents excess of the costs over the net fair value of the assets of the
  businesses acquired. SFAS No. 142 requires goodwill to be tested for
  impairment at least annually or between annual tests in certain
  circumstances, and written down when impaired, rather than being amortized.
  FAS 142 prescribes a two phase process for impairment testing of goodwill.
  The first phase screens for impairment, while the second phase (if necessary)
  measures impairment. In the first phase of impairment testing, goodwill
  attributable to each of the reporting units is tested for impairment by
  comparing the fair value of each reporting unit with its carrying value. If
  the carrying value of the reporting unit exceeds its fair value, the second
  phase is then performed. The second phase of the goodwill impairment test
  compares the implied fair value of the reporting units goodwill with the
  carrying amount of that goodwill. If the carrying amount of the reporting
  units goodwill exceeds the implied fair value of that goodwill, an
  impairment loss is recognized in an amount equal to that excess. Fair value
  is determined using discounted cash flows. Significant estimates used in the
  methodologies include estimates of future cash flows, future short-term and
  long-term growth rates and weighted average cost of capital for each of the
  reportable units. During 2005, 2006 and 2007, no impairment losses have been
  identified.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | m. | Revenue
  recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The Group
  generates its revenues mainly from (1) installation of comprehensive security
  systems for which revenues are generated from long-term fixed price
  contracts; (2) sales of security products; and (3) services and maintenance,
  which are performed either on a fixed-price basis or as time-and-materials
  based contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F - 14

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenues
  from installation of comprehensive security systems are generated from
  fixed-price contracts according to which the time between the signing of the
  contract and the final customer acceptance is usually over one year. Such
  contracts require significant customization for each customer specific needs
  and, as such, revenues from these type of contracts are recognized in
  accordance with Statement of Position (SOP) No. 81-1, Accounting for
  Performance of Construction-Type and Certain Production-Type Contracts,
  using contract accounting on a percentage of completion method. Accounting
  for long-term contracts using the percentage-of-completion method stipulates
  that revenue and expense are recognized throughout the life of the contract,
  even though the project is not completed and the purchaser does not have
  possession of the project. Percentage of completion is calculated based on
  the Input Method.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Project
  costs include materials purchased to produce the system, related labor and
  overhead expenses and subcontractors costs. The percentage to completion is
  measured by monitoring costs and efforts devoted using records of actual
  costs incurred to date in the project compared to the total estimated project
  requirement, which corresponds to the costs related to earned revenues. The
  amounts of revenues recognized are based on the total fees under the
  agreements and the percentage to completion achieved. Provisions for
  estimated losses on uncompleted contracts are made in the period in which
  such losses are first determined, in the amount of the estimated loss on the
  entire contract.                                                                                                                                                                                                                                         
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Estimated
  gross profit or loss from long-term contracts may change due to changes in
  estimates resulting from differences between actual performance and original
  forecasts. Such changes in estimated gross profit are recorded in results of
  operations when they are reasonably determinable by management, on a
  cumulative catch-up basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | The Group
  believes that the use of the percentage of completion method is appropriate
  as the Group has the ability to make reasonably dependable estimates of the
  extent of progress towards completion, contract revenues and contract costs.
  In addition, contracts executed include provisions that clearly specify the
  enforceable rights regarding services to be provided and received by the
  parties to the contracts, the consideration to be exchanged and the manner
  and the terms of settlement, including in cases of terminations for
  convenience. In all cases the Group expects to perform its contractual
  obligations and its customers are expected to satisfy their obligations under
  the contract.                                                                                                                                                                                                                                        
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Fees are
  payable upon completion of agreed upon milestones and subject to customer
  acceptance. Amounts of revenues recognized in advance of contractual billing,
  are recorded as unbilled accounts receivable. The period between most
  instances of advanced recognition of revenues and the customers billing
  generally ranges between one to six months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | The Group
  sells security products to customers according to customer orders without
  installation work. The customers are not entitled to return the products.
  Revenues from security product sales are recognized in accordance with Staff
  Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial
  Statements, when delivery has occurred, persuasive evidence of an agreement
  exists, the vendors fee is fixed or determinable, no further obligation
  exists and collectibility is probable.                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F - 15

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Services and
  maintenance are performed under either fixed-price based or
  time-and-materials based contracts. Under fixed-price contracts, the Group
  agrees to perform certain work for a fixed price. Under time-and-materials
  contracts, the Group is reimbursed for labor hours at negotiated hourly
  billing rates and for materials. Such service contracts are not in the scope
  of SOP No. 81-1, and accordingly, related revenues are recognized in
  accordance with SAB No. 104, as those services are performed or over the term
  of the related agreements provided that, an evidence of an arrangement has
  been obtained, fees are fixed and determinable and collectibility is
  reasonably assured.                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Deferred
  revenue includes unearned amounts under installation services, service
  contracts and maintenance agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | n. | Accounting
  for stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | On
  January 1, 2006, the Company adopted Statement of Financial Accounting
  Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123(R))
  which requires the measurement and recognition of compensation expense based
  on estimated fair values for all share-based payment awards made to employees
  and directors. SFAS 123(R) supersedes Accounting Principles Board Opinion
  No. 25, Accounting for Stock Issued to Employees (APB 25), under
  which the Company previously accounted for its share based awards granted to
  employees and directors, for periods beginning in fiscal 2006. In March 2005,
  the Securities and Exchange Commission issued Staff Accounting Bulletin
  No. 107 (SAB 107) relating to SFAS 123(R). The Company has applied the
  provisions of SAB 107 in its adoption of SFAS 123(R).
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | SFAS 123(R) requires
  companies to estimate the fair value of equity-based payment awards on the
  date of grant using an option-pricing model. The value of the portion of the
  award that is ultimately expected to vest is recognized as an expense over
  the requisite service periods in the Companys consolidated income statement.
  Prior to the adoption of SFAS 123(R), the Company accounted for equity-based
  awards to employees and directors using the intrinsic value method in
  accordance with APB 25 as allowed under Statement of Financial Accounting
  Standards No. 123, Accounting for Stock-Based Compensation (SFAS
  123).                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The Company adopted SFAS
  123(R) using the modified prospective transition method, which requires the
  application of the accounting standard starting from January 1, 2006,
  the first day of the Companys fiscal year 2006. Under that transition
  method, compensation cost recognized in 2006, includes only compensation cost
  for all share-based payments granted prior to, but not yet vested as of
  January 1, 2006, based on the grant date fair value estimated in accordance
  with the original provisions of Statement 123. The Company did not grant
  stock options in 2006. Results for prior periods have not been restated.                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The Company recognizes
  compensation expenses for the value of its awards, which have graded vesting,
  based on the accelerated attribution method over the vesting period, net of
  estimated forfeitures. Estimated forfeitures are based on actual historical
  pre-vesting forfeitures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F - 16

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As a result of adopting
  SFAS 123(R) on January 1, 2006, the Companys net income for the year ended
  December 31, 2006, was approximately $15 lower than if it had continued to
  account for stock-based compensation under APB 25. The influence on the basic
  and diluted net earnings per share for the year ended December 31, 2006 was
  immaterial.                                                                                                                               
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Prior to January 1, 2006,
  the Company applied the intrinsic value method of accounting for stock
  options as prescribed by APB 25, whereby compensation expense is equal to the
  excess, if any, of the quoted market price of the stock over the exercise
  price at the grant date of the award.                                                                                                                                                                                       
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | During the
  years ended December 31, 2005, 2006 and 2007, the Company recognized
  stock-based compensation expenses related to employee stock options in the
  amounts of $439, $51 and $83, respectively.                                                                                                                                                                                                                                                                                 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | The Company
  estimates the fair value of stock options granted using the
  Black-Scholes-Merton option-pricing model. The option-pricing model requires
  a number of assumptions, of which the most significant are expected stock
  price volatility and the expected option term. Expected volatility was
  calculated based upon actual historical stock price movements.                                                                                                               
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | The expected
  option term represents the period that the Companys stock options are
  expected to be outstanding and was determined based on the simplified method
  permitted by SAB 107 and SAB 110 as the average of the vesting period and the
  contractual term. The risk-free interest rate is based on the yield from U.S.
  Treasury zero-coupon bonds with an equivalent term. The Company has
  historically not paid dividends and has no foreseeable plans to pay
  dividends.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Fair values were estimated
  using the following weighted average assumptions:                                                                                                                                                                                                                                                                                                                                                                                                               

|                         |  |           |      |  |      |  |           |   | 
|------------------------ |  | --------- | ---- |  | ---- |  | --------- | - | 
|                         |  | 2005      | 2006 |  | 2007 | 
|                         |  |           |      |  |      |  |           |   | 
|Dividend
  yield         |  | 0         | %    |  |     |  | 0         | % | 
|Expected
  volatility    |  | 83.4      | %    |  |     |  | 62.4      | % | 
|Risk-free
  interest     |  | 4         | %    |  |     |  | 4.15      | % | 
|Expected
  life of up to |  | 2.5 years |      |  |     |  | 3.5 years |   | 

F - 17

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |  |                                                                                                                                                                               
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A summary of
  employee option activity under the Companys stock option plans as of
  December 31, 2007 and changes during the year ended December 31, 2007 are as
  follows:

|                                                   |  |                   |         |                                   |   |                                                              |  |                                            |      |  |   |     | 
|-------------------------------------------------- |  | ----------------- | ------- | --------------------------------- | - | ------------------------------------------------------------ |  | ------------------------------------------ | ---- |  | - | --- | 
|                                                   |  | Number of options |         | Weighted-average
  exercise price |   | Weighted- average remaining contractual
  life
  (in months) |  | Aggregate intrinsic
  value (in thousands) |     
|                                                   |  |                   |         |                                   |   |                                                              |  |                                            |     
|                                                   |  |                   |         |                                   |   |                                                              |  |                                            |      |  |   |     | 
|Outstanding
  at January 1, 2007                   |  |                   | 322,100 |                                   | $ | 8.34                                                         |  |                                            | 40.3 |  | $ | 218 | 
|Granted                                            |  |                   | 100,000 |                                   |   |                                                              |  |                                            |      |  |   |     | 
|Exercised                                          |  |                   | (5,000  | )                                 |   |                                                              |  |                                            |      |  |   |     | 
|Forfeited                                          |  |                   | (13,600 | )                                 |   |                                                              |  |                                            |      |  |   |     | 
|                                                   |  |                   |         |                                   |   |                                                              |  |                                            |      |  |   |     | 
|                                                   |  |                   |         |                                   |   |                                                              |  |                                            |      |  |   |     | 
|Outstanding
  at December 31, 2007                 |  |                   | 403,500 |                                   | $ | 8.32                                                         |  |                                            | 35.3 |  |   |    | 
|                                                   |  |                   |         |                                   |   |                                                              |  |                                            |      |  |   |     | 
|                                                   |  |                   |         |                                   |   |                                                              |  |                                            |      |  |   |     | 
|Exercisable
  at December 31, 2007                 |  |                   | 303,500 |                                   | $ | 8.35                                                         |  |                                            | 28.6 |  |   |    | 
|                                                   |  |                   |         |                                   |   |                                                              |  |                                            |      |  |   |     | 
|                                                   |  |                   |         |                                   |   |                                                              |  |                                            |      |  |   |     | 
|Vested and
  expected to vest at December 31, 2007 |  |                   | 403,500 |                                   | $ | 8.32                                                         |  |                                            | 35.3 |  |   |    | 
|                                                   |  |                   |         |                                   |   |                                                              |  |                                            |      |  |   |     | 

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The weighted-average
  grant-date fair value of options granted during the years ended
  December 31, 2005 and 2007 was $4.39 and $3.94 respectively. The
  aggregate intrinsic value in the table above represents the total intrinsic
  value (the difference between the Companys closing stock price on the last
  trading day of the fourth quarter of fiscal 2007 and the exercise price,
  multiplied by the number of in-the-money options). This amount changes based
  on the fair market value of the Companys stock. Total intrinsic value of
  options exercised for the year ended December 31, 2007 was approximately $7.
  As of December 31, 2007, there was approximately $320 of total unrecognized
  compensation costs related to non-vested share-based compensation
  arrangements granted under the Companys stock option plans. That cost is
  expected to be recognized over a weighted-average period of 1.62 years. Total
  grant-date fair value of options that vested during the year ended
  December 31, 2007 was approximately $18.

F - 18

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |  |                                                                                                                                                                                                                                                           
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The
  following table illustrates the effect on the net loss and net earnings loss
  per share, assuming that the Company had applied the fair value recognition
  provision of SFAS 123 on its stock-based employee compensation for all
  prior periods:

|                                                                                                                                 |  |                                  |        |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | -
|                                                                                                                                 |  | Year ended
  December 31,
  2005 |       
|                                                                                                                                 |  |                                  |       
|                                                                                                                                 |  |                                  |        |  
|Net loss as reported:                                                                                                            |  | $                                | (3,211 | )
|Add: stock-based compensation expenses
  determined under the intrinsic value based method included in the reported
  net income |  |                                  | 439    |  
|Deduct: stock-based compensation expenses
  determined under fair value based method for all awards                              |  |                                  | (1,493 | )
|                                                                                                                                 |  |                                  |        |  
|                                                                                                                                 |  |                                  |        |  
|Pro forma net loss                                                                                                               |  | $                                | (4,265 | )
|                                                                                                                                 |  |                                  |        |  
|                                                                                                                                 |  |                                  |        |  
|Basic net loss per share, as reported                                                                                            |  | $                                | (0.32  | )
|                                                                                                                                 |  |                                  |        |  
|Diluted net loss per share, as reported                                                                                          |  | $                                | (0.32  | )
|                                                                                                                                 |  |                                  |        |  
|                                                                                                                                 |  |                                  |        |  
|Pro forma basic net loss per share                                                                                               |  | $                                | (0.43  | )
|                                                                                                                                 |  |                                  |        |  
|Pro forma diluted net loss per share                                                                                             |  | $                                | (0.43  | )
|                                                                                                                                 |  |                                  |        |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | o. | Research and
  development costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Research and
  development costs incurred in the process of developing product improvements
  or new products, are charged to expenses as incurred, net of grants received
  and investment tax credit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | p. | Warranty
  costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The Group
  provides a warranty for up to 24 months, at no extra charge. The Group
  estimates the costs that may be incurred under its warranty and records a
  liability in the amount of such costs at the time product revenue is
  recognized in accordance with FASB interpretation (FIN) No. 45,
  Guarantors Accounting and Disclosure Requirements for Guarantees, Including
  Indirect Guarantees of Indebtedness of Others and SFAS No. 5, Accounting
  for Contingencies. Factors that affect the Groups warranty liability
  include the number of units, historical and anticipated rates of warranty
  claims and cost per claim. The Group periodically assesses the adequacy of
  its recorded warranty liabilities and adjusts the amounts as necessary. A
  tabular reconciliation of the changes in the Groups aggregate product
  warranty liability is not provided due to immateriality.

F - 19

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | q. | Net earnings
  (loss) per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Basic net
  earnings (loss) per share is computed based on the weighted average number of
  Ordinary shares outstanding during each year. Diluted net earnings (loss) per
  share is computed based on the weighted average number of Ordinary shares
  outstanding during each year, plus dilutive potential Ordinary shares
  considered outstanding during the year, in accordance with SFAS No. 128,
  Earnings Per Share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | r. | Concentrations
  of credit risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Financial
  instruments that potentially subject the Group to concentrations of credit
  risk consist principally of cash and cash equivalents, marketable securities,
  short-term and long-term bank deposits, trade receivables, unbilled accounts
  receivable, long-term trade receivables and long-term loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | The
  Companys cash and cash equivalents, marketable securities and short-term and
  long-term bank deposits at December 31, 2007, $19.9 million is invested in
  major Israeli and U.S. banks, approximately $16.3 million is invested in
  other banks, mainly with Deutsche Bank, RBC Royal Bank, Leutkircher Bank,
  Commerzbank and Natwest Bank. Deposits, cash and cash equivalents in the United States
  may be in excess of insured limits and are not insured in other
  jurisdictions. The Company believes that the financial institutions that hold
  its investments are financially sound and, accordingly, minimal credit risk
  exists with respect to these investments.                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | The
  Companys marketable securities include investments in U.S. government debentures; foreign
  banks shares, shares, mutual funds and money market funds. Management believes that those securities are
  financially sound and that the portfolios are well-diversified, and accordingly, minimal credit risk
  exists with respect to these
  marketable securities. Moreover, the Companys investment policy, limits the amount the Company may
invest.                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | During the
  recent turmoil in capital markets, the Company tightened its control and monitoring over its
  marketable securities portfolio. The Company has taken several measures in order to minimize
  potential risks stemming from the current capital markets environment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | The
  short-term and long-term trade receivables of the Group, as well as the
  unbilled accounts receivable, are primarily derived from sales to large and
  solid organizations and governmental authorities located mainly in Israel,
  the United States, Canada, Mexico, Africa and Europe. The Group performs
  ongoing credit evaluations of its customers and to date has not experienced
  any material losses. An allowance for doubtful accounts is determined with
  respect to those amounts that the Group has determined to be doubtful of
  collection and in accordance with an aging policy. During the years ended
  December 31, 2005, 2006 and 2007, the Group recorded $(54), $138 and $(68) of
  expenses (income) related to doubtful accounts, respectively. In certain
  circumstances, the Group may require letters of credit, other collateral or
  additional guarantees.

F - 20

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | The loan
  granted to a third party is secured by personal guarantee of the beneficial
  owner (see Note 11i). The management believes that the loan is well secured,
  and accordingly, minimal credit risk exists with respect to this loan.                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The Group
  has no significant off-balance sheet concentration of credit risks, such as
  foreign exchange contracts or foreign hedging arrangements, except derivative
  instruments, which are detailed in w. below.                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | s. | Income
  taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The Group
  accounts for income taxes in accordance with SFAS No. 109, Accounting for
  Income Taxes. This Statement prescribes the use of the liability method
  whereby deferred tax assets and liability account balances are determined
  based on differences between financial reporting and tax bases of assets and
  liabilities and are measured using the enacted tax rates and laws that will
  be in effect when the differences are expected to reverse. The Group provides
  a valuation allowance, if necessary, to reduce deferred tax assets to their
  estimated realizable value.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | t. | Severance
  pay:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The
  Companys liability for its Israeli employees severance pay is calculated
  pursuant to Israels Severance Pay Law based on the most recent salary of the
  employees multiplied by the number of years of employment, as of the balance
  sheet date. Employees are entitled to one months salary for each year of
  employment or a portion thereof. The Companys liability for its employees in
  Israel is fully provided by monthly deposits with insurance policies and by
  an accrual. The value of these policies is recorded as an asset in the
  Companys balance sheet.          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The
  deposited funds include profits accumulated up to balance sheet date. The
  deposited funds may be withdrawn only upon the fulfillment of the obligation
  pursuant to Israels Severance Pay Law or labor agreements. The value of the
  deposited funds is based on the cash surrendered value of these policies, and
  includes immaterial profits.                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | On December
  31, 2007, the Chairman of the Companys Board of Directors, retired from his
  position. Pursuant to his retirement agreement, the retired Chairman will be
  entitled to receive certain perquisites from the Company for the rest of his
  life. As of December 31, 2007, the actuarial value of these perquisites is
  estimated be approximately $544. This provision was included as part of
  accrued severance pay                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Severance
  expenses for the years ended December 31, 2005, 2006 and 2007, amounted to
  approximately $362, $476 and $1,020, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F - 21

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | u. | Fair value
  of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The
  following methods and assumptions were used by the Group in estimating its
  fair value disclosures for financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | (i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | The carrying
  amounts of cash and cash equivalents, marketable securities, short-term bank
  deposits, trade receivables, unbilled accounts receivable, short-term bank
  credit and trade payables approximate their fair value due to the short-term
  maturity of such instruments.                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | (ii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | The carrying
  amount of the Groups long-term trade receivables and long-term bank deposits
  approximate their fair value. The fair value was estimated using discounted
  cash flows analyses, based on the Groups investment rates for similar type
  of investment arrangements.                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | (iii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | The carrying
  amounts of the Groups long-term debt are estimated by discounting the future
  cash flows using current interest rates for loans of similar terms and
  maturities. As of December 31, 2006, the fair value of the Companys
  long-term borrowing was $ 8,158, compared to the carrying amount of $ 8,194. As
  of December 31, 2007, the fair value of the Companys long-term
  borrowing was $ 7,439, compared to the carrying amount of $ 7,398.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | v. | Advertising
  expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Advertising
  costs are expensed as incurred. Advertising expenses for the years ended
  December 31, 2005, 2006 and 2007, were $ 420, $ 447 and $ 250, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | w. | Derivative
  instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | SFAS No.
  133, Accounting for Derivative Instruments and Hedging Activities, requires
  a company to recognize all of its derivative instruments as either assets or
  liabilities in the statement of financial position at fair value. The
  accounting for changes in the fair value (i.e., gains or losses) of a
  derivative instrument depends on whether it has been designated and qualifies
  as part of a hedging relationship and further, on the type of hedging
  relationship. For those derivative instruments that are designated and
  qualify as hedging instruments, a company must designate the hedging
  instrument, based upon the exposure being hedged.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | To protect
  against the change in the forecasted foreign currency cash flows of certain
  sale arrangements resulting from changes in the exchange rate, the Company
  has entered during 2005 and 2006 entered into forward contracts in order to
  hedge portions of its forecasted revenue and unbilled accounts receivable
  denominated in Euros and Polish Zlotys. The Company designated the forward
  instruments as cash flow hedges for accounting purposes.                                                                                                                                                                                                            

F - 22

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | For
  derivative instruments designated as cash flow hedges (i.e., hedging the
  exposure to variability in expected future cash flows that is attributable to
  a particular risk), the effective portion of the gain or loss on the
  derivative instrument is reported as a component of other comprehensive
  income and reclassified into earnings in the same line item associated with
  the forecasted transaction in the same period or periods during which the
  hedged transaction affects earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | The Company
  determined that the sales arrangement in Polish Zlotys and the related
  forecasted revenues and accounts receivable will not occur by the end of the
  specified time period. Accordingly, changes in the fair value of the forward
  contracts were recorded in financial expenses in the years ended December 31,
  2005, 2006 and 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | On October
  1, 2006, the Company changed its functional currency from dollars to NIS (see
  also Note 2b). From the date of change in functional currency, the hedge
  against the dollar of the revenues in Euros is no longer effective. Changes
  in the fair value of the forward contracts from October 1, 2006 were
  charged to financial expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | The Company
  recorded $110, $915 and $666 as financial expenses related to forward
  contracts transactions, in 2005, 2006 and 2007, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | x. | Reclassification:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | Certain
  financial statement data for prior years have been reclassified to conform to
  current year financial statement presentation. The reclassification did not
  impact net income, working capital or cash flows from operations as
  previously reported.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | y. | Impact of
  recently issued Accounting Standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | In September
  2006, the FASB issued Statement of Financial Accounting Standards No. 157,
  Fair Value Measurements (SFAS 157) which defines fair value, establishes a
  framework for measuring fair value, and expands disclosures about fair value
  measurements. SFAS 157 applies to other accounting pronouncements that
  require or permit fair value measurements and, accordingly, does not require
  any new fair value measurements. SFAS 157 is effective for fiscal years
  beginning after November 15, 2007 for financial assets and liabilities, as
  well as for any other assets and liabilities that are carried at fair value
  on a recurring basis, and should be applied prospectively. The adoption of
  the provisions of SFAS 157 related to financial assets and liabilities and
  other assets and liabilities that are carried at fair value on a recurring
  basis is not anticipated to materially impact the Companys consolidated financial
  position and results of operations. Subsequently, the FASB provided for a
  one-year deferral of the provisions of SFAS 157 for non-financial assets and
  liabilities that are recognized or disclosed at fair value in the
  consolidated financial statements on a non-recurring basis. The Company is
  currently evaluating the impact of adopting the provisions of SFAS 157 for
  non-financial assets and liabilities that are recognized or disclosed on a
  non-recurring basis.

F - 23

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In February 2007, the FASB
  issued Statement of Financial Accounting Standards No. 159, The Fair Value
  Option for Financial Assets and Financial Liabilities (SFAS 159). Under this
  Standard, the Company may elect to report financial instruments and certain
  other items at fair value on a contract-by-contract basis with changes in
  value reported in earnings. This election is irrevocable. SFAS 159 provides
  an opportunity to mitigate volatility in reported earnings that is caused by
  measuring hedged assets and liabilities that were previously required to use
  a different accounting method than the related hedging contracts when the
  complex provisions of SFAS 133 hedge accounting are not met. SFAS 159 is
  effective for years beginning after November 15, 2007. As the Company did not
  elect the fair value option in the date of adoption, the Company does not
  expect the adoption of SFAS 159 will have a material impact on its
  consolidated financial statements.                                                                                                                                                                     
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | In December 2007, the FASB
  issued Statement of Financial Accounting Standards No. 141 (Revised 2007)
  (SFAS 141R), Business Combinations. SFAS 141R will change the accounting for
  business combinations. Under SFAS 141R, an acquiring entity will be required
  to recognize all the assets acquired and liabilities assumed in a transaction
  at the acquisition-date fair value with limited exceptions. SFAS 141R will
  change the accounting treatment and disclosure for certain specific items in
  a business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the
  beginning of the first annual reporting period beginning on or after December
  15, 2008. SFAS 141R will have an impact on accounting for future business
  combinations once adopted and not on prior acquisitions.                                                                                                                                                                                                                                                                                                                    
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | In December 2007, the FASB
  issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
  Statements (SFAS 160). SFAS 160 establishes accounting and reporting
  standards for ownership interests in subsidiaries held by parties other than
  the parent, the amount of consolidated net income attributable to the parent
  and to the noncontrolling interest, changes in a parents ownership interest
  and the valuation of retained noncontrolling equity investments when a
  subsidiary is deconsolidated. SFAS 160 also establishes reporting
  requirements that provide sufficient disclosures that clearly identify and
  distinguish between the interests of the parent and the interests of the
  noncontrolling owners. This standard is effective for fiscal years beginning
  after December 15, 2008and
  should be applied prospectively. However, the presentation and disclosure
  requirements of the statement shall be applied retrospectively for all
  periods presented. The adoption of the provisions of Statement No. 160 is not
  anticipated to materially impact the Companys consolidated financial
  position and results of operations.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | In December
  2007, the SEC staff issued Staff Accounting Bulletin (SAB) 110, Share-Based
  Payment, which amends SAB 107, Share-Based Payment, to permit public
  companies, under certain circumstances, to use the simplified method in SAB
  107 for employee option grants after December 31, 2007. Use of the
  simplified method after December 2007 is permitted only for companies whose
  historical data about their employees exercise behavior does not provide a reasonable
  basis for estimating the expected term of the options. Based on the
  significant restrictions on employee trading during the restatement periods,
  the Company has not experienced regular employee exercise behavior since the
  implementation of SFAS No. 123R on January 20, 2006. The Company
  expects to continue to use the simplified method as allowed under SAB 110.                                                                                                                                                                                                                                                                                                                

F - 24

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In June
  2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3
  Accounting for Nonrefundable Advance Payments for Goods or Services to be
  Used in Future Research and Development Activities (EITF Issue No. 07-3)
  which is effective for fiscal years beginning after December 15, 2007. EITF
  Issue No. 07-3 requires that nonrefundable advance payments for future
  research and development activities be deferred and capitalized. Such amounts
  will be recognized as an expense as the goods are delivered or the related
  services are performed. The Company does not expect the adoption of EITF
  Issue No. 07-3 to have a material impact on the financial results of the
  Company.

|         |                      
|-------- | ---------------------
|NOTE 3:- | MARKETABLE SECURITIES

| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Group
  invests in marketable debt securities, which are classified as
  available-for-sale investments. The following is a summary of marketable debt
  securities:

|                                               |  |                  |       |                     |   |                |  |                  |       |                          |   |                |  |   |     |  |   |       | 
|---------------------------------------------- |  | ---------------- | ----- | ------------------- | - | -------------- |  | ---------------- | ----- | ------------------------ | - | -------------- |  | - | --- |  | - | ----- | 
|                                               |  | December 31,     |      
|                                               |  |                  |      
|                                               |  | 2006             |       | 2007                |  
|                                               |  |                  |       |                     |  
|                                               |  | Amortized
  cost |       | Unrealized
  losses |   | Market
  value |  | Amortized
  cost |       | Unrealized
  Losses, net |   | Market
  value | 
|                                               |  |                  |       |                     |   |                |  |                  |       |                          |   |                | 
|                                               |  |                  |       |                     |   |                |  |                  |       |                          |   |                | 
|Available-for-sale:                            |  |                  |       |                     |   |                |  |                  |       |                          |   |                |  |   |     |  |   |       | 
|                                               |  |                  |       |                     |   |                |  |                  |       |                          |   |                |  |   |     |  |   |       | 
|U.S. Government debentures                     |  | $                | 3,080 |                     | $ | 13             |  | $                | 3,067 |                          | $ | 1,260          |  | $ |    |  | $ | 1,260 | 
|Share, Mutual funds and money market funds     |  |                  |       |                     |   |                |  |                  |       |                          |   | 8,355          |  |   | 151 |  |   | 8,204 | 
|                                               |  |                  |       |                     |   |                |  |                  |       |                          |   |                |  |   |     |  |   |       | 
|                                               |  |                  |       |                     |   |                |  |                  |       |                          |   |                |  |   |     |  |   |       | 
|Total available-for-sale marketable securities |  | $                | 3,080 |                     | $ | 13             |  | $                | 3,067 |                          | $ | 9,615          |  | $ | 151 |  | $ | 9,464 | 
|                                               |  |                  |       |                     |   |                |  |                  |       |                          |   |                |  |   |     |  |   |       | 

| |                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
  unrealized losses on available-for-sale securities included in other
  comprehensive income, as a separate component of shareholders equity,
  totaled $ 134 as of December 31, 2007.                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                        
| | The
  unrealized losses on the Companys investments in available-for-sale
  securities are a result of interest rate changes. Since the Company has the
  ability and intent to hold these investments until a recovery of fair value,
  which may be until maturity, the Company does not consider these investments
  to be other-than-temporarily impaired as of December 31, 2007.
| |                                                                                                                                                                                                                                                                                                                                                                                        
| | The
  amortized cost and estimated fair value of available-for-sale investments as
  of December 31, 2006 and 2007, by contractual maturity, are as follows:                                                                                                                                                                                                                           

|                              |  |                   |       |              |   |                |  |              |       |  |   |       | 
|----------------------------- |  | ----------------- | ----- | ------------ | - | -------------- |  | ------------ | ----- |  | - | ----- | 
|                              |  | December 31,      |      
|                              |  |                   |      
|                              |  | 2006              |       | 2007         |  
|                              |  |                   |       |              |  
|                              |  | Amortized 
  cost |       | Market value |   | Amortized cost |  | Market value |      
|                              |  |                   |       |              |   |                |  |              |      
|                              |  |                   |       |              |   |                |  |              |      
|Available-for-sale:           |  |                   |       |              |   |                |  |              |       |  |   |       | 
|Matures in one year           |  | $                 |      |              | $ |               |  | $            | 6,483 |  | $ | 6,326 | 
|Matures in one to three years |  |                   | 3,080 |              |   | 3,067          |  |              | 3,132 |  |   | 3,138 | 
|                              |  |                   |       |              |   |                |  |              |       |  |   |       | 
|                              |  |                   |       |              |   |                |  |              |       |  |   |       | 
|                              |  | $                 | 3,080 |              | $ | 3,067          |  | $            | 9,615 |  | $ | 9,464 | 
|                              |  |                   |       |              |   |                |  |              |       |  |   |       | 

F - 25

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                                               
|-------- | ----------------------------------------------
|NOTE 4:- | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

|                       |  |              |       |      |   |       | 
|---------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                       |  | December 31, |      
|                       |  |              |      
|                       |  | 2006         |       | 2007 |  
|                       |  |              |       |      |  
|                       |  |              |       |      |   |       | 
|Government authorities |  | $            | 1,756 |      | $ | 2,823 | 
|Employees              |  |              | 207   |      |   | 86    | 
|Prepaid expenses       |  |              | 450   |      |   | 648   | 
|Advances to suppliers  |  |              | 1,159 |      |   | 1,473 | 
|Others                 |  |              | 249   |      |   | 723   | 
|                       |  |              |       |      |   |       | 
|                       |  |              |       |      |   |       | 
|                       |  | $            | 3,821 |      | $ | 5,753 | 
|                       |  |              |       |      |   |       | 

|         |            
|-------- | -----------
|NOTE 5:- | INVENTORIES

|                  |  |              |        |      |   |        | 
|----------------- |  | ------------ | ------ | ---- | - | ------ | 
|                  |  | December 31, |       
|                  |  |              |       
|                  |  | 2006         |        | 2007 |  
|                  |  |              |        |      |  
|                  |  |              |        |      |   |        | 
|Raw materials     |  | $            | 7,650  |      | $ | 7,919  | 
|Work in progress  |  |              | 2,213  |      |   | 4,064  | 
|Finished products |  |              | 4,108  |      |   | 11,802 | 
|                  |  |              |        |      |   |        | 
|                  |  |              |        |      |   |        | 
|                  |  | $            | 13,971 |      | $ | 23,785 | 
|                  |  |              |        |      |   |        | 

|         |                       
|-------- | ----------------------
|NOTE 6:- | PROPERTY AND EQUIPMENT

| |    |             
| | -- | ------------
| | a. | Composition:

|                               |  |              |        |      |   |        | 
|------------------------------ |  | ------------ | ------ | ---- | - | ------ | 
|                               |  | December 31, |       
|                               |  |              |       
|                               |  | 2006         |        | 2007 |  
|                               |  |              |        |      |  
|                               |  |              |        |      |   |        | 
|Cost:                          |  |              |        |      |   |        | 
|Land and buildings             |  | $            | 8,982  |      | $ | 9,913  | 
|Machinery and equipment        |  |              | 6,775  |      |   | 7,958  | 
|Motor vehicles                 |  |              | 1,133  |      |   | 1,480  | 
|Promotional displays           |  |              | 1,083  |      |   | 1,321  | 
|Office furniture and equipment |  |              | 2,746  |      |   | 3,375  | 
|Leasehold improvements         |  |              | 42     |      |   | 46     | 
|                               |  |              |        |      |   |        | 
|                               |  |              |        |      |   |        | 
|                               |  |              | 20,761 |      |   | 24,093 | 
|                               |  |              |        |      |   |        | 
|Accumulated
  depreciation:    |  |              |        |      |   |        | 
|Buildings                      |  |              | 3,144  |      |   | 3,734  | 
|Machinery and equipment        |  |              | 5,662  |      |   | 6,807  | 
|Motor vehicles                 |  |              | 896    |      |   | 1,053  | 
|Promotional displays           |  |              | 991    |      |   | 1,197  | 
|Office furniture and equipment |  |              | 2,349  |      |   | 2,857  | 
|Leasehold improvements         |  |              | 12     |      |   | 16     | 
|                               |  |              |        |      |   |        | 
|                               |  |              |        |      |   |        | 
|                               |  |              | 13,054 |      |   | 15,664 | 
|                               |  |              |        |      |   |        | 
|                               |  |              |        |      |   |        | 
|Depreciated
  cost             |  | $            | 7,707  |      | $ | 8,429  | 
|                               |  |              |        |      |   |        | 

| |    |                                                                                                                                       
| | -- | --------------------------------------------------------------------------------------------------------------------------------------
| | b. | Depreciation
  expenses amounted to $ 1,110, $ 1,053 and $ 1,027 for the years
  ended December 31, 2005, 2006 and 2007, respectively.
| |    |                                                                                                                                       
| | c. | As for
  charges, see Note 11g.                                                                                                       

F - 26

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                             
|-------- | ----------------------------
|NOTE 7:- | OTHER INTANGIBLE ASSETS, NET

| |    |             
| | -- | ------------
| | a. | Composition:

|                          |  |              |       |      |   |        | 
|------------------------- |  | ------------ | ----- | ---- | - | ------ | 
|                          |  | December 31, |      
|                          |  |              |      
|                          |  | 2006         |       | 2007 |  
|                          |  |              |       |      |  
|                         
|Cost:                     |  |              |       |      |   |        | 
|Know-how                  |  | $            | 982   |      | $ | 1,050  | 
|Patents                   |  |              | 2,859 |      |   | 3,412  | 
|Customer related assets   |  |              |      |      |   | 6,920  | 
|Technology                |  |              | 436   |      |   | 451    | 
|                          |  |              |       |      |   |        | 
|                          |  |              |       |      |   |        | 
|                          |  |              | 4,277 |      |   | 11,833 | 
|                          |  |              |       |      |   |        | 
|Accumulated amortization: |  |              |       |      |   |        | 
|Know-how                  |  |              | 429   |      |   | 560    | 
|Patents                   |  |              | 2,626 |      |   | 3,152  | 
|Customer related assets   |  |              |       |      |   | 825    | 
|Technology                |  |              | 191   |      |   | 256    | 
|                          |  |              |       |      |   |        | 
|                          |  |              |       |      |   |        | 
|                          |  |              | 3,246 |      |   | 4,793  | 
|                          |  |              |       |      |   |        | 
|                          |  |              |       |      |   |        | 
|Amortized cost            |  | $            | 1,031 |      | $ | 7,040  | 
|                          |  |              |       |      |   |        | 

| |    |                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | Amortization
  expenses related to intangible assets amounted to $ 141, $ 150 and
  $ 1,028 for the years ended December 31, 2005, 2006 and 2007,
  respectively.
| |    |                                                                                                                                                                  
| | c. | Estimated
  amortization of intangible assets for the years ended:                                                                                               

|                      |  |   |       |  |  |  | 
|--------------------- |  | - | ----- |  |  |  | 
|December 31,          |  |   |       |  |  |  | 
|                      |  |   |       |  |  |  | 
|                      |  |   |       |  |  |  | 
|2008                  |  | $ | 4,448 |  |  |  | 
|2009                  |  |   | 954   |  |  |  | 
|2010                  |  |   | 1,117 |  |  |  | 
|2011                  |  |   | 204   |  |  |  | 
|2012 and
  thereafter |  |   | 317   |  |  |  | 
|                      |  |   |       |  |  |  | 
|                      |  |   |       |  |  |  | 
|                      |  | $ | 7,040 |  |  |  | 
|                      |  |   |       |  |  |  | 

F - 27

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|         |                       
|-------- | ----------------------
|NOTE 8:- | SHORT-TERM BANK CREDIT

| |    |                                                            
| | -- | -----------------------------------------------------------
| | a. | Classified
  by currency, linkage terms and interest rates:

|                                                         |  |               |  |              |      |      |  |      |        |  |   |        | 
|-------------------------------------------------------- |  | ------------- |  | ------------ | ---- | ---- |  | ---- | ------ |  | - | ------ | 
|                                                         |  | Interest rate |  | December 31, |     
|                                                         |  |               |  |              |     
|                                                         |  | 2006          |  | 2007         |      | 2006 |  | 2007 |       
|                                                         |  |               |  |              |      |      |  |      |       
|                                                         |  | %             |  |              |      |      | 
|                                                         |  |               |  |              |     
|                                                         |  |               |  |              |      |      |  |      |        |  |   |        | 
|In or linked to U.S. dollars (1)                         |  | 5.71          |  |              | 5.82 |      |  | $    | 13,600 |  | $ | 8,100  | 
|In or linked to NIS (1)                                  |  | 5.85          |  |              | 5.58 |      |  |      | 3,426  |  |   | 8,189  | 
|In or linked to EURO                                     |  |               |  |              | 7.5  |      |  |      |        |  |   | 145    | 
|                                                         |  |               |  |              |      |      |  |      |        |  |   |        | 
|                                                         |  |               |  |              |      |      |  |      |        |  |   |        | 
|                                                         |  |               |  |              |      |      |  | $    | 17,026 |  | $ | 16,434 | 
|                                                         |  |               |  |              |      |      |  |      |        |  |   |        | 
|Weighted average interest rates at the end
  of the year |  | 5.74          |  |              | 5.72 |      |  |      |        |  |   |        | 

| |    |             
| | -- | ------------
| | b. | Credit lines

|                                          |  |   |        |  |   |        | 
|----------------------------------------- |  | - | ------ |  | - | ------ | 
|Short-term bank credit                    |  |   | 17,026 |  |   | 16,434 | 
|Long-term bank credit                     |  |   | 8,194  |  |   | 7,398  | 
|Performance guarantees                    |  |   | 6,488  |  |   | 9,753  | 
|Letters of credit and forward contracts   |  |   | 1,696  |  |   | 1,202  | 
|                                          |  |   |        |  |   |        | 
|                                          |  |   | 33,404 |  |   | 34,787 | 
|                                          |  |   |        |  |   |        | 
|                                         
|Unutilized credit lines approximate       |  | $ | 21,437 |  | $ | 28,802 | 
|                                          |  |   |        |  |   |        | 
|                                          |  |   |        |  |   |        | 
|Total authorized credit lines approximate |  | $ | 54,841 |  | $ | 63,588 | 
|                                          |  |   |        |  |   |        | 

| |    |                                
| | -- | -------------------------------
| | c. | As for
  charges, see Note 11g.

|         |                                            
|-------- | -------------------------------------------
|NOTE 9:- | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

|                               |  |              |       |      |   |        | 
|------------------------------ |  | ------------ | ----- | ---- | - | ------ | 
|                               |  | December 31, |      
|                               |  |              |      
|                               |  | 2006         |       | 2007 |  
|                               |  |              |       |      |  
|                               |  |              |       |      |   |        | 
|Employees and payroll accruals |  | $            | 1,759 |      | $ | 2,519  | 
|Accrued expenses               |  |              | 5,462 |      |   | 5,812  | 
|Deferred revenues              |  |              | 309   |      |   | 587    | 
|Government authorities         |  |              | 528   |      |   | 341    | 
|Income tax payable             |  |              | 635   |      |   | 989    | 
|Others                         |  |              | 522   |      |   | 633    | 
|                               |  |              |       |      |   |        | 
|                               |  |              |       |      |   |        | 
|                               |  | $            | 9,215 |      | $ | 10,881 | 
|                               |  |              |       |      |   |        | 

F - 28

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                    
|--------- | -------------------
|NOTE 10:- | LONG-TERM BANK DEBT

| |    |                                                            
| | -- | -----------------------------------------------------------
| | a. | Classified
  by currency, linkage terms and interest rates:

|                                                         |  |                 |      |               |       |              |      |  |      |  |  |   |       |  |   |       | 
|-------------------------------------------------------- |  | --------------- | ---- | ------------- | ----- | ------------ | ---- |  | ---- |  |  | - | ----- |  | - | ----- | 
|                                                         |  | Linkage
  terms |      | Interest rate |       | December 31, |     
|                                                         |  |                 |      |               |       |             
|                                                         |  |                 | 2006 |               | 2007  |              | 2006 |  | 2007 | 
|                                                         |  |                 |      |               |       |              |      |  |      |  | 
|                                                         |  |                 |      | %             |       |              |     
|                                                         |  |                 |      |               |       |              |     
|                                                         |  |                 |      |               |       |              |      |  |      |  |  |   |       |  |   |       | 
|Bank loans                                               |  | U.S. $          |      |               | 5.96  |              |      |  | 5.79 |  |  | $ | 5,540 |  | $ | 4,900 | 
|Bank promissory notes(1)                                 |  | U.S. $          |      |               | 6.215 |              |      |  | 5.99 |  |  |   | 1,000 |  |   | 1,000 | 
|Mortgage payable                                         |  | U.S. $          |      |               | 5.45  |              |      |  | 5.45 |  |  |   | 1,654 |  |   | 1,498 | 
|                                                         |  |                 |      |               |       |              |      |  |      |  |  |   |       |  |   |       | 
|                                                         |  |                 |      |               |       |              |      |  |      |  |  |   |       |  |   |       | 
|                                                         |  |                 |      |               |       |              |      |  |      |  |  |   | 8,194 |  |   | 7,398 | 
|Less - current maturities                                |  |                 |      |               |       |              |      |  |      |  |  |   | 795   |  |   | 4,303 | 
|                                                         |  |                 |      |               |       |              |      |  |      |  |  |   |       |  |   |       | 
|                                                         |  |                 |      |               |       |              |      |  |      |  |  |   |       |  |   |       | 
|                                                         |  |                 |      |               |       |              |      |  |      |  |  | $ | 7,399 |  | $ | 3,095 | 
|                                                         |  |                 |      |               |       |              |      |  |      |  |  |   |       |  |   |       | 
|Weighted average interest
  rates at the end of the year |  |                 |      |               | 5.89  |              |      |  | 6.04 |  |  |   |       |  |   |       | 

| |  |     |                                                                                                                                                                                                                                                                                                                                                     
| |  | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (1) | The
  promissory notes contain covenants that require the Group to maintain
  $ 1,000 in deposits at all times otherwise the interest rate on the
  notes becomes the banks rate plus 0.25% until the minimum deposit is
  maintained. As of December 31, 2007, management believes that the Group was
  in compliance with these ratios and terms.

| |    |                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------
| | b. | As of
  December 31, 2007, the aggregate annual maturities of the long-term loans are
  as follows:

|     |  |   |       |  |  |  | 
|---- |  | - | ----- |  |  |  | 
|2008 |  | $ | 4,303 |  |  |  | 
|2009 |  |   | 813   |  |  |  | 
|2010 |  |   | 1,802 |  |  |  | 
|2011 |  |   | 480   |  |  |  | 
|     |  |   |       |  |  |  | 
|     |  |   |       |  |  |  | 
|     |  | $ | 7,398 |  |  |  | 
|     |  |   |       |  |  |  | 

| |    |                                
| | -- | -------------------------------
| | c. | As for
  charges, see Note 11g.

F - 29

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.AND ITS SUBSIDIARIES            
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                                       
|--------- | --------------------------------------
|NOTE 11:- | COMMITMENTS AND CONTINGENT LIABILITIES

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Royalty
  commitments to the Office of the Chief Scientist of the Israeli Ministry of
  Industry and Trade (OCS):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Under the
  research and development agreements between the Company and the OCS and
  pursuant to applicable laws, the Company is required to pay royalties at the
  rate of 3%-4.5% of sales of products developed with funds provided by the
  OCS, up to an amount equal to 100% of the OCS research and development grants
  received, linked to the U.S. dollars plus interest on the unpaid amount
  received based on the 12-month LIBOR rate applicable to dollar deposits. The
  Company is obligated to repay the Israeli Government for the grants received
  only to the extent that there are sales of the funded products.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Royalties
  paid amounted to $ 83, $ 79 and $ 143 for the years ended December 31, 2005,
  2006 and 2007, respectively. As of December 31, 2007, the Company had
  remaining contingent obligations to pay royalties in the amount of
  approximately $ 1,509.                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | b. | Royalty
  commitments to a third party:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | During 2002,
  the Company entered into a development agreement for planning, developing and
  manufacturing a security system with a third party. Under the agreement, the
  Company agreed to pay the third party royalty fees, based on a defined
  formula. Under this agreement, the Company also committed to purchase a
  certain volume of products at a minimum amount of approximately $ 300 over 2.5
  years after achievement of certain milestones. As of December 31, 2007,
  royalty commitments under the agreement amounted to $ 31.                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | c. | In September
  2006, the Company signed a non exclusive agreement with a third party for the
  rights to use certain intangible assets such as know-how and patents for the
  production, sale and marketing of perimeter security system based on
  fiber-optic lines that is used mainly to protect marine sites. The contract
  period is 2 years and the Company has the right to extend the contract for an
  additional 5 years. The consideration for the license is $ 548, payable in 24
  monthly installments. In addition, the Company agreed to pay royalties based
  on a defined formula.                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | In addition,
  the parties have signed an unlimited agreement that grants the Company the
  rights to provide maintenance and support for the systems previously sold by
  the third party. The Company agreed to pay royalties based on a defined
  formula. No royalties were paid or accrued as of December 31, 2007.                                                                                                                                                                                                                                                                                                                

F - 30

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.AND ITS SUBSIDIARIES            
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                                               
|--------- | ----------------------------------------------
|NOTE 11:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

| |    |                                                                                                                                                                                        
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | d. | Lease
  commitments:                                                                                                                                                                   
| |    |                                                                                                                                                                                        
| |    | The Group
  rents certain of its facilities and some of its motor vehicles under various
  operating lease agreements, which expire on various dates, the latest of
  which is in 2011.
| |    |                                                                                                                                                                                        
| |    | Future
  minimum lease payments under non-cancelable operating lease agreements are as
  follows:                                                                                      

|     |  |   |       | 
|---- |  | - | ----- | 
|2008 |  | $ | 693   | 
|2009 |  |   | 562   | 
|2010 |  |   | 301   | 
|2011 |  |   | 63    | 
|     |  |   |       | 
|     |  |   |       | 
|     |  | $ | 1,619 | 
|     |  |   |       | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Total rent
  expenses for the years ended December 31, 2005, 2006 and 2007, were
  approximately $ 593, $ 700 and $ 664, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | e. | Guarantees:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | As of
  December 31, 2007, the Group obtained bank performance guarantees and advance
  payment guarantees and bid bond guarantees from several banks mainly in
  Israel in the amount of $ 10,955.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | f. | Legal
  proceedings:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | In May 2005,
  the Company entered into an agreement to supply comprehensive security
  solutions for a sensitive site in Eastern Europe. As part of the agreement,
  the Company received an advance payment, secured by a bank advanced payment
  guarantee that was to be reduced proportionally as execution of the project
  progressed. In addition, the Company issued the customer a performance bank
  guarantee. The Company commenced the project and delivered some of the
  equipment and other deliverables to the customer in 2005. In April 2006, the
  customer informed the Company that it was canceling the agreement due to
  errors in the design documents that the Company submitted. In addition, the
  customer did not make payments required under the agreement. Based on its
  cancellation of the agreement, the customer collected $3.2 million under an
  advanced payment guarantee on June 20, 2006. Due to this uncertainty, the Company
  did not recognize any revenues from this project.

F - 31

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.AND ITS SUBSIDIARIES            
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                                               
|--------- | ----------------------------------------------
|NOTE 11:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                         
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | On July 11,
  2006 the customer made a demand for an additional $1.4 million payment under
  a bank performance guarantee. Upon the Companys motion, the District Court
  in Haifa, Israel issued a temporary injunction against the payment of such
  guarantee pending a hearing in August 2006. At the hearing, the Company
  reached a settlement with the customer pursuant to which the Company paid the
  customer approximately $700,000 of the disputed amount and agreed that the
  balance would be repaid only if the Company is found liable for damages
  exceeding the amount paid by it. In view of the above and due to the
  uncertainty of the Company being able to prevent the forfeiture of the bank
  performance guarantee, the Company included a $1.4 million provision in
  respect of this guarantee in its financial statements for the year ended
  December 31, 2005. Based on the August 2006 settlement, the Company in 2006
  cancelled the balance of the provision it made in its financial statements.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | On June 6,
  2007, the Court of Arbitration issued its decision in the arbitration and
  stated that the agreement between the Company and the customer was void due
  to legal mistakes made by the customer in the tender process. As a result of
  such award and as agreed in the settlement agreement the performance
  guarantee was cancelled on February 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                         
| |    | In addition,
  the Group is subject to legal proceedings arising in the normal course of
  business. Based on the advice of legal counsel, management believes that
  these proceedings will not have a material adverse effect on the Companys
  financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | g. | Charges:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | As
  collateral for all of the Group liabilities to banks:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | A fixed charge has been placed on the Companys property.                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                         
| |    | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | The Company agreed not to pledge any of its assets without the
  consent of several banks.                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                         
| |    | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | A fixed charge in the amount of $ 3,000 has been placed on the
  Companys bank deposits.                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                         
| |    | 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | A subsidiary
  of the Company has two bank promissory notes in the aggregate amount of
  $ 1,000 due on July 17, 2008, collateralized by substantially all of the
  subsidiarys assets.

F - 32

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.AND ITS SUBSIDIARIES            
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                                               
|--------- | ----------------------------------------------
|NOTE 11:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | h. | In October
  2006, the Company signed an agreement with a third party, which consults,
  markets and implements projects in the security field. According to the
  agreement, during the first 12 months (the agreement period), the parties
  agreed to cooperate in the development of the business of the third party.                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
| |    | The Company
  has granted a loan to the third party in the amount of $600. The Company will
  also provide the third party with additional monthly amounts to fund its
  activities during the agreement period, that will not exceed $ 23 per month.
  The loan and the monthly amounts will bear an annual interest rate of 5%, and
  shall be paid in October 2011.                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
| |    | The Company
  received an option to purchase all of the assets of the third partys
  business, exercisable during the agreement period (the option). The Company
  is obligated to exercise the option if the third party will meet certain
  milestones. The exercise price of the option is comprised of the outstanding
  loan and the monthly amounts mentioned above and an additional $ 400 in cash.
  In the event that the Company will exercise the option, the beneficial owner
  of the third party will be entitled to receive 50% of the operating profit of
  certain projects, as defined in the agreement.

|          |                     
|--------- | --------------------
|NOTE 12:- | SHAREHOLDERS EQUITY

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | a. | Pertinent
  rights and privileges conferred by Ordinary shares:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The Ordinary
  shares of the Company are listed for trade on the NASDAQ Global Market and in
  Israel, on the Tel-Aviv Stock Exchange. The Ordinary shares confer upon their
  holders the right to receive notice to participate and vote in the general
  meetings of the Company and the right to receive dividends, if declared.                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | b. | Issued and outstanding
  share capital:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | On April 19, 2005, the
  Company completed a public offering of $ 16.3 thousand in consideration of the
  sale of 1,700,000 of the Companys Ordinary shares at a price per share of
  $ 9.5 and at a price of $ 9.92 (the closing price of the Ordinary shares on the
  date of the transaction) with respect to shares sold to two principal
  shareholders of the Company.                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | c. | Stock Option
  Plan:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | On October
  27, 2003, the Companys Board of Directors approved the 2003 Israeli Share
  Option Plan (the 2003 Plan). Under the 2003 Plan, stock options will be
  periodically granted to employees, directors, officers and consultants of the
  Company or its subsidiaries, in accordance with the decision of the Board of
  Directors of the Company (or a committee appointed by it). The Board of
  Directors has the authority to determine the number of options, if any, which
  will be granted to each of the aforementioned, the dates of the grant of such
  options, the date of their exercise as well as their rate of conversion into
  shares in respect of each stock option, and the purchase price thereof.

F - 33

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.AND ITS SUBSIDIARIES            
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                             
|--------- | ----------------------------
|NOTE 12:- | SHAREHOLDERS EQUITY (Cont.)

| |  |                                                                                                                                                                                      | 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
| |  | The 2003
  Plan is effective for ten years and shall terminate in October 2013. Any
  options that are cancelled or forfeited before expiration become available
  for future grant.
| |  |                                                                                                                                                                                      | 
| |  | As of
  December 31, 2007, there were 215,075 options available for future grant.                                                                                                   
| |  |                                                                                                                                                                                      | 
| |  | A summary of
  the Companys stock options activities in 2005, 2006 and 2007, is as follows:                                                                                        

|                                   |  |                         |         |                                       |   |                     |  |                                       |         |                     |   |                                       |  |  |         |   |   |      | 
|---------------------------------- |  | ----------------------- | ------- | ------------------------------------- | - | ------------------- |  | ------------------------------------- | ------- | ------------------- | - | ------------------------------------- |  |  | ------- | - | - | ---- | 
|                                   |  | Year ended December 31, |        
|                                   |  |                         |        
|                                   |  | 2005                    |         | 2006                                  |   | 2007                | 
|                                   |  |                         |         |                                       |   |                     | 
|                                   |  | Number
  of options     |         | Weighted
  average
  exercise
  price |   | Number
  of options |  | Weighted
  average
  exercise
  price |         | Number
  of options |   | Weighted
  average
  exercise
  price | 
|                                   |  |                         |         |                                       |   |                     |  |                                       |         |                     |   |                                       | 
|                                   |  |                         |         |                                       |   |                     |  |                                       |         |                     |   |                                       |  |  |         |   |   |      | 
|Outstanding at beginning of year   |  |                         | 105,000 |                                       | $ | 7.66                |  |                                       | 343,000 |                     | $ | 8.35                                  |  |  | 322,100 |   | $ | 8.34 | 
|Granted                            |  |                         | 238,000 |                                       | $ | 8.65                |  |                                       |        |                     |   |                                       |  |  | 100,000 |   | $ | 8.22 | 
|Exercised                          |  |                         |        |                                       | $ |                    |  |                                       | (19,100 | )                   | $ | 8.56                                  |  |  | (5,000  | ) | $ | 8.56 | 
|Forfeited                          |  |                         |        |                                       | $ |                    |  |                                       | (1,800  | )                   | $ | 8.56                                  |  |  | (13,600 | ) | $ | 7.87 | 
|                                   |  |                         |         |                                       |   |                     |  |                                       |         |                     |   |                                       |  |  |         |   |   |      | 
|                                   |  |                         |         |                                       |   |                     |  |                                       |         |                     |   |                                       |  |  |         |   |   |      | 
|Outstanding at end of year         |  |                         | 343,000 |                                       | $ | 8.35                |  |                                       | 322,100 |                     | $ | 8.34                                  |  |  | 403,500 |   | $ | 8.32 | 
|                                   |  |                         |         |                                       |   |                     |  |                                       |         |                     |   |                                       |  |  |         |   |   |      | 
|                                   |  |                         |         |                                       |   |                     |  |                                       |         |                     |   |                                       |  |  |         |   |   |      | 
|Exercisable options at end of year |  |                         | 231,200 |                                       | $ | 8.56                |  |                                       | 317,100 |                     | $ | 8.26                                  |  |  | 303,500 |   | $ | 8.35 | 
|                                   |  |                         |         |                                       |   |                     |  |                                       |         |                     |   |                                       |  |  |         |   |   |      | 

| |  |                                                               
| |  | --------------------------------------------------------------
| |  | The options
  outstanding as of December 31, 2007 are follows:

|                                                |  |  |                |       |                                             |  |                                                   |  |  |         | 
|----------------------------------------------- |  |  | -------------- | ----- | ------------------------------------------- |  | ------------------------------------------------- |  |  | ------- | 
|Options outstanding
  as of
  December 31, 2007 |  |  | Exercise price |       | Weighted average remaining contractual life |  | Options exercisable as of 
  December 31, 
  2007 | 
|                                                |  |  |                |       |                                             |  |                                                   | 
|                                                |  |  |                |       | (in months)                                 |  |                                                   | 
|                                                |  |  |                |       |                                             |  |                                                   | 
|                                                |  |  |                |       |                                             |  |                                                   |  |  |         | 
|94,500                                          |  |  | $              | 7.66  |                                             |  | 12.9                                              |  |  | 94,500  | 
|204,000                                         |  |  | $              | 8.56  |                                             |  | 35.7                                              |  |  | 204,000 | 
|5,000                                           |  |  | $              | 13.00 |                                             |  | 35.7                                              |  |  | 5,000   | 
|100,000                                         |  |  | $              | 8.22  |                                             |  | 55.5                                              |  |  |         | 
|                                                |  |  |                |       |                                             |  |                                                   |  |  |         | 
|                                                |  |  |                |       |                                             |  |                                                   |  |  |         | 
|403,500                                         |  |  | $              | 8.32  |                                             |  |                                                   |  |  | 303,500 | 
|                                                |  |  |                |       |                                             |  |                                                   |  |  |         | 

| |    |                                                                                                                                                                                                                                                                                                           
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | d. | Dividends:                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                           
| |    | Dividends,
  if any, will be declared and paid in U.S. dollars. Dividends paid to
  shareholders in Israel will be converted into NIS on the basis of the
  exchange rate prevailing at the date of payment. The Company has determined
  that it will not distribute dividends out of tax-exempt profits.

F - 34

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.AND ITS SUBSIDIARIES            
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                                         
|--------- | ----------------------------------------
|NOTE 13:- | BASIC AND DILUTED NET EARNINGS PER SHARE

|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|--------------------------------------------------------------------------------------------------------- |  | ----------------------- | --------- | ---- | - | ---------- | - | - | ---------- | 
|                                                                                                          |  | Year ended December 31, |          
|                                                                                                          |  |                         |          
|                                                                                                          |  | 2005                    |           | 2006 |   | 2007       |  
|                                                                                                          |  |                         |           |      |   |            |  
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|Numerator:                                                                                                |  |                         |           |      |   |            |   |   |            | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|Income (loss) from continuing operations                                                                  |  | $                       | (1,673    | )    | $ | 2,029      |   | $ | 196        | 
|Income (loss) on discontinued operations                                                                  |  |                         | (1,538    | )    |   | (1,219     | ) |   | 1,686      | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|Net income (loss)                                                                                         |  | $                       | (3,211    | )    | $ | 810        |   | $ | 1,882      | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|Denominator:                                                                                              |  |                         |           |      |   |            |   |   |            | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|Denominator for basic net earnings per
  share - weighted-average number of shares outstanding            |  |                         | 9,883,407 |      |   | 10,384,047 |   |   | 10,394,989 | 
|Effect of diluting securities:                                                                            |  |                         |           |      |   |            |   |   |            | 
|Employee stock options                                                                                    |  |                         | 16,926    |      |   | 57,777     |   |   | 36,114     | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|Denominator for diluted net earnings per
  share - adjusted weighted average shares and assumed exercises |  |                         | 9,900,333 |      |   | 10,441,824 |   |   | 10,431,103 | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|Basic net earnings (loss) per share from
  continuing operations                                          |  | $                       | (0.17     | )    | $ | 0.20       |   | $ | 0.02       | 
|Basic net earnings (loss) per share from
  discontinued operations                                        |  |                         | (0.15     | )    |   | (0.12      | ) |   | 0.16       | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|Basic net earnings (loss) per share                                                                       |  | $                       | (0.32     | )    | $ | 0.08       |   | $ | 0.18       | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|Diluted net earnings (loss) per share form
  continuing operations                                        |  | $                       | (0.17     | )    | $ | 0.20       |   | $ | 0.02       | 
|Diluted net earnings (loss) per share from
  discontinued operations                                      |  |                         | (0.15     | )    |   | (0.12      | ) |   | 0.16       | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 
|Diluted net earnings (loss) per share                                                                     |  | $                       | (0.32     | )    | $ | 0.08       |   | $ | 0.18       | 
|                                                                                                          |  |                         |           |      |   |            |   |   |            | 

F - 35

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.AND ITS SUBSIDIARIES            
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                
|--------- | ---------------
|NOTE 14:- | TAXES ON INCOME

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   
| | a. | Tax benefits
  in Israel under the Law for the Encouragement of Capital Investments, 1959
  (the Law):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The Company
  has been granted the status of an Approved Enterprise under the Law.
  Currently, there are two expansion programs under which the Company is
  entitled to tax benefits:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | On March 18,
  1997, a program of the Company was granted the status of an Approved
  Enterprise. The Company elected to enjoy the alternative benefits track -
  waiver of grants in return for tax exemption and accordingly, the Companys
  income from this program was tax-exempt for a period of four years, and is
  subject to a reduced tax rate of 10%-25% for a period ranging between three
  to six years (depending on the percentage of foreign ownership of the
  Company). The period of benefits under this program began in 1998 and will
  terminate in 2007.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | On August 13,
  2002, a program of the Company was granted the status of an Approved
  Enterprise. The Company elected to enjoy the alternative benefits track -
  waiver of grants in return for tax exemption - and, accordingly, the
  Companys income from this program is tax-exempt for a period of two years,
  and is subject to a reduced tax rate of 10%-25% for a period of five to eight
  years (depending upon the percentage of foreign ownership of the Company).
  The benefit period for this program began in 2003 and will terminate in 2012.                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The
  entitlement to the above benefits is conditional upon the Company fulfilling
  the conditions stipulated by the Law, regulations published there under and
  the letters of approval for the specific investments in Approved Enterprises.
  In the event of failure to comply with these conditions, the benefits may be
  canceled and the Company may be required to refund the amount of the
  benefits, in whole or in part, including interest. As of December 31, 2007,
  management believes that the Company is in compliance with all of the
  aforementioned conditions.                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The period
  of tax benefits detailed above is subject to limits of the earlier of 12
  years from the commencement of production or 14 years from receiving the
  approval.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | An amendment
  to the Law, which has been officially published effective as of April 1, 2005
  (the Amendment), has changed certain provisions of the Law. As a result of
  the Amendment, a company is no longer obliged to implement an Approved
  Enterprise status in order to receive the tax benefits previously available
  under the Alternative Benefits provisions, and therefore there is no need to
  apply to the Investment Center for this purpose (Approved Enterprise status
  remains mandatory for companies seeking grants). Rather, a company may claim
  the tax benefits offered by the Investment Law directly in its tax returns,
  provided that its facilities meet the criteria for tax benefits set out by
  the Amendment. A company is also granted a right to approach the Israeli Tax
  Authority for a pre-ruling regarding their eligibility for benefits under the
  Amendment.

F - 36

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---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.AND ITS SUBSIDIARIES            
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                        
|--------- | -----------------------
|NOTE 14:- | TAXES ON INCOME (Cont.)

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | Tax benefits
  are available under the Amendment to production facilities (or other eligible
  facilities), which are generally required to derive more than 25% of their
  business income from export. In order to receive the tax benefits, the
  Amendment states that a company must make an investment in the Beneficiary
  Enterprise exceeding a minimum amount specified in the Law. Such investment
  may be made over a period of no more than three years ending at the end of the
  year in which a company requested to have the tax benefits apply to the
  Beneficiary Enterprise (the Year of Election). Where a company requests to
  have the tax benefits apply to an expansion of existing facilities, then only
  the expansion will be considered a Beneficiary Enterprise and the companys
  effective tax rate will be the result of a weighted combination of the
  applicable rates. In this case, the minimum investment required in order to
  qualify as a Beneficiary Enterprise is required to exceed a certain
  percentage of the companys production assets before the expansion. The
  duration of tax benefits is subject to a limitation of the earlier of 7 years
  from the Commencement Year, or 12 years from the first day of the Year of
  Election.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | On March 3,
  2007, the Company received a pre-ruling from the Israeli Tax Authority for
  its request for a Benefiting Facility, regarding eligibility for benefits
  under the Amendment. The Companys income from this program is tax-exempt for
  a period of two years, and is subject to a reduced tax rate of 10%-25% for a
  period of five to eight years (depending upon the percentage of foreign
  ownership of the Company). The Company has not yet obtained any tax benefits
  from this program.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 
| |  | Income from
  sources other than Approved Enterprise, during the benefit period was
  subject to tax at regular rate of 29% in 2007 (see e. below).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | By virtue of
  the Law, the Company is entitled to claim accelerated depreciation on
  equipment used by the Approved Enterprise during five tax years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Since the
  Company is operating under more than one approval and since part of its
  taxable income is not entitled to tax benefits under the aforementioned law
  and is taxed at regular rates (29% in 2007), its effective tax rate is the
  result of a weighted combination of the various applicable rates and
  tax-exemptions. The computation is made for income derived from each program
  on the basis of formulas determined in the law and in the approvals.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | The
  tax-exempt income attributable to the Approved Enterprises can be
  distributed to shareholders without subjecting the Company to taxes only upon
  the complete liquidation of the Company. If the retained tax-exempt income is
  distributed in a manner other than in the complete liquidation of the Company,
  it would be taxed at the corporate tax rate applicable to such profits as if
  the Company had not chosen the alternative tax benefits (currently - 15%).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F - 37

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|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.AND ITS SUBSIDIARIES            
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                        
|--------- | -----------------------
|NOTE 14:- | TAXES ON INCOME (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                           
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | Measurement
  of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | Under the
  Income Tax (Inflationary Adjustments) Law, 1985, results for tax purposes are
  measured in real terms, in accordance with the changes in the Israeli
  Consumer Price Index (Israeli CPI). Accordingly, until 2002, results for
  tax purposes were measured in terms of earnings in NIS after certain
  adjustments for increases in the Israeli CPI. Commencing in taxable year 2003
  through 2006, the Company elected to measure its taxable income and file its
  tax returns under the Israeli Income Tax Regulations (Principles Regarding
  the Management of Books of Account of Foreign Invested Companies and Certain
  Partnerships and the Determination of Their Taxable Income), 1986. Such an
  election obligated the Company for three years. Accordingly, commencing in
  the 2003 taxable year, results for tax purposes are measured in terms of
  earnings in dollar.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | Changes in
  the tax laws applicable to the Group:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | In February
  2008, the Knesset (Israeli Parliament) passed an amendment to the Income
  Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law
  with effect from 2008 and thereafter. From 2008, the results for tax purposes
  will be measured in nominal values, excluding certain adjustments for changes
  in the Israeli CPI carried out in the period up to December 31, 2007. The amended
  law includes, inter alia, the elimination of the inflationary additions and
  deductions and the additional deduction for depreciation with effect from
  2008.                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | c. | Tax benefits
  (in Israel) under the Law for the Encouragement of Industry (Taxes), 1969:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The Company
  is an industrial company as defined by this law and, as such, is entitled
  to certain tax benefits including accelerated depreciation, deduction of the
  purchase price of patents and know-how and deduction of public offering
  expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | d. | Tax rates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | On July 25, 2005, the
  Knesset (Israeli Parliament) passed the Law for the Amendment of the Income
  Tax Ordinance (No. 147), 2005, which prescribes, among others, a gradual
  decrease in the corporate tax rate in Israel to the following tax rates: in
  2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in 2010 and
  thereafter - 25%.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                           
| |    | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | The tax
  rates of the Companys subsidiaries range between 25%-40%. In December 2007,
  the tax rate in Germany was reduced to 30% from 38%. The tax reduction is
  effective beginning January 1, 2008. Deferred taxes had been adjustment
  according.                                                                                                 

F - 38

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---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.AND ITS SUBSIDIARIES            
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                        
|--------- | -----------------------
|NOTE 14:- | TAXES ON INCOME (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                        | 
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | e. | Investment
  tax credit:                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                       
| |    | Two of the
  Companys subsidiaries is eligible for investment tax credits on its research
  and development activities and on certain current and capital expenditures.
  During the year ended December 31, 2007, the subsidiaries recognized $ 160 of
  investment tax credits as a reduction of research and development expenses.
| |    |                                                                                                                                                                                                                                                                                                                                       
| |    | In total,
  the subsidiaries have investment tax credits available to reduce future federal
  income taxes payable, amounting to $ 738, which will expire in 2014-2027.                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                        | 
| | f. | Reconciliation
  between the theoretical tax expense, assuming all income is taxed at the
  Israeli statutory rate, and the actual tax expense, is as follows:                                                                                                                                                                        

|                                                                         |  |                         |        |      |   |       |   |   |      |  
|------------------------------------------------------------------------ |  | ----------------------- | ------ | ---- | - | ----- | - | - | ---- | -
|                                                                         |  | Year ended December 31, |       
|                                                                         |  |                         |       
|                                                                         |  | 2005                    |        | 2006 |   | 2007  |  
|                                                                         |  |                         |        |      |   |       |  
|                                                                         |  |                         |        |      |   |       |   |   |      |  
|Income (loss) before taxes as reported in
  the statements of operations |  | $                       | (1,701 | )    | $ | 2,972 |   | $ | 569  |  
|                                                                         |  |                         |        |      |   |       |   |   |      |  
|                                                                         |  |                         |        |      |   |       |   |   |      |  
|Tax rate                                                                 |  |                         | 34     | %    |   | 31    | % |   | 29   | %
|                                                                         |  |                         |        |      |   |       |   |   |      |  
|                                                                         |  |                         |        |      |   |       |   |   |      |  
|Theoretical tax expense (tax benefit)                                    |  | $                       | (578   | )    | $ | 921   |   | $ | 165  |  
|Increase (decrease) in taxes:                                            |  |                         |        |      |   |       |   |   |      |  
|Non-deductible items, net                                                |  |                         | 25     |      |   | 45    |   |   | 113  |  
|Difference between the basis of measurement
  of income reported for tax |  |                         |       |      |   |      |   |   | (449 | )
|Deferred taxes on losses for which
  valuation allowance was provided    |  |                         | 43     |      |   | 51    |   |   | 765  |  
|Tax exemption applicable to Approved
  Enterprises and exempted income |  |                         | 347    |      |   | (75   | ) |   |     |  
|Reduction of tax rate in subsidiary                                      |  |                         |        |      |   |       |   |   | (472 | )
|Taxes in respect of prior years                                          |  |                         | 52     |      |   | 1     |   |   | 357  |  
|Tax benefit due to discontinued operation                                |  |                         |        |      |   |       |   |   | (134 | )
|Other                                                                    |  |                         | 83     |      |   |       |   |   | 28   |  
|                                                                         |  |                         |        |      |   |       |   |   |      |  
|                                                                         |  |                         |        |      |   |       |   |   |      |  
|Taxes on income (tax benefit) in the
  statements of operations          |  | $                       | (28    | )    | $ | 943   |   | $ | 373  |  
|                                                                         |  |                         |        |      |   |       |   |   |      |  

F - 39

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|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.AND ITS SUBSIDIARIES            
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                        
|--------- | -----------------------
|NOTE 14:- | TAXES ON INCOME (Cont.)

| |    |                                                                           | 
| | -- | ------------------------------------------------------------------------- | 
| | g. | Taxes on
  income (tax benefit) included in the statements of operations:

|                                                           |  |                         |      |      |   |       |   |   |       |  
|---------------------------------------------------------- |  | ----------------------- | ---- | ---- | - | ----- | - | - | ----- | -
|                                                           |  | Year ended December 31, |     
|                                                           |  |                         |     
|                                                           |  | 2005                    |      | 2006 |   | 2007  |  
|                                                           |  |                         |      |      |   |       |  
|                                                           |  |                         |      |      |   |       |   |   |       |  
|Current:                                                   |  |                         |      |      |   |       |   |   |       |  
|Foreign                                                    |  | $                       | 615  |      | $ | 1,036 |   |   | 1,097 |  
|                                                           |  |                         |      |      |   |       |   |   |       |  
|Deferred:                                                  |  |                         |      |      |   |       |   |   |       |  
|Domestic                                                   |  |                         | (642 | )    |   | 248   |   |   | (594  | )
|Foreign                                                    |  |                         | (53  | )    |   | (342  | ) |   | (487  | )
|                                                           |  |                         |      |      |   |       |   |   |       |  
|Taxes in
  respect of prior years:                         |  |                         |      |      |   |       |   |   |       |  
|Domestic                                                   |  |                         |     |      |   | 1     |   |   | 402   |  
|Foreign                                                    |  |                         | 52   |      |   |      |   |   | (45   | )
|                                                           |  |                         |      |      |   |       |   |   |       |  
|                                                           |  |                         |      |      |   |       |   |   |       |  
|Taxes on
  income (tax benefit) from continuing operations |  |                         | (28  | )    |   | 943   |   |   | 373   |  
|Tax benefit
  from discontinued operations                 |  |                         | (31  | )    |   | (29   | ) |   | 134   |  
|                                                           |  |                         |      |      |   |       |   |   |       |  
|                                                           |  |                         |      |      |   |       |   |   |       |  
|Total taxes
  on income (tax benefit)                      |  | $                       | (59  | )    | $ | 914   |   | $ | 507   |  
|                                                           |  |                         |      |      |   |       |   |   |       |  

F - 40

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|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.AND ITS SUBSIDIARIES            
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                        
|--------- | -----------------------
|NOTE 14:- | TAXES ON INCOME (Cont.)

| |    |                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | h. | Deferred
  income taxes:                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                   
| |    | Deferred
  income taxes reflect the net tax effects of temporary differences between the
  carrying amounts of assets and liabilities for financial reporting purposes
  and the amounts used for income tax purposes. Significant components of the
  Groups deferred tax assets are as follows:

|                                                  |  |              |        |      |   |        |  
|------------------------------------------------- |  | ------------ | ------ | ---- | - | ------ | -
|                                                  |  | December 31, |       
|                                                  |  |              |       
|                                                  |  | 2006         |        | 2007 |  
|                                                  |  |              |        |      |  
|                                                  |  |              |        |      |   |        |  
|Operating
  loss carryforward                     |  | $            | 4,549  |      | $ | 4,212  |  
|Reserves and
  tax allowances                     |  |              | 2,372  |      |   | (127   | )
|                                                  |  |              |        |      |   |        |  
|                                                  |  |              |        |      |   |        |  
|Total
  deferred taxes before valuation allowance |  |              | 6,921  |      |   | 4,085  |  
|Valuation
  allowance                             |  |              | (4,631 | )    |   | (3,483 | )
|                                                  |  |              |        |      |   |        |  
|                                                  |  |              |        |      |   |        |  
|Net deferred
  tax assets                         |  | $            | 2,290  |      | $ | 602    |  
|                                                  |  |              |        |      |   |        |  
|                                                  |  |              |        |      |   |        |  
|Domestic                                          |  | $            | 1,442  |      | $ | 2,197  |  
|Foreign                                           |  |              | 848    |      |   | (1,595 | )
|                                                  |  |              |        |      |   |        |  
|                                                  |  |              |        |      |   |        |  
|                                                  |  | $            | 2,290  |      | $ | 602    |  
|                                                  |  |              |        |      |   |        |  

| |    |                                                                                    
| | -- | -----------------------------------------------------------------------------------
| | i. | The domestic
  and foreign components of income (loss) before taxes are as follows:

|         |  |                         |        |      |   |       |  |   |        |  
|-------- |  | ----------------------- | ------ | ---- | - | ----- |  | - | ------ | -
|         |  | Year ended December 31, |       
|         |  |                         |       
|         |  | 2005                    |        | 2006 |   | 2007  | 
|         |  |                         |        |      |   |       | 
|         |  |                         |        |      |   |       |  |   |        |  
|Domestic |  | $                       | (2,998 | )    | $ | 564   |  | $ | (3,980 | )
|Foreign  |  |                         | 1,297  |      |   | 2,408 |  |   | 4,549  |  
|         |  |                         |        |      |   |       |  |   |        |  
|         |  |                         |        |      |   |       |  |   |        |  
|         |  | $                       | (1,701 | )    | $ | 2,972 |  | $ | 569    |  
|         |  |                         |        |      |   |       |  |   |        |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | j. | Net
  operating carryforward tax losses:                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The Company
  has estimated total available carryforward tax losses of $ 7,047 to
  offset against future taxable income.                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The
  Companys subsidiaries in the U.S. and the U.K. have estimated total
  available carryforward tax losses of $ 5,332 and $ 930,
  respectively, to offset against future taxable income for 16 to 20 years, and
  an indefinite period, respectively. As of December 31, 2007, the Company
  recorded a full valuation allowance of the subsidiaries abovementioned tax
  assets due to the uncertainty of their future realization.

F - 41

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---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.AND ITS SUBSIDIARIES            
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                        
|--------- | -----------------------
|NOTE 14:- | TAXES ON INCOME (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Utilization
  of U.S. net operating losses may be subject to a substantial annual
  limitation due to the change in ownership provisions of the Internal
  Revenue Code of 1986 and similar state provisions. The annual limitation may
  result in the expiration of net operating losses before utilization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | k. | In December
  2007 the Company signed on tax assessment agreement for the years 2001-2004.
  According to the agreement, the Company paid $402. An additional amount of
  $467 will be paid to the tax authority if the Company will not receive
  Approved enterprise status under the law for encouragement of capital
  investments 1959.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | l. | Effective
  January 1, 2007, the Company adopted the provisions of FASB
  Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an
  interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies
  the accounting for uncertainties in income taxes by establishing minimum
  standards for the recognition and measurement of tax positions taken or
  expected to be taken in a tax return. Under the requirements of FIN 48, the
  Company must review all of its tax positions and make a determination as to
  whether its position is more-likely-than-not to be sustained upon examination
  by regulatory authorities. If a tax position meets the more-likelythan-not
  standard, then the related tax benefit is measured based on a cumulative
  probability analysis of the amount that is more-likely-than-not to be realized
  upon ultimate settlement or disposition of the underlying issue. The impact
  on the Companys consolidated financial position and results of operations as
  a result of the adoption of the provisions of FIN 48 was $ 229, which
  was recognized as an adjustment to retained earnings.

|          |                                               
|--------- | ----------------------------------------------
|NOTE 15:- | BALANCES AND TRANSACTIONS WITH RELATED PARTIES

| |    |                                 
| | -- | --------------------------------
| | a. | Balances
  with related parties:

|                                |  |              |    |      |   |      |  
|------------------------------- |  | ------------ | -- | ---- | - | ---- | -
|                                |  | December 31, |   
|                                |  |              |   
|                                |  | 2006         |    | 2007 |  
|                                |  |              |    |      |  
|                                |  |              |    |      |   |      |  
|Balances
  with related parties |  | $            | 59 |      | $ | (167 | )
|                                |  |              |    |      |   |      |  

| |    |                            
| | -- | ---------------------------
| | b. | Sales to
  related parties:

|                               |  |                         |     |      |   |      |  |   |     | 
|------------------------------ |  | ----------------------- | --- | ---- | - | ---- |  | - | --- | 
|                               |  | Year ended December 31, |    
|                               |  |                         |    
|                               |  | 2005                    |     | 2006 |   | 2007 | 
|                               |  |                         |     |      |   |      | 
|                               |  |                         |     |      |   |      |  |   |     | 
|Sales to
  related parties (1) |  | $                       | 671 |      | $ | 765  |  | $ | 781 | 
|                               |  |                         |     |      |   |      |  |   |     | 



| |     |                                                                                                                     
| | --- | --------------------------------------------------------------------------------------------------------------------
| | (1) | Sales and
  balances to related parties represent services provided by discontinued
  operation, see note 18a below.

F - 42

---

---

|                                                           
|-----------------------------------------------------------
|MAGAL SECURITY SYSTEMS LTD.AND ITS SUBSIDIARIES            
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                                                       
|--------- | ------------------------------------------------------
|NOTE 15:- | BALANCES AND TRANSACTIONS WITH RELATED PARTIES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c. | On December
  31, 2007, the Chairman of the Companys Board of Directors (Hereinafter  the
  retired Chairman), retired from his position. Pursuant to his retirement
  agreement, the retired Chairman agreed not to compete with the Company for a
  period of three years following his retirement in consideration of a one time
  payment of $ 360 payable within three months. In addition the Chairman is
  entitled to receive certain perquisites from the Company for the rest of his
  life. The liability as for December 31, 2007 and the special post benefit
  expense related to the retirement agreement amounted to $904.

|          |                    
|--------- | -------------------
|NOTE 16:- | SEGMENT INFORMATION

| |                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                        
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Group
  adopted SFAS No. 131, Disclosures about Segments of an Enterprise and
  Related Information. The Group operates in three major reportable segments,
  which represent the Groups operating segments as follows:
| |                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                        
| | 1.                                                                                                                                                                                                                             | Perimeter
  security systems - The Groups line of perimeter security systems consists of
  the following: Microprocessor-based central control units, taut wire
  perimeter intrusion detection systems, INNO fences, vibration detection
  systems, field disturbance sensors, and other.                                                                            
| |                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                        
| | 2.                                                                                                                                                                                                                             | Security
  turnkey projects - The Group executes turnkey projects based on the Companys
  security management system and acts as an integrator.                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                        
| | 3.                                                                                                                                                                                                                             | Video
  monitoring services - The Group supplied video monitoring services through
  Smart Interactive Systems, Inc., a U.S. subsidiary whose assets and business
  was sold on December 24, 2007. Therefore all balances and operations
  attributed to the video monitoring services segment were classified and
  presented as discontinued operation, see note 18a.

F - 43

---

---

|                                                           
|-----------------------------------------------------------
|                                                           
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                            
|--------- | ---------------------------
|NOTE 16:- | SEGMENT INFORMATION (Cont.)

| |    |                                                                                                                              
| | -- | -----------------------------------------------------------------------------------------------------------------------------
| | a. | The
  following data present the revenues, expenditures, assets and other operating
  data of the Groups operating segments:

|                                                                       |  |                         |        |          |   |        |   |              |     |       |   |           |  |          |        |       |   |              |  |       |        |           |   |          |   |       |     |              |   |        |   |  |        |  |  |        |  |  |      |   |  |     |   |   |        | 
|---------------------------------------------------------------------- |  | ----------------------- | ------ | -------- | - | ------ | - | ------------ | --- | ----- | - | --------- |  | -------- | ------ | ----- | - | ------------ |  | ----- | ------ | --------- | - | -------- | - | ----- | --- | ------------ | - | ------ | - |  | ------ |  |  | ------ |  |  | ---- | - |  | --- | - | - | ------ | 
|                                                                       |  | Year ended December 31, |       
|                                                                       |  |                         |       
|                                                                       |  | 2005                    |        | 2006     |   | 2007   |  
|                                                                       |  |                         |        |          |   |        |  
|                                                                       |  | Perimeter               |        | Projects |   | Other  |   | Eliminations |     | Total |   | Perimeter |  | Projects |        | Other |   | Eliminations |  | Total |        | Perimeter |   | Projects |   | Other |     | Eliminations |   | Total  |  
|                                                                       |  |                         |        |          |   |        |   |              |     |       |   |           |  |          |        |       |   |              |  |       |        |           |   |          |   |       |     |              |   |        |  
|                                                                       |  |                         |        |          |   |        |   |              |     |       |   |           |  |          |        |       |   |              |  |       |        |           |   |          |   |       |     |              |   |        |   |  |        |  |  |        |  |  |      |   |  |     |   |   |        | 
|Revenues                                                               |  | $                       | 40,143 |          | $ | 17,970 |   | $            | 272 |       |   |           |  | $        | 58,385 |       | $ | 47,186       |  | $     | 16,167 |           | $ | 247      |   |       |     |              | $ | 63,600 |   |  | 43,781 |  |  | 28,167 |  |  | 427  |   |  |     |   |   | 72,375 | 
|                                                                       |  |                         |        |          |   |        |   |              |     |       |   |           |  |          |        |       |   |              |  |       |        |           |   |          |   |       |     |              |   |        |   |  |        |  |  |        |  |  |      |   |  |     |   |   |        | 
|                                                                       |  |                         |        |          |   |        |   |              |     |       |   |           |  |          |        |       |   |              |  |       |        |           |   |          |   |       |     |              |   |        |   |  |        |  |  |        |  |  |      |   |  |     |   |   |        | 
|Depreciation and amortization                                          |  | $                       | 1,228  |          | $ | 19     |   | $            | 4   |       |   |           |  | $        | 1,251  |       | $ | 1,070        |  | $     | 133    |           | $ |         |   |       |     |              | $ | 1,203  |   |  | 1,087  |  |  | 966    |  |  | 2    |   |  |     |   |   | 2,055  | 
|                                                                       |  |                         |        |          |   |        |   |              |     |       |   |           |  |          |        |       |   |              |  |       |        |           |   |          |   |       |     |              |   |        |   |  |        |  |  |        |  |  |      |   |  |     |   |   |        | 
|                                                                       |  |                         |        |          |   |        |   |              |     |       |   |           |  |          |        |       |   |              |  |       |        |           |   |          |   |       |     |              |   |        |   |  |        |  |  |        |  |  |      |   |  |     |   |   |        | 
|Operating income (loss), before financial expenses and taxes on
income |  | $                       | 4,334  |          | $ | (5,290 | ) | $            | 53  |       | $ | 15        |  | $        | (888   | )     | $ | 3,070        |  | $     | 935    |           | $ | (138     | ) | $     | (31 | )            | $ | 3,836  |   |  | 2,421  |  |  | 506    |  |  | (193 | ) |  | (28 | ) |   | 2,706  | 
|                                                                       |  |                         |        |          |   |        |   |              |     |       |   |           |  |          |        |       |   |              |  |       |        |           |   |          |   |       |     |              |   |        |   |  |        |  |  |        |  |  |      |   |  |     |   |   |        | 
|Financial expenses, net                                                |  |                         |        |          |   |        |   |              |     |       |   |           |  |          | 813    |       |   |              |  |       |        |           |   |          |   |       |     |              |   | 864    |   |  |        |  |  |        |  |  |      |   |  |     |   |   | 2,137  | 
|Taxes on income (tax benefit)                                          |  |                         |        |          |   |        |   |              |     |       |   |           |  |          | (28    | )     |   |              |  |       |        |           |   |          |   |       |     |              |   | 943    |   |  |        |  |  |        |  |  |      |   |  |     |   |   | 373    | 
|Income (loss) from discontinued operations, net                        |  |                         |        |          |   |        |   |              |     |       |   |           |  |          | (1,538 | )     |   |              |  |       |        |           |   |          |   |       |     |              |   | (1,219 | ) |  |        |  |  |        |  |  |      |   |  |     |   |   | 1,686  | 
|                                                                       |  |                         |        |          |   |        |   |              |     |       |   |           |  |          |        |       |   |              |  |       |        |           |   |          |   |       |     |              |   |        |   |  |        |  |  |        |  |  |      |   |  |     |   |   |        | 
|                                                                       |  |                         |        |          |   |        |   |              |     |       |   |           |  |          |        |       |   |              |  |       |        |           |   |          |   |       |     |              |   |        |   |  |        |  |  |        |  |  |      |   |  |     |   |   |        | 
|Net income (loss)                                                      |  |                         |        |          |   |        |   |              |     |       |   |           |  | $        | (3,211 | )     |   |              |  |       |        |           |   |          |   |       |     |              | $ | 810    |   |  |        |  |  |        |  |  |      |   |  |     |   | $ | 1,882  | 
|                                                                       |  |                         |        |          |   |        |   |              |     |       |   |           |  |          |        |       |   |              |  |       |        |           |   |          |   |       |     |              |   |        |   |  |        |  |  |        |  |  |      |   |  |     |   |   |        | 

|                        |  |              |        |          |   |       |  |       |    |           |   |          |  |       |        |       |   |           |  |          |    |       |   |        |  |  |        |  |  |       |  |  |   |  |  |        | 
|----------------------- |  | ------------ | ------ | -------- | - | ----- |  | ----- | -- | --------- | - | -------- |  | ----- | ------ | ----- | - | --------- |  | -------- | -- | ----- | - | ------ |  |  | ------ |  |  | ----- |  |  | - |  |  | ------ | 
|                        |  | December 31, |       
|                        |  |              |       
|                        |  | 2005         |        | 2006     |   | 2007  | 
|                        |  |              |        |          |   |       | 
|                        |  | Perimeter    |        | Projects |   | Other |  | Total |    | Perimeter |   | Projects |  | Other |        | Total |   | Perimeter |  | Projects |    | Other |   | Total  | 
|                        |  |              |        |          |   |       |  |       |    |           |   |          |  |       |        |       |   |           |  |          |    |       |   |        | 
|                        |  |              |        |          |   |       |  |       |    |           |   |          |  |       |        |       |   |           |  |          |    |       |   |        |  |  |        |  |  |       |  |  |   |  |  |        | 
|Total long-lived assets |  | $            | 13,042 |          | $ | 194   |  | $     | 19 |           | $ | 13,255   |  | $     | 12,451 |       | $ | 552       |  | $        | 20 |       | $ | 13,023 |  |  | 12,518 |  |  | 8,560 |  |  | 1 |  |  | 21,079 | 
|                        |  |              |        |          |   |       |  |       |    |           |   |          |  |       |        |       |   |           |  |          |    |       |   |        |  |  |        |  |  |       |  |  |   |  |  |        | 

F - 44

---

---

|                                                           
|-----------------------------------------------------------
|                                                           
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                            
|--------- | ---------------------------
|NOTE 16:- | SEGMENT INFORMATION (Cont.)

| |    |                                                      
| | -- | -----------------------------------------------------
| | b. | Major
  customer data (percentage of total revenues):

|           |  |                         |      |      |  |      |   |  |       |  
|---------- |  | ----------------------- | ---- | ---- |  | ---- | - |  | ----- | -
|           |  | Year ended December 31, |     
|           |  |                         |     
|           |  | 2005                    |      | 2006 |  | 2007 |  
|           |  |                         |      |      |  |      |  
|           |  |                         |      |      |  |      |   |  |       |  
|Customer A |  |                         | 23.9 | %    |  | 33.7 | % |  | *) 13 | %
|           |  |                         |      |      |  |      |   |  |       |  
|           |  |                         |      |      |  |      |   |  |       |  
|Customer B |  |                         | 10.2 | %    |  | *)  |   |  | *)   |  
|           |  |                         |      |      |  |      |   |  |       |  
|           |  |                         |      |      |  |      |   |  |       |  
|Customer C |  |                         |     |      |  |     |   |  | 13.4  | %
|           |  |                         |      |      |  |      |   |  |       |  

| |    |                                                                                                                            |                                   
| | -- | -------------------------------------------------------------------------------------------------------------------------- | ----------------------------------
| |    | *)                                                                                                                         | Less than
  10% of total revenues.
| |    |                                                                                                                            |                                   
| | c. | Geographical
  information:                                                                                               
| |    |                                                                                                                            |                                   
| |    | The
  following is a summary of revenues within geographic areas based on end
  customers location and long-lived assets:

|   |                         |  |                         |        |      |   |        |  |   |        | 
|-- | ----------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|   |                         |  | Year ended December 31, |       
|   |                         |  |                         |       
|   |                         |  | 2005                    |        | 2006 |   | 2007   | 
|   |                         |  |                         |        |      |   |        | 
|   |                         |  |                         |        |      |   |        |  |   |        | 
|1. | Revenues:               |  |                         |        |      |   |        |  |   |        | 
|   |                         |  |                         |        |      |   |        |  |   |        | 
|   | Israel                  |  | $                       | 19,309 |      | $ | 26,385 |  | $ | 15,663 | 
|   | Europe                  |  |                         | 9,935  |      |   | 9,793  |  |   | 18,342 | 
|   | North America           |  |                         | 19,047 |      |   | 14,176 |  |   | 14,869 | 
|   | South and Latin America |  |                         | 3,165  |      |   | 7,456  |  |   | 6,818  | 
|   | Africa                  |  |                         | 700    |      |   | 321    |  |   | 10,879 | 
|   | Others                  |  |                         | 6,229  |      |   | 5,469  |  |   | 5,804  | 
|   |                         |  |                         |        |      |   |        |  |   |        | 
|   |                         |  |                         |        |      |   |        |  |   |        | 
|   |                         |  | $                       | 58,385 |      | $ | 63,600 |  | $ | 72,375 | 
|   |                         |  |                         |        |      |   |        |  |   |        | 
|2. | Long-lived assets:      |  |                         |        |      |   |        |  |   |        | 
|   |                         |  |                         |        |      |   |        |  |   |        | 
|   | Israel                  |  | $                       | 2,930  |      | $ | 2,763  |  | $ | 2,955  | 
|   | Europe                  |  |                         | 921    |      |   | 1,001  |  |   | 8,472  | 
|   | USA                     |  |                         | 5,627  |      |   | 5,469  |  |   | 5,244  | 
|   | Canada                  |  |                         | 3,656  |      |   | 3,648  |  |   | 4,189  | 
|   | Others                  |  |                         | 121    |      |   | 142    |  |   | 219    | 
|   |                         |  |                         |        |      |   |        |  |   |        | 
|   |                         |  |                         |        |      |   |        |  |   |        | 
|   |                         |  | $                       | 13,255 |      | $ | 13,023 |  | $ | 21,079 | 
|   |                         |  |                         |        |      |   |        |  |   |        | 

F - 45

---

---

|                                                           
|-----------------------------------------------------------
|                                                           
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                                   
|--------- | ----------------------------------
|NOTE 17:- | SELECTED STATEMENTS OF INCOME DATA

| |    |                                          
| | -- | -----------------------------------------
| | a. | Research and
  development expenses, net:

|                                                                          |  |                         |       |      |   |       |  |   |       | 
|------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | ----- | 
|                                                                          |  | Year ended December 31, |      
|                                                                          |  |                         |      
|                                                                          |  | 2005                    |       | 2006 |   | 2007  | 
|                                                                          |  |                         |       |      |   |       | 
|                                                                          |  |                         |       |      |   |       |  |   |       | 
|Expenses                                                                  |  | $                       | 5,427 |      | $ | 5,540 |  | $ | 5,924 | 
|Less - investment tax
  credits and a royalty bearing grant ($8K in 2005) |  |                         | 162   |      |   | 162   |  |   | 160   | 
|                                                                          |  |                         |       |      |   |       |  |   |       | 
|                                                                          |  |                         |       |      |   |       |  |   |       | 
|                                                                          |  | $                       | 5,265 |      | $ | 5,378 |  | $ | 5,764 | 
|                                                                          |  |                         |       |      |   |       |  |   |       | 

| |    |                      
| | -- | ---------------------
| | b. | Financial
  expenses:

|                                                                                                 |  |                         |        |      |   |        |   |   |        |  
|------------------------------------------------------------------------------------------------ |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                                                 |  | Year ended December 31, |       
|                                                                                                 |  |                         |       
|                                                                                                 |  | 2005                    |        | 2006 |   | 2007   |  
|                                                                                                 |  |                         |        |      |   |        |  
|                                                                                                 |  |                         |        |      |   |        |   |   |        |  
|Financial expenses:                                                                              |  |                         |        |      |   |        |   |   |        |  
|Interest on long-term debt                                                                       |  | $                       | (622   | )    | $ | (698   | ) | $ | (563   | )
|Interest on short-term bank
  credit                                                             |  |                         | (630   | )    |   | (689   | ) |   | (1,337 | )
|Forward contracts loss                                                                           |  |                         | (110   | )    |   | (915   | ) |   | (666   | )
|Foreign exchange losses                                                                          |  |                         | (314   | )    |   | (337   | ) |   | (792   | )
|                                                                                                 |  |                         |        |      |   |        |   |   |        |  
|                                                                                                 |  |                         |        |      |   |        |   |   |        |  
|                                                                                                 |  |                         | (1,676 | )    |   | (2,639 | ) |   | (3,358 | )
|                                                                                                 |  |                         |        |      |   |        |   |   |        |  
|Financial income:                                                                                |  |                         |        |      |   |        |   |   |        |  
|Interest on short-term and
  long-term bank deposits, structured notes and marketable securities |  |                         | 694    |      |   | 1,162  |   |   | 1,221  |  
|Foreign exchange gains                                                                           |  |                         | 169    |      |   | 613    |   |   |       |  
|                                                                                                 |  |                         |        |      |   |        |   |   |        |  
|                                                                                                 |  |                         |        |      |   |        |   |   |        |  
|                                                                                                 |  |                         | 863    |      |   | 1,775  |   |   | 1,221  |  
|                                                                                                 |  |                         |        |      |   |        |   |   |        |  
|                                                                                                 |  |                         |        |      |   |        |   |   |        |  
|                                                                                                 |  | $                       | (813   | )    | $ | (864   | ) | $ | (2,137 | )
|                                                                                                 |  |                         |        |      |   |        |   |   |        |  

|          |                        
|--------- | -----------------------
|NOTE 18:- | DISCONTINUED OPERATIONS

| |    |                                                                                                                                                                                                                                                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | General:                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                          
| |    | On July 28,
  2005, the Company decided to dispose of the indoor security sensors
  operations.                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                          
| |    | On December
  24, 2007 the Company decided to sell its U.S. based video monitoring business
  that was operated by Smart Interactive Systems Inc. for $ 8.5 million. The
  video monitoring business was previously reported as a separate segment in
  the Groups financial statements.

F - 46

---

---

|                                                           
|-----------------------------------------------------------
|                                                           
|MAGAL SECURITY SYSTEMS LTD.
  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|          |                                
|--------- | -------------------------------
|NOTE 18:- | DISCONTINUED OPERATIONS (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                              
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | In view of
  the above, the operating results and cash flows attributed to the indoor
  security sensors operations and video monitoring business were presented in
  the Companys statements of operations and cash flows as discontinued
  operations. Accordingly, the comparative figures were reclassified for all
  periods presented.
| |    |                                                                                                                                                                                                                                                                                                                                              
| | b. | The
  following are the results of the discontinued operations for the years ended
  December 31, 2005, 2006 and 2007:                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                              
| |    | Indoor security sensors operations                                                                                                                                                                                                                                                                                                           

|                         |  |                         |     |      |   |      |   |   |   | 
|------------------------ |  | ----------------------- | --- | ---- | - | ---- | - | - | - | 
|                         |  | Year ended December 31, |    
|                         |  |                         |    
|                         |  | 2005                    |     | 2006 |   | 2007 |  
|                         |  |                         |     |      |   |      |  
|                         |  |                         |     |      |   |      |   |   |   | 
|Revenues                 |  | $                       | 427 |      | $ | 48   |   | $ |  | 
|Cost of
  revenues       |  |                         | 470 |      |   | 198  |   |   |  | 
|                         |  |                         |     |      |   |      |   |   |   | 
|                         |  |                         |     |      |   |      |   |   |   | 
|Gross loss               |  |                         | 43  |      |   | 150  |   |   |  | 
|                         |  |                         |     |      |   |      |   |   |   | 
|                         |  |                         |     |      |   |      |   |   |   | 
|Operating
  expenses:    |  |                         |     |      |   |      |   |   |   | 
|Sales and marketing, net |  |                         | 149 |      |   | 12   |   |   |  | 
|                         |  |                         |     |      |   |      |   |   |   | 
|                         |  |                         |     |      |   |      |   |   |   | 
|Operating
  loss         |  |                         | 192 |      |   | 162  |   |   |  | 
|Tax benefit              |  |                         | (36 | )    |   | (34  | ) |   |  | 
|                         |  |                         |     |      |   |      |   |   |   | 
|                         |  |                         |     |      |   |      |   |   |   | 
|Net loss                 |  | $                       | 156 |      | $ | 128  |   | $ |  | 
|                         |  |                         |     |      |   |      |   |   |   | 

| |  |                 
| |  | ----------------
| |  | Video monitoring

|                                                      |  |                         |        |      |   |        |   |   |       | 
|----------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ----- | 
|                                                      |  | Year ended December 31, |       
|                                                      |  |                         |       
|                                                      |  | 2005                    |        | 2006 |   | 2007   |  
|                                                      |  |                         |        |      |   |        |  
|                                                      |  |                         |        |      |   |        |   |   |       | 
|Revenues                                              |  | $                       | 2,897  |      | $ | 3,358  |   | $ | 3,435 | 
|Cost of revenues                                      |  |                         | 2,496  |      |   | 2,995  |   |   | 2,937 | 
|                                                      |  |                         |        |      |   |        |   |   |       | 
|                                                      |  |                         |        |      |   |        |   |   |       | 
|Gross profit                                          |  |                         | 401    |      |   | 363    |   |   | 498   | 
|                                                      |  |                         |        |      |   |        |   |   |       | 
|                                                      |  |                         |        |      |   |        |   |   |       | 
|Operating expenses:                                   |  |                         |        |      |   |        |   |   |       | 
|Sales and marketing                                   |  |                         | 795    |      |   | 476    |   |   | 267   | 
|General and administrative                            |  |                         | 996    |      |   | 986    |   |   | 885   | 
|                                                      |  |                         |        |      |   |        |   |   |       | 
|                                                      |  |                         |        |      |   |        |   |   |       | 
|Operating loss                                        |  |                         | 1,390  |      |   | 1,099  |   |   | 654   | 
|                                                      |  |                         |        |      |   |        |   |   |       | 
|Capital gain from sale of video monitoring
  activity |  |                         |       |      |   |       |   |   | 2,427 | 
|Financial income, net                                 |  |                         | 13     |      |   | 13     |   |   | 55    | 
|Tax expense                                           |  |                         | 5      |      |   | 5      |   |   | 142   | 
|                                                      |  |                         |        |      |   |        |   |   |       | 
|                                                      |  |                         |        |      |   |        |   |   |       | 
|Net Income (loss)                                     |  | $                       | (1,382 | )    | $ | (1,091 | ) | $ | 1,686 | 
|                                                      |  |                         |        |      |   |        |   |   |       | 

F - 47

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Report of
Independent Registered Public Accounting Firm

To the
Shareholders of

Senstar
Stellar Latin America, S. A. de C.V.:

We
have audited the accompanying balances sheets of SENSTAR STELLAR LATIN AMERICA,
S.A. DE C.V. (incorporated in Mexico), as of December 31, 2007 and 2006, and
the related statements of operations, changes in shareholders equity, and cash
flows for each of the years then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on the financial statements based on our audits.

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

In
our opinion, the translated financial statements referred to above present
fairly, in all material respects, the financial position of Senstar Stellar
Latin America, S.A. de C.V. as of December 31, 2007 and 2006, and the related
statements of operations, changes in shareholders equity and cash flows for
each of the years then ended in conformity with the accounting principles
generally accepted in the United States of America.



|                      |                                      |                        
|--------------------- | ------------------------------------ | -----------------------
|                      | SALLES,
SAINZ  GRANT THORNTON, S.C.
|                     
|                      |                                      | /S/ Hector Bautista    
|                      |                                      |                        
|                      |                                      |                        
|                      |                                      | By: Hector Bautista CPA
|                      |                                      |                        
|Mexico City,
  Mexico |                                      |                        
|January
  31, 2008    |                                      |                        

F - 48

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SIGNATURE

The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this amendment to annual report on its behalf.

| |  | MAGAL SECURITY SYSTEMS   LTD.By: /s/ Izhar Dekel
Name: Izhar DekelTitle: Chief Executive OfficerDate: June 30, 2008
| |  | ---------------------------------------------------------------------------------------------------------------------------------

82

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