UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K





ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended December
31,
2008Commission
File No. 0-22810





MACE
SECURITY INTERNATIONAL, INC.


(Exact
name of registrant as specified in its charter)





Delaware
                (State
      or Other Jurisdiction of
                Incorporation
      or Organization)
              03-0311630
                (I.R.S.
      Employer
                Identification
      No.)





240
Gibraltar Rd., Suite 220, Horsham, PA 19044


(Address of Principal Executive Offices)          (Zip Code)





Registrant's
Telephone Number, Including Area Code: (267) 317-4009





Securities
Registered Pursuant to Section 12(b) of the Act:




Common
Stock, par value $0.01 per share




Name
of each exchange on which registered: The NASDAQ Global Market




Securities
Registered Pursuant to Section 12(g) of the Act: None





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





Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes ̈Nox





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 (the
“Exchange Act”) during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.  Yes x  No  ̈





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.  (Check
one)


Large accelerated filer ̈
              Accelerated
      filer  ̈
              Non-accelerated filer ̈
              Smaller reporting companyx





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes ̈Nox





The
aggregate market value of the voting stock held by non-affiliates of registrant
on June 30, 2008 was approximately $25,504,000. Such aggregate market value was
computed by reference to the closing price of the common stock as reported on
the Nasdaq Global Market on June 30, 2008. For purposes of determining this
amount only, the registrant has defined affiliates as including (a) the
executive officers and directors of the Registrant on June 30, 2008 and (b) each
stockholder that had informed registrant that it was the beneficial owner of 10%
or more of the outstanding common stock of Registrant on June 30,
2008.





The
number of shares of Common Stock, par value $0.1 per share, of registrant
outstanding as of March 18, 2009 was 16,285,377.














Mace
Security International, Inc. and Subsidiaries


Form
10-K


Year
Ended December 31, 2008





Contents




PagePART
      IItem
      1.
                                Business
                                
                                3Item
      1A.
                                Risk
      Factors
                                
                                11Item
      1B.
                                Unresolved
      Staff Comments
                                
                                20Item
      2.
                                Properties
                                
                                20Item
      3.
                                Legal
      Proceedings
                                
                                21Item
      4.
                                Submission
      of Matters to a Vote of Security Holders
                                
                                22PART
      IIItem
      5.
                                Marketfor Registrant’s
      Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities
                                
                                23Item
      6.
                                Selected
      Financial Data
                                
                                26Item
      7.
                                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                
                                27Item
      7A.
                                Quantitative
      and Qualitative Disclosures About Market Risk
                                
                                43Item
      8.
                                Financial
      Statements and Supplementary Data
                                
                                43Item
      9.
                                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                
                                43Item
      9A(T).
                                Controls
      and Procedures
                                
                                43Item
      9B.
                                Other
      Information
                                
                                44PART
      IIIItem
      10.
                                Directors,
      Executive Officers and Corporate Governance
                                
                                44Item
      11.
                                Executive
      Compensation
                                
                                46Item
      12.
                                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                
                                62Item
      13.
                                Certain
      Relationships and Related Transactions, and Director
      Independence
                                
                                64Item
      14.
                                Principal
      Accounting Fees and Services
                                
                                64PART
      IVItem
      15.
                                Exhibits,
      Financial Statement Schedules
                                
                                65


2


PART
I





ITEM
      1.
            BUSINESS





GENERAL





Mace
Security International, Inc. (the “Company” or “Mace”) was incorporated in
Delaware on September 1, 1993.   Our operations are currently
conducted through three segments: Security, Digital Media Marketing, and Car
Wash.





Our
Security Segment designs, manufactures, assembles, markets and sells a wide
range of security products. Our primary focus in the Security Segment is
electronic surveillance products and components that we purchase from Asian
manufacturers who design equipment to our requirements. We sell the electronic
surveillance products and components primarily to installing dealers,
distributors, system integrators and end users.  Other products in our
Security Segment are less-than-lethal Mace® defense sprays and other security
devices such as monitors, high-end digital and machine vision cameras and
professional imaging components, as well as video conferencing
equipment.  The main marketing channels for our products are industry
shows, trade publications, catalogs, the internet, telephone orders,
distributors, and mass merchants.





Our
Digital Media Marketing Segment focuses on selling products on third party
internet promotional sites.  The products we sell are developed
internally. We have in the past and may in the future conduct marketing and
customer acquisitions for third parties using  a proprietary marketing
platform. The products we sell on the third party internet promotional sites
utilize our proprietary marketing platform.





Our Car
Wash Segment owns a total of 12 car washes as of March 18, 2009, one which is
closed. All of Mace’s car washes are for sale.





The
Company’s periodic reports on Forms 10-K and 10-Q and current reports on Form
8-K, as filed with the United States Securities and Exchange Commission (the
“SEC”), can be accessed through the Company’s website at www.mace.com.





LINES
OF BUSINESS





Security
Segment.  The Security Segment offers a wide variety of
security related products.  Among the items offered are electronic
surveillance products, including analog, digital and IP cameras, digital video
recorders, security monitors, matrix switching equipment for video distribution,
robotic camera dome systems, system controls, and consoles for system assembly
markets.  Other products offered are Mace® defense sprays, personal
alarms, home security alarms, whistles, door jammers, and window and door lock
alarms. We also offer the KinderGard ® product line of childproof security
locks, security literature for the domestic and foreign financial community,
state-of-the-art training videos, crisis response materials and TG Guard®, an
electronically controlled tear gas system used in prisons, embassies, and safe
rooms.





Our
electronic surveillance products and system component requirements are
established by our operating and marketing staffs in Ft. Lauderdale, Florida and
Farmers Branch, Texas and manufactured by overseas original equipment
manufacturers (“OEM”). Our electronic surveillance products and system
components are warehoused and shipped from our facility in Farmers Branch,
Texas. Our defense sprays are manufactured by us in our Bennington, Vermont
facility.  The KinderGard ® product line is manufactured by a third
party utilizing molds primarily owned by the Company.  Our defense
sprays and the KinderGard ® product line are packaged, warehoused, and shipped
from our Vermont facility. Our TG Guard® products are also assembled in our
Vermont facility.





Our
electronic surveillance products and components are marketed through several
sales channels, such as dealers, system integrators, catalogs, the internet,
mass merchants, exhibitions at national trade shows and by telephone orders. We
also sell our products by the use of distributors, exhibitions at national trade
shows and advertisements in trade publications.





The
Security Segment provided 40.9%, 52.7% and 63.3% of our revenues in fiscal years
2008, 2007, and 2006, respectively.





Digital Media Marketing
Segment. The Digital Media Marketing Segment is an e-commerce and online
marketing business which has two business divisions: (1) e-commerce and (2)
online marketing. The online marketing division is currently not
active.  The segment uses proprietary technologies and software to
sell products on the internet, through the e-commerce division.  In
the past and possibly in the future the Company used its proprietary technology
to provide internet marketing services to third party
advertisers.


3





Linkstar,
which is our e-commerce division, is a direct-response product business that
develops, markets and sells products directly to consumers through the internet
promotional sites. We reach the customers predominately through online
advertising on  third-party promotional websites. The products
include: Vioderm, an anti-wrinkle skin care product (www.vioderm.com);
Purity by Mineral Science, a mineral cosmetic (www.mineralscience.com);
TrimDayTM, a weight-loss supplement (www.trimday.com);
Eternal Minerals, a dead sea spa product line (www.eternalminerals.com);
ExtremeBriteWhite, a teeth whitening product (www.extremebritewhite.com);
and Knockout, an acne product (www.knockoutmyacne.com).
We continuously develop and test product offerings to determine customer
acquisition costs and revenue potential, as well as to identify the most
efficient marketing programs.





From the
acquisition date, July 20, 2007, through June  2008, our online
marketing division, PromoPath, an online affiliate marketing business, located
customers or leads for third party clients who hired PromoPath.  The
advertising clients who hired PromoPath paid us based on a set fee per customer,
prospect or lead acquired.  The online media marketing industry refers
to the arrangement of acquiring customers, prospects or leads for advertisers on
a fee basis per customer as the cost-per-acquisition (“CPA”)
model.  PromoPath helped companies create effective performance driven
marketing campaigns and provided design, brand and technical support services in
order to acquire customers for its advertising clients.  PromoPath
worked with many large publishers to reach many areas of interactive media.
PromoPath’s advertising clients were typically established direct-response
advertisers with well recognized brands and broad consumer appeal such as
NetFlix, Discover credit cards and Bertelsmann Group. PromoPath generated CPA
revenue, both brokered and through co-partnered sites.  Promopath may
in the future restart its third party marketing business.  Currently,
PromoPath only provides services to our e-commerce division.





In
addition to CPA revenue, PromoPath had two other types of revenue streams. List
management revenue, a revenue stream, based on a relationship between a data
owner and a list management company. The data owner, PromoPath, compiles,
collects, owns and maintains a proprietary computerized database composed of
consumer information.  PromoPath, as the data owner, granted a list
manager a non-exclusive, non-transferable, revocable worldwide license to
manage, make use and have access to the data pursuant to defined terms and
conditions for which PromoPath is paid revenue. Another type of revenue stream
PromoPath had was  lead generation or Cost per Lead (“CPL”).
Advertisers who purchase potential customers, on a CPL basis are interested in
collecting data from consumers expressing interest in a product or
service.  CPL varies from CPA in that no credit card information for
the potential customer needs to be provided to the advertiser for the fee to be
paid for the lead.





Revenues
within the Digital Media Marketing Segment from the acquisition date of the
business, July 20, 2007, were approximately $7.6 million; consisting of $4.2
million, or 55.3%, from the e-commerce division and $3.4 million, or 44.7%, from
the online marketing division. (See Note 20, Segment Reporting, to the
consolidated financial statements accompanying this report.)





Car Wash
Segment.  The Company, through its subsidiaries, owned 14 car
washes as of December 31, 2008, three of which were closed. As of March 18,
2009, the Company owns 12 car washes in Texas, one of which is
closed.   The 12 locations consist of 11 full service car washes
and one self service car wash location.  The full service car washes
provide exterior washing and drying, vacuuming of the interior of the vehicle,
dusting of dashboards and door panels, and cleaning of all windows and
glass.





Our
typical car wash facility consists of a free standing building of approximately
4,000 square feet, containing a sales area for impulse items and a car wash
tunnel.  Cars are moved through the car wash tunnel by a conveyor
system.  Inside the tunnel, automatic equipment cleans the vehicle as
it moves past the equipment. Additional services, including wheel cleaning,
fragrance, rust protection treatment, wheel treatments, and waxing are also
offered at the locations.  Many of our locations also offer other
consumer products and related car care services, such as professional automotive
detailing services (currently offered at 11 locations), oil and lubrication
services (currently offered at 5 locations), gasoline dispensing services
(currently offered at 10 locations), state inspection services (currently
offered at 5 locations), convenience store sales (currently offered at one
location), and merchandise sales (currently offered at 11 locations). The Car
Wash Segment provided 25.1%, 29.2% and 36.7% of our revenues in fiscal years
2008, 2007 and 2006, respectively.  (See Note 20, Segment Reporting to the
consolidated financial statements accompanying this report.)





Our car
wash operations are not dependent on any one or a small number of
customers.  The nature of our car wash operations does not result in a
backlog of orders at any time, and all of our car wash revenues are derived from
sales in the United States.





For a
discussion of seasonal effects on our car wash operations,see Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations-Seasonality and
Inflation.


4





BUSINESS
STRATEGIES





Security Segment.





Internal
Growth.The
Security Segment designs, manufacturers, markets and sells a wide range of
security products.  For the year ended December 31, 2008, revenues
from the Security Segment were $20.7 million. The Company began selling
electronic surveillance products and system components in August 2002. Revenues
from electronic surveillance products and system components have grown from
$373,000 of revenue in 2002 to $10.7 million in 2008. Growth has been
principally achieved through acquiring businesses and through internal growth
through development of new product offerings, as well as expanded advertising
and marketing efforts. We are currently pursuing the strategy of acquiring a
wholesale alarm monitoring company. If acquired, the wholesale alarm monitoring
company will offer our dealers an easy alternative for the monitoring of the
video output of our products that the dealers install. By offering video
monitoring we hope to be able to increase the loyalty and number of our
dealers.





The
Company sells its defense sprays in the consumer market under its Mace® brand.
Defense sprays are sold in the law enforcement market under the brand name of
TakeDown®. The Mace Trademark Corporation, a subsidiary of Mace Security
International, Inc., manages the correct use of the Mace® trademark by Mace
Security International, Inc. and Armor Holdings, Inc. (See also Trademarks and
Patents, page 8). Armor Holdings, Inc has the exclusive right to use the Mace®
brand when selling aerosol defense sprays to the law enforcement market,
pursuant to an agreement dated July 1998. We believe that the total consumer
defense spray market is approximately $18 million to $20 million in annual
revenues and that the law enforcement market is approximately $5 million in
annual revenues.  Our newly developed Pepper Gel® has increased sales
in Law Enforcement and Consumer markets.  Pepper GelÔ has a patent pending in
the US Patent Office and internationally through the Patent Co-operation Treaty
(PCT).





During
the six months ended December 31, 2008, we implemented company wide cost savings
measures, including a reduction in employees throughout the entire Company, and
began a consolidation of our Security Segment’s electronic surveillance
equipment operations in Ft. Lauderdale, Florida and Farmers Branch, Texas. As
part of this reorganization, we consolidated our security division’s
surveillance equipment warehouse operations into our Farmers Branch, Texas
facility. Our professional security sales and administrative team remained in
Florida with our security catalog sales team being located in Texas. Our
intended goals of the reorganization are to better align our electronic
surveillance equipment sales teams to achieve sales growth; gain efficiencies by
sharing redundant functions within our security operations such as warehousing,
customer service, and accounting services; and to streamline our organization
structure and management team for improved long-term growth.





Operating
Agreements and Acquisitions.   On
August 12, 2002, the video systems and system component products were added to
the Security Segment when we acquired certain of the assets and operations of
Micro-Tech, Inc., a manufacturer and retailer of video security and surveillance
devices.  Plasma and video security monitors were added to the
Security Segment on September 26, 2003 when we acquired certain assets and the
operations of Vernex, Inc., a manufacturer and retailer of plasma and CRT video
monitors.   We added a line of high-end digital and machine
vision cameras and professional imaging components, Industrial Vision Source
(“IVS”), and a line of consumer “do it yourself” video surveillance systems,
SecurityandMore (“S&M”), on July 1, 2004, when we acquired the two
businesses from American Building Control, Inc.  On November 23, 2005
we acquired the inventory and customer accounts of Securetek, Inc. which
specializes in the sale of electronic surveillance products to security alarm
dealers and installers. The acquired businesses were relocated and integrated
into our existing security operations.





We
regularly evaluate potential acquisitions for the Security Segment to determine
if they provide an advantageous opportunity.  In evaluating potential
acquisitions, we consider: (i) our cash position and the availability of
financing at favorable terms; (ii) the potential for operating cost reductions;
(iii) marketing advantages by adding new products to the Mace® brand name; (iv)
market penetration of existing products; and (v) other relevant
factors.





As
consideration for acquisitions, we may use combinations of common stock,
warrants, cash, and indebtedness. The consideration for each future acquisition
will vary on a case-by-case basis depending on our financial interests, the
historic operating results of the acquisition target, and the growth potential
of the business to be acquired.  We expect to finance the cash portion
of future acquisitions through our cash reserves, funds provided by operations,
loans, and the proceeds of possible future equity sales.


5





Digital Media Marketing
Segment.





Sales. We have been
increasing sales and customer acquisition efforts and expenses in our e-commerce
division. The Purity cosmetics product line is, to date, our most successful
product line and is anticipated to remain stable.  We also anticipate
additional growth from our recent launch of new products such as our Extreme
BriteWhite, our teeth whitening product; Knockout, our acne product and
continued expansion of our other current product lines.





Operating
Efficiency.In
an effort to streamline and strengthen internal operations, we have consolidated
all internal operations of our Digital Media Marketing Segment in our Wexford,
Pennsylvania office, a suburb of Pittsburgh, Pennsylvania.  We
maintain a sales presence throughout the country. We consolidated the Digital
Media Marketing Segment’s e-commerce division’s shipping and fulfillment
functions within our security warehouse and shipping facility in Farmers Branch,
Texas in 2008. We plan to lease warehouse space in the Wexford, Pennsylvania
area in 2009 and move the e-commerce division’s shipping and fulfillment
functions to Pennsylvania.  We believe that the consolidation provides
savings in operating costs, overhead, and personnel.





Acquisition.On
July 20, 2007, the Digital Media Marketing Segment was added to our operations
when all of the outstanding common stock of Linkstar was purchased from
Linkstar’s shareholders. The acquisition of Linkstar provides us with a presence
in the online and digital media services industry. We paid approximately $10.5
million to the Linkstar shareholders consisting of $7.0 million in cash at
closing, $500,000 of promissory notes bearing a 5% interest rate paid on January
3, 2008 and 1,176,471 unregistered shares of the Company’s common stock. The
Company’s stock was issued based on a closing price of $2.55 per share or a
total value of $2.9 million.





Car
Wash Segment.





Sales.
We intend to maintain our revenues of the car washes we own while we continue to
sell the car washes. We intend to maintain the revenues by providing superior
service and through our existing marketing efforts. To maintain market share in
a given operating region, we spend approximately 2% to 3% of regional revenue on
regional advertising campaigns emphasizing coupons to attract volume with
discount offers and brand awareness.





Operating
Efficiency.We have implemented
programs to take advantage of certain economies of scale in such areas as the
purchase of equipment, chemicals, supplies and parts, equipment maintenance,
data processing, financing arrangements, employee benefits, insurance and
communications.  We train our operating personnel to emphasize
customer service, labor efficiency, safe operations, and sales of add-on and
ancillary services.





Acquisitions
and Divestitures.We acquired our car and
truck washes between May 1999 and December 2000. Our current strategy is to sell
the car washes we own. From December 2005 to March 18, 2009, we have sold 37 car
washes including all of our car washes in the Northeast, Arizona, Florida and
San Antonio, Texas regions.  The five truck washes we had owned were
sold in 2007.





On
January 14, 2009, we sold our two remaining San Antonio, Texas car washes. The
sales price of the car washes was $1,000,000, resulting in a loss of
approximately $7,000. The sales price was paid by the buyer issuing us a secured
promissory note in the amount of $750,000 bearing interest at 6% per annum.
Additionally, on January 15, 2009, we entered into an agreement of sale for two
of the three car washes we own in Austin, Texas for a sale price of $6,000,000.
The net book value of these two washes is approximately $5,300,000. The
transaction is conditioned upon the buyer being satisfied with a Phase 2
environmental study that is being conducted on the two sites. No assurances can
be given the transaction will be consummated.





We
currently own 12 car washes, as of March 18, 2009, all located in Texas. We are
marketing our car washes individually and in groups. We are considering offers
for our car washes and evaluate offers based on whether the purchase price would
be sufficient to retire all debt related to the car washes and provide
sufficient capital for the growth of our Security and Digital Media Marketing
Segments.  We seek to grow the Security and Digital Media Marketing
Segments through acquisitions, new product development and new market
penetration.





MARKETING





Security Segment. Our
electronic surveillance products and components are marketed through several
sales channels, such as catalogs, the internet, mass merchants, exhibitions at
national trade shows and telephone orders. Our other products are sold through
direct marketing, the use of distributors as well as exhibitions at national
trade shows and advertisements in trade publications.





Our self
defense sprays are available for purchase at mass merchant/department stores,
gun shops, sporting goods stores, hardware, auto, convenience and drug
stores.  In the law enforcement market, our defense sprays, including
Pepper Gel®, are sold through direct marketing, the use of independent sales
representatives and distributors as well as exhibitions at national trade shows
and advertisements in trade publications.


6





We have a
diverse customer base within the Security Segment with no single customer
accounting for 5% or more of our consolidated revenues for the fiscal year ended
December 31, 2008. We do not believe that the loss of any single Security
Segment customer would have a material adverse effect on our business or results
of operations.





Digital Media Marketing
Segment.All  e-commerce products and services are
marketed on third party promotional internet sites. We are continuing to
increase the products offered by  our Linkstar e-commerce division,
with the successful launch of our mineral cosmetic line, Purity, in late 2007,
the launch of Eternal Minerals, a Dead Sea spa product line in the Spring of
2008 and ExtremeBriteWhite, a teeth whitening product in late 2008. We intend to
concentrate on expanding our existing product lines, building brand awareness,
and launching three to four new product lines in 2009.





Car Wash
Segment.  The car care industry services customers on a local
and regional basis. We employ operational and customer service people at our
operating locations.  The operational and customer service people are
supervised by the management of the operating locations.  We emphasize
providing quality services as well as customer satisfaction and
retention.  We market our services through regional coupon
advertising, direct mail marketing programs and radio and television
advertisements.  We have a diverse customer base, with no single
customer accounting for 5% or more of our consolidated revenues for the fiscal
year ended December 31, 2008.  We do not believe that the loss of any
single customer would have a material adverse effect on our business or results
of operations.





PRODUCTION
AND SUPPLIES





Security Segment. Our
electronic surveillance products and system component requirements are
established at our Ft. Lauderdale, Florida and Farmers Branch, Texas facilities
and are manufactured principally in Korea, China, and other foreign countries,
by original equipment manufacturers (“OEM”). The electronic surveillance
products and components meeting our requirements are labeled, packaged, and
shipped ready for sale, to our warehouse in Farmers Branch, Texas.





Substantially
all of the manufacturing processes for our defense sprays are performed at our
leased Bennington, Vermont facility.  Defense spray products are
manufactured on an aerosol filling machine. Most products are packaged in
sealed, tamper-resistant "clamshells." KinderGard ®, a product line of
childproof locks, MaceCashÔ, a dye pack system, and TG
Guard®, an electronic tear gas security system, are primarily manufactured by
unrelated companies and are assembled and packaged on-site at our Vermont
facility.  There are numerous potential suppliers of the components
and parts required in the production process.  We have developed
strong long-term relationships with many of our suppliers, including the
following: Moldamatic, Inc., Amber International, Inc., and Springfield
Printing, Inc.  In addition, we purchase for resale a variety of
products produced by others including whistles and window and door
alarms.





Digital Media Marketing
Segment.Our Linkstar e-commerce division is located in
Wexford, Pennsylvania (a suburb of Pittsburgh).  Shipping and
fulfillment for the e-commerce division is performed in the Company’s Dallas,
Texas warehouse location and from a third-party fulfillment center. The products
sold by the e-commerce division are manufactured within the US as well as China
and other foreign countries.  The packaging of products is also
currently obtained through suppliers in the US and China.





Car Wash
Segment.We do not manufacture any of the car wash equipment
or supplies which we use.  There are numerous suppliers of car wash
equipment and supplies.





COMPETITION





Security Segment. Our video
systems and security products components face competition from many larger
companies such as Sony, Panasonic, Security Equipment Corp. and others. A number
of these competitors have significantly greater financial, marketing, and other
resources than us. Our high-end digital and machine vision camera operation,
IVS, is a large distributor of Sony® products.  Customers of IVS who
achieve a high Sony® product purchasing level, qualify for purchasing directly
from Sony®. IVS occasionally loses high volume customers to Sony. Additionally,
our foreign manufacturers of electronic surveillance products also sell directly
to our customer base. We also compete with numerous well-established, smaller,
local or regional firms.  Increased competition from these companies
could have an adverse effect on our electronic surveillance products
sales.





There
continues to be a number of companies marketing personal defense sprays to
civilian consumers such as Armor Holdings, Inc. We continue to offer defense
spray products that we believe distinguish themselves through brand name
recognition and superior product features and formulations. This segment
experienced increased sales in aerosols in each of the three years ending
December 31, 2008, 2007 and 2006 and increased sales in TG Guard systems in 2006
and 2007.  We attribute the increased sales to improved marketing,
including improvements in our website, as well as an increase in government
spending on purchasing our TG Guard systems for embassy, prison and safe room
installations.


7





Digital Media Marketing
Segment. Linkstar, our e-commerce division, competes with product
development and marketing companies, both on and offline.  Our success
relies on creating innovative products attractive to consumers, and being able
to gain and protect market share for successful product lines. We compete with
numerous well-established national and regional companies such as ValueClick,
Think Partnership, Syndero, Intelligent Beauty, Guthy-Renker, and Bare
Escentuals.  PromoPath, our online marketing division, currently is
not conducting any business except for the placement of Linkstar’s e-commerce
products on third-party promotional websites.





Car Wash
Segment.  The car care industry is a highly fragmented industry
comprised of many large and small businesses. We compete principally with
locally-owned car wash facilities and other regional car wash chains which may,
in many instances, be located near our car washes. The car care industry is
highly competitive. Competition is based primarily on location, facilities,
customer service, available services and price. We also face competition from
sources outside the car wash industry, such as gas stations that offer automated
car wash services. Barriers to entry in the car care industry are relatively
low. Competition is always entering our existing markets from new sources not
currently competing with us.





TRADEMARKS
AND PATENTS





Security
Segment.We began marketing products in 1993 under the Mace®
brand name and related trademarks pursuant to an exclusive license for sales of
defense sprays to the consumer market in the continental United States, and a
non-exclusive license for sales to the consumer market worldwide. We
subsequently purchased outright the Mace® brand name and related trademarks
(Pepper Mace®, Chemical Mace®, Mace . . . Just in Case®, CS MaceÔ and Magnum MaceÔ). In conjunction with this
purchase, we acquired a non-exclusive worldwide license to promote a patented
pepper spray formula in both the consumer and law enforcement markets. We have
patents pending for our new less-than-lethal gel products in the United States
and also in several foreign jurisdictions. Additionally, we have recently
obtained trademarks for Mace Pepper Gel® and have filed trademark applications
for Hot Pink Mace Defense SprayTM and the Sportsman Scent System®. Additionally,
we have been issued a patent on the locking mechanism for our Mark VI defense
spray unit.





In July
1998, in connection with the sale of our Law Enforcement Division, we
transferred our Mace® brand trademark and all related trademarks, and a patent
(No. 5,348,193) to our wholly-owned subsidiary, Mace Trademark Corp. The
purchaser of our Law Enforcement division received a 99 year license to use the
Mace® brand, certain other such trademarks and the patents in the law
enforcement market only.





We also
have various other patents and trademarks for the devices we sell, including
trademarks and/or patents for the Big Jammer® door brace, Screecher®,
Peppergard®, Mace (Mexico)®, Viper® defense spray, KinderGard®, TG Guard®, Take
Down®, Muzzle®, Pepper Mace®, MSI and Design®, Mace® Community (European Union)
Trademark, Pepper Gel®, and  Take Down Extreme®. We also license the
pending patent for our new Pepper Gun product.





With the
2004 acquisition of S&M and IVS, we obtained the following trademarks used
in our Security Segment: SecurityandMore®, SecurityandMore.com®, Industrial
Vision Source®, Security Outsourcing SolutionsÔ, Observision®,
ProtectItNow!®, Easy Watch®, Focus Vision 4 Observation System (Stylized)® and
SmartChoice®.





The
Company has expanded the Mace® trademark to cover new electronic surveillance
products.





We
believe these Mace-related trademarks provide us with a competitive
advantage.





Digital Media Marketing
Segment.We are applying for trademarks and service marks for
the brands we sell on the internet.





Car Wash
Segment.  We own a registered service mark for Super Bright®. Super Bright® is our brand
name in our Lubbock, Texas locations. We operate our remaining car washes in our
Texas regions under locally recognizable names such as Colonial Car Wash in
Dallas, Texas and Genie Car Wash in Austin, Texas.


8





GOVERNMENT
REGULATION/ENVIRONMENTAL COMPLIANCE





Security
Segment.  The distribution, sale, ownership, and use of
consumer defense sprays are legal in some form in all fifty states and the
District of Columbia. However, in some states, sales to minors are prohibited
and in several states (MA, MI, NY and WI, for example) sales are highly
regulated. Among the typical regulations are the following, which list is not
all inclusive: Massachusetts requires both the seller and possessor to be
licensed; Michigan does not allow the sale of combinations of tear gas and
pepper sprays; and New York requires sellers to be licensed firearms dealers or
pharmacists. There are often restrictions on sizes, labeling and packaging that
may vary from state to state. We have been able to sell our defense sprays
consistent with the requirements of state laws. We believe we are in material
compliance with all federal, state, and local laws that affect the sale and
marketing of our defense spray business. There can be no assurance, however,
that broader or more severe restrictions will not be enacted that would have an
adverse impact on the sale of defense sprays. Additionally, certain states
require licenses for the sale of our security equipment. We have obtained all
required licenses.





During
January 2008, the Environmental Protection Agency (“EPA”) conducted a site
investigation at the Company’s Bennington, Vermont location and the building
within which the facility is located.  The Company leases 44,000
square feet of the building from Vermont Mill Properties, Inc. (“Vermont
Mill”).  The site investigation was focused on whether hazardous
substances were being improperly stored.  Subsequent to the
investigation, the EPA notified the Company and the building owner that
remediation of certain hazardous wastes were required.  The EPA, the
Company and the building owner entered into an Administrative Consent Order
under which the hazardous materials and waste were remediated. All remediation
required by the Administrative Consent Order was completed within the time
allowed by the EPA and a final report regarding the remediation was submitted to
the EPA in October 2008, as required by the Administrative Consent
Order.  The Company has not received any comments from the EPA
regarding the final report. A total estimated cost of approximately $710,000
relating to the remediation, which includes disposal of the waste materials, as
well as expenses incurred to engage environmental engineers and legal counsel
and reimbursement of the EPA’s costs, has been recorded through December 31,
2008. This amount represents management’s best estimate of probable loss, as
defined by SFAS No. 5, Accounting for Contingencies.
Approximately $593,000 has been paid to date, leaving an accrual balance of
$117,000 at December 31, 2008 for estimated EPA costs. The initial accrual of
$285,000 recorded at December 31, 2007 was increased by $380,000 in the first
quarter and $65,000 in the second quarter due to there being more hazardous
waste to dispose of than originally estimated, increased cost estimates for
additional EPA requirements in handling and oversight related to disposing of
the hazardous waste, and the cost of obtaining additional engineering reports
requested by the EPA. The accrual for waste disposal was decreased by $27,000 in
the third quarter when the final hazardous materials and waste were disposed of
and the actual cost of disposal of the waste was determined and increased by
$7,000 in the fourth quarter due to the actual cost of preparing final
engineering reports exceeding original estimated costs.





In
addition to the EPA site investigation, the United States Attorney for the
District of Vermont (“U.S. Attorney”) conducted a search of the Company’s
Bennington, Vermont location and the building in which the facility is located,
during February 2008 under a search warrant issued by the U.S. District Court
for the District of Vermont.  On May 2, 2008, the U.S. Attorney issued
a grand jury subpoena to the Company.  The subpoena required the
Company to provide the U.S. Attorney documents related to the storage, disposal
and transportation of materials at the Bennington, Vermont
location.  The Company has supplied the documents and fully cooperated
with the U.S. Attorney’s investigation and will continue to do
so.  The Company is unable at this time to determine whether further
action will be taken by the U.S. Attorney or if any charges, fines or penalties
will be imposed on the Company.  The Company has made no provision for
any future costs associated with the investigation.





Digital Media Marketing
Segment.We believe that we currently comply with all state
and federal laws within our online marketing practices.  However, the
online marketing segment has come under increased scrutiny by the Federal Trade
Commission (“FTC”) and several state Attorney Generals in regards to online lead
generation practices.  Because our online marketing and e-commerce
sites could be impacted, we are closely monitoring any changes to state or
federal laws and FTC guidelines.  In addition, any changes to laws
impacting the import or sale of any products within our e-commerce division
could adversely impact revenues, although we believe this to be of minimal risk
in the near future.





Car Wash
Segment.  We are subject to various local, state, and federal
laws regulating the discharge of pollutants into the environment.  We
believe that our operations are in compliance, in all material respects, with
applicable environmental laws and regulations. Compliance with these laws and
regulations is not expected to materially affect our competitive position. Three
major areas of regulation facing us are disposal of lubrication oil at our oil
change centers, the compliance with all underground storage tank laws in
connection with our gasoline sales, and the proper recycling and disposal of
water used in our car washes.  We use approved waste-oil haulers to
remove our oil and lubricant waste.  When we acquired our gasoline
dispensing sites, we investigated  them to verify that any underground
storage tanks were in compliance with all legal requirements. We recycle our
waste water and, where we have proper permits, it is disposed of into sewage
drains.  Approximately 70% of the water used in the car wash is
recycled at sites where a built-in reclaim system exists.


9


RESEARCH
AND DEVELOPMENT





Security
Segment.  Our staffs in our Ft. Lauderdale, Florida and Farmers
Branch, Texas facilities determine the requirements of various electronic
surveillance products and components in conjunction with OEM manufacturers. We
also have an on-site laboratory at our Vermont facility where research and
development is conducted to maintain our reputation in the defense spray
industry. We are continually reviewing ideas and potential licensing
arrangements to expand our product lines.Our research and
development expense was not material in 2008, 2007 or 2006.





Digital Media Marketing
Segment. We spend funds on internally developing software
used in this business.  We also have employees whose duties are to
perform market research and testing of new product ideas and improve existing
products within the e-commerce division.





Car Wash Segment.
There are no research and development expenditures within the Car Wash
Segment.





INSURANCE





We
maintain various insurance policies for our assets and
operations.  These policies provide property insurance including
business interruption protection for each location.  We maintain
commercial general liability coverage in the amount of $1 million per occurrence
and $2 million in the aggregate with an umbrella policy which provides coverage
up to $25 million.  We also maintain workers’ compensation policies in
every state in which we operate.  Commencing July 2002, as a result of
increasing costs of the Company’s insurance program, including auto, general
liability, and workers’ compensation coverage, we are insured through
participation in a captive insurance program with other unrelated companies. The
Company maintains excess coverage through occurrence-based policies. With
respect to our auto, general liability, and workers’ compensation policies, we
are required to set aside an actuarially determined amount of cash in a
restricted “loss fund” account for the payment of claims under the
policies.  We expect to fund these accounts annually as required by
the captive insurance company. Should funds deposited exceed claims incurred and
paid, unused deposited funds are returned to us with interest upon the captive
insurance company deciding a distribution is appropriate but no earlier than the
fifth anniversary of the policy year-end.  The captive insurance
program is further secured by a letter of credit in the amount of $827,747 at
December 31, 2008.  The Company records a monthly expense for losses
up to the reinsurance limit per claim based on the Company’s tracking of claims
and the insurance company’s reporting of amounts paid on claims plus an estimate
of reserves for possible future losses on reported claims and claims incurred
but not reported.  There can be no assurance that our insurance will
provide sufficient coverage in the event a claim is made against us, or that we
will be able to maintain in place such insurance at reasonable
prices.  An uninsured or under insured claim against us of sufficient
magnitude could have a material adverse effect on our business and results of
operations.





U.S.
BASED BUSINESS





Our
electronic surveillance products are manufactured in Korea, China, and other
foreign countries. All of our property and equipment is located in the United
States. We do not believe we are currently subject to any material risks
associated with any foreign operations.  Our Digital Media Market
Segment products are manufactured within the US as well as China and other
foreign countries. All of our car wash business is conducted in the United
States.  Approximately 4.5%, (or $936,000), 3.8%, (or $841,000) and
4.1% (or $956,000) of the 2008, 2007 and 2006 revenues, respectively, from our
Security Segment were derived from customers outside of the United States.
Additionally, revenues of approximately 1.0%, or $145,000, and 0.2%, or $18,000,
of our Digital Media Marketing Segment revenues in 2008 and 2007, respectively,
were derived from customers outside of the United States.





EMPLOYEES





As of
March 18, 2009, we had approximately 465 employees, of which approximately 353
were employed in the Car Wash Segment, 72 employed in the Security Segment, 23
employed in the Digital Media Marketing Segment, 14 in corporate clerical and
administrative positions in our corporate and finance departments, and three in
executive management.  None of our employees are covered by a
collective bargaining agreement.





AVAILABLE
INFORMATION





For more
information about Mace Security International, Inc., please visit our website at
www.mace.com.
Our electronic filings with the SEC (including all annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, and any
amendments to these reports), including the exhibits, are available free of
charge through our website as soon as reasonably practicable after we
electronically file them with or furnish them to the SEC.


10





ITEM
      1A.
            RISK
      FACTORS





Risks
Related to Our Business





Many of our
customers’ activity levels and spending for our products and services may be
impacted by the current deterioration in the economy and credit markets.As a result of slowing domestic economic growth, the credit market
crisis, declining consumer and business confidence, increased unemployment, and
other challenges currently affecting the domestic economy, our customers have
reduced their spending on our products and services.  Many of our
customers in our electronic surveillance equipment business finance their
purchase activities through cash flow from operations or the incurrence of debt.
Additionally, many of our customers in our personal defense products division,
our e-commerce division and our car wash operations depend on disposable
personal income. The combination of a reduction of disposal personal income, a
reduction in cash flow of businesses and a possible lack of availability of
financing to businesses and individuals has resulted in a significant reduction
in our customers’ spending for our products and services. During the fourth
quarter of 2008, our revenues from continuing operations declined $3.0 million
or 22% from our revenues from continuing operations in the fourth quarter of
2007.  To the extent our customers reduce their spending for the
remainder 2009, this reduction in spending could have a material adverse effect
on our operations. If the economic slowdown continues for a significant period
or there is significant further deterioration in the economy, our results of
operations, financial position and cash flows will be materially adversely
affected.





If we are unable
to finance the growth of our business, our stock price could
decline.Our business plan
involves growing our Security and Digital Media Marketing Segments through
acquisitions and internal development, and divesting of our car washes through
third party sales. The growth of our Security and Digital Media Segments
requires significant capital that we hope to partially fund through the sale of
our car washes.  Our capital requirements also include working capital
for daily operations and capital for equipment purchases.  Although we
had positive working capital of $16.0 million as of December 31, 2008, we have a
history of net losses and in some years we have ended our fiscal year with a
negative working capital balance. Our positive working capital decreased by
approximately $1.8 million from December 31, 2007 to December 31, 2008
principally due to the sale of  our six Florida car washes and payoff
of their related mortgage debt recorded as current at December 31, 2007 in the
first quarter of 2008; the $2.2 million investment loss related to the Victory
Fund, Ltd. Hedge fund, the impact on working capital of our continuing losses,
and  the reclass from non-current debt to current debt of
approximately $2.3 million of 15-year amortizing loans with JP Morgan Chase
Bank, N.A. (“Chase”) secured by several of our Texas car wash operations and our
warehouse facility in Farmers Branch, Texas as a result of this debt being up
for renewal from June 2009 through October 2009. Although we expect that we will
be successful in renewing this debt, or paying off the car wash related mortgage
debt with proceeds from the sale of the car wash facilities, there can be no
assurances that this will occur. The current economic climate has made it more
difficult to sell our remaining car washes as it is more difficult for buyers to
finance the purchase price. To the extent that we lack cash to meet our future
capital needs, we will need to raise additional funds through bank borrowings
and additional equity and/or debt financings, which may result in significant
increases in leverage and interest expense and/or substantial dilution of our
outstanding equity.  If we are unable to raise additional capital, we
may need to substantially reduce the scale of our operations and curtail our
business plan. Although we have generated cash from the sale of our car washes,
there is no guarantee that in the current economic climate we will be able to
sell our remaining car washes.





Our liquidity
could be adversely affected if we do not prevail in the litigation initiated by
Louis D. Paolino, Jr.The Board of Directors of the
Company terminated Louis D. Paolino, Jr. as the Chief Executive Officer of the
Company on May 20, 2008.  On June 9, 2008, the Company received a
Demand for Arbitration from Mr. Paolino (“Arbitration Demand”) filed with the
American Arbitration Association in Philadelphia, Pennsylvania (“Arbitration
Proceeding”).  The primary allegations of the Arbitration Demand are:
(i) Mr. Paolino alleges that he was terminated by the Company wrongfully and is
owed a severance payment of $3,918,120 due to the termination; (ii) Mr. Paolino
is claiming that the Company owes him $322,606 because the Company did not issue
him a sufficient number of stock options in August 2007, under provisions of the
Employment Contract between Mr. Paolino and the Company dated August 21, 2006;
(iii) Mr. Paolino is claiming damages against the Company in excess of
$6,000,000, allegedly caused by the Company having defamed Mr. Paolino’s
professional reputation and character in the Current Report on Form 8-K dated
May 20, 2008 filed by the Company and in the press release the Company issued on
May 21, 2008, relating to Mr. Paolino’s termination; and (iv)  Mr.
Paolino is also seeking punitive damages, attorney’s fees and costs in an
unspecified amount.   The Company filed a counterclaim in the
Arbitration Proceeding demanding damages from Mr. Paolino of
$1,000,000.  On June 25, 2008, Mr. Paolino also filed a claim with the
United States Department of Labor claiming that his termination as Chief
Executive Officer of the Company was an “unlawful discharge” in violation of 18
U.S.C. Sec. 1514A, a provision of the Sarbanes-Oxley Act of 2002 (“DOL
Complaint”).  In the DOL Complaint, Mr. Paolino demands the same
damages he requested in the Arbitration Demand and additionally requests
reinstatement as Chief Executive Officer with back pay from the date of
termination.  Upon the motion of Mr. Paolino, the proceedings relating
to the DOL Complaint have been stayed pending the conclusion of the Arbitration
Proceeding.  The Company is disputing the allegations made by Mr.
Paolino and is defending itself in the Arbitration Proceeding and against the
DOL Complaint.  Though the Company is confident in prevailing, it is
not possible to predict the outcome of litigation with any certainty. If the
Company does not prevail and significant damages are awarded to Mr. Paolino,
such award may severely diminish the Company’s liquidity.


11


Our liquidity
could be adversely effected if we are required to repay a redemption we received
from Victory Fund, Ltd.One of our short-term investments was in a hedge
fund, namely the Victory Fund, Ltd. We requested redemption of this hedge fund
investment on June 18, 2008. Under the Limited Partnership Agreement with the
hedge fund, the redemption request was timely for a return of the investment
account balance as of September 30, 2008, payable ten business days after the
end of the September 30, 2008 quarter. The hedge fund acknowledged that the
redemption amount owed was $3,206,748; however, on October 15, 2008 the hedge
fund asserted the right to withhold the redemption amount due to extraordinary
market circumstances. After negotiations, the hedge fund agreed to pay the
redemption amount in two installments, $1,000,000 on November 3, 2008 and
$2,206,748 on January 15, 2009. The Company received the first installment of
$1,000,000 on November 5, 2008.  The Company has not received the
second installment.  On January 21, 2009, a receiver (“Receiver”) was
appointed in a civil case that was initiated by the Securities and Exchange
Commission, Plaintiff (“SEC”), versus, Arthur Nadel, Scoop Capital, LLC, Scoop
Management, Inc., (“Defendants”), and Scoop Real Estate, L.P., Valhalla
Investment Partners, L.P., Valhalla Management, Inc., Victory IRA Fund, Ltd,
Victory Fund, Ltd, Viking IRA Fund, LLC, Viking Fund, LLC, and Viking
Management, LLC, (“Relief Defendants”), Case No. 8:09-cv-87-T-26TBM in the
United States District Court for the Middle District of Florida, Tampa Division
(“Court”).  The SEC alleged that Arthur Nadel defrauded investors in
the Victory Fund, LLC and the other Relief Defendants by massively overstating
the value of investments in these funds and issuing false and misleading account
statements to investors. The Receiver has been directed by the Court to (i)
administer and manage the business affairs, funds, assets, and any other
property of the Defendants and Relief Defendants; (ii) marshall and safeguard
the assets of the Defendants and Relief Defendants; (iii) investigate the manner
in which the affairs of the Defendants and Relief Defendants were conducted and
institute such legal proceedings for the benefit of the Defendants and Relief
Defendants and their investors and creditors as the Receiver deems necessary and
(iv) take whatever actions are necessary for the protection of the investors.
One of the actions the Receiver may take on behalf of all investors is to
attempt to “claw back” redemptions and distributions made by the hedge funds to
their investors and use the returned funds to pay the expenses of the Receiver
and for a pro-rata distribution to all investors.  No “claw back”
action has been filed to date and, if filed we would oppose such an action. If
we are required by the Court to pay back the $1,000,000 redemption we received,
our liquidity would be adversely affected.





If we fail to
manage the growth of our business, our stock price could decline.Our business plan is
predicated on growing the Security Segment.  If we succeed in growing,
it will place significant burdens on our management and on our operational and
other resources.  For example, it may be difficult to assimilate the
operations and personnel of an acquired business into our existing business; we
must integrate management information and accounting systems of an acquired
business into our current systems; our management must devote its attention to
assimilating the acquired business, which diverts attention from other business
concerns; we may enter markets in which we have limited prior experience; and we
may lose key employees of an acquired business. We will also need to attract,
train, motivate, retain, and supervise senior managers and other
employees.  If we fail to manage these burdens successfully, one or
more of the acquisitions could be unprofitable, the shift of our management’s
focus could harm our other businesses, and we may be forced to abandon our
business plan, which relies on growth.





We have debt
secured by mortgages, which can be foreclosed upon if we default on the
debt.Our bank debt borrowings as of December 31, 2008 were
$6.5 million, including borrowings related to assets held for sale,
substantially all of which are secured by mortgages against certain of our real
property (including up to eight of our car wash facilities at December 31,
2008). Our most significant borrowings are secured notes payable to Chase in the
amount of $5.4 million.  We have in the past violated loan covenants
in our Chase agreements. We have obtained waivers for our violations of the
Chase agreements. Our ongoing ability to comply with the debt covenants under
our credit arrangements and refinance our debt depends largely on our
achievement of adequate levels of cash flow. Our cash flow has been and could
continue to be adversely affected by economic conditions. If we default on our
loan covenants in the future and are not able to obtain amendments or waivers of
acceleration, our debt could become due and payable on demand, and Chase could
foreclose on the assets pledged in support of the relevant indebtedness. If our
assets (including up to eight of our car wash facilities at December 31, 2008)
are foreclosed upon, revenues from our Car Wash Segment, which comprised 25.1%
of our total revenues for the fiscal 2008, would be severely impacted and we may
go out of business.





Our loans with
Chase have financial covenants that restrict our operations and which can cause
our loans to be accelerated.Our secured notes payable to
Chase total $5.4 million, $2.3 million of which was classified as non-current
debt at December 31, 2008. The Chase agreements contain affirmative and negative
covenants, including the maintenance of certain levels of tangible net worth,
maintenance of certain levels of unencumbered cash and marketable securities,
limitations on capital spending, and certain financial reporting requirements.
Our Chase agreements contain an express prohibition on incurring additional debt
without the approval of the lender. The Chase term loan agreements also limit
capital expenditures annually to $1.0 million, require the Company to provide
Chase with a Form 10-K and audited financial statements within 120 days of the
Company’s fiscal year end and a Form 10-Q within 60 days after the end of each
fiscal quarter, and require the maintenance of a minimum total unencumbered cash
and marketable securities balance of $5 million. If we are unable to satisfy the
Chase covenants and we cannot obtain further waivers or amendments to our loan
agreements, the Chase notes may be reflected as current in future balance sheets
and as a result our stock price may decline. We were in compliance with these
covenants at December 31, 2008.


12


We have reported
net losses in the past. If we continue to report net losses, the price of our
common stock may decline, or we could go out of business.We
reported net losses and negative cash flow from operating activity from
continuing operations in each of the five years ended December 31, 2008.
Although a portion of the reported losses in past years related to non-cash
impairment charges of intangible assets under SFAS 142 and non-cash stock-based
compensation expense under SFAS 123(R), we may continue to report net losses and
negative cash flow in the future.  Additionally, SFAS 142 requires
annual fair value based impairment tests of goodwill and other intangible assets
identified with indefinite useful lives.  As a result, we may be
required to record additional impairments in the future, which could materially
reduce our earnings and equity. If we continue to report net losses and negative
cash flows, our stock price could be adversely impacted.





We compete with
many companies, some of whom are more established and better capitalized than
us.  We compete with a variety of companies on a worldwide
basis.  Some of these companies are larger and better capitalized than
us.  There are also few barriers to entry in our markets and thus above
average profit margins will likely attract additional competitors.  Our
competitors may develop products and services that are superior to, or have
greater market acceptance than our products and services. For example, many of
our current and potential competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources and
larger customer bases than ours.  These factors may allow our competitors
to respond more quickly than we can to new or emerging technologies and changes
in customer requirements.  Our competitors may engage in more extensive
research and development efforts, undertake more far-reaching marketing
campaigns and adopt more aggressive pricing policies which may allow them to
offer superior products and services.




Failure or
circumvention of our controls or procedures could seriously harm our business.An internal control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no system of controls can provide absolute assurance that all
control issues, mistakes and instances of fraud, if any, within the Company have
been or will be detected. The design of any system of controls is based in part
upon certain assumptions about the likelihood of future events, and we cannot
assure you that any design will succeed in achieving its stated goals under all
potential future conditions. Any failure of our controls and procedures to
detect error or fraud could seriously harm our business and results of
operations.





If we lose the
services of our executive officers, our business may
suffer.If we lose the services of one or more of our
executive officers and do not replace them with experienced personnel, that loss
of talent and experience will make our business plan, which is dependent on
active growth and management, more difficult to implement and could adversely
impact our operations.





If our insurance
is inadequate, we could face significant losses.We maintain
various insurance coverages for our assets and operations.  These
coverages include property coverage including business interruption protection
for each location.  We maintain commercial general liability coverage
in the amount of $1 million per occurrence and $2 million in the aggregate with
an umbrella policy which provides coverage up to $25 million.  We also
maintain workers’ compensation policies in every state in which we
operate.  Since July 2002, as a result of increasing costs of the
Company’s insurance program, including auto, general liability, and workers’
compensation coverage, we have been insured as a participant in a captive
insurance program with other unrelated businesses. The Company maintains excess
coverage through occurrence-based policies.  With respect to our auto,
general liability, and workers’ compensation policies, we are required to set
aside an actuarially determined amount of cash in a restricted “loss fund”
account for the payment of claims under the policies.  We expect to
fund these accounts annually as required by the insurance company. Should funds
deposited exceed claims incurred and paid, unused deposited funds are returned
to us with interest after the fifth anniversary of the policy
year-end.  The captive insurance program is further secured by a
letter of credit from Mace in the amount of $827,747 at December 31,
2008.  The Company records a monthly expense for losses up to the
reinsurance limit per claim based on the Company’s tracking of claims and the
insurance company’s reporting of amounts paid on claims plus an estimate of
reserves for possible future losses on reported claims and claims incurred but
not reported.  There can be no assurance that our insurance will
provide sufficient coverage in the event a claim is made against us, or that we
will be able to maintain in place such insurance at reasonable
prices.  An uninsured or under insured claim against us of sufficient
magnitude could have a material adverse effect on our business and results of
operations.


13





Risks
Related to our Security Segment





We could become
subject to litigation regarding intellectual property rights, which could
seriously harm our business.Although we have not been the
subject of any such actions, third parties may in the future assert against us
infringement claims or claims that we have violated a patent or infringed upon a
copyright, trademark or other proprietary right belonging to them.  We
provide the specifications for most of our security products and contract with
independent suppliers to engineer and manufacture those products and deliver
them to us.  Certain of these products 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.  Some of our suppliers have
agreed to indemnify us against any such infringement claim, but any infringement
claim, even if not meritorious and/or covered by an indemnification obligation,
could result in the expenditure of a significant amount of our financial and
managerial resources, which would adversely effect our operations and financial
results.





If our Mace brand
name falls into common usage, we could lose the exclusive right to the brand
name.The Mace registered name and trademark is important to
our security business and defense spray business. If we do not defend the Mace
name or allow it to fall into common usage, our security segment business could
be adversely affected.





If our original
equipment manufacturers (“OEMs”) fail to adequately supply our products, our
security products sales may suffer.Reliance upon OEMs, as
well as industry supply conditions generally involves several additional risks,
including the possibility of defective products (which can adversely affect our
reputation for reliability), a shortage of components and reduced control over
delivery schedules (which can adversely affect our distribution schedules), and
increases in component costs (which can adversely affect our profitability). We
have some single-sourced manufacturer relationships, either because alternative
sources are not readily or economically available or because the relationship is
advantageous due to performance, quality, support, delivery, capacity, or price
considerations.  If these sources are unable or unwilling to
manufacture our products in a timely and reliable manner, we could experience
temporary distribution interruptions, delays, or inefficiencies, adversely
affecting our results of operations.  Even where alternative OEMs are
available, qualification of the alternative manufacturers and establishment of
reliable suppliers could result in delays and a possible loss of sales, which
could affect operating results adversely.





Many States have
and other States  have stated an intention to enact laws (“electronic
recycling laws”)  requiring manufacturers of certain electronic
products to pay annual registration fees and have recycling plans in place for
electronic products sold at retail such as televisions, computers, and
monitors.  If the electronic recycling laws are applied to us, the
sale of monitors by us may become prohibitively expensive.Our
Security Segment sells monitors as part of the video security surveillance
packages we market.  The video security  surveillance
packages consist of cameras, digital video recorders and video
monitors.  We have taken the position with many states that our
monitors are security monitors and are not subject to the laws they have enacted
which generally refer to computer monitors. If we have to pay registration fees
and have recycling plans for the monitors we sell, it may be prohibitively
expensive to offer monitors as part of our security surveillance
packages.  The inability to offer monitors at a competitive price will
place us at a competitive disadvantage .





The businesses
that manufacture our electronic surveillance products are located in foreign
countries, making it difficult to recover damages if the manufacturers fail to
meet their obligations.Our electronic surveillance
products and many non-aerosol personal protection products are manufactured on
an OEM basis. Most of the OEM suppliers we deal with are located in Asian
countries and are paid a significant portion of an order in advance of the
shipment of the product. We also have limited information on the OEM suppliers
from which we purchase, including their financial strength, location and
ownership of the actual manufacturing facilities producing the goods. If any of
the OEM suppliers defaulted on their agreements with the Company, it would be
difficult for the Company to obtain legal recourse because of the suppliers’
assets being located in foreign countries.





If people are
injured by our consumer safety products, we could be held liable and face damage
awards.We face claims of injury allegedly resulting from our
defense sprays, which we market as less-than-lethal.  For example, we
are aware of allegations that defense sprays used by law enforcement personnel
resulted in deaths of prisoners and of suspects in custody.  In
addition to use or misuse by law enforcement agencies, the general public may
pursue legal action against us based on injuries alleged to have been caused by
our products. We may also face claims by purchasers of our electronic
surveillance systems if they fail to operate properly during the commission of a
crime. As the use of defense sprays and electronic surveillance systems by the
public increases, we could be subject to additional product liability
claims.  We currently have a $25,000 deductible on our consumer safety
products insurance policy, meaning that all such lawsuits, even unsuccessful
ones and ones covered by insurance, cost the Company
money.  Furthermore, if our insurance coverage is exceeded, we will
have to pay the excess liability directly.  Our product liability
insurance provides coverage of $1 million per occurrence and $2 million in the
aggregate with an umbrella policy which provides coverage up to $25 million.
However, if we are required to directly pay a claim in excess of our coverage,
our income will be significantly reduced, and in the event of a large claim, we
could go out of business.


14





If governmental
regulations regarding defense sprays change or are applied differently, our
business could suffer.The distribution, sale, ownership and use of
consumer defense sprays are legal in some form in all 50 states and the District
of Columbia.  Restrictions on the manufacture or use of consumer
defense sprays may be enacted, which would severely restrict the market for our
products or increase our costs of doing business.





Our defense
sprays use hazardous materials which if not properly handled would result in our
being liable for damages under environmental laws.Our
consumer defense spray manufacturing operation currently incorporates hazardous
materials, the use and emission of which are regulated by various state and
federal environmental protection agencies, including the United States
Environmental Protection Agency. If we fail to comply with any environmental
requirements, these changes or failures may expose us to significant liabilities
that would have a material adverse effect on our business and financial
condition. The Environmental Protection Agency conducted a site investigation at
our Bennington, Vermont facility in January, 2008 and found the facility in need
of remediation.  See Note 17. Commitments and
Contingencies.





Risks
Related to our Digital Media Marketing Segment





We have lost the
services of two senior executives in our Digital Media Marketing Segment, and as
a result our business may suffer. The executive who headed the operations
of our Linkstar operation left the Company’s employ at the end of July 2008 and
the executive who headed the operations of the PromoPath subsidiary left the
Company’s employ in January 2009. The Company has promoted Ronald Gdovic, the
Chief Operating Officer of the Segment, to the position of President of the
Segment.  Mr. Gdovic is not as experienced in the digital media
marketing business as the departed executives.  The business plan for
the Digital Media Marketing Segment is dependent on active growth and
management. Without experienced executives it will be more difficult to execute
the business plan.  If the business plan is not executed, the Segment
will have revenue loss and potentially a lack of profitability.





Our current Board
of Directors and Chief Executive Officer lack experience in the Digital Media
Marketing business sector. The members of the Company’s board
of directors do not have any practical experience with e-commerce or digital
media marketing advertising. Ronald Gdovic, the President of the Digital Media
Marketing Segment currently reports to Dennis R. Raefield, the Company’s CEO,
who prior to becoming CEO did not have any digital media marketing experience.
The Nominating Committee has conducted a search for a director nominee with
e-commerce experience; however, the Board has not committed to add a director
with e-commerce or digital media marketing advertising
expertise.





Our e-commerce
brands are not well known.  Our e-commerce brands of Vioderm
(anti-wrinkle products), TrimDay (diet supplement), Purity by Mineral Science
(mineral based facial makeup), Eternal Minerals (Dead Sea spa products) and
Extreme Brite White (a teeth whitening product) are relatively
new.  We have not yet been able to develop widespread awareness of our
e-commerce brands.  Lack of brand awareness could harm the success of our
marketing campaigns, which could have a material adverse effect on our business,
results of operations, financial condition and the trading price of our common
stock.




We have a
concentration of our e-commerce business in limited
products.E-Commerce revenues are currently generated from
five product lines. The concentration of our business in limited products
creates the risk of adverse financial impact if we are unable to continue to
sell these products or unable to develop additional products. We believe that we
can mitigate the financial impact of any decrease in sales by the development of
new products, however we cannot predict the timing of or success of new
products.





We compete with
many established e-commerce companies that have been in business longer than
us. Current and potential e-commerce competitors are making,
and are expected to continue to make, strategic acquisitions or establish
cooperative, and, in some cases, exclusive relationships with significant
companies or competitors to expand their businesses or to offer more
comprehensive products and services.  To the extent these competitors or
potential competitors establish exclusive relationships with major portals,
search engines and ISPs, our ability to reach potential members through online
advertising may be restricted.  Any of these competitors could cause us
difficulty in attracting and retaining online registrants and converting
registrants into customers and could jeopardize our existing affiliate program
and relationships with portals, search engines, ISPs and other internet
properties.  Failure to compete effectively including by developing and
enhancing our services offerings would have a material adverse effect on our
business, results of operations, financial condition and the trading price of
our common stock.




We need to
attract and retain a large number of e-commerce customers who purchase our
products on a recurring basis.  Our e-commerce model is driven by
the need to attract a large number of customers to our continuity program and to
maintain customers for an extended period of time.  We have fixed
costs in obtaining an initial customer which can be defrayed only by a customer
making further purchases.  For our business to be profitable, we must
convert a certain percentage of our initial customers to customers that purchase
our products on a recurring monthly basis for a period of time.  To do
so, we must continue to invest significant resources in order to enhance our
existing products and to introduce new high-quality products and services. 
There is no assurance we will have the resources, financial or otherwise,
required to enhance or develop products and services.  Further, if we are
unable to predict user preferences or industry changes, or if we are unable to
improve our products and services on a timely basis, we may lose existing
members and may fail to attract new customers.  Failure to enhance or
develop products and services or to respond to the needs of our customers in an
effective or timely manner could have a material adverse effect on our business,
results of operations, financial condition and the trading price of our common
stock.


15





Our customer
acquisition costs may increase significantly.  The customer
acquisition cost of our business depends in part upon our ability to obtain
placement on promotional internet sites at a reasonable cost.  We
currently pay for the placement of our products on third party promotional
internet sites by paying the site operators a fixed fee for each customer we
obtain from the site, (“CPA fee”).  The CPA fee varies over time, depending
upon a number of factors, some of which are beyond our control.  One of the
factors that determine the amount of the CPA fee is the attractiveness of our
products and how many consumers our products draw to a promotional
website.  Historically, we have used online advertising on promotional
websites as the sole means of marketing our products.  In general, the
costs of online advertising have increased substantially and are expected to
continue to increase as long as the demand for online advertising remains
robust.  We may not be able to pass these costs on in the form of higher
product prices.  Continuing increases in advertising costs could have a
material adverse effect on our business, results of operations, financial
condition and the trading price of our common stock.




Our online
marketing business must keep pace with rapid technological change to remain
competitive.  Our online marketing business operates in a market
characterized by rapidly changing technology, evolving industry standards,
frequent new product and service announcements, enhancements, and changing
customer demands.  We must adapt to rapidly changing technologies and
industry standards and continually improve the speed, performance, features,
ease of use and reliability of our services and products.  Introducing new
technology into our systems involves numerous technical challenges, requires
substantial amounts of capital and personnel resources, and often takes many
months to complete.  We may not successfully integrate new technology into
our websites on a timely basis, which may degrade the responsiveness and speed
of our websites.  Technology, once integrated, may not function as
expected.  Failure to generally keep pace with the rapid technological
change could have a material adverse effect on our business, results of
operations, financial condition and the trading price of our common
stock.




We depend on our
merchant and banking relationships, as well as strategic relationships with
third parties, who provide us with payment processing solutions. 
Our e-commerce products are sold by us on the internet and are paid for by
customers through credit cards.  From time to time, VISA and
MasterCard increase the fees that they charge processors. We may attempt to pass
these increases along to our customers, but this might result in the loss of
those customers to our competitors who do not pass along the increases. Our
revenues from merchant account processing are dependent upon our continued
merchant relationships which are highly sensitive and can be canceled if
customer charge-backs escalate and generate concern that the company has not
held back sufficient funds in reserve accounts to cover these charge-backs as
well as result in significant charge-back fines. Cancellation by our merchant
providers would most likely result in the loss of new customers and lead to a
reduction in our revenues.





We depend on
credit card processing for a majority of our e-commerce business, including but
not limited to Visa, MasterCard, American Express, and Discover.
Significant changes to the merchant operating regulations, merchant rules and
guidelines, card acceptance methods and/or card authorization methods could
significantly impact our revenues. Additionally our e-commerce membership
programs are accepted under a negative option billing term (customers are
charged monthly until they cancel), and change in regulation of negative option
billing could significantly impact our revenue.





We are exposed to
risks associated with credit card fraud and credit payment.  Our
customers use credit cards to pay for our e-commerce products and for the
products we market for third parties.  We have suffered losses, and may
continue to suffer losses, as a result of orders placed with fraudulent credit
card data, even though the associated financial institution approved
payment.  Under current credit card practices, a merchant is liable for
fraudulent credit card transactions when the merchant does not obtain a
cardholder’s signature.  A failure to adequately control fraudulent credit
card transactions would result in significantly higher credit card-related costs
and could have a material adverse effect on our business, results of operations,
financial condition and the trading price of our common stock.




Security breaches
and inappropriate internet use could damage our Digital Media Marketing
business. Failure to successfully prevent security breaches could
significantly harm our business and expose us to lawsuits.  Anyone who is
able to circumvent our security measures could misappropriate proprietary
information, including customer credit card and personal data, cause
interruptions in our operations, or damage our brand and reputation. 
Breach of our security measures could result in the disclosure of personally
identifiable information and could expose us to legal liability.  We cannot
assure you that our financial systems and other technology resources are
completely secure from security breaches or sabotage.  We have
experienced security breaches and attempts at “hacking.”  We may be
required to incur significant costs to protect against security breaches or to
alleviate problems caused by breaches.   All of these factors could
have a material adverse effect on our business, results of operations, financial
condition and the trading price of our common stock.


16


Changes in
government regulation and industry standards could decrease demand for our
products and services and increase our costs of doing business.Laws and regulations
that apply to internet communications, commerce and advertising are becoming
more prevalent. These regulations could affect the costs of communicating on the
web and could adversely affect the demand for our advertising solutions or
otherwise harm our business, results of operations and financial condition. The
United States Congress has enacted internet legislation regarding children’s
privacy, copyrights, sending of commercial email (e.g., the Federal CAN-SPAM Act
of 2003), and taxation. Other laws and regulations have been adopted and
may be adopted in the future, and may address issues such as user
privacy, spyware, “do not email” lists, pricing, intellectual property ownership
and infringement, copyright, trademark, trade secret, export of encryption
technology, click-fraud, acceptable content, search terms, lead generation,
behavioral targeting, taxation, and quality of products and services. This
legislation could hinder growth in the use of the web generally and adversely
affect our business. Moreover, it could decrease the acceptance of the web as a
communications, commercial and advertising medium. The Company does not use any
form of spam or spyware.




Government
enforcement actions could result in decreased demand for our products and
services.The Federal Trade
Commission and other governmental or regulatory bodies have increasingly focused
on issues impacting online marketing practices and consumer protection. The
Federal Trade Commission has conducted investigations of competitors and filed
law suits against competitors.  Some of the investigations and law
suits have been settled by consent orders which have imposed fines and required
changes with regard to how competitors conduct business.  The New York
Attorney General’s office has sued a major Internet marketer for alleged
violations of legal restrictions against false advertising and deceptive
business practices related to spyware.  In our judgment, the marketing
claims we make in advertisements we place to obtain new e-commerce customers are
legally permissible.  Governmental or regulatory authorities may
challenge the legality of the advertising we place and the marketing claims we
make. We could be subject to regulatory proceedings for past marketing
campaigns, or could be required to make changes in our future marketing claims,
either of which could adversely affect our revenues.





Our business
could be subject to regulation by foreign countries, new unforeseen laws and
unexpected interpretations of existing laws, resulting in an increase cost of
doing business.Due to the global nature of the web, it is
possible that, although our transmissions originate in California and
Pennsylvania, the governments of other states or foreign countries might attempt
to regulate our transmissions or levy sales or other taxes relating to our
activities. In addition, the growth and development of the market for internet
commerce may prompt calls for more stringent consumer protection laws, both
in the United States and abroad, that may impose additional burdens on
companies conducting business over the Internet. The laws governing the internet
remain largely unsettled, even in areas where there has been some legislative
action. It may take years to determine how existing laws, including those
governing intellectual property, privacy, libel and taxation, apply to the
Internet and Internet advertising. Our business, results of operations and
financial condition could be materially and adversely affected by the adoption
or modification of industry standards, laws or regulations relating to the
Internet, or the application of existing laws to the Internet or Internet-based
advertising.




We depend on
third parties to manufacture all of the products we sell within our e-commerce
division, and if we are unable to maintain these manufacturing and product
supply relationships or enter into additional or different arrangements, we may
fail to meet customer demand and our net sales and profitability may suffer as
a result.  In addition, shortages of raw ingredients, especially
for our Purity mineral cosmetics line, could affect our supply chain and impede
current and future sales and net revenues.All of our products
are contract manufactured or supplied by third parties. The fact that we do not
have long-term contracts with our other third-party manufacturers means that
they could cease manufacturing these products for us at any time and for any
reason. In addition, our third-party manufacturers are not restricted from
manufacturing our competitors’ products, including mineral-based products. If we
are unable to obtain adequate supplies of suitable products because of the loss
of one or more key vendors or manufacturers, our business and results of
operations would suffer until we could make alternative supply arrangements. In
addition, identifying and selecting alternative vendors would be time-consuming
and expensive, and we might experience significant delays in production during
this selection process. Our inability to secure adequate and timely supplies of
merchandise would harm inventory levels, net sales and gross profit, and
ultimately our results of operations.




The quality of
our e-commerce products depend on quality control of third party
manufacturers.For our e-commerce products, third-party
manufacturers may not continue to produce products that are consistent with our
standards or current or future regulatory requirements, which would require us
to find alternative suppliers of our products.  Our third-party
manufacturers may not maintain adequate controls with respect to product
specifications and quality and may not continue to produce products that are
consistent with our standards or applicable regulatory requirements. If we are
forced to rely on products of inferior quality, then our customer satisfaction
and brand reputation would likely suffer, which would lead to reduced net
sales.


17


Within our
e-commerce division, we manufacture and market health and beauty consumer
products that are ingestible or applied topically.  These products may
cause unexpected and undesirable side effects that could limit their use,
require their removal from the market or prevent further development. In
addition, we are vulnerable to claims that our products are not as effective as
we claim them to be.  We also may be vulnerable to product liability
claims from their use.Unexpected and undesirable side effects caused by
our products for which we have not provided sufficient label warnings could
result in our recall or discontinuance of sales of our products. Unexpected and
undesirable side effects could prevent us from achieving or maintaining market
acceptance of the affected products or could substantially increase the costs
and expenses of commercializing new products. In addition, consumers or industry
analysts may assert claims that our products are not as effective as we claim
them to be. Unexpected and undesirable side effects associated with our products
or assertions that our products are not as effective as we claim them to be also
could cause negative publicity regarding our company, brand or products, which
could in turn harm our reputation and net sales.  Our business exposes
us to potential liability risks that arise from the testing, manufacture and
sale of our beauty products. Plaintiffs in the past have received substantial
damage awards from other cosmetics companies based upon claims for injuries
allegedly caused by the use of their products. We currently maintain general
liability insurance in the amount of $1 million per occurrence and
$2 million in the aggregate with an umbrella policy which provides coverage
up to $25 million. Any claims brought against us may exceed our existing or
future insurance policy coverage or limits. Any judgment against us that is in
excess of our policy limits would have to be paid from our cash reserves, which
would reduce our capital resources.  Any product liability claim or
series of claims brought against us could harm our business significantly,
particularly if a claim were to result in adverse publicity or damage awards
outside or in excess of our insurance policy limits.




Risks
Related to our Car Wash Segment





Our car wash work
force may expose us to claims that might adversely affect our business,
financial condition and results of operations; our insurance coverage may not
cover all of our potential liability.We employ a large
number of workers who perform manual labor at the car washes we operate. Many of
the workers are paid at or slightly above minimum wage. Also, a large percentage
of our car wash work force is composed of employees who have been employed by us
for relatively short periods of time. This work force is constantly turning
over. Our work force may subject us to financial claims in a variety of ways,
such as:





·      claims
by customers that employees damaged automobiles in our custody;


·      claims
related to theft by employees;


·      claims
by customers that our employees harassed or physically harmed them;


·      claims
related to the inadvertent hiring of undocumented workers;


·      claims
for payment of workers’ compensation claims and other similar claims;
and


·      claims
for violations of wage and hour requirements.





We may
incur fines and other losses or negative publicity with respect to these claims.
In addition, some or all of these claims may rise to litigation, which could be
costly and time consuming to our management team, and could have a negative
impact on our business. We cannot assure you that we will not experience these
problems in the future, that our insurance will cover all claims or that our
insurance coverage will continue to be available at economically feasible
rates





Our car wash
operations face governmental regulations, including environmental regulations,
and if we fail to or are unable to comply with those regulations, our business
may suffer.We are governed by federal, state and local laws
and regulations, including environmental regulations that regulate the operation
of our car wash centers and other car care services businesses.  Other
car care services and products, such as gasoline and lubrication, use a number
of oil derivatives and other regulated hazardous substances.  As a
result, we are governed by environmental laws and regulations dealing with,
among other things:


·      transportation,
storage, presence, use, disposal, and handling of hazardous materials and
wastes;


·      discharge
of storm water; and


·      underground
storage tanks.





If
uncontrolled hazardous substances are found on any of our properties, including
leased property, or if we are otherwise found to be in violation of applicable
laws and regulations, we could be responsible for clean-up costs, property
damage, fines, or other penalties, any one of which could have a material
adverse effect on our financial condition and results of
operations.





Through
our Car Wash Segment, we face a variety of potential environmental liabilities,
including those arising out of improperly disposing waste oil or lubricants at
our lube centers, and leaks from our underground gasoline storage
tanks.  If we improperly dispose of oil or other hazardous substances,
or if our underground gasoline tanks leak, we could be assessed fines by federal
or state regulatory authorities and/or be required to remediate the
property.  Although each case is different, and there can be no
assurance as to the cost to remediate an environmental problem, if any, at one
of our properties, the costs for remediation of a leaking underground storage
tank typically range from $30,000 to $75,000.





If our car wash
equipment is not maintained, our car washes will not be
operable.Many of our car washes have older equipment that
requires frequent repair or replacement.  Although we undertake to
keep our car washing equipment in adequate operating condition, the operating
environment in car washes results in frequent mechanical problems.  If
we fail to properly maintain the equipment in a car wash, that car wash could
become inoperable or malfunction resulting in a loss of revenue, damage to
vehicles and poorly washed vehicles.


18


The current
difficult economic conditions make it more difficult to sell our Car
Washes.We can offer no assurances that we will be able to
locate additional buyers for our remaining car washes or that we will be able to
consummate any further sales to potential buyers we do locate. The current
economic climate has made it more difficult to sell our remaining car washes.
Potential buyers of the car washes are finding it difficult to finance the
purchase price.





If we sell our
Car Wash Segment, our revenues will decrease and our business may
suffer.  If we are able to sell our remaining car
washes, our total revenues will decrease and our business will become reliant on
the success of our Security Segment and our Digital Marketing Media Segment.
Those businesses face significant risks as set forth herein and our reliance on
them may impact our ability to generate positive operating income or cash flows
from operations, may cause our financial results to become more volatile, or may
otherwise materially adversely affect us.





Risks
Related to our Common Stock





Our
stock price has been, and likely will continue to be, volatile and an investment
in our common stock may suffer a decline in value.


The
market price of our common stock has in the past been, and is likely to continue
in the future to be volatile. That volatility depends upon many factors,
some of which are beyond our control, including:


·
            announcements
      regarding the results of expansion or development efforts by us or our
      competitors;


·
            announcements
      regarding the acquisition of businesses or companies by us or our
      competitors;


·
            announcements
      regarding the disposition of all or a significant portion of the assets
      that comprise our Car Wash Segment, which may or may not be on favorable
      terms;


·
            technological
      innovations or new commercial products developed by us or our
      competitors;


·
            changes
      in our, or our suppliers’ intellectual property
  portfolio;


·
            issuance
      of new or changed securities analysts’ reports and/or recommendations
      applicable to us or our
competitors;


·
            additions
      or departures of our key personnel;


·
            operating
      losses by us;


·
            actual
      or anticipated fluctuations in our quarterly financial and operating
      results and degree of trading liquidity in our common stock;
      and


·
            our
      ability to maintain our common stock listing on the Nasdaq Global
      Market.





One or
more of these factors could cause a decline in our revenues and income or in the
price of our common stock, thereby reducing the value of an investment in our
Company.





We could lose our
listing on the NASDAQ Global Market if our stock price remains below $1.00 for
30 consecutive days, after the $1.00 minimum bid rule is
reinstated.  The loss of the listing would make our stock
significantly less liquid and would affect its value.Our
common stock is listed on NASDAQ Global Market with a closing price of $0.68 at
the close of the market on March 18, 2009. The NASDAQ Global Market rule
requires that listed stock is subject to delisting if its price falls below
$1.00 and for 30 consecutive days remains below $1.00. The delisting rule has
been suspended through July 19, 2009.  If the rule is reinstated on
July 20, 2009, we may be subject to being delisted from the NASDAQ Global
Market, if our stock remains below $1.00 for 30 consecutive days after July 20,
2009.  Upon delisting from the NASDAQ Global Market, our stock would
be traded on the Nasdaq Capital Market until we maintain a minimum bid price of
$1.00 for 30 consecutive days at which time we would be able to regain our
listing on the NASDAQ Global Market.  If our stock fails to maintain a
minimum bid price of $1.00 for 30 consecutive days during a 180-day grace period
on the Nasdaq Capital Market or a 360-day grace period if compliance with
certain core listing standards are demonstrated, we could receive a delisting
notice from the Nasdaq Capital Market.  Upon delisting from the Nasdaq
Capital Market, our stock would be traded over-the-counter, more commonly known
as OTC.  OTC transactions involve risks in addition to those
associated with transactions in securities traded on the NASDAQ Global Market or
the Nasdaq Capital Market (together “Nasdaq-listed Stocks”). Many OTC stocks
trade less frequently and in smaller volumes than Nasdaq-listed
Stocks.  Accordingly, our stock would be less liquid than it would be
otherwise.  Also, the values of these stocks may be more volatile than
Nasdaq-listed Stocks.  If our stock is traded in the OTC market and a
market maker sponsors us, we may have the price of our stock electronically
displayed on the OTC Bulletin Board, or OTCBB.  However, if we lack
sufficient market maker support for display on the OTCBB, we must have our price
published by the National Quotations Bureau LLP in a paper publication known as
the Pink Sheets. The marketability of our stock would be even more limited if
our price must be published on the Pink Sheets.





Because we are a
Delaware corporation, it may be difficult for a third party to acquire us, which
could affect our stock price.We are governed by Section 203
of the Delaware General Corporation Law, which prohibits a publicly held
Delaware corporation from engaging in a “business combination” with an entity
who is an “interested stockholder” (as defined in Section 203 an owner of 15% or
more of the outstanding stock of the corporation) for a period of three years
following the shareholders becoming an “interested shareholder,” unless approved
in a prescribed manner.  This provision of Delaware law may affect our
ability to merge with, or to engage in other similar activities with, some other
companies.  This means that we may be a less attractive target to a
potential acquirer who otherwise may be willing to pay a premium for our common
stock above its market price.


19


If we issue our
authorized preferred stock, the rights of the holders of our common stock may be
affected and other entities may be discouraged from seeking to acquire control
of our Company.Our certificate of incorporation authorizes
the issuance of up to 10 million shares of “blank check” preferred stock that
could be designated and issued by our board of directors to increase the number
of outstanding shares and thwart a takeover attempt.  No shares of
preferred stock are currently outstanding.  It is not possible to
state the precise effect of preferred stock upon the rights of the holders of
our common stock until the board of directors determines the respective
preferences, limitations, and relative rights of the holders of one or more
series or classes of the preferred stock.  However, such effect might
include: (i) reduction of the amount otherwise available for payment of
dividends on common stock, to the extent dividends are payable on any issued
shares of preferred stock, and restrictions on dividends on common stock if
dividends on the preferred stock are in arrears, (ii) dilution of the voting
power of the common stock to the extent that the preferred stock has voting
rights, and (iii) the holders of common stock not being entitled to share in our
assets upon liquidation until satisfaction of any liquidation preference granted
to the holders of our preferred stock.  The “blank check” preferred
stock may be viewed as having the effect of discouraging an unsolicited attempt
by another entity to acquire control of us and may therefore have an
anti-takeover effect.  Issuances of authorized preferred stock can be
implemented, and have been implemented by some companies in recent years, with
voting or conversion privileges intended to make an acquisition of a company
more difficult or costly.  Such an issuance, or the perceived threat
of such an issuance, could discourage or limit the stockholders’ participation
in certain types of transactions that might be proposed (such as a tender
offer), whether or not such transactions were favored by the majority of the
stockholders, and could enhance the ability of officers and directors to retain
their positions.





Our policy of not
paying cash dividends on our common stock could negatively affect the price of
our common stock.We have not paid in the past, and do not
expect to pay in the foreseeable future, cash dividends on our common
stock.  We expect to reinvest in our business any cash otherwise
available for dividends.  Our decision not to pay cash dividends may
negatively affect the price of our common stock.





ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS





At March
18, 2009, there were no unresolved comments from the SEC staff regarding our
periodic or current reports.





ITEM
      2.
            PROPERTIES





Our
corporate headquarter is located in Horsham, Pennsylvania and the office of our
Chief Executive Officer is in Walnut Creek, California. We rent approximately
5,000 square feet of space at a current annual cost of approximately $112,000 in
Horsham, Pennsylvania and approximately 800 square feet of space plus use of
common areas at a current annual cost of approximately $45,000 in Walnut Creek,
California.





Security Segment
Properties.  The operations of our electronic surveillance
product operations are located in Ft. Lauderdale, Florida and Farmers Branch,
Texas. The operations of our personal defense and law enforcement aerosol
business, including administration and sales, and all of its production
facilities are located in Bennington, Vermont.





Commencing
May 1, 2002, we leased approximately 44,000 square feet of space in a building
from Vermont Mill Properties, Inc. (“Vermont Mill”) at an annual cost of
approximately $127,000. This lease, which expires on November 15, 2009, was
amended during 2008 to approximately 44,300 square feet of space with a total
annual cost of approximately $129,000. We also began leasing in November, 2008
on a month-to-month basis approximately 3,000 square feet of temporary inventory
storage space at a monthly cost of $1,200. Vermont Mill is controlled by Jon E.
Goodrich, a director of the Company through December 2003 and a current employee
of the Company.





We
purchased a 20,000 square foot facility in June 2004 in Ft. Lauderdale, Florida.
The administrative and sales staff of the Security Segment’s electronic
surveillance products division is located in the Fort Lauderdale, Florida
facility.  The facility is currently being marketed for sale with a
real estate broker based in Ft Lauderdale, Florida.  We have listed
the facility for sale at a price of $1,950,000.  When and if the
property is sold, we will lease office space in the south Florida area for the
administrative and sales staff that is currently located in the
facility.





In August
2004, we purchased a 45,000 square foot facility in Farmers Branch, Texas where
our electronic surveillance products and our high end camera products are
warehoused and sold. Additionally, in the fourth quarter of 2008, we
consolidated the inventory of our Ft. Lauderdale, Florida based electronic
surveillance equipment operation into our Farmers Branch, Texas facility. We
also warehouse certain of our Digital Media Marketing Segment e-commerce
division product at our Farmers Branch, Texas facility. The Farmers Branch,
Texas facility is secured by a first mortgage loan in the amount of $699,000 at
December 31, 2008.


20


Digital Media Marketing
Properties. The operations of our Digital Media Marketing Segment were
consolidated in November 2007 into a 5,000 square foot leased space in Wexford,
PA, a suburb of Pittsburgh, PA, at an annual cost of approximately $90,000. We
leased additional 2,000 square foot of space in March 2008 at an additional
$40,000 annual cost. This additional space allows for expansion. We previously
leased 3,872 square feet of space in San Francisco, California under an 18 month
sublease agreement at an annual cost of approximately $81,000. We in turn
entered into a sublease agreement for this space with a third party effective
March 1, 2008. As noted above, we warehoused and shipped certain of our
e-commerce division products from our Farmers Branch, Texas facility through
December 31, 2008 as well as from a third-party fulfillment center.





Car Wash
Properties.  Our principal fixed assets are our car wash
facilities used for performing car care services which are described under Item 1.
Business.  The 14 car wash facilities owned or operated by us
as of December 31, 2008 are situated on sites we own or lease.  As of
December 31, 2008, we owned 12 and leased two of our car wash facilities. As of
March 18, 2009, we own 10 and lease two car wash facilities.  We have
sold 37 car wash facilities since December 31, 2005. The locations of our car
washes and the services offered at the locations are set forth in summary
fashion in the chart below.




Locations(1)
                    
                    Type of
                      Car Wash(2)
                    
                    Number of
                      Facilities as of
                      December 31, 2008
                    
                    
                    Number of
                      Facilities as of
                      March 18, 2009Dallas,
      Texas Area
                    
                    Full
      ServiceSelf Serve /Lube
                    
                    
                    6
                    
                    
                    
                    6Austin,
      Texas
                    
                    Full
      Service
                    
                    
                    3
                    
                    
                    
                    3Lubbock,
      Texas
                    
                    Full
      Service
                    
                    
                    3
                    
                    
                    
                    3San
      Antonio, Texas (3)
                    
                    Full
      Service
                    
                    
                    2
                    
                    
                    
                    -





(1)
                The
      majority of our locations are owned, except for two locations in Dallas,
      Texas which are leased.


(2)
              Several
      locations also offer other consumer products and related car care
      services, such as professional detailing services (currently offered at 11
      locations), oil and lubrication services (currently offered at five
      locations), gasoline dispensing services (currently offered at 10
      locations), state inspection services (currently offered at five
      locations), convenience store sales (currently offered at one location)
      and merchandise store sales (currently offered at 11
      locations).


(3)
              The
      two San Antonio, Texas facilities were sold on January 14,
      2009.





We own
real estate, buildings, equipment, and other properties that we employ in
substantially all of our car washes.  We expect to make investments in
additional equipment and property as deemed necessary to insure the car washes
operate adequately.





Many of
our car washes are encumbered by first mortgage loans.  Of the 14 car
washes owned or leased by us at December 31, 2008, eight properties and related
equipment with a net book value totaling $14.9 million secured first mortgage
loans totaling $5.8 million and six properties were not encumbered.





ITEM
      3.
            LEGAL
      PROCEEDINGS





The Board
of Directors of the Company terminated Mr. Paolino as the Chief Executive
Officer of the Company on May 20, 2008.  On June 9, 2008, the Company
received a Demand for Arbitration from Mr. Paolino (“Arbitration
Demand”).  The Arbitration Demand has been filed with the American
Arbitration Association in Philadelphia, Pennsylvania (“Arbitration
Proceeding”).  The primary allegations of the Arbitration Demand are:
(i) Mr. Paolino alleges that he was terminated by the Company wrongfully and is
owed a severance payment of $3,918,120 due to the termination; (ii) Mr. Paolino
is claiming that the Company owes him $322,606 because the Company did not issue
him a sufficient number of stock options in August 2007, under provisions of the
Employment Contract between Mr. Paolino and the Company dated August 21, 2006;
(iii) Mr. Paolino is claiming damages against the Company in excess of
$6,000,000, allegedly caused by the Company having defamed Mr. Paolino’s
professional reputation and character in the Current Report on Form 8-K dated
May 20, 2008 filed by the Company and in the press release the Company issued on
May 21, 2008, relating to Mr. Paolino’s termination; and (iv)  Mr.
Paolino is also seeking punitive damages, attorney’s fees and costs in an
unspecified amount. The Company has disputed the allegations made by Mr. Paolino
and is defending itself in the Arbitration Proceeding. The Company has also
filed a counterclaim in the Arbitration Proceeding demanding damages from Mr.
Paolino of $1,000,000.  The arbitrators, who will decide claims of the
parties, have scheduled hearing dates in the later spring of 2009. Discovery in
the Arbitration Proceeding has not been concluded; the Company believes that the
hearing dates will be rescheduled for dates later than the spring of
2009.  It is not possible to predict the outcome of the Arbitration
Proceeding. No accruals have been made with respect to Mr. Paolino’s
claims.


21





On June
25, 2008, Mr. Paolino filed a claim with the United States Department of Labor
claiming that his termination as Chief Executive Officer of the Company was an
“unlawful discharge” in violation of 18 U.S.C. Sec. 1514A, a provision of the
Sarbanes-Oxley Act of 2002 (“DOL Complaint”). Mr. Paolino has alleged that he
was terminated in retaliation for demanding that certain risk factors be set
forth in the Company’s Form 10-Q for the quarter ended March 31, 2008, filed by
the Company on May 15, 2008. Even though the risk factors demanded by Mr.
Paolino were set forth in the Company’s Form 10-Q for the quarter ended March
31, 2008, Mr. Paolino in the DOL Complaint asserts that the demand was a
“protected activity” under 18 U.S.C. Sec. 1514A which protects Mr. Paolino
against a “retaliatory termination”.  In the DOL Complaint, Mr.
Paolino demands the same damages he requested in the Arbitration Demand and
additionally requests reinstatement as Chief Executive Officer with back pay
from the date of termination.  On September 23, 2008 the Secretary of
Labor, acting through the Regional Administrator for the Occupational Safety and
Health Administration, Region III dismissed the DOL Complaint and issued
findings (“Findings”) that there was no reasonable cause to believe that the
Company violated 18 U.S.C. Sec. 1514A of the Sarbanes-Oxley Act of
2002.  The Findings further stated that: (i) the investigation
revealed that Mr. Paolino was discharged for non-retaliatory reasons that were
unrelated to his alleged protected activity; (ii) Mr. Paolino was discharged
because of his failure to comply with a Board directive to reduce costs; (iii)
the Board terminated Mr. Paolino’s employment because of his failure to follow
its directions and for his failure to reduce corporate overhead and expenses;
and (iv) a preponderance of the evidence indicates that the alleged protected
activity was not a contributing factor in the adverse action taken against Mr.
Paolino.  Mr. Paolino has filed objections to the
Findings.  As a result of the objections, an Administrative Law Judge
set a date for a “de novo” hearing on Mr. Paolino’s claims.  A “de
novo hearing” is a proceeding where evidence is presented to the Administrative
Law Judge and the Administrative Law Judge rules on the claims based on the
evidence presented at the hearing.  Upon the motion of Mr. Paolino,
the de novo hearing and the claims made in the DOL Complaint  have
been stayed pending the conclusion of the Arbitration Proceeding.  The
Company will defend itself against the allegations made in the DOL Complaint,
which the Company believes are without merit. Though the Company is confident in
prevailing, it is not possible to predict the outcome of the DOL Complaint or
when the matter will reach a conclusion.





On May 8,
2008, Car Care, Inc., a wholly-owned subsidiary of the Company (“Car Care”), as
well as the Company’s former Northeast region car wash manager and four former
general managers of the four Northeast region car washes that were searched in
March 2006, were indicted by the U.S. Attorney for the Eastern District of
Pennsylvania with one count of conspiracy to defraud the government, harboring
illegal aliens and identity theft. To resolve the indictment, Car Care entered
into a written Guilty Plea Agreement on June 23, 2008 with the government to
plead guilty to the one count of conspiracy charged in the indictment. Under
this agreement, on June 27, 2008, Car Care paid a criminal fine of $100,000 and
forfeited $500,000 in proceeds from the sale of the four car washes. A charge of
$600,000 was recorded as a component of income from discontinued operations for
the three months ended March 31, 2008, as prescribed by SFAS No. 5, Accounting for Contingencies.
The Company was not named in the indictment and will not be charged. The Company
fully cooperated with the government in its investigation of this
matter.





The
Company is a party to various other legal proceedings related to its normal
business activities.  In the opinion of the Company’s management, none
of these proceedings are material in relation to the Company’s results of
operations, liquidity, cash flows, or financial condition.





Additional
information regarding our legal proceedings can be found in Note 17 of the Notes
to Consolidated Financial Statements included in this Form 10-K.





ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS





The
Annual Meeting of the stockholders of Mace Security International, Inc. was held
on December 11, 2008. Proposals for the election of five directors to the Board
of Directors for one-year terms and the ratification of the Audit Committee’s
appointment of Grant Thornton as Mace’s registered public accounting firm for
fiscal year 2008 were submitted to a vote.





The
proposals were adopted by the shareholders. The voting was as
follows:





Directors:
                      
                      Votes For
                      
                      
                      Votes Withheldor Against
                      
                      
                      AbstentionsDennis
      Raefield
                      
                      
                      14,548,844
                      
                      
                      
                      162,447
                      
                      
                      
                      -John
      C. Mallon
                      
                      
                      13,639,054
                      
                      
                      
                      1,072,237
                      
                      
                      
                      -Constantine
      N. Papadakis, Ph.D
                      
                      
                      13,076,172
                      
                      
                      
                      1,635,119
                      
                      
                      
                      -Mark
      S. Alsentzer
                      
                      
                      9,911,695
                      
                      
                      
                      4,799,596
                      
                      
                      
                      -Gerald
      T. LaFlamme
                      
                      
                      14,630,416
                      
                      
                      
                      80,875
                      
                      
                      
                      -Ratify
      appointment ofGrant
      Thornton LLP
                      
                      
                      13,883,318
                      
                      
                      
                      57,438
                      
                      
                      
                      770,535


22





PART
II





ITEM
5.MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES





(a)
Market Price and Dividends of the Registrant’s Common Equity





Our
common stock is traded and quoted on the Nasdaq Global Market under the trading
symbol "MACE."  Common stock price reflects inter-dealer quotations,
does not include retail markups, markdowns or commissions and does not
necessarily represent actual transactions.





The
following table sets forth, for the quarters indicated, the high and low sale
prices per share for our common stock, as reported by Nasdaq.





HIGH
                    
                    
                    LOWYear
      Ending December 31, 2007First
      Quarter
                    
                    $
                    2.99
                    
                    
                    $
                    2.50Second
      Quarter
                    
                    
                    2.73
                    
                    
                    
                    2.37Third
      Quarter
                    
                    
                    2.70
                    
                    
                    
                    1.85Fourth
      Quarter
                    
                    
                    2.39
                    
                    
                    
                    1.84Year
      Ending December 31, 2008First
      Quarter
                    
                    
                    2.05
                    
                    
                    
                    1.40Second
      Quarter
                    
                    
                    1.99
                    
                    
                    
                    1.40Third
      Quarter
                    
                    
                    1.65
                    
                    
                    
                    1.04Fourth
      Quarter
                    
                    
                    1.26
                    
                    
                    
                    0.61Year
      Ending December 31, 2009First
      Quarter, through March 18, 2009
                    
                    
                    0.91
                    
                    
                    
                    0.61





The
closing price for our common stock on June 30, 2008 was $1.59.  For
purposes of calculating the aggregate market value of our shares of common stock
held by non-affiliates, as shown on the cover page of this report, it has been
assumed that all of the outstanding shares were held by non-affiliates except
for the shares held by our directors and executive officers and stockholders
owning 10% or more of our outstanding shares.  However, this should
not be deemed to constitute an admission that all such persons are, in fact,
affiliates of the Company, or that there are not other persons who may be deemed
to be affiliates of the Company.  For further information concerning
ownership of our securities by executive officers, directors and principal
stockholders, see Item 12,
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.





As of
March 18, 2009 we had 80 stockholders of record and approximately 3,038
beneficial owners of our common stock. We did not pay dividends in the preceding
two years and do not anticipate paying any cash dividends in the foreseeable
future. We intend to retain all working capital and earnings, if any, for use in
our operations and in the expansion of our business.  Any future
determination with respect to the payment of dividends will be at the discretion
of our Board of Directors and will depend upon, among other things, our results
of operations, financial condition and capital requirements, the terms of any
then existing indebtedness, general business conditions, and such other factors
as our Board of Directors deems relevant. Certain of our credit facilities
prohibit or limit the payment of cash dividends without prior bank
approval.





For
information regarding our equity compensation plans, See Item 12, Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.





(c)           Stock
Performance Graph





The
following line graph and table compare, for the five most recently concluded
fiscal years, the yearly percentage change in the cumulative total stockholder
return, assuming reinvestment of dividends, on the Company’s common stock with
the cumulative total return of companies on the Nasdaq Stock Market and an index
comprised of certain companies in similar service industries (the “Selected Peer
Group Index”).(1)


23











(1)
            The
      Selected Peer Group Index is comprised of securities of Command Security
      Corp, Goldleaf Financial Solutions, Innodata Isogen, Inc., Lasercard
      Corp, Looksmart Ltd., Napco Security Systems, Inc., RAE Systems, Inc.,
      Taser International, Inc., Think Partnership, Inc., Track Data
      Corp., and Versar, Inc. The current peer group includes security
      product, e-commerce and digital media marketing companies which
      appropriately reflect Mace’s business. There can be no assurance that the
      Company’s stock performance will continue into the future with the same or
      similar trends depicted by the graph above.  The Company neither
      makes nor endorses any predictions as to future stock
      performance.





COMPARISON
OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG MACE SECURITY


INTERNATIONAL,
INC., THE NASDAQ MARKET INDEX, AND SELECTED PEER GROUP





December 31,2003
                  
                  
                  2004
                  
                  
                  2005
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2008Mace
      Security International, Inc.
                  
                  
                  100.00
                  
                  
                  
                  229.67
                  
                  
                  
                  118.18
                  
                  
                  
                  122.49
                  
                  
                  
                  97.13
                  
                  
                  
                  38.28Selected
      New Peer Group
                  
                  
                  100.00
                  
                  
                  
                  268.13
                  
                  
                  
                  102.66
                  
                  
                  
                  99.95
                  
                  
                  
                  130.82
                  
                  
                  
                  47.42Nasdaq
      Market Index
                  
                  
                  100.00
                  
                  
                  
                  108.41
                  
                  
                  
                  110.79
                  
                  
                  
                  122.16
                  
                  
                  
                  134.29
                  
                  
                  
                  79.25





The
Performance Graph set forth above shall not be deemed incorporated by reference
into any filing under the Securities Act or the Exchange Act by virtue of any
general statement in such filing incorporating this Form 10-K by reference,
except to the extent that the Company specifically incorporates the information
contained in this section by reference, and shall not otherwise be deemed filed
under either the Securities Act of 1933, as amended (the “Securities Act”) or
the Exchange Act.


24





(d)
Recent Sales of Unregistered Securities





On July
20, 2007, the Company completed the purchase of all of the outstanding common
stock of Linkstar Interactive, Inc. (“Linkstar”) from Linkstar’s shareholders by
paying approximately $10.5 million to the Linkstar shareholders consisting of
$7.0 million in cash at closing and $500,000 of promissory notes bearing a 5%
interest rate paid in January 2008. As part of the consideration paid for
Linkstar, the Company issued 1,176,471 unregistered shares of the Company’s
common stock with a total value of $2.9 million to the six prior shareholders of
Linkstar Interactive, Inc.





In
undertaking this issuance, the Company relied on an exemption from registration
under Section 4(2) of the Securities Act.





(e)
Issuer Purchases of Securities





The
following table summarizes our equity security repurchase during the three
months ended December 31, 2008:





Period
                
                Total Number
                  of Shares
                  Purchased
                
                
                Average Price
                  Paid per Share
                
                
                Total Number of
                  Shares Purchased
                  as part of
                  Publicly
                  Announced Plans
                  or Programs
                
                
                Approximate Dollar
                  Value of Shares that
                  May Yet Be
                  Purchased Under
                  the Plans or
                  Programs (1)October
      1 to October 31, 2008
                
                
                59,900
                
                
                $
                1.02
                
                
                
                59,900
                
                
                $
                1,790,000November
      1 to November 30, 2008
                
                
                13,900
                
                
                $
                0.79
                
                
                
                13,900
                
                
                $
                1,779,000December
      1 to December 31, 2008
                
                
                30,599
                
                
                $
                0.85
                
                
                
                30,599
                
                
                $
                1,753,000Total
                
                
                104,399
                
                
                $
                0.94
                
                
                
                104,399





(1)  
On August 13, 2007, the Company’s Board of Directors approved a share repurchase
program to allow the Company to repurchase up to an aggregate $2,000,000 of its
common shares in the future if the market conditions so dictate. As of December
31, 2008, 185,408 shares had been repurchased under this program at a cost of
approximately $247,000.


25


ITEM
      6.
            SELECTED
      FINANCIAL DATA





The
information below was derived from our Consolidated Financial Statements
included in this report and in reports we have previously filed with the SEC.
This information should be read together with those financial statements and the
Notes to the Consolidated Financial Statements.  For more information
regarding this financial data, see “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations” section also included
in this report.





Statement
      of Operations Data:
                                      
                                      Year ended December 31,2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006
                                      
                                      
                                      2005
                                      
                                      
                                      2004(In
      thousands, except share information)Revenues:Car
      wash and detailing services
                                      
                                      $
                                      8,327
                                      
                                      
                                      $
                                      8,493
                                      
                                      
                                      $
                                      9,123
                                      
                                      
                                      $
                                      9,968
                                      
                                      
                                      $
                                      9,091Lube
      and other automotive services
                                      
                                      
                                      2,631
                                      
                                      
                                      
                                      2,761
                                      
                                      
                                      
                                      3,089
                                      
                                      
                                      
                                      2,921
                                      
                                      
                                      
                                      3,012Fuel
      and merchandise
                                      
                                      
                                      1,821
                                      
                                      
                                      
                                      1,098
                                      
                                      
                                      
                                      1,338
                                      
                                      
                                      
                                      1,495
                                      
                                      
                                      
                                      1,265Security
                                      
                                      
                                      20,788
                                      
                                      
                                      
                                      22,278
                                      
                                      
                                      
                                      23,366
                                      
                                      
                                      
                                      24,909
                                      
                                      
                                      
                                      16,632Digital
      media marketing
                                      
                                      
                                      17,290
                                      
                                      
                                      
                                      7,625
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -50,857
                                      
                                      
                                      
                                      42,255
                                      
                                      
                                      
                                      36,916
                                      
                                      
                                      
                                      39,293
                                      
                                      
                                      
                                      30,000Cost
      of revenues:Car
      wash and detailing services
                                      
                                      
                                      6,591
                                      
                                      
                                      
                                      6,704
                                      
                                      
                                      
                                      7,203
                                      
                                      
                                      
                                      7,273
                                      
                                      
                                      
                                      6,642Lube
      and other automotive services
                                      
                                      
                                      2,015
                                      
                                      
                                      
                                      2,114
                                      
                                      
                                      
                                      2,393
                                      
                                      
                                      
                                      2,139
                                      
                                      
                                      
                                      2,268Fuel
      and merchandise
                                      
                                      
                                      1,826
                                      
                                      
                                      
                                      975
                                      
                                      
                                      
                                      1,232
                                      
                                      
                                      
                                      1,295
                                      
                                      
                                      
                                      1,101Security
                                      
                                      
                                      15,071
                                      
                                      
                                      
                                      16,223
                                      
                                      
                                      
                                      17,427
                                      
                                      
                                      
                                      17,658
                                      
                                      
                                      
                                      11,989Digital
      media marketing
                                      
                                      
                                      10,769
                                      
                                      
                                      
                                      6,120
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -36,272
                                      
                                      
                                      
                                      32,136
                                      
                                      
                                      
                                      28,255
                                      
                                      
                                      
                                      28,365
                                      
                                      
                                      
                                      22,000Selling,
      general and administrative expenses
                                      
                                      
                                      20,639
                                      
                                      
                                      
                                      17,757
                                      
                                      
                                      
                                      15,563
                                      
                                      
                                      
                                      11,668
                                      
                                      
                                      
                                      9,552Depreciation
      and amortization
                                      
                                      
                                      1,281
                                      
                                      
                                      
                                      1,219
                                      
                                      
                                      
                                      1,114
                                      
                                      
                                      
                                      1,007
                                      
                                      
                                      
                                      960Costs
      of terminated acquisitions
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      53Goodwill
      and asset impairment charges
                                      
                                      
                                      5,449
                                      
                                      
                                      
                                      447
                                      
                                      
                                      
                                      151
                                      
                                      
                                      
                                      1,563
                                      
                                      
                                      
                                      3,542Operating
      loss
                                      
                                      
                                      (12,784
                                      )
                                      
                                      
                                      (9,304
                                      )
                                      
                                      
                                      (8,167
                                      )
                                      
                                      
                                      (3,310
                                      )
                                      
                                      
                                      (6,107
                                      )Interest
      expense, net
                                      
                                      
                                      (102
                                      )
                                      
                                      
                                      (378
                                      )
                                      
                                      
                                      (701
                                      )
                                      
                                      
                                      (515
                                      )
                                      
                                      
                                      (578
                                      )Other
      (loss)  income
                                      
                                      
                                      (2,160
                                      )
                                      
                                      
                                      1,003
                                      
                                      
                                      
                                      848
                                      
                                      
                                      
                                      339
                                      
                                      
                                      
                                      113Loss
      from continuing operations before income taxes
                                      
                                      
                                      (15,046
                                      )
                                      
                                      
                                      (8,679
                                      )
                                      
                                      
                                      (8,020
                                      )
                                      
                                      
                                      (3,486
                                      )
                                      
                                      
                                      (6,572
                                      )Income
      tax expense (benefit)
                                      
                                      
                                      100
                                      
                                      
                                      
                                      98
                                      
                                      
                                      
                                      156
                                      
                                      
                                      
                                      2,198
                                      
                                      
                                      
                                      (2,005
                                      )Loss
      from continuing operations
                                      
                                      
                                      (15,146
                                      )
                                      
                                      
                                      (8,777
                                      )
                                      
                                      
                                      (8,176
                                      )
                                      
                                      
                                      (5,684
                                      )
                                      
                                      
                                      (4,567
                                      )Income
      (loss) from discontinued operations, net of tax
                                      
                                      
                                      4,494
                                      
                                      
                                      
                                      2,192
                                      
                                      
                                      
                                      1,394
                                      
                                      
                                      
                                      664
                                      
                                      
                                      
                                      (1,843
                                      )Net
      loss
                                      
                                      $
                                      (10,652
                                      )
                                      
                                      $
                                      (6,585
                                      )
                                      
                                      $
                                      (6,782
                                      )
                                      
                                      $
                                      (5,020
                                      )
                                      
                                      $
                                      (6,410
                                      )Basic
      and Diluted loss per shareLoss
      from continuing operations
                                      
                                      $
                                      (0.92
                                      )
                                      
                                      $
                                      (0.56
                                      )
                                      
                                      $
                                      (0.53
                                      )
                                      
                                      $
                                      (0.37
                                      )
                                      
                                      $
                                      (0.34
                                      )Income
      (loss) from discontinued operations, net of tax
                                      
                                      $
                                      0.27
                                      
                                      
                                      $
                                      0.14
                                      
                                      
                                      $
                                      0.09
                                      
                                      
                                      
                                      0.04
                                      
                                      
                                      
                                      (0.13
                                      )Net
      loss
                                      
                                      $
                                      (0.65
                                      )
                                      
                                      $
                                      (0.42
                                      )
                                      
                                      $
                                      (0.44
                                      )
                                      
                                      $
                                      (0.33
                                      )
                                      
                                      $
                                      (0.47
                                      )Weighted
      average number of shares outstanding
                                      
                                      
                                      16,464,760
                                      
                                      
                                      
                                      15,810,705
                                      
                                      
                                      
                                      15,274,498
                                      
                                      
                                      
                                      15,271,637
                                      
                                      
                                      
                                      13,679,604


26





Year ended December 31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004(In
      thousands)Balance
      Sheet Data (at end of period):Working
      capital
              
              $
              16,025
              
              
              $
              17,764
              
              
              $
              26,556
              
              
              $
              14,615
              
              
              $
              17,471Intangible
      assets, net
              
              $
              10,336
              
              
              $
              13,796
              
              
              $
              4,546
              
              
              $
              6,148
              
              
              $
              6,522Total
      assets
              
              $
              55,036
              
              
              $
              75,436
              
              
              $
              87,598
              
              
              $
              96,111
              
              
              $
              102,757Long-term
      debt, including current maturities (1)
              
              $
              6,452
              
              
              $
              13,558
              
              
              $
              23,966
              
              
              $
              26,674
              
              
              $
              29,195Stockholders’
      equity
              
              $
              43,167
              
              
              $
              53,566
              
              
              $
              56,506
              
              
              $
              61,650
              
              
              $
              66,522


(1)  Includes
Long-term debt included in Liabilities related to assets held for
sale.





ITEM
7.MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS





The
following discussion reviews our operations for each of the three years in the
period ended December 31, 2008, and should be read in conjunction with our
Consolidated Financial Statements and related notes thereto included elsewhere
herein.





FACTORS
INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING
STATEMENTS





This
report includes forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (“Forward-Looking Statements”).  All
statements other than statements of historical fact included in this report are
Forward-Looking Statements.  Forward-Looking Statements are statements
related to future, not past, events. In this context, Forward-Looking Statements
often address our expected future business and financial performance and
financial condition, and often contain words such as "expect," "anticipate,"
"intend," "plan," believe," "seek," or ''will." Forward-Looking Statements by
their nature address matters that are, to different degrees, uncertain. For us,
particular uncertainties that could cause our actual results to be materially
different than those expressed in our Forward-Looking Statements include: the
severity and duration of current economic and financial conditions; our success
in selling our remaining car washes; the level of demand of the customers we
serve for our goods and services, and numerous other matters of national,
regional and global scale, including those of a political, economic, business
and competitive nature. These uncertainties are described in more detail in Part
I, Item 1A. Risk
Factors of this Form 10-K Report. The Forward- Looking Statements made
herein are only made as of the date of this filing, and we undertake no
obligation to publicly update such Forward-Looking Statements to reflect
subsequent events or circumstances.




Introduction





Revenues





Security





Our
Security Segment designs, manufactures, markets and sells a wide range of
products. The Company’s primary focus in the Security Segment is the sourcing
and selection of electronic surveillance products and components that it
produces and sells, primarily to installing dealers, system integrators,
retailers and end users.  Other products in our Security Segment
include, but are not limited to, less-than-lethal Mace defense sprays, personal
alarms, high-end digital and machine vision cameras and imaging components, as
well as video conferencing equipment and security monitors.  The main
marketing channels for our products are industry shows and publications, outside
sales representatives, catalogs, internet and sales through telephone
orders.Revenues
generated for the year ended December 31, 2008 for the Security Segment were
comprised of approximately 35% from our professional electronic surveillance
operation in Florida, 43 % from our consumer direct electronic surveillance and
machine vision camera and video conferencing equipment operation in Texas, and
22% from our personal defense and law enforcement aerosol operation in
Vermont.




Digital
Media Marketing





Prior to
June 2008, our Digital Media Marketing Segment consisted of two business
divisions: (1) e-commerce and (2) online marketing. After June 2008 we
discontinued the online marketing services to outside customers and our Digital
Media Marketing Segment is now essentially an online e-commerce
business.


27





Our
e-commerce division is a direct-response product business that develops, markets
and sells products directly to consumers through the internet. We reach our
customers predominately through online advertising on third party promotional
websites. Before discontinuing PromoPath, Linkstar also marketed products on
promotional websites operated by PromoPath. Our products include: Vioderm, an
anti-wrinkle skin care product (www.vioderm.com);
Purity by Mineral Science, a mineral cosmetic (www.mineralscience.com);
TrimDayTM, a weight-loss supplement (www.trimday.com);
Eternal Minerals, a Dead Sea spa product line  (www.eternalminerals.com);
ExtremeBriteWhite, a teeth whitening product (www.extremebritewhite.com);
Knockout, an acne product (www.knockoutmyacne.com),
as well as Mace’s pepper sprays and surveillance products. We continuously
develop and test product offerings to determine customer acquisition costs and
revenue potential, as well as to identify the most efficient marketing
programs.





PromoPath,
our online affiliate marketing company, secured customer acquisitions or leads
for advertising clients principally using promotional internet sites offering
free gifts. Promopath was paid by its clients based on the cost-per-acquisition
(“CPA”) model. PromoPath’s advertising clients were typically established
direct-response advertisers with well recognized brands and broad consumer
appeal such as NetFlix®, Discover® credit cards and Bertelsmann Group. PromoPath
generated CPA revenue, both brokered and through co-partnered sites, as well as
list management and lead generation revenues. CPA revenue in the digital media
marketplace refers to paying a fee for the acquisition of a new customer,
prospect or lead. List management revenue is based on a relationship between a
data owner and a list management company. The data owner compiles, collects,
owns and maintains a proprietary computerized database composed of consumer
information. The data owner grants a list manager a non-exclusive,
non-transferable, revocable worldwide license to manage, use and have access to
the data pursuant to defined terms and conditions for which the data owner is
paid revenue. Lead generation is referred to as cost per lead (“CPL”) in the
digital media marketplace. Advertisers purchasing media on a CPL basis are
interested in collecting data from consumers expressing interest in a product or
service. CPL varies from CPA in that no credit card information needs to be
provided to the advertiser for the publishing source to be paid for the
lead.





In June
of 2008, the Company discontinued marketing PromoPath’s online marketing
services to external customers. PromoPath’s primary mission is now focused on
increasing the distribution of the products of the e-commerce division,
Linkstar.





Revenues
within our Digital Media Marketing Segment for the year ended December 31, 2008,
were approximately $17.3 million; consisting of $15.1 million, or
87.2%,  from our e-commerce division and $2.2 million, or
12.8%,  from our online marketing division.





Car Wash





At
December 31, 2008, we owned full service and self-service car wash locations in
Texas.  We earn revenues from washing and detailing automobiles;
performing oil and lubrication services, minor auto repairs, and state
inspections; selling fuel; and selling merchandise through convenience stores
within the car wash facilities.  Revenues generated for 2008 for the
Car and Truck Wash Segment were comprised of approximately 65% from car washing
and detailing, 21% from lube and other automotive services, and 14% from fuel
and merchandise.  Additionally, our Arizona, Florida, Northeast,
Lubbock, Texas, and San Antonio, Texas region car washes and our truck washes
are being reported as discontinued operations, (see Note 4 of the Notes to
Consolidated Financial Statements), and accordingly, have been segregated from
the following revenue and expense discussion. Revenues from discontinued
operations were $3.4 million, $14.8 million and $26.4 million for the years
ended December 31, 2008, 2007 and 2006, respectively. Operating (loss) income
from discontinued operations was $(1.6) million, $155,000, and $1.8 million for
the years ended December 31, 2008, 2007 and 2006, respectively.





The
Company executed a lease-to-sell agreement on December 31, 2005 with Eagle to
lease Mace’s five truck washes beginning January 1, 2006 for up to two years.
Pursuant to the terms of the agreement, Eagle paid Mace $9,000 per month to
lease the Company’s truck washes, and was responsible for all underlying
property expenses. On December 31, 2007 Eagle completed the purchase of the
truck washes for $1.2 million consideration, consisting of $280,000 cash and a
$920,000 note payable to Mace secured by mortgages on the truck washes. The
$920,000 note, which has a balance of $892,000 at December 31, 2008, has a
five-year term, with principal and interest paid on a 15-year amortization
schedule. As a result, we did not recognize revenue or operating expenses during
the term of the lease other than rental income and interest
expense.





The
majority of revenues from our Car Wash Segment are collected in the form of cash
or credit card receipts, thus minimizing customer accounts
receivable.


28





Cost
of Revenues





Security





Cost of
revenues within the Security Segment consists primarily of costs to purchase or
manufacture the security products including direct labor and related taxes and
fringe benefits, and raw material costs. Product warranty costs related to the
Security Segment are mitigated in that a portion of customer product warranty
claims are covered by the supplier through repair or replacement of the product
associated with the warranty claim.





Digital Media Marketing





Cost of
revenues within the Digital Media Marketing Segment consist primarily of amounts
we pay to website publishers that are directly related to revenue-generating
events, including the cost to enroll new members, fulfillment and warehousing
costs, including direct labor and related taxes and fringe benefits and
e-commerce product costs.





Car Wash




Cost of
revenues within the Car Wash Segment consists primarily of direct labor and
related taxes and fringe benefits, certain insurance costs, chemicals, wash and
detailing supplies, rent, real estate taxes, utilities, car damages, maintenance
and repairs of equipment and facilities, as well as the cost of the fuel and
merchandise sold.





Selling,
General and Administrative Expenses





Selling,
general and administrative (“SG&A”) expenses consist primarily of
management, clerical and administrative salaries, professional services,
insurance premiums, sales commissions, and other costs relating to marketing and
sales.





We
capitalize direct incremental costs associated with business acquisitions.
Indirect acquisition costs, such as executive salaries, corporate overhead,
public relations, and other corporate services and overhead are expensed as
incurred.





Depreciation
and Amortization





Depreciation
and amortization consists primarily of depreciation of buildings and equipment,
and amortization of leasehold improvements and certain intangible
assets.  Buildings and equipment are depreciated over the estimated
useful lives of the assets using the straight-line method. Leasehold
improvements are amortized over the shorter of their useful lives or the lease
term with renewal options. Intangible assets, other than goodwill or intangible
assets with indefinite useful lives, are amortized over their useful lives
ranging from three to fifteen years, using the straight-line or an accelerated
method.





Other
Income





Other
income consists primarily of rental income received on renting out excess space
at our car wash facilities and includes gains and losses on short-term
investments.





Income
Taxes





Income
tax expense is derived from tax provisions for interim periods that are based on
the Company’s estimated annual effective rate.  Currently, the
effective rate differs from the federal statutory rate primarily due to state
and local income taxes, non-deductible costs related to acquired intangibles,
and changes to the valuation allowance.


29





Results
of Operations for the Three Years Ended December 31, 2008, 2007 and
2006





The
following table presents the percentage each item in the consolidated statements
of operations bears to total revenues:





Year ended December 31,2008
                              
                              
                              2007
                              
                              
                              2006Revenues
                              
                              
                              100
                              %
                              
                              
                              100
                              %
                              
                              
                              100
                              %Cost
      of revenues
                              
                              
                              71.3
                              
                              
                              
                              76.1
                              
                              
                              
                              76.5Selling,
      general and administrative expenses
                              
                              
                              40.6
                              
                              
                              
                              42.0
                              
                              
                              
                              42.2Depreciation
      and amortization
                              
                              
                              2.5
                              
                              
                              
                              2.9
                              
                              
                              
                              3.0Goodwill
      and asset impairment charges
                              
                              
                              10.7
                              
                              
                              
                              1.1
                              
                              
                              
                              0.4Operating
      loss
                              
                              
                              (25.1
                              )
                              
                              
                              (22.1
                              )
                              
                              
                              (22.1
                              )Interest
      expense, net
                              
                              
                              (0.2
                              )
                              
                              
                              (0.9
                              )
                              
                              
                              (1.9
                              )Other
      income
                              
                              
                              (4.2
                              )
                              
                              
                              2.4
                              
                              
                              
                              2.3Loss
      from continuing operations before income taxes
                              
                              
                              (29.5
                              )
                              
                              
                              (20.6
                              )
                              
                              
                              (21.7
                              )Income
      tax expense
                              
                              
                              0.2
                              
                              
                              
                              0.2
                              
                              
                              
                              0.4Loss
      from continuing operations
                              
                              
                              (29.7
                              )
                              
                              
                              (20.8
                              )
                              
                              
                              (22.1
                              )Income
      from discontinued operations, net of tax
                              
                              
                              8.8
                              
                              
                              
                              5.2
                              
                              
                              
                              3.8Net
      loss
                              
                              
                              (20.9
                              )%
                              
                              
                              (15.6
                              )%
                              
                              
                              (18.3
                              )%





Revenues





Security





Revenues
were approximately $20.8 million, $22.3 million and $23.4 million for the years
ended December 31, 2008, 2007 and 2006, respectively. Of the $20.8 million of
revenues for the year ended December 31, 2008, $7.2 million, or 35%, was
generated from our professional electronic surveillance operation in Florida,
$9.0 million, or 43%, from our consumer direct electronic surveillance and high
end digital and machine vision cameras and professional imaging components
operation in Texas, and $4.6 million, or 22%, from our personal defense and law
enforcement aerosol operation in Vermont. Of the $22.3 million of revenues for
year ended December 31, 2007, $7.8 million, or 35%, was generated from our
professional electronic surveillance operation in Florida, $9.9 million, or 44%,
from our consumer direct electronic surveillance and high end digital and
machine vision cameras and professional imaging components operation in Texas,
and $4.6 million, or 21%, from personal defense and law enforcement aerosol
operations in Vermont. Of the $23.4 million of revenues for the year ended
December 31, 2006, $9.1 million, or 39%, was generated from our professional
electronic surveillance operations in Florida, $10.8 million, or 46%, from our
consumer direct electronic surveillance and high end digital and machine vision
cameras and professional imaging components operation in Texas, and $3.5 million
or 15%, for our personal defense and law enforcement aerosol operations in
Vermont.





The
decrease in revenues within the Security Segment in 2008 was due to several
factors.   The majority of the decrease in sales was
from  decreases in sales of our consumer direct electronic
surveillance division, our professional electronic surveillance operation and
our machine vision camera and video conferencing operation. Our Vermont personal
defense operations sales remain consistent between years. The decrease in sales
of our consumer direct electronic surveillance, machine vision camera and video
conference equipment operations, and our professional electronic surveillance
operation was due to several factors,  including the impact on sales
of increased competition and the impact of management’s completion of its
consolidation of the Security Segment’s electronic surveillance equipment
operations from Ft. Lauderdale, Florida to the Farmers Branch, Texas warehouse.
The consumer direct electronic surveillance and professional electronic
surveillance division had a decrease in sales due to a delay in introducing new
product lines during 2008. In the latter part of 2008 sales also decreased due
to a reduction in spending by certain of our customers impacted by the
deteriorating economy. Additionally, the Company’s machine vision camera and
video conferencing equipment operations continue to be impacted by certain large
customers purchasing directly from its main supplier combined with reductions in
sales to certain customers with ties to the big three automotive manufacturers.
Although revenues within our personal defense operation remained consistent
between years, we did experience growth in aerosol and non-aerosol sales largely
from the introduction of new products such as a new home security system, our
Mace Pepper Gun® and our Mace Pepper GelTM off set by a decrease in sales of TG
Guard, law enforcement and OEM supplied products.


30





The
decrease in revenues within the Security Segment in 2007 as compared to 2006 was
due principally to a decrease in sales of our consumer direct electronic
surveillance and machine vision camera and video conferencing equipment in Texas
and our professional electronic surveillance operation in Florida. The decrease
in sales in our professional electronic surveillance operation was partially a
result of sales of discontinued and refurbished products at lower selling
prices, the inability of some of Mace’s vendors to supply high volume products
in a timely manner, competitive pressures and the impact on operations and
management of the Florida embezzlement investigation. The decrease in sales of
our consumer direct electronic surveillance operations in Texas was largely a
result of increased competition and inventory shortages of certain components.
The Company’s machine vision camera and video conferencing equipment operation
was impacted by competition and certain large customers purchasing direct from
its main supplier. This decrease in revenue was partially offset by a $1.05
million or 30% increase in revenue in our personal defense and law enforcement
aerosol operations with a noted increase in sales in our Mace aerosol defense
sprays and TG Guard® products.





Digital
Media Marketing





Revenues
within our Digital Media Marketing Segment for the year ended December 31, 2008
were approximately $17.3 million, consisting of $15.1 million from our
e-commerce division and $2.2 million from our online marketing
division.  Revenues within our Digital Media Marketing Segments from
the acquisition date, July 20, 2007, through December 31, 2007, were
approximately $7.6 million, consisting of $4.2 million from our e-commerce
division and $3.4 million from our online marketing division.





Car
Wash





Revenues
for the year ended December 31, 2008 were $12.8 million as compared to $12.4
million for the year ended December 31, 2007, an increase of $427,000 or 3%. Of
the $12.8 million of revenues for the year ended December 31, 2008, $8.3 million
or 65% was generated from car wash and detailing, $2.7 million or 21% from lube
and other automotive services, and $1.8 million or 14% from fuel and merchandise
sales. Of the $12.4 million of revenues for the year ended December 31, 2007,
$8.5 million or 69% was generated from car wash and detailing, $2.8 million or
22% from lube and other automotive services, and $1.1 million or 9% from fuel
and merchandise sales. The slight decrease in wash and detail revenues in 2008
was principally due to a decrease in average wash and detailing revenue per car.
Average wash and detailing revenue per car decreased from $19.22 in 2007 to
$18.73 in 2008.This decrease in average wash and detailing revenue per car was
partially offset by an increase of 2,000 cars despite a reduction of 5,000 cars
from the sale of two Texas car wash sites included in continuing operations
since the beginning of 2007. The increase in fuel and merchandise revenues was
primarily the result of selling fuel at a higher fuel price.





Revenues
for the year ended December 31, 2007 were $12.4 million as compared to $13.6
million for the year ended December 31, 2006, a decrease of $1.2 million or
8.8%. This decrease was primarily attributable to a decrease in wash and detail
services.  Of the $12.4 million of revenues for the year ended
December 31, 2007, $8.5 million or 69% was generated from car wash and
detailing, $2.8 million or 22% from lube and other automotive services, and $1.1
million or 9% from fuel and merchandise sales. Of the $13.6 million of revenues
for the year ended December 31, 2006, $9.1 million or 67% was generated from car
wash and detailing, $3.1 million or 23% from lube and other automotive services,
and $1.4 million or 10% from fuel and merchandise sales. The decrease in wash
and detail revenues in 2007 was principally due to the sale of car washes and
reduced car wash volumes in the Texas market due to unfavorable weather. Overall
car wash volumes declined by 95,000 cars, or 18% in 2007 as compared to 2006,
15%, excluding the impact of a car wash volume reduction of approximately 19,300
cars from the closure and divestiture of two car wash locations in Texas since
September 2006 included in continuing operations. Partially offsetting this
decline in volume, the Company experienced an increase in average car wash and
detailing revenue per car, from $17.01 in 2006 to $19.22 in
2007.  This increase in average wash and detailing revenue per car was
the result of management’s continued focus on aggressive selling detailing and
additional on-line car wash services. The decrease in fuel and merchandise
revenues was primarily the result of selling less volume of fuel as a result of
higher fuel prices. The decrease in merchandise sales in our car wash lobbies
corresponds with the reduction in our car wash volumes and site
traffic.





Cost
of Revenues





Security





Costs of
revenues were $15.1 million, or 72% of revenues, $16.2 million or 73% of
revenues and $17.4 million or 74% of revenues for 2008, 2007 and 2006,
respectively. The decrease in cost of revenues as a percentage of revenues is
due to a change in customer and product mix and a conscious effort to reduce
discounting of list prices and sell products at higher profit margins and
partially due to reduced overhead costs from the consolidation of the Ft.
Lauderdale, Florida warehouse operations into the Farmers Branch, Texas
warehouse in the fourth quarter of 2008. Additionally, the margins within our
professional electronic surveillance operation in Florida were negatively
impacted in 2007 by an increase in sales of discontinued products, refurbished
items and substitute items as a result of the inability of some of Mace’s
vendors to supply high volume products in a timely manner.




31


The
slight decrease in cost of revenues as a percentage of revenues in 2007 as
compared to 2006 is due principally to a change in customer and product mix and
a conscious effort to reduce discounting of list prices, offset partially by an
increase in sale of discontinued products and refurbished items at lower profit
margins.





Digital Media Marketing





Cost of
revenues within our Digital Media Marketing Segment was approximately $10.8
million, or 62% of revenues, for the year ended December 31, 2008. Of this
amount, $8.8 million related to our e-commerce division and $1.98 million
related to our online marketing division. Cost of revenues within our Digital
Media Marketing Segment from July 20, 2007, the date we acquired the segment,
through December 31, 2007 were approximately $6.1 million; $2.9 million related
to our e-commerce division and $3.2 related to our online marketing
division.





Car Wash





Cost of
revenues for the year ended December 31, 2008 were $10.4 million, or 82% of
revenues, with car washing and detailing costs at 79% of respective revenues,
lube and other automotive services costs at 77% of respective revenues, and fuel
and merchandise costs at 100% of respective revenues.  Cost of
revenues for the year ended December 31, 2007 were $9.8 million, or 79% of
revenues, with car washing and detailing costs at 79% of respective revenues,
lube and other automotive services costs at 77% of respective revenues, and fuel
and merchandise costs at 89% of respective revenues. This increase in our fuel
and merchandise costs as a percent of revenues in 2008 was due to a loss on the
sale of fuel of approximately $44,000 in the fourth quarter of 2008 and an
additional write down of fuel of approximately $93,000 at December 31, 2008 to
estimated net realizable value with the significant drop in fuel cost and
selling prices in the fourth quarter of 2008.





Cost of
revenues for the year ended December 31, 2007 were $9.8 million or 79% of
revenues with car washing and detailing costs at 79% of respective revenues,
lube and other automotive services costs at 77% of respective revenues, and fuel
and merchandise costs at 89% of respective revenues.  Cost of revenues
for the year ended December 31, 2006 was $10.8 million, or 80% of revenues with
car wash and detailing costs at 79% of respective revenues, lube and other
automotive services costs at 77% of respective revenues, and fuel and
merchandise costs at 92% of respective revenues.  Cost of revenues, as
a percent of revenues, was relatively consistent between 2007 and
2006.





Selling,
General and Administrative Expenses





SG&A
expenses for the year ended December 31, 2008 were $20.6 million compared to
$17.8 million for the same period in 2007, an increase of approximately $2.8
million or 16%. SG&A expenses as a percent of revenues were 40.6% for the
year ended December 31, 2008 as compared to 42.0% for the year ended December
31, 2007. The increase in SG&A costs is primarily the result of the
acquisition of Linkstar, which represents an increase in SG&A costs of $3.9
million in 2008 as compared to 2007 and an additional charge of approximately
$425,000 for the waste remediation at our personal defense operation in Vermont
(See Note 17. Commitments and Contingencies). These increases were partially
offset by a decrease in costs related to the Northeast car wash region
immigration investigation, non-cash compensation expense, reduction in costs
within our Florida and Texas operations, and costs of the previously reported
Florida security based controller embezzlement. SG&A expenses include
$244,000 of legal fees in 2008 relating to the immigration investigation as
compared to $674,000 in 2007. SG&A costs also include non-cash compensation
expense from continuing operations of approximately $626,000 and $896,000 in
2008 and 2007, respectively. SG&A costs decreased within our Florida and
Texas electronic surveillance equipment operations by approximately $360,000,
partially as a result of our reduced sales levels and partially as a result of
our consolidation efforts to reduce SG&A costs in all areas. In April 2007,
we determined that our former Florida security based divisional controller
embezzled funds from the Company. The Company conducted an internal
investigation, and our Audit Committee engaged an independent consulting firm to
conduct an independent forensic investigation. As a result of these
investigations, we estimated that the amount embezzled by the employee was
approximately $240,000 during fiscal 2006 and $99,000 in the first quarter of
fiscal 2007. SG&A expenses for 2007 also include approximately $300,000 of
legal, consulting and accounting fees related to the Florida embezzlement
investigation.





SG&A
expenses for the year ended December 31, 2007 were $17.8 million compared to
$15.6 million for the same period in 2006. SG&A expenses as a percent of
revenues was 42% for both the years ended December 31, 2007 and 2006. The
increase in SG&A expenses is primarily the result of the acquisition of
Linkstar which added SG&A expenses of $2.0 million in 2007 and a commission
payment related to the Linkstar acquisition which added SG&A expenses of
$310,000 in 2007.  SG&A expenses for the year ending December 31,
2007 also include an accrual for approximately $285,000 for the waste
remediation at our personal defense and law enforcement aerosol operation in
Vermont and approximately $310,000 of legal, consulting and accounting fees
related to the Florida embezzlement investigation.  If we recover any
of the embezzled funds, such amounts will be recorded as recoveries in future
periods when they are received. The increase was partially offset by a decrease
in costs related to the ongoing immigration investigation. SG&A expenses
include $674,000 of legal, consulting and accounting fees in 2007 relating to
the ongoing immigration investigation as compared to $1.5 million in 2006.
SG&A expenses also include non-cash compensation expense of approximately
$896,000 and $1.36 million in the fiscal years 2007 and 2006, respectively.
Management expects SG&A expenses to increase in the future as the Company
continues to expand its security and digital media marketing
operations.


32




Depreciation
and Amortization





Depreciation
and amortization totaled $1.3 million, $1.2 million and $1.1 million for 2008,
2007 and 2006, respectively. The increase in depreciation and amortization
expense, principally in 2008 and 2007 as compared to 2006, was related to
amortization expense on Linkstar acquired intangible assets.





Costs
of Terminated Acquisitions





Our
policy is to charge as an expense any previously capitalized expenditures
relating to proposed acquisitions that in our current opinion will not be
consummated. There were no such expenses in 2008, 2007 or 2006.





Asset
Impairment Charges





In
accordance with SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets(“SFAS 144”), we periodically review the
carrying value of our long-lived assets held and used, and assets to be disposed
of, for possible impairment when events and circumstances warrant such a review.
Assets classified as held for sale are measured at the lower of carrying value
or fair value, net of costs to sell.





Continuing Operations





In
assessing goodwill for impairment, we first compare the fair value of our
reporting units with their net book value. We estimate the fair value of the
reporting units using discounted expected future cash flows, supported by the
results of various market approach valuation models. If the fair value of the
reporting units exceeds their net book value, goodwill is not impaired, and no
further testing is necessary. If the net book value of our reporting units
exceeds their fair value, we perform a second test to measure the amount of
impairment loss, if any. To measure the amount of any impairment loss, we
determine the implied fair value of goodwill in the same manner as if our
reporting units were being acquired in a business combination. Specifically, we
allocate the fair value of the reporting units to all of the assets and
liabilities of that unit, including any unrecognized intangible assets, in a
hypothetical calculation that would yield the implied fair value of goodwill. If
the implied fair value of goodwill is less than the goodwill recorded on our
balance sheet, we record an impairment charge for the difference.





We
performed extensive valuation analyses, utilizing both income and market
approaches, in our goodwill assessment process. The following describes the
valuation methodologies used to derive the fair value of the reporting
units.





·
            Income Approach: To
      determine fair value, we discounted the expected cash flows of the
      reporting units. The discount rate used represents the estimated weighted
      average cost of capital, which reflects the overall level of inherent risk
      involved in our reporting units and the rate of return an outside investor
      would expect to earn. To estimate cash flows beyond the final year of our
      model, we used a terminal value approach. Under this approach, we used
      estimated operating income before interest, taxes, depreciation and
      amortization in the final year of our model, adjusted to estimate a
      normalized cash flow, applied a perpetuity growth assumption and
      discounted by a perpetuity discount factor to determine the terminal
      value. We incorporated the present value of the resulting terminal value
      into our estimate of fair value.





·
            Market-Based Approach:To corroborate the results of the income approach described above,
      we estimated the fair value of our reporting units using several
      market-based approaches, including the value that we derive based on our
      consolidated stock price as described above. We also used the guideline
      company method which focuses on comparing our risk profile and growth
      prospects to select reasonably similar/guideline publicly traded
      companies.




The
determination of the fair value of the reporting units requires us to make
significant estimates and assumptions that affect the reporting unit’s expected
future cash flows. These estimates and assumptions primarily include, but are
not limited to, the discount rate, terminal growth rates, operating income
before depreciation and amortization and capital expenditures forecasts. Due to
the inherent uncertainty involved in making these estimates, actual results
could differ from those estimates. In addition, changes in underlying
assumptions would have a significant impact on either the fair value of the
reporting units or the goodwill impairment charge.





The
allocation of the fair value of the reporting units to individual assets and
liabilities within reporting units also requires us to make significant
estimates and assumptions. The allocation requires several analyses to determine
fair value of assets and liabilities including, among others, customer
relationships, non-competition agreements and current replacement costs for
certain property, plant and equipment.


33




As of
November 30, 2008, we conducted our annual assessment of goodwill for impairment
for our Security Segment and as of June 30 for our Digital Media Marketing
Segment. We conduct assessments more frequently if indicators of impairment
exists. As of November 30, 2008, we experienced a sustained, significant decline
in our stock price. The Company believes the reduced market capitalization
reflects the financial market’s reduced expectations of the Company’s
performance, due in large part to overall deteriorating economic conditions that
may have a materially negative impact on the Company’s future performance. We
also updated our forecasted cash flows of the reporting units during the fourth
quarter. This update considered current economic conditions and trends;
estimated future operating results, our views of growth rates, anticipated
future economic and regulatory conditions. Additionally, based upon our
procedures, we determined impairment indicators existed at December 31, 2008
relative to our Digital Media Marketing Segment and accordingly, we performed an
updated assessment of goodwill for impairment. Based on the results of our
assessment of goodwill for impairment, the net book value of our Mace Security
Products, Inc. (Florida and Texas operations) reporting unit exceeded its fair
value. Our Digital Media Marketing Segment reporting unit fair value as
determined exceeded its net book value.





With the
noted potential impairment in Mace Security Products, Inc., we performed the
second step of the impairment test to determine the implied fair value of
goodwill. Specifically, we hypothetically allocated the fair value of the
impaired reporting units as determined in the first step to our recognized and
unrecognized net assets, including allocations to intangible assets such as
trademarks, customer relationships and non-competition
agreements.  The resulting implied goodwill was $(5.9) million;
accordingly, we recorded an impairment charge to write off the goodwill of this
reporting unit totaling $1.34 million. We also performed impairment testing of
certain other intangible assets relating to Mace Security Products, Inc.,
specifically, the value assigned to trademarks. We recorded an additional
impairment charge to trademarks of approximately $223,000 related to our
consumer direct electronic surveillance operations and our high end digital and
machine vision cameras and professional imaging component
operations.





In the
fourth quarter of 2007, as a result of our annual impairment test of goodwill
and other intangibles, we recorded a goodwill impairment charge of approximately
$280,000 and an impairment of trademarks of approximately $66,000 related to our
consumer direct electronic surveillance operations and an impairment of
trademarks of approximately $101,000 related to our high end digital and machine
vision cameras and professional imaging components operations, both located in
Texas. Additionally, in the fourth quarter of 2006, as a result of our annual
impairment test of Goodwill and Other Intangibles in accordance with SFAS 142,
we recorded an impairment of goodwill of approximately $105,000 related to our
high end digital and machine vision cameras and professional imaging components
operation in Texas.





In June
2008, management made a decision to discontinue marketing efforts by its
subsidiary, PromoPath, the on-line marketing division of Linkstar, to
third-party customers on a non-exclusive CPA basis, both brokered and through
promotional sites. Management’s decision was the result of business environment
changes in which the ability to maintain non-exclusive third-party relationships
at an adequate profit margin became increasingly difficult. PromoPath will
continue to market and acquire customers for the Company’s e-commerce operation,
Linkstar. As a result of this decision, the value assigned to customer
relationships at the time of the acquisition of PromoPath in accordance with
SFAS 141,Business
Combinations, was determined to be impaired as of June 30, 2008 in that
future undiscounted cash flows relating to this asset were insufficient to
recover its carrying value. Accordingly, in the second quarter of 2008, in
accordance with SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we recorded an impairment charge of
approximately $1.4 million representing the net book value of the PromoPath
customer relationship intangible asset at June 30, 2008.





During
the quarter ended September 30, 2006, we wrote down assets related to a full
service car wash in Fort Worth, Texas by approximately $40,000. During the
quarter ended June 30, 2008, we wrote down assets related to two full service
car washes in Arlington, Texas by approximately $1.2
million.  Additionally, during the quarter ended December 31, 2008, we
wrote down the assets of two of our Arlington, Texas area car wash sites by
approximately $1.0 million. We determined that based on current data utilized to
estimate the fair value of these car wash facilities, the future expected cash
flows would not be sufficient to recover their carrying values.





In the
fourth quarter of 2008, we consolidated the inventory in our Ft. Lauderdale,
Florida warehouse into our Farmers Branch, Texas facility. Certain of our
administrative and sales staff of our Security Segment’s electronic surveillance
products division remain in the Ft. Lauderdale, Florida building which we listed
for sale with a real estate broker. We performed an updated market evaluation of
this property, listing the facility for sale at a price of $1,950,000. We
recorded an impairment charge of $275,000 related to this property at December
31, 2008 to write-down the property to our estimate of net realizable
value.


34





Discontinued Operations





During
the quarter ended September 30, 2006, we wrote down assets related to a full
service car wash in Moorestown, New Jersey, by approximately $40,000.
Additionally, during the quarter ended December 31, 2007, we wrote down assets
related to a full service car wash in San Antonio, Texas by approximately
$180,000.  We also closed the two remaining car wash locations in San
Antonio, Texas in the quarter ended September 30, 2008. In connection with the
closing of these two facilities, we wrote down the assets of these sites by
approximately $310,000 to our estimate of net realizable value based on our plan
to sell the two facilities for real estate value. Additionally, during the
quarter ending December 31, 2008, we closed a full service car wash location in
Lubbock, Texas and wrote down the assets of this site by approximately $670,000
to an updated appraisal value based on our plan to sell this facility for real
estate value. We also wrote down an additional Lubbock, Texas location by
approximately $250,000. We have determined that due to further reductions in car
wash volumes at these sites resulting from increased competition and a
deterioration in demographics in the immediate geographic areas of these sites,
current economic pressures, along with current data utilized to estimate the
fair value of these car wash facilities, future expected cash flows would not be
sufficient to recover their carrying values.





Interest
Expense, Net





Interest
expense, net of interest income, for year ended December 31, 2008 was $102,000,
compared to $378,000 for the year ended December 31, 2007. The decrease in net
interest expense is due to a decrease in interest expense of approximately
$425,000 as a result of decreasing interest rates and a reduction in outstanding
debt due to routine principal payments and repayment of debt related to car wash
site sales, and a decrease in interest income of approximately $149,000 related
to the Company’s decrease in interest rates and in our cash and cash
equivalents.





Interest
expense, net of interest income, for the year ended December 31, 2007 was
$378,000 compared to $701,000 for the year ended December 31, 2006. The decrease
in net interest expense is due to a slight decrease in interest expense of
approximately $46,000 as a result of increasing interest rates offset by a
reduction in outstanding debt due to routine principal payments and an increase
in interest income of approximately $276,000 with the Company’s increase in cash
and cash equivalents.





Other
(Expense) Income





Other
(expense) income was $(2.2) million, $1.0 million and $848,000 for 2008, 2007
and 2006, respectively. The 2008 amount includes $250,000 of earnings on short
term investments offset by a $2.2 million investment loss related to the Victory
Fund, Ltd. hedge fund and a loss of $380,000 on the redemption of a mutual fund
investment in the fourth quarter of 2008. See Liquidity section below. Other
income during 2007 included $752,000 of earnings on short-term investments and
the recovery of a previously written-off acquisition deposit of $150,000. Other
income in 2006 included a $461,000 gain on the sale of a Dallas, Texas car wash
site and $323,000 of earnings on short term investments.





Income
Taxes





We
recorded income tax expense of $100,000, $98,000 and $156,000 for the years
ended December 31, 2008, 2007 and 2006, respectively. Income tax expense
(benefit) reflects the recording of income taxes on loss before income taxes at
effective rates of approximately (.66)%, (1.1)%, and (2.0)% for the years ended
December 31, 2008, 2007, and 2006, respectively.  The effective rate
differs from the federal statutory rate for each year primarily due to state and
local income taxes, non-deductible costs related to intangibles, and changes to
the valuation allowance.





Realization
of the future tax benefits related to the deferred tax assets is dependent upon
many factors, including the Company’s ability to generate taxable income in
future years. The Company performed a detailed review of the considerations
influencing our ability to realize the future benefit of the NOLs, including the
extent of recently used NOLs, the turnaround of future deductible temporary
differences, the duration of the NOL carryforward period, and the Company’s
future projection of taxable income. The Company increased its valuation
allowance against deferred tax assets by $2.6 million in 2006, $3.9 million in
2007 and $4.3 million in 2008 with a total valuation allowance of $15.0 million
at December 31, 2008 representing the amount of its deferred income tax assets
in excess of the Company’s deferred income tax liabilities. The valuation
allowance was recorded because management was unable to conclude that
realization of the net deferred income tax asset was more likely than not. This
determination was a result of the Company’s continued losses, the uncertainty of
the timing of the Company’s transition from the Car Wash business, and the
ultimate extent of growth in the Company’s Security and Digital Media Marketing
Segments.




35




Liquidity
and Capital Resources





Liquidity





Cash,
cash equivalents and short-term investments were $9.3 million at December 31,
2008.  The ratio of our total debt to total capitalization, which
consists of total debt plus stockholders’ equity, was 13.0% at December 31,
2008, and 20.2% at December 31, 2007.The improvements in the
Company’s total debt to total capitalization ratio is directly related to
routine principal payments on debt and the payoff of debt related to the sale of
car and truck wash sites as noted below.





One of
our short-term investments was in a hedge fund, namely the Victory Fund, Ltd. We
requested redemption of this hedge fund investment on June 18, 2008. Under the
Limited Partnership Agreement with the hedge fund, the redemption request was
timely for a return of the investment account balance as of September 30, 2008,
payable ten business days after the end of the September 30, 2008 quarter. The
hedge fund acknowledged that the redemption amount owed was $3,206,748; however,
on October 15, 2008 the hedge fund asserted the right to withhold the redemption
amount due to extraordinary market circumstances. After negotiations, the hedge
fund agreed to pay the redemption amount in two installments, $1,000,000 on
November 3, 2008 and $2,206,748 on January 15, 2009. The Company received the
first installment of $1,000,000 on November 5, 2008.  The Company has
not received the second installment.  On January 21, 2009, the
principal of the Victory Fund, Ltd, Arthur Nadel, was criminally charged with
operating a “Ponzi” scheme.  Additionally, the SEC has initiated a
civil case against Mr. Nadel and others alleging that Arthur Nadel defrauded
investors in the Victory Fund, LLC and five other hedge funds by massively
overstating the value of investments in these funds and issuing false and
misleading account statements to investors. The SEC also alleges that Mr. Nadel
transferred large sums of investor funds to secret accounts which only he
controlled.  A receiver (“Receiver”) has been appointed in the civil
case and has been directed to administer and manage the business affairs, funds,
assets, and any other property of Mr. Nadel (“Defendant”), the Victory Fund, LLC
and the five other hedge funds and conduct and institute such legal proceedings
that benefit of the hedge fund investors.  Accordingly, we recorded a
charge of $2,206,748 as an investment loss at December 31, 2008. If we recover
any of the investment loss, such amounts will be recorded as recoveries in
future periods when received. The original amount invested in the hedge fund was
$2,000,000.





Our
business requires a substantial amount of capital, most notably to pursue our
expansion strategies, including our current expansion in the Security and
Digital Media Marketing Segment. We plan to meet these capital needs from
various financing sources, including borrowings, internally generated funds,
cash generated from the sale of car washes, and the issuance of common stock if
the market price of the Company’s stock is at a desirable level.





As of
December 31, 2008, we had working capital of approximately $16.0 million.
Working capital was approximately $17.8 million and $26.6 million at December
31, 2007 and 2006, respectively. Our positive working capital decreased by
approximately $1.8 million from December 31, 2007 to December 31, 2008,
principally due to the sale of  our six Florida car washes and payoff
of their related mortgage debt recorded as current at December 31, 2007 in the
first quarter of 2008, the $2.2 million investment loss related to the Victory
Fund, Ltd. hedge fund, the impact on working capital of our continuing losses,
and  the reclass from non-current debt to current debt of
approximately $2.3 million of 15-year amortizing loans with Chase secured by
several of our Texas car wash operations and our warehouse facility in Farmers
Branch, Texas as a result of this debt being up for renewal from June 2009
through October 2009. Although we expect that we will be successful in renewing
this debt, or paying off the car wash related mortgage debt with proceeds from
the sale of the car wash facilities, there can be no assurances that this will
occur.





During
the years ended December 31, 2008, 2007 and 2006, we made capital expenditures
of $230,000, $536,000 and $957,000, (including $32,000, $235,000, and $854,000
related to discontinued operations) respectively, within our Car Wash Segment.
We believe our current cash and short-term investment balance at December 31,
2008 of $9.3 million, cash flow from operating activities in 2009, and cash
generated from the sale of our Car Wash operations will be sufficient to meet
our Security, Digital Media Marketing and Car Wash Segment’s capital expenditure
and operating funding needs through at least the next twelve months, and
continue to satisfy our debt covenant requirement with Chase to maintain a total
unencumbered cash and marketable securities balance of $5 million  In
years subsequent to 2009, we estimate that our Car Wash Segment will require
annual capital expenditures of $150,000 to $250,000 depending upon the timing of
the sale of our remaining car wash sites. Capital expenditures within our Car
Wash Segment are necessary to maintain the efficiency and competitiveness of our
sites.  If the cash provided from operating activities does not
improve in 2009 and future years and if current cash balances are depleted, we
will need to raise additional capital to meet these ongoing capital
requirements.





Capital
expenditures for our Security Segment were $438,000, $205,000, and $341,000 for
the fiscal years ending December 31, 2008, 2007 and 2006, respectively. We
estimate capital expenditures for the Security Segment at approximately $50,000
to $100,000 for 2009, principally related to technology and facility
improvements for warehouse production equipment.





We expect
to invest resources in additional products within our e-commerce division. Our
online marketing division will also require the infusion of additional capital
as we grow our new members because our e-commerce customers are charged after a
14 to 21 day trial period while we typically pay our website publishers for new
member acquisitions in approximately 15 days. Additionally, as we introduce new
e-commerce products, upfront capital spending is required to purchase inventory
as well as pay for upfront media costs to enroll new e-commerce
members.


36





We intend
to continue to expend cash for the purchasing of inventory as we grow and
introduce new video surveillance products in 2009 and in years subsequent to
2009. We anticipate that inventory purchases will be funded from cash collected
from sales and working capital.  At December 31, 2008, we maintained
an unused and fully available $500,000 revolving credit facility with Chase to
provide financing for additional video surveillance product inventory purchases.
The amount of capital that we will spend in 2009 and in years subsequent to 2009
is largely dependent on the marketing success we achieve with our video
surveillance systems and components. We believe our cash and short-term
investments balance of $9.3 million at December 31, 2008, the revolving credit
facility, and cash generated from the sale of our car wash operations, will
provide for growth in 2009, and continue to satisfy our debt covenant
requirement with Chase to maintain a total unencumbered cash and marketable
securities balance of $5 million. Unless our operating cash flow improves, our
growth will be limited if we deplete our cash balance.





During
the six months ended December 31, 2008, we implemented company wide cost savings
measures, including a reduction in employees throughout the entire Company, and
began a consolidation of our Security Segment’s electronic surveillance
equipment operations in Ft. Lauderdale, Florida and Farmers Branch, Texas. As
part of this reorganization, we consolidated our security division’s
surveillance equipment warehouse operations into our Farmers Branch, Texas
facility. Our professional security sales and administrative team remained in
Florida with the security catalog sales team being located in Texas. Our
intended goals of the reorganization are to better align our electronic
surveillance equipment sales teams to achieve sales growth; gain efficiencies by
sharing redundant functions within our security operations such as warehousing,
customer service, and accounting services; and to streamline our organization
structure and management team for improved long-term growth. We estimate that
our reorganization within our Security Segment, our Company wide employee
reductions, and other cost saving measures resulted in approximately $2.3
million in annualized savings. This program will continue throughout the first
quarter of 2009. Through December 31, 2008, we incurred approximately $63,000 in
severance costs from employee reductions and expect to incur additional
severance costs as well as costs of physically consolidating the Florida and
Texas security operations in the first quarter of 2009.





As
previously disclosed, on June 27, 2008 Car Care, Inc., a subsidiary of the
Company, paid  a criminal fine of $100,000 and forfeited $500,000 in
proceeds from the sale of four car washes to settle a criminal indictment. A
charge of $600,000 was recorded as a component of income from discontinued
operations for the three months ended March 31, 2008, as prescribed by SFAS 5,
Accounting for
Contingencies.




Shortly
after the Company’s Audit Committee became aware of the now resolved criminal
investigation into the hiring of illegal aliens at four of the Company’s car
washes on March 6, 2006, the Company’s Audit Committee retained independent
outside counsel (“Special Counsel”) to conduct an independent investigation of
the Company’s hiring practices at the Company’s car washes and other related
matters. Special Counsel’s findings included, among other things, a finding that
the Company’s internal controls for financial reporting at the corporate level
were adequate and appropriate, and that there was no financial statement impact
implicated by the Company’s hiring practices, except for a potential contingent
liability. The Company incurred $704,000 in legal, consulting and accounting
expenses associated with the Audit Committee investigations in fiscal 2006 and a
total of $1.7 million ($244,000, $674,000 and $796,000, in fiscal 2008, 2007 and
2006, respectively), in legal fees associated with the governmental
investigation and Company’s defense and negotiations with the government. As a
result of this matter, the Company has incorporated additional internal control
procedures at the corporate, regional and site level to further enhance the
existing internal controls with respect to the Company’s hiring procedures at
the car wash locations to prevent the hiring of undocumented
workers.





As
previously discussed, during January 2008, the Environmental Protection Agency
(“EPA”) conducted a site investigation at the Company’s Bennington, Vermont
location and the building in which the facility is located.  The
Company does not own the building or land and leases 44,000 square feet of the
building from Vermont Mill Properties, Inc (“Vermont
Mill”).   The site investigation was focused on whether hazardous
substances were being improperly stored.  Subsequent to the
investigation and search, the EPA notified the Company and the building owner
that remediation of certain hazardous wastes were required.  The
Company completed the remediation of the waste during September 2008 within the
time allowed by the EPA.  A total cost of approximately $710,000,
which includes disposal of the waste materials, as well as expenses incurred to
engage environmental engineers and legal counsel and the cost of reimbursing the
EPA for its costs, has been recorded through December 31, 2008. Approximately
$593,000 has been paid to date, leaving an accrual balance of $117,000 at
December 31, 2008. The initial accrual of $285,000 recorded at December 31, 2007
was increased by $380,000 in the first quarter and $65,000 in the second quarter
due to there being more hazardous waste to dispose of than originally estimated,
increased cost estimates for additional EPA requirements in handling and
oversight related to disposing of the hazardous waste, and the cost of obtaining
additional engineering reports requested by the EPA. The accrual for waste
disposal was decreased by $27,000 in the third quarter when the final hazardous
materials and waste were disposed of and the actual cost of disposal of the
waste was determined and increased by $7,000 in the fourth quarter due to the
actual cost of preparing final engineering reports exceeding original estimated
costs.





The
United States Attorney for the District of Vermont (“U.S. Attorney”) conducted a
search of the Company’s Bennington, Vermont location and the building in which
the facility is located during February 2008 under a search warrant issued by
the U.S. District Court for the District of Vermont.  On May 2, 2008
the U.S. Attorney issued a grand jury subpoena to the Company.  The
subpoena required the Company to provide the U.S. Attorney documents related to
the storage, disposal and transportation of materials at the Bennington, Vermont
location.  The Company has supplied the documents and fully cooperated
with the U.S. Attorney’s investigation and will continue to do
so.  The Company is unable at this time to determine whether further
action will be taken by the U.S. Attorney or if any charges, fines or penalties
will be imposed on the Company.  The Company has made no provision for
any future costs associated with the investigation.


37




The
Company is a party to various other legal proceedings related to its normal
business activities.  In the opinion of the Company’s management, none
of these proceedings are material in relation to the Company’s results of
operations, liquidity, cash flows, or financial condition.





Despite
our recent operating losses, we believe our cash and short-term investment
balance of approximately $9.3 million at December 31, 2008, cash flow from
operating activities, cash provided from the sale of assets, and the revolving
credit facility will be sufficient to meet its car wash and security operations
capital expenditure and operating funding needs through at least the next twelve
months and provide for growth in 2009, and continue to satisfy our debt covenant
requirement with Chase to maintain a total unencumbered cash and marketable
securities balance of $5 million.





In
December 2004, the Company announced that it was exploring the sale of its car
and truck washes. From December 2005 through March 18, 2009, we sold 37 car
washes and five truck washes with total cash proceeds generated of approximately
$34.5 million, net of pay-off of related mortgage debt. We believe we will be
successful in selling additional car washes and generating cash for funding of
current operating needs and expansion of our Security Segment.  If the
cash provided from operating activities does not improve in 2009 and in future
years and if current cash balances are depleted, we will need to raise
additional capital to meet these ongoing capital requirements.





In the
past, we have been successful in obtaining financing by selling common stock and
obtaining mortgage loans.  Our ability to obtain new financing can be
adversely impacted by our stock price. Our failure to maintain the required debt
covenants on existing loans also adversely impacts our ability to obtain
additional financing. We are reluctant to sell common stock at market prices
below our per share book value.  Our ability to obtain new financing
will be limited if our stock price is not above our per share book value and our
cash from operating activities does not improve. Currently, we cannot incur
additional long term debt without the approval of one of our commercial lenders.
The Company must demonstrate that the cash flow benefit from the use of new loan
proceeds exceeds the resulting future debt service requirements.





Debt
Capitalization and Other Financing Arrangements





At
December 31, 2008, we had borrowings, including capital lease obligations, of
approximately $6.5 million. We had two letters of credit outstanding at December
31, 2008, totaling $831,000 as collateral relating to workers’ compensation
insurance policies.  We maintain a $500,000 revolving credit facility
to provide financing for additional video surveillance product inventory
purchases.  There were no borrowings outstanding under the revolving
credit facility at December 31, 2008. The Company also maintains a $300,000 bank
commitment for commercial letters of credit for the importation of inventory.
There were no outstanding commercial letters of credit under this commitment at
December 31, 2008.





Several
of our debt agreements, as amended, contain certain affirmative and negative
covenants and require the maintenance of certain levels of tangible net worth,
maintenance of certain unencumbered cash and marketable securities balances,
limitations on capital spending and the maintenance of certain debt service
coverage ratios on a consolidated level.





The
Company entered into amendments to the Chase term loan agreements effective
September 30, 2006.  The amended loan agreements with Chase eliminated
the Company’s requirement to maintain a ratio of consolidated earnings before
interest, income taxes, depreciation and amortization to debt service. The Chase
term loan agreements also limit capital expenditures annually to $1.0 million,
requires the Company to provide Chase with a Form 10-K and audited financial
statements within 120 days of the Company’s fiscal year end and a Form 10-Q
within 60 days after the end of each fiscal quarter, and requires the
maintenance of a minimum total unencumbered cash and marketable securities
balance of $5 million. If we are unable to satisfy these covenants and we cannot
obtain waivers, the Chase notes may be reflected as current in future balance
sheets and as a result our stock price may decline. We were in compliance with
these covenants as of December 31, 2008.





If we
default on any of the Chase covenants and are not able to obtain amendments or
waivers of acceleration, Chase debt totaling $5.4 million at December 31, 2008,
including debt recorded as long-term debt at December 31, 2008, could become due
and payable on demand, and Chase could foreclose on the assets pledged in
support of the relevant indebtedness.  If our assets (including up to
eight of our car wash facilities as of December 31, 2008) are foreclosed upon,
revenues from our Car Wash Segment, which comprised 25.1% of our total revenues
for fiscal year 2008 would be severely impacted and we may be unable to continue
to operate our business.  Even if the debt were accelerated without
foreclosure, it would be very difficult for us to continue to and we may go out
of business.




38




The
Company’s ongoing ability to comply with its debt covenants under its credit
arrangements and refinance its debt depends largely on the achievement of
adequate levels of cash flow.  If our future cash flows are less than
expected or our debt service, including interest expense, increases more than
expected causing us to further default on any of the Chase covenants in the
future, the Company will need to obtain further amendments or waivers from
Chase. Our cash flow has been and could continue to be adversely affected by
weather patterns, economic conditions, and the requirements to fund the growth
of our security business. In the event that non-compliance with the debt
covenants should continue to occur, the Company would pursue various
alternatives to attempt to successfully resolve the non-compliance, which might
include, among other things, seeking additional debt covenant waivers or
amendments, or refinancing debt with other financial institutions.  If
the Company is unable to obtain waivers or amendments in the future, Chase debt
currently totaling $5.4 million, including debt recorded as long-term debt at
December 31, 2008, would become payable on demand by the financial institution
upon expiration of its current waiver. There can be no assurance that further
debt covenant waivers or amendments would be obtained or that the debt would be
refinanced with other financial institutions at favorable terms. If we are
unable to obtain renewals on maturing loans or refinancing of loans on favorable
terms, our ability to operate would be materially and adversely
affected.
 
 The
Company is obligated under various operating leases, primarily for certain
equipment and real estate within the Car Wash Segment.  Certain of
these leases contain purchase options, renewal provisions, and contingent
rentals for our proportionate share of taxes, utilities, insurance, and annual
cost of living increases.
 
 The
following are summaries of our contractual obligations and other commercial
commitments at December 31, 2008, including debt related to discontinued
operations and liabilities related to assets held for sale (in
thousands):
  Payments Due By PeriodContractual Obligations  (1)
                          
                          Total
                          
                          
                          Less than
                            One Year
                          
                          
                          One to Three
                            Years
                          
                          
                          Three to Five
                            Years
                          
                          
                          More Than
                            Five YearsLong-term
      debt (2)
                          
                          $
                          6,452
                          
                          
                          $
                          3,292
                          
                          
                          $
                          1,524
                          
                          
                          $
                          1,636
                          
                          
                          $
                          -Minimum
      operating lease  payments
                          
                          
                          3,673
                          
                          
                          
                          811
                          
                          
                          
                          1,342
                          
                          
                          
                          865
                          
                          
                          
                          655$
                          10,125
                          
                          
                          $
                          4,103
                          
                          
                          $
                          2,866
                          
                          
                          $
                          2,501
                          
                          
                          $
                          655
 
 Amounts Expiring Per PeriodOther Commercial Commitments
                          
                          Total
                          
                          
                          Less Than
                            One Year
                          
                          
                          One to Three
                            Years
                          
                          
                          Three to Five
                            Years
                          
                          
                          More Than
                            Five YearsLine
      of credit  (3)
                          
                          $
                          –
                          
                          
                          $
                          –
                          
                          
                          $
                          –
                          
                          
                          $
                          –
                          
                          
                          $
                          –Standby
      letters of credit  (4)
                          
                          
                          831
                          
                          
                          
                          831
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –$
                          831
                          
                          
                          $
                          831
                          
                          
                          $
                          –
                          
                          
                          $
                          –
                          
                          
                          $
                          –
 (1)   Potential
amounts for inventory ordered under purchase orders are not reflected in the
amounts above as they are typically cancelable prior to delivery and, if
purchased, would be sold within the normal business cycle.
 (2)   Related
interest obligations have been excluded from this maturity schedule. Our
interest payments for the next twelve month period, based on current market
rates, are expected to be approximately $344,000.
 (3)   The
Company maintains a $500,000 line of credit with Chase. There were no borrowings
outstanding under this line of credit at December 31, 2008.
 (4)   The
Company also maintains a $300,000 bank commitment for commercial letters of
credit with Chase for the importation of inventory. There were no outstanding
commercial letters of credit under this commitment at December 31, 2008.
Additionally, outstanding letters of credit of $831,000 represent collateral for
workers’ compensation insurance policies.
 
 Cash
Flows
 
 Operating Activities.Net
cash used in operating activities totaled $6.5 million for the year ended
December 31, 2008. Cash used in operating activities in 2008 was primarily due
to a net loss from continuing operations of $15.1 million, which included
$626,000 in non-cash stock-based compensation charges from continuing
operations, $1.3 million of depreciation and amortization expense and asset
impairment charges of $5.4 million. Cash was also impacted by a decrease in
accounts payable of $2.1 million, a decrease in accounts receivable of $1.1
million and a decrease in inventory of $1.3 million.
 
 Net cash
used in operating activities totaled $9.3 million for the year ended December
31, 2007. Cash used in operating activities in 2007 was primarily due to a net
loss from continuing operations of $8.8 million, which included $896,000 in
non-cash stock-based compensation charges and $1.2 million of depreciation and
amortization. Cash was also impacted by a decrease in accounts payable and
accrued expenses of $1.4 million and an increase in inventory of $2.3 million.
Net cash used in operating activities totaled $3.1 million for the year ended
December 31, 2006. Cash used in operating activities in 2006 was primarily due
to a net loss from continuing operations of $8.2 million offset partially by
$1.4 million in non-cash stock based compensation charges and $2.4 million of
cash provided by discontinued operations.


39




Investing
Activities.  Cash provided by investing activities totaled
approximately $9.5 million for the year ended December 31, 2008, which includes
cash provided by investing activities from discontinued operations of $8.3
million related to the sale of six  car wash sites in the year ended
December 31, 2008, capital expenditures of $684,000 related to ongoing
operations and proceeds of approximately $1.9 million from the sale of a Dallas,
Texas car wash site.





Cash
provided by investing activities totaled approximately $15.1 million for the
year ended December 31, 2007, which includes cash provided by investing
activities from discontinued operations of $22.4 million related to the sale of
24 car wash sites and five truck washes in the year ended December 31, 2007
offset by the acquisition of Linkstar Interactive, Inc. of $6.9 million.
Investing activity in 2007 also included capital expenditures of $301,000
related to ongoing car wash operations, $252,000 for Security Segment
operations, Digital Media Marketing operations and Corporate and $237,000 for
discontinued operations. Cash provided by investing activities totaled
approximately $1.5 million for the year ended December 31, 2006, which includes
capital expenditures of $103,000 related to ongoing car wash operations and
proceeds of approximately $1.85 million from the sale of a Dallas, Texas car
wash site, $353,000 for Security Segment operations and Corporate, and $806,000
for discontinued operations and proceeds of approximately $1.0 million from the
sale of our Deptford, New Jersey site.





Financing
Activities.  Cash used in financing activities was
approximately $2.8 million for the year ended December 31, 2008, which includes
$1.4 million of routine principal payments on debt from continuing
operations, $1.2 million of debt paid off related to the Dallas, Texas car wash
sold, and $299,000 of routine principal payments on debt related to discontinued
operations.





Cash used
in financing activities was approximately $1.8 million for the year ended
December 31, 2007, which includes $713,000 of routine principal payments on debt
from continuing operations and $1 million from routine principal payments on
debt related to discontinued operations. Cash used in financing activities was
approximately $2.7 million for the year ended December 31, 2006, which includes
$1.2 million of routine principal payments on debt related to continuing
operations and $1.5 million of routine principal payments on debt related
to discontinued operations.





Seasonality
and Inflation





The
Company believes that its car washing and detailing operations are adversely
affected by periods of inclement weather.  In particular, long periods
of rain and cloudy weather adversely affect our car wash volumes and related
lube and other automotive services as people typically do not wash their cars
during such periods.  Additionally, extended periods of warm, dry
weather, usually encountered during the Company’s third quarter, may encourage
customers to wash their cars themselves which also can adversely affect our car
wash business.  The Company has attempted to mitigate the risk of
unfavorable weather patterns in the past by having operations in diverse
geographic regions.  The Company does not believe its security or
digital media marketing operations are subject to seasonality.





The
Company believes that inflation and changing prices have not had, and are not
expected to have, a material adverse effect on its results of operations in the
near future.





Summary
of Critical Accounting Policies





The
discussion and analysis of our financial condition and results of operations is
based upon the Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States.  The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities at the date of the Company's financial
statements.  Actual results may differ from these estimates under
different assumptions or conditions.





Critical
accounting policies are defined as those that are reflective of significant
judgments and uncertainties, and potentially result in materially different
results under different assumptions and conditions.  The Company’s
critical accounting policies are described below.


40





Revenue
Recognition and Deferred
Revenue





The
Company’s recognizes revenue in accordance with Staff Accounting Bulletin
(“SAB”) No. 104, Revenue
Recognition in Financial Statements. Under SAB No. 104, the Company
recognizes revenue when the following criteria have been met: persuasive
evidence of an arrangement exists, the fees are fixed and determinable, no
significant obligations remain and collection of the related receivable is
reasonably assured. Allowances for sales returns, discounts and allowances, are
estimated and recorded concurrent with the recognition of the sale and are
primarily based on historical return rates.





Revenues
from the Company’s Security Segment are recognized when shipments are made and
title has passed, and are recorded net of sales returns and
discounts.





Revenues
from the Company’s Digital Media Marketing Segment are recognized in accordance
with Staff Accounting Bulletin SAB No. 104, Revenue Recognition in Financial
Statements. The e-commerce division recognizes revenue and the related
product costs for trial product shipments after the expiration of the trial
period. Marketing costs incurred by the e-commerce division are recognized as
incurred. The online marketing division recognizes revenue and cost of sales
consistent with the provisions of the Emerging Issues Task Force (“EITF”) Issue
No. 99-19, Reporting Revenue
Gross as a Principal versus Net as an Agent, the Company records revenue
based on the gross amount received from advertisers and the amount paid to the
publishers placing the advertisements as cost of sales.





Revenues
from the Company’s Car Wash Segment are recognized, net of customer coupon
discounts, when services are rendered or fuel or merchandise is
sold.  The Company records a liability for gift certificates, ticket
books, and seasonal and annual passes sold at its car care locations but not yet
redeemed.  The Company estimates these unredeemed amounts based on
gift certificate and ticket book sales and redemptions throughout the year, as
well as utilizing historical sales and tracking of redemption rates per the car
washes’ point-of-sale systems. Seasonal and annual passes are amortized on a
straight-line basis over the time during which the passes are
valid.





Shipping
and handling costs related to the Company’s Security Segment of $669,000 ,
$713,000 and $745,000 in the years ending December 31, 2008, 2007 and 2006,
respectively are included in selling, general and administrative (SG&A)
expense. Shipping and handling costs related to the Digital Media Marketing
Segment of $1.4 million and $384,000 are included in SG&A expenses for the
years ended December 31, 2008 and 2007, respectively.





Accounts
Receivable


The
Company’s accounts receivable are due from trade customers.  Credit is
extended based on evaluation of customers’ financial condition and, generally,
collateral is not required.  Accounts receivable payment terms vary
and amounts due from customers are stated in the financial statements net of an
allowance for doubtful accounts.  Accounts outstanding longer than the
payment terms are considered past due.  The Company determines its
allowance by considering a number of factors, including the length of time trade
accounts receivable are past due, the Company’s previous loss history, the
customer’s current ability to pay its obligation to the Company, and the
condition of the general economy and the industry as a whole.  The
Company writes off accounts receivable when they are deemed uncollectible, and
payments subsequently received on such receivables are credited to the allowance
for doubtful accounts. Risk of losses from international sales within the
Security Segment are reduced by requiring substantially all international
customers to provide either irrevocable confirmed letters of credit or cash
advances.


Inventories


Inventories
are stated at the lower of cost or market.  Cost is determined using
the first-in first-out (FIFO) method for security, e-commerce and car care
products.  Inventories at the Company’s car wash locations consist of
various chemicals and cleaning supplies used in operations and merchandise and
fuel for resale to consumers.  Inventories within the Company’s
Security Segment consist of defense sprays, child safety products, electronic
security monitors, cameras and digital recorders, and various other consumer
security and safety products. Inventories within the e-commerce division of the
Digital Media Marketing segment consist of several health and beauty products.
The Company continually and at least on a quarterly basis reviews the book value
of slow moving inventory items, as well as, discontinued product lines to
determine if inventory is properly valued. The Company identifies slow moving or
discontinued product lines by a detail review of recent sales volumes of
inventory items as well as a review of recent selling prices versus cost and
assesses the ability to dispose of inventory items at a price greater than cost.
If it is determined that cost is less than market value, then cost is used for
inventory valuation. If market value is less than cost, than an adjustment is
made to the Company’s obsolescence reserve to adjust the inventory to market
value. When slow moving items are sold at a price less than cost, the difference
between cost and selling price is charged against the established obsolescence
reserve.


41





Advertising
and Marketing Costs





The
Company expenses advertising costs in its Security and Car Wash Segments,
including advertising production cost, as the costs are incurred or the first
time the advertisement appears. Marketing costs in the Company’s Digital Media
Marketing Segment, which consist of the costs to acquire new members for its
e-commerce business, are expensed as incurred rather than deferred and amortized
over the expected life of a customer, based on the Company’s application of
Statement of Position (“SOP”) 93-7. Under SOP 93-7, a company could capitalize
and amortize direct-response advertising costs in a stable, established market
where a company can demonstrate a history of profitability in the related
product or advertising campaign. The Company’s determination is that neither the
history nor stable market criteria are currently met.





Impairment
of Long-Lived Assets





In
accordance with SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we periodically review the carrying value
of our long-lived assets held and used, and assets to be disposed of, when
events and circumstances warrant such a review. If significant events or changes
in circumstances indicate that the carrying value of an asset or asset group may
not be recoverable, we perform a test of recoverability by comparing the
carrying value of the asset or asset group to its undiscounted expected future
cash flows. Cash flow projections are sometimes based on a group of assets,
rather than a single asset. If cash flows cannot be separately and independently
identified for a single asset, we determine whether an impairment has occurred
for the group of assets for which we can identify the projected cash flows. If
the carrying values are in excess of undiscounted expected future cash flows, we
measure any impairment by comparing the fair value of the asset group to its
carrying value. If the fair value of an asset or asset group is determined to be
less than the carrying amount of the asset or asset group, an impairment in the
amount of the difference is recorded.





Goodwill





Goodwill
represents the premium paid over the fair value of the net tangible and
intangible assets we have acquired in business combinations.  SFAS No.
142, Goodwill and Other
Intangible Asset (“SFAS 142”), requires the Company to perform a goodwill
impairment test on at least an annual basis. Application of the goodwill
impairment test requires significant judgments including estimation of future
cash flows, which is dependent on internal forecasts, estimation of the
long-term rate of growth for the businesses, the useful life over which cash
flows will occur and determination of our weighted average cost of
capital.  Changes in these estimates and assumptions could materially
affect the determination of fair value and/or conclusions on goodwill impairment
for each reporting unit.  The Company conducts its annual goodwill
impairment test as of November 30 for its Security Segment and as of June 30 for
its Digital Media Marketing Segment, or more frequently if indicators of
impairment exist.  We periodically analyze whether any such indicators
of impairment exist.  A significant amount of judgment is involved in
determining if an indicator of impairment has occurred. Such indicators may
include a sustained, significant decline in our share price and market
capitalization, a decline in our expected future cash flows, a significant
adverse change in legal factors or in the business climate, unanticipated
competition and/or slower expected growth rates, among others.  The
Company compares the fair value of each of its reporting units to their
respective carrying values, including related goodwill.  Future
changes in the industry could impact the results of future annual impairment
tests.  Goodwill at December 31, 2008 and 2007 was $6.9 million and
$8.2 million, respectively.  There can be no assurance that future
tests of goodwill impairment will not result in impairment charges. See Note 5 Goodwill.





Other
Intangible Assets





Other
intangible assets consist primarily of deferred financing costs, non-compete
agreements, customer lists, software costs, product lists and trademarks. In
accordance with SFAS 142, Goodwill and Other Intangible
Assets, our trademarks are considered to have indefinite lives, and as
such, are not subject to amortization. These assets are tested for impairment
using discounted cash flow methodology annually and whenever there is an
impairment indicator. Estimating future cash flows requires significant judgment
and projections may vary from cash flows eventually realized. Several impairment
indicators are beyond our control, and determining whether or not they will
occur cannot be predicted with any certainty. Customer lists, product lists,
software costs, patents and non-compete agreements are amortized on a
straight-line or accelerated basis over their respective assigned estimated
useful lives.





Income
Taxes





Deferred
income taxes are determined based on the difference between the financial
accounting and tax bases of assets and liabilities. Deferred income tax expense
(benefit) represents the change during the period in the deferred income tax
assets and deferred income tax liabilities. In establishing the provision for
income taxes and deferred income tax assets and liabilities, and valuation
allowances against deferred tax assets, the Company makes judgments and
interpretations based on enacted laws, published tax guidance and estimates of
future earnings. Deferred income tax assets include tax loss and credit
carryforwards and are reduced by a valuation allowance if, based on available
evidence, it is more likely than not that some portion or all of the deferred
income tax assets will not be realized.


42




Stock-Based
Compensation





The
Company has two stock-based employee compensation plans.  The Company
follows SFAS 123(R), Share-Based Payment, which
requires that the compensation cost relating to share-based payment transactions
be recognized in financial statements. The cost is recognized as compensation
expense on a straight-line basis over the vesting period of the instruments,
based upon the grant date fair value of the equity or liability instruments
issued. Total stock compensation expense is approximately $629,000 for the year
ended December 31, 2008, ($626,000 in SG&A expense and $3,000 in
discontinued operations); $924,000 for the year ended December 31, 2007,
($896,000 in SG&A expense and $28,000 in discontinued operations), and $1.39
million for the year ended December 31, 2006, ($1.36 million in SG&A
expense, $15,000 in cost of revenues, and $13,000 in discontinued
operations).





The
Company expects the application of SFAS 123(R) to result in stock compensation
expense and therefore a reduction of income before income taxes in 2009 of
approximately $200,000 to $250,000. The Company’s actual stock compensation
expense in 2009 could differ materially from this estimate depending on the
timing, magnitude and vesting of new awards, the number of new awards and
changes in the market price or the volatility of the Company’s common
stock.





ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS





We are
not materially exposed to market risks arising from fluctuations in foreign
currency exchange rates, commodity prices, or equity prices.





Interest
Rate Exposure





With the
payoff of the Arizona fixed rate mortgages in the second quarter of 2007, nearly
100% of the Company’s debt at December 31, 2008, including debt related to
discontinued operations, is at variable rates. Substantially all of our variable
rate debt obligations are tied to the prime rate, as is our incremental
borrowing rate. A one percent increase in the prime rates would not have a
material effect on the fair value of our variable rate debt at December 31,
2008. The impact of increasing interest rates by one percent would be an
increase in interest expense of approximately $97,000 in 2008.





On
October 14, 2004, we entered into an interest rate cap that effectively changes
our interest rate exposure on approximately $7 million of variable rate debt.
The variable rate debt floats at prime plus .25. The interest rate cap contract
had a 36-month term and capped the interest rate on the $7 million of variable
rate debt at 6.5%. The contract expired at September 30, 2007.





ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





The
reports of independent registered public accounting firm and Consolidated
Financial Statements are included in Part IV, Item 15 of this
Report.





ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE




None.





ITEM 9A(T).
            CONTROLS AND
      PROCEDURES





(a)
Disclosure Controls and Procedures





The
Company’s disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act, is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules, and include
controls and procedures designed to ensure that such information is accumulated
and communicated to the Company’s management, including its
principal  executive and financial officers, to allow timely decisions
regarding required disclosure. Based on the evaluation of the effectiveness of
the Company’s disclosure controls and procedures as of December 31, 2008
required by Rule 13a-15(b) under the Exchange Act and conducted by the Company’s
Chief Executive Officer and Chief Financial Officer, such officers concluded
that the Company’s disclosures controls and procedures were effective as of
December 31, 2008.


43





(b)
Management’s Annual Report on Internal Control over Financial
Reporting





The
management of Mace Security International, Inc. and its subsidiaries is
responsible for establishing and maintaining adequate internal control over
financial reporting. With the participation of the Principal Executive Officer
and the Principal Financial Officer, management has evaluated the effectiveness
of its internal control over financial reporting as of December 31, 2008. Based
on such evaluation, management has concluded that Mace Security International,
Inc.’s internal control over financial reporting is effective as of December 31,
2008. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control-Integrated
Framework. This annual report does not include an attestation report of
the Company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.





Changes
in Internal Control Over Financial Reporting and Remediation
Actions





The
Company’s management, including its Chief Executive Officer and Chief Financial
Officer, have concluded that during the quarter ended December 31, 2008, there
were no changes in the Company’s internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect the
Company’s internal control over financial reporting.





ITEM 9B.
            OTHER
      INFORMATION





None.




PART
III





ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





DIRECTORS


Name
                          
                          Age
                          
                          PositionJohn
      C. Mallon
                          
                          73
                          
                          Director,
      Chairman of the BoardDennis
      R. Raefield
                          
                          61
                          
                          Director,
      President and Chief Executive OfficerMark
      S. Alsentzer
                          
                          53
                          
                          DirectorGerald
      T. LaFlamme
                          
                          69
                          
                          DirectorConstantine
      N. Papadakis, Ph.D
                          
                          63
                          
                          Director


All of
Mace’s directors serve for terms of one year each until their successors are
elected and qualified.  All of the above directors were elected on
December 11, 2008.


Dennis R. Raefieldhas served
as a director since October 16, 2007 and as President and Chief Executive
Officer since August 18, 2008. From April 2007 to the August 17, 2008, Mr.
Raefield was the President of Reach Systems, Inc. (formerly Edge Integration
Systems, Inc.) (a manufacturer of security access control systems). From
February 2005 to February 2006, Mr. Raefield was President of Rosslare Security
Products, Inc. (a manufacturer of diverse security products).  From
February 2004 to February 2005, Mr. Raefield was President of NexVision
Consulting (security business consultant).  From January 2003 to
February 2004, Mr. Raefield was President of Ortega InfoSystems (a software
developer).  From October 1998 to November 2002, Mr. Raefield was
President of Ademco and Honeywell Access Systems (a division of Honeywell, Inc.
that manufactured access control systems).





Mark S. Alsentzerhas served
as a director since December 15, 1999.  From January 2006 to the
present, Mr. Alsentzer has been the Chief Executive Officer and Director of Pure
Earth, Inc.  From December 1996 to October 2005, Mr. Alsentzer was a
director of U.S. Plastic Lumber Corporation (a plastic lumber and recycling
company).  From December 1996 to July 2004, Mr. Alsentzer was the
President and Chief Executive Officer of U.S. Plastic Lumber Corporation (a
plastic lumber and recycling company).  From 1992 to December 1996,
Mr. Alsentzer was Vice President of Republic Environmental System, Inc. (an
environmental services company).  On July 23, 2004, U.S. Plastic
Lumber Corporation filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code. At the time of the Chapter 11 filing, Mark S. Alsentzer
was Chairman, President and Chief Executive Officer of U.S. Plastic Lumber
Corporation. Mr. Alsentzer is no longer Chairman, a director, President or Chief
Executive Officer of U.S. Plastic Lumber Corporation.




44


Gerald T. LaFlammehas served
as a director since December 14, 2007. From May 20, 2008 to August 18, 2008, Mr.
LaFlamme served as interim Chief Executive Officer of the Company. From 2004 to
the present, Mr. LaFlamme has been President of JL Development Company, Inc. (a
real estate development and consulting company).  From 2001 to 2004,
Mr. LaFlamme was Senior Vice President and CFO of Davidson Communities, LLC (a
regional home builder).  From 1978 to 1997, Mr. LaFlamme was Area
Managing Partner for Ernst & Young, LLP, and a predecessor accounting firm
in San Diego, CA.  Mr. LaFlamme is a director and Chairman of the
Audit Committee of Arlington Hospitality Inc.  On August 31, 2005,
Arlington Hospitality Inc. filed a voluntary petition under Chapter 11 of the
United States Bankruptcy Code. At the time of the Chapter 11 filing, Mr.
LaFlamme was a director.





John C. Mallonhas served as a
director since December 14, 2007 and as Chairman of the Board since May 20,
2008. From 1994 to the present, Mr. Mallon has been the Managing Director of
Mallon Associates (an investment bank and broker specializing in the security
industry).  From 1994 to 2006, Mr. Mallon was the Editor and Publisher
of Mallon’s Security Investing and Mallon’s Security Report (financial
newsletters tracking more than 250 public security companies).  Mr.
Mallon is a director of and Chairman of the Audit Committee of Good Harbor
Partners Acquisition Corporation (a public special purpose acquisition
corporation focusing on acquisitions in the global security
market).  Mr. Mallon is a director of and Chairman of the Board of IBI
Armored Services, Inc. (a privately held national armored trucking, and money
processing company). Mr. Mallon is also an attorney admitted to practice in the
states of New York and Connecticut and before the Federal Court.





Constantine N. Papadakis, Ph.D.has served as a director since May 24, 1999.  From 1995 to the
present, Dr. Papadakis has been the President of Drexel
University.  From 1986 to 1995, Dr. Papadakis was Dean of the College
of Engineering at the University of Cincinnati.  Dr. Papadakis is a
director of Met-Pro Corporation, Amkor Technology, Inc., Aqua America, Inc.,
CDI, Inc., The Executive Committee of the Greater Philadelphia Chamber of
Commerce, the Opera Company of Philadelphia, the National Commission for
Cooperative Education, and the World Trade Center of Philadelphia.





EXECUTIVE
OFFICERS


Name
                    
                    Age
                    
                    PositionDennis
      R. Raefield
                    
                    61
                    
                    President
      and Chief Executive OfficerRobert
      M. Kramer
                    
                    56
                    
                    Executive
      Vice President, General Counsel and SecretaryGregory
      M. Krzemien
                    
                    49
                    
                    Chief
      Financial Officer and
Treasurer





Dennis R. Raefieldhas served
as President and Chief Executive Officer since August 18, 2008.  From
April 2007 to August 17, 2008, Mr. Raefield was the President of Reach Systems,
Inc. (formerly Edge Integration Systems, Inc.) (a manufacturer of security
access control systems). From February 2005 to February 2006, Mr. Raefield was
President of Rosslare Security Products, Inc. (a manufacturer of diverse
security products).  From February 2004 to February 2005, Mr. Raefield
was President of NexVision Consulting (security business
consultant).  From January 2003 to February 2004, Mr. Raefield was
President of Ortega InfoSystems (a software developer).  From October
1998 to November 2002, Mr. Raefield was President of Ademco and Honeywell Access
Systems (a division of Honeywell, Inc. that manufactured access control
systems).


Robert M. Kramer has served as
Executive Vice President, General Counsel, and Secretary of the Company since
May 1999, and as Chief Operating Officer of the Car Wash Segment from July 2000
to July 2006. Mr. Kramer also served as a director of the Company from May 1999
to December 2003. From June 1996 through December 1998, he served as General
Counsel, Executive Vice President and Secretary of Eastern Environmental
Services, Inc.  Mr. Kramer is an attorney and has practiced law since
1979 with various firms, including Blank Rome Comisky & McCauley,
Philadelphia, Pennsylvania and Arent Fox Kitner Poltkin & Kahn, Washington,
D.C.  From 1989 to December 2000, Mr. Kramer had been the sole partner
of Robert M. Kramer & Associates, P.C. From December 1989 to December 1997,
Mr. Kramer served on the Board of Directors of American Capital Corporation, a
registered securities broker dealer.  Mr. Kramer received B.S. and
J.D. degrees from Temple University.
  Gregory M. Krzemien has served
as the Chief Financial Officer and Treasurer of the Company since May
1999.  From August 1992 through December 1998, he served as Chief
Financial Officer and Treasurer of Eastern Environmental Services,
Inc.  From October 1988 to August 1992, Mr. Krzemien was a senior
audit manager with Ernst & Young LLP.  Mr. Krzemien received a
B.S. degree in Accounting from the Pennsylvania State University.
 
 CORPORATE
GOVERNANCE
 
 Audit
Committee and Audit Committee Financial Expert
 
 The Board
of Directors has determined that Gerald T. LaFlamme, the Chairman of the
Company’s Audit Committee, is an audit committee financial expert as defined by
Item 407(d)(5)(ii) of Regulation S-K of the Exchange Act.  The Company
has a separately designated standing Audit Committee established in accordance
with Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee
are Gerald T. LaFlamme, Chairman, Mark S. Alsentzer, and Constantine N.
Papadakis, Ph.D. The Board of Directors has determined that each member of the
Audit Committee is independent within the meaning of Rule 4200(a)(15) of the
National Association of Securities Dealers’ Nasdaq Global Market listing
standards and Rule 10A-3 promulgated under the Securities Exchange Act of
1934.  The Charter of the Audit Committee is posted on our website at
www.mace.com.


45


Section
16(a) Beneficial Ownership Reporting Compliance
 
 Section
16(a) of the Exchange Act requires Mace’s directors and executive officers, as
well as persons beneficially owning more than 10% of Mace’s outstanding shares
of common stock and certain other holders of such shares (collectively, “Covered
Persons”), to file with the SEC and the Nasdaq Stock Market (the “Nasdaq”),
within specified time periods, initial reports of ownership, and subsequent
reports of changes in ownership, of common stock and other equity securities of
Mace. Based upon Mace’s review of copies of such reports furnished to it and
upon representations of Covered Persons that no other reports were required, to
Mace’s knowledge, all of the Section 16(a) filings required to be made by the
Covered Persons with respect to 2008 were made on a timely basis, except that a
Form 4 Report required to be filed within two business days of a stock purchase
by John Mallon was filed late by five days.
 
 Code
of Ethics and Corporate Governance
 
 The
Company has adopted a Code of Ethics and Business Conduct for directors,
officers (including the chief executive officer, chief financial officer, and
chief accounting officer), and employees. The Code of Ethics and Business
Conduct is posted on our website at www.mace.com.
 
 The Board
of Directors adopted Corporate Governance Guidelines. Stockholders are
encouraged to review the Corporate Governance Guidelines at our website at www.mace.com for
information concerning the Company’s governance practices. Copies of the
charters of the committees of the Board are also available on the Company’s
website.


Nominating
Committee





The
Corporation has a Nominating Committee composed of all independent
directors.  The Nominating Committee has a charter that is available
for inspection on the Company’s website, www.mace.com under
the heading of Investors Relations. The Nominating Committee considers
candidates for Board membership suggested by its members, other Board members,
and management.  The Nominating Committee will also consider
recommendations by stockholders of nominees for directors to be elected at the
Company’s annual meeting of stockholders, if they are received on or before
September 1 of the year of the meeting. In evaluating nominations received from
stockholders, the Committee will apply the same criteria and follow the same
process used to evaluate candidates recommended by members of the Nominating
Committee. Stockholders wishing to recommend a nominee for director are to
submit such nomination in writing, along with any other supporting materials the
stockholder deems appropriate, to the Secretary of the Company at the Company’s
offices at 240 Gibraltar Road, Suite 220, Pennsylvania Business Campus, Horsham,
Pennsylvania 19044. There were no material changes to the procedures by which
stockholders may recommend nominees to the Company’s board of directors in
2008.


ITEM
      11.
              EXECUTIVE
      COMPENSATION
 
 COMPENSATION
DISCUSSION AND ANALYSIS


Introduction.The
Compensation Committee is responsible for developing the Company’s philosophy
and structure for executive compensation.  Consistent with this
philosophy, on an annual basis the Compensation Committee reviews and sets the
compensation for the Chief Executive Officer (“CEO”), Chief Financial Officer
(“CFO”), the Executive Vice President, General Council (“EVP”) and the Chief
Accounting Officer (“CAO”) Unless noted below, the following executive officers
(the “Named Executive Officers”) have been the Executive Officers of the Company
during calendar year 2008 to present:





(a)
                Dennis
      R. Raefield, the President and CEO, August 18, 2008 to
      present;
 (b)
                Gerald
      T. LaFlamme, the Interim CEO, from May 20, 2008 to August 18,
      2008;


(c)
                Louis
      D. Paolino, Jr., the Chairman of the Board, CEO, and President, from
      January 1, 2008 to May 20,
2008;


(d)
              Gregory
      M. Krzemien, CFO and Treasurer;
 (e)
              Robert
      M. Kramer, the EVP and General Counsel;
and


46





The
Company’s executive compensation program is based on principles designed to
align executive compensation with the Company’s business strategy of creating
wealth for its shareholders and creating long-term value for the
business.  The Compensation Committee believes in establishing base
executive compensation which is comparable to the median base compensation paid
by comparable companies with bonuses tied to the execution of business
strategies approved by the Board.  It is the Company’s philosophy to
evaluate its executive compensation structure with other companies of
comparative size, type and geographic scope.  The Company’s
compensation policy for executives is intended to further the interests of the
Company and its stockholders by encouraging growth of its business through
securing, retaining, and motivating management employees of high caliber who
possess the skills necessary to the development and growth of the
Company.  This was especially true in 2008, as the Company was in the
process of selling its car washes, focusing its energy on the Security Segment
and developing its digital media marketing business.
 
 The
Company terminated the services of Louis D. Paolino, Jr. as CEO on May 20,
2008.  Gerald LaFlamme was Interim CEO from May 20, 2008 to August 18,
2008.  The Company selected Dennis R. Raefield as its CEO as of August
18, 2008.  The Compensation Committee believes that the Company’s
current management team is experienced and capable.


Compensation and
Benefits Philosophy.The compensation and
benefits programs for the Executive Officers are designed with the goal of
providing compensation and benefits that are fair, reasonable and
competitive.  The programs are intended to help the Company recruit
and retain qualified executives, motivate executive performance to achieve
specific strategic objectives of the Company, and align the interests of
executive management with the long-term interests of the Company’s
stockholders.





The
design of specific programs is based on the following guiding
principles:


Competitiveness:
Compensation and benefit programs are designed to be competitive with those
provided by companies with whom we compete for talent.  In general,
programs are considered competitive when all factors of a job are considered
with compensation levels at the 50th percentile as measured against these
competitor companies.





Performance:
The Company believes that the best way to accomplish the alignment of
compensation plans with the interest of its executives and shareholders is to
link pay directly to individual and Company performance.
 
 Cost:
Compensation and benefit programs are designed to be cost-effective and
affordable, ensuring that the interests of the Company’s stockholders are
considered.  This is especially critical during this time of
transition, as we cannot afford to add executives to strengthen our
“bench.”
 
 Comparator
Group: The relevant comparator group for compensation and benefit programs
consists primarily of companies of comparative size, similar businesses and
geographic scope.  These are the firms with which the Company competes
for talent.  The comparator group was chosen to include companies with
similar market capitalization, similar revenue size, direct competitors, and
also included some companies in areas where the Company intended to do business
in the future.


The
comparator companies used when establishing the compensation for Mr. Paolino’s
August 21, 2006 Employment Contract and Mr. Krzemien’s and Mr. Kramer’s February
12, 2007 Employment Contracts were:


Abatix
      Corporation
                    DHB
      Industries
                    Markwest
      Energy PartAble
      Laboratories
                    Devcon
      International
                    NumerexAdams
      Respiratory
                    ECC
      Capital Corp.
                    Pacific
      Ethanol ProveAllied
      Defense Group
                    Emtec
      Inc.
                    RAE
      SystemsAmerican
      Science Engineering
                    Hansen
      Natural Corporation
                    Strattec
      Security Corp.Atlas
      America
                    Integrated
      Alarm Services Corp.
                    SunoptaBoss
      Holdings
                    Inphonic
      Inc.
                    Sunpower
      CorpCeradyne
                    Identix
                    Taser
      InternationalCogent
                    Ionatron
                    TherapeuticsCohu
                    Kaanapali
      Land LLC
                    Versar
      Inc.Compudyne
                    Lojack
      Corp.
                    Vicon
      IndustriesDatatec
      Systems
                    MGP
      Ingredients
                    Viisage
      TechnologyWaste
      Services,
Inc.


47





In
addition to the comparator group above, Compensation Resources, Inc., the
Company’s compensation consultant used in connection with Mr. Paolino’s 2006
Employment Contract and Mr. Krzemien’s and Mr. Kramer’s 2007 Employment
Contracts, examined a much broader group of companies in varied industries with
a similar financial profile as Mace.  This group included 120
companies, and the findings from the larger sample indicated that our peer group
was statistically relevant.


The
comparator group used by the Company was modified in December
2007.  The reason for the modification was to select companies that
the Compensation Committee believed were more closely aligned to the
Company.  The Hay Group, the Company’s compensation consultant used
the comparator companies set forth below in connection with determining the
second option grant made to Mr. Paolino under Mr. Paolino’s Employment Agreement
dated August 21, 2006.


Command
      Security Corp
                Lasercard
      Corp
                Taser
      International, Inc.Goldleaf
      Financial Solutions
                Looksmart
      Ltd
                Think
      Partnership, Inc.Innodata
      Isogen, Inc.
                Napco
      Security Systems, Inc
                Track
      Data CorpKintera,
      Inc.
                RAE
      Systems, Inc.
                Tumbleweed
      Comm. CoVersar,
      Inc.





Roles,
Responsibilities and Charter of the Committee.The primary
purpose of the Compensation Committee is to conduct reviews of the Company’s
general executive compensation policies and strategies, oversee and evaluate the
Company’s overall compensation structure and programs and establish the
compensation for the Executive Officers.  The Compensation Committee’s
direct responsibilities include, but are not limited
to:


·
              Determining
      and approving the compensation level of the
CEO;
 ·
              Evaluating
      and approving compensation levels of the other Executive
      Officers;
 ·
              Evaluating
      and approving all grants of equity-based compensation to Executive
      Officers;
 ·
              Recommending
      to the Board compensation policies for non-employee directors;
      and
 ·
              Designing
      performance-based and equity-based incentive plans for the CEO and other
      Executive Officers and reviewing other benefit programs presented to the
      Compensation Committee by the
CEO.





In
December 2007, the Committee retained the firm of Hay Group as its compensation
consultant to assist in the continual development and evaluation of compensation
policies and the Compensation Committee’s determinations of compensation
awards.  The role of Hay Group is to provide independent, third party
advice and expertise in executive compensation issues.


Overall Program
Components.The key components of the Company’s executive
compensation package are direct compensation and company-sponsored benefit
plans.  These components are administered with the goal of providing
total compensation that recognizes meaningful differences in individual
performance, is competitive, varies the opportunity based on individual and
corporate performance, and is valued by the Company’s executives.  The
Company seeks to achieve its compensation objectives through five key
compensation elements:


·
              A
      base salary;
 ·
              Structured
      performance bonuses (with respect to Mr. Paolino’s Employment Contract),
      Periodic (generally annual) grants of long-term, equity-based compensation
      (i.e., longer-term incentives), such as stock options, which may be
      subject to performance-based and/or time-based vesting
      requirements;
 ·
              Change
      of control arrangements that are designed to retain executives and provide
      continuity of management in the event of an actual or threatened change of
      control;


·
              Special
      awards and/or bonuses for duties that are above and beyond the normal
      scope of duties for a given executive;
and
 ·
              Perquisites
      and benefits.





Competitive
Consideration.In making compensation decisions with respect
to each element of compensation, the Compensation Committee considers the
competitive market for executives and compensation levels provided by comparable
companies. The Compensation Committee regularly reviews the compensation
practices at companies with which it competes for talent, including businesses
engaged in activities similar to those of the Company, as noted in the list
above.
  The
Compensation Committee does not attempt to set each compensation element for
each executive within a particular range related to levels provided by industry
peers or the comparator group.  The Compensation Committee does use
market comparisons as one factor in making compensation
decisions.  Some of the other factors considered when making
individual executive compensation decisions include individual contribution and
performance, reporting structure, internal pay relationship, complexity and
importance of role and responsibilities, leadership and growth
potential.


48


Executive
Compensation Practices.  The Company’s practices with respect
to each of the five key compensation elements identified above, as well as other
elements of compensation, are set forth below, followed by a discussion of the
specific factors considered in determining key elements of fiscal year 2008
compensation for the Named Executive Officers.





Base
Salary. Base salary is designed to attract and retain
experienced executives who can drive the achievement of the Company’s business
goals. Mr. Raefield became the Company’s CEO on August 18, 2008.  Mr.
Raefield’s base salary was arrived at by negotiation.  Mr. Raefield
requested a base salary of $450,000 and after negotiation agreed to a base
salary of $375,000, a one time signing fee of $50,000 and up to $5,000 for
reimbursement of legal fees incurred in negotiating and reviewing his employment
agreement. The Compensation Committee felt that Mr. Raefield’s security industry
experience warranted the agreed upon base salary and the one time
payments.  Mr. Raefield’s agreed upon salary was less than the base
salary of $450,000 that had been paid to Mr. Paolino, the former CEO. Base
salaries were generally targeted slightly above the median of the competitive
market for the CEO  and slightly under the median for Mr. Krzemien and
Mr. Kramer.  Mr. Krzemien and Mr. Kramer did not receive any increase
in base salary during 2008. While an executive’s initial base salary is
determined through an assessment of comparative market levels for the position,
the major factors in determining base salary increases are individual
performance, pertinent experience, an increase in responsibility and the
profitability of the Company.  Executives who are new to a role have
their base salaries set with reference to market median.  If the new
executive has significant experience the base salary may be set above market
median.





The
minimum salary for the CEO, CFO, and General Counsel are established by
employment agreement.  The amount of any increase over this minimum
for the CEO, CFO and General Counsel, are determined by the Compensation
Committee based on a variety of factors, including:


·
              The
      nature and responsibility of the position and, to the extent available,
      salary norms for persons in comparable positions at comparable
      companies;


·
              The
      expertise of the individual
executive;
 ·
              The
      competitiveness of the market for the executive’s
  services;
 ·
              The
      recommendations of the CEO (except in the case of his own
      compensation);


·
              The
      amount of structured bonuses paid under the executive’s Employment
      Contract (in the case of Mr. Paolino);
and


·
              The
      success of the Company in achieving the goals established by the Board of
      Directors.


·
              Where
      not specified by contract, salaries are generally reviewed
      annually.





Annual Incentives
for Named Executive Officers.  There was no formal incentive
plan in place for 2008 that rewards the Named Executive Officers for annual
results.  The Employment Agreement between the Company and Mr.
Raefield entered into on July 29, 2008, provided that Mr. Raefield and the
Company were required to develop a mutually acceptable annual bonus plan for Mr.
Raefield, within forty-five (45) days from the date of the Employment
Agreement.  No annual bonus plan for Mr. Raefield was proposed by the
Compensation Committee for 2008 within the required time frame or to date. It is
the opinion of the Compensation Committee that, due to the current nature of the
business, the Company’s current operating losses, the Company’s entry into the
digital media marketing business and the Company’s exit from the car wash
segment, an Annual Incentive Plan and appropriate goal setting, during this time
of reorganization, is extremely difficult, and could potentially reward
non-desired behaviors.  Therefore, we believe that equity
participation provides a better line of sight and rewards the executives for
increasing shareholder value and long-term growth of the
Company.  However, it is the intent of the Committee to implement a
formal Annual Incentive Plan in the future.  The Annual Incentive Plan
would be designed to focus on key financial, operational, and individual
goals.  Implementation of a formal incentive plan may occur in
2009.
 
 Under the
terms of Mr. Paolino’s August 21, 2006 Employment Contract, he was entitled to a
Mergers and Acquisition Transaction Bonus (“Transaction Bonus”) as a reward for
his efforts in acquiring new business lines, and divesting those businesses that
no longer fit the strategic plan for the Company.  This Transaction
Bonus was 1% of the transaction value of any car wash sold, and 3% of the value
of any other businesses bought or sold.  The 3% reward was reduced by
any fees paid to an investment banker hired by the Company where the investment
banker located the transaction and conducted all negotiations (no deduction is
made for any fairness opinion fee).  Transaction Bonuses totaled
$124,969 and $637,000 in 2008 and 2007, respectively. The Company’s 2006
Compensation Committee believed that the Company would save significantly by
providing a Transaction Bonus to the CEO, and thereby avoiding the larger fees
that would be paid to an Investment Banking Firm that specializes in this area.
The 2006 Compensation Committee decided to reward and encourage acquisitions and
divestitures through the structured Transaction Bonus.





The
Compensation Committee has discretion to provide bonuses to the Executive
Officers for exceptional results, special circumstances, and other
non-quantitative measures.  In 2008, no annual bonuses, special awards
or recognition were granted by the Compensation Committee, and none of the
Executive Officers received any annual incentive payments, other than the
Transaction Bonus paid to Mr. Paolino under the terms of his Employment
Contract.
 49


Long-term
Incentive Compensation. The long-term equity-based award is
designed to attract and retain executives and certain other key employees, and
to strengthen the link between compensation and increased returns for
stockholders through share price appreciation.  The Company uses stock
options as its long-term incentive compensation.  Awards granted to
individual executives are discretionary and may be made annually under the
Company’s 1999 Stock Option Plan (the “Option Plan”).  The number of
shares granted is at the discretion of the Compensation Committee and are
generally awarded each year for the previous year’s performance, or when the
Company conducts a market-based review to ensure compensation is in line with
the outside world.  The options are typically subject to a ten-year
life and vest per the terms of each option agreement.  Options are
issued at the market closing price for the Company’s common stock on the date
the option is authorized.  The value of each option is not adjusted
during the option’s lifetime.
 
 The
Company has adopted a policy on stock option grants that includes the following
provisions relating to the timing of option grants:


·
              All
      awards of stock options to Executive Officers are awarded by the
      Compensation Committee or when each Executive Officer’s compensation and
      performance is reviewed by the Compensation
  Committee.
 ·
              All
      awards of stock options to employees who are not Executive Officers are
      awarded by the Compensation Committee based on the Executive Officer’s
      recommendations after review by the Compensation
  Committee.
 ·
              Option
      grants are not timed with the release of material non-public
      information.
 ·
              Except
      for inducement grants for new employees, Executive Officers recommend an
      award of stock options based on a review of the employee’s performance and
      compensation.
 ·
              The
      grant date of the stock options is always the date the Compensation
      Committee authorizes the grant or a date in the
  future.
 ·
              The
      exercise price is the closing price of the underlying common stock on the
      grant date authorized by the Compensation
  Committee.
 ·
              Stock
      option awards for Executive Officers are promptly announced on a Form 4
      filing.


The
long-term incentive program calls for stock options to be granted with exercise
prices of not less than fair market value of the Company’s stock on the date of
authorization and to vest over time, based on continued employment, with rare
exceptions made by the Compensation Committee.  The Compensation
Committee will not grant stock options with exercise prices below the market
price of the Company’s stock on the date of authorization.  New option
grants to Executive Officers normally have a term of ten years.
 
 Long-term
equity grants are positioned at or below the median of the competitive market
when performance is at target levels.  When performance falls below
target levels, funding will be below the market median or
eliminated.  When performance exceeds target levels, funding may be
above the market median.
 
 Overall
grant levels are at the discretion of the Compensation Committee.  The
size of individual long-term equity based awards is determined using
compensation guidelines developed based on individual performance.
 
 Fiscal Year 2008
Stock Option Decisions.In fiscal 2008, as part of hiring Mr.
Raefield, the Compensation Committee awarded Mr. Raefield a vested option for
250,000 shares of the Company’s Common Stock.  The option is
exercisable at $1.50 per share.  The Black-Scholes value of the
awarded option was $235,824.  The median long term incentive
compensation of chief executive officers, as set forth in the Hay 2007 Report
was $243,257.
 
 The
Compensation Committee believed that the option award was warranted due to the
award being below the median of long term incentive compensation granted to
chief executive officers, as stated in the Hay 2007 Report. Mr. Raefield’s total
direct compensation under his employment agreement was below the median total
direct compensation market consensus for chief executive officers, as set forth
in the Hay 2007 Report.
 
 Mr.
Kramer and Mr. Krzemien were each awarded an option for 40,000 shares on March
25, 2008 at a per share exercise price of $1.44 per share, vesting one half
immediately and the balance one year from the date of grant.  The
Black-Scholes value of the option for 40,000 shares was
$31,459.  According to a report of the Hay Group finalized on March
31, 2008, the value of the option was below the median of long term incentive
compensation received by Chief Financial Officers and Executive Vice
Presidents/General Counsels.  The Compensation Committee, in an effort
to conserve cash, decided not to increase the base salaries of Mr. Krzemien or
Mr. Kramer for 2008.  The Compensation Committee decided that an award
of options would be appropriate to provide incentive to Mr. Krzemien and Mr.
Kramer for 2008.
 50


Mr.
Paolino’s Employment Contract provided that he was to receive an option grant
within five days of August 21, 2007, based on a market
assessment.  The amount of option shares which were required to be
granted are determined by the Company’s Compensation Committee, based on a
current compensation study of the Chief Executive Officer position. The amount
of option shares, at time of grant, plus the $450,000 annual compensation paid
to Mr. Paolino, is equal to no less than the “market consensus total direct
compensation” amount paid by comparable companies to their Chief Executive
Officers, as set forth in a compensation study to be obtained by the
Compensation Committee. The Compensation Committee obtained the Hay 2007 Report,
a compensation study for the Chief Executive Officer position from the Hay Group
dated December 12, 2007. The Hay 2007 Report indicated that the median market
consensus for Total Direct Compensation was $722,834 and the 75th
percentile market consensus for total direct compensation was $970,238. The
Compensation Committee decided to award Mr. Paolino with an amount of options
that would equal $335,800 in Black-Scholes value.  On February 22,
2008, Mr. Paolino was issued 300,000 options in satisfaction of the employment
contract obligation.  Mr. Paolino objected to the size of the option
grant, taking the position that an option for more shares should have been
granted.  To satisfy the objection of Mr. Paolino, the Company issued
Mr. Paolino and, Mr. Paolino accepted, an additional option for 35,000 shares on
March 25, 2008.  Both options were fully vested on the date of the
grant.  The option agreements relating to the two option grants,
provided that the options may only be exercised within ninety days after a
termination for cause, as defined under the option agreements.  The
Company has taken the position that Mr. Paolino was terminated for cause, as
defined in the options agreements and that the two described options are no
longer exercisable.
 
 Change of Control
Arrangements.The Employment Agreement between the Company and Mr.
Raefield entered into on July 29, 2008 did not contain a provision for payments
triggered by a change in control, but does require certain payments if Mr.
Raefield is terminated without cause. The Company entered into a change of
control arrangement with Mr. Paolino in 2006 and with Mr. Kramer and Mr.
Krzemien in 2007.  The Company entered into the arrangements in order
to encourage the executives to remain employed with the Company during a period
when the Company is changing its business from the car wash industry to the
security business and e-commerce business. The Compensation Committee was
concerned that the uncertain atmosphere could result in Mr. Paolino, Mr. Kramer,
and Mr. Krzemien seeking employment at another company. The 2006 and 2007
Compensation Committee believed that it was important to retain its key
executives as the Company transitioned its business.
 
 Mr.
Paolino’s change in control payment was linked to the single trigger of a change
of control event. Mr. Paolino’s change of control payment was 2.99 times his
five-year average compensation. The Compensation Committee believed that it was
appropriate for the Chief Executive Officer to have a single trigger, which
would result in a change of control payment. The 2.99 amount was selected as it
was under the threshold of the amount where an excise tax under Section 280G of
the Internal Revenue Code would be imposed. Compensation Resources, Inc., the
Company’s compensation consultant, advised the Compensation Committee that a
payment of 2.99 times total compensation was prudent, and that a single trigger
was used among companies in the comparator group. To receive the change of
control payment, Mr. Paolino must be employed by the Company at the time the
change of control occurs.  Additionally, if Mr. Paolino was paid the
change of control payment, he could have then been discharged by the Company,
without cause, with no further payment.
 
 Mr.
Kramer’s and Mr. Krzemien’s payments are linked to three separate events. Mr.
Kramer and Mr. Krzemien receive a one-time payment of their base annual salary
(currently $230,000) in the event that both a change of control occurs and Mr.
Paolino no longer is Chief Executive Officer of the Company (“Double
Trigger”).   As Mr. Paolino was terminated as Chief Executive
Officer of the Company on May 20, 2008, only one trigger remains on Mr. Kramer’s
and Mr. Krzemien’s change of control payment.  After the Double
Trigger occurs, if the Company chooses to terminate Mr. Kramer or Mr. Krzemien,
respectively, or the Company breaches their respective employment agreement, the
affected Executive Officer would receive an additional one-time payment of his
base annual salary (“Triple Trigger”). The Compensation Committee, after
consultation with Compensation Resources, Inc., believed the lesser payment and
the Double Trigger and Triple Trigger was sufficient to encourage the retention
of Mr. Kramer and Mr. Krzemien.


Termination
Payment Provisions for Mr. Raefield.The Employment Agreement
between the Company and Mr. Raefield entered into on July 29, 2008, provides
that Mr. Raefield can be terminated by the Board of Directors for cause, as set
forth in the Raefield Employment Agreement, without any severance or other
payment.  The Board of Directors can also terminate Mr. Raefield
without cause, upon a payment of two times Mr. Raefield’s current annual base
salary.  Mr. Raefield is prohibited from competing with the Company
during his period of employment and for a one year period following a
termination of employment.  The Company is obligated to pay Mr.
Raefield $375,000 in exchange for the one year obligation not to compete, if Mr.
Raefield is employed through August 18, 2011 and the Company and Mr. Raefield do
not enter into a new employment agreement within sixty days after August 18,
2011.


Change of Control
Provision for Mr. Paolino.Louis D. Paolino, Jr., in
August 2006, received a new three-year employment contract. Upon a change in
control, Mr. Paolino was entitled to a payment of 2.99 times Mr. Paolino’s
average total compensation (base salary plus any bonuses plus the value of any
option awards, valued using the Black Scholes method) over the past five years.
If Mr. Paolino received the change of control payment, his employment could have
been terminated by the Company without cause and with no further payment. Prior
to a change of control payment, the Company was entitled to terminate Mr.
Paolino, without cause upon the payment of 2.99 times Mr. Paolino’s five-year
average total compensation. The Company computes the 2.99 payment as of December
31, 2007 as $3,851,000.  The Company terminated Mr. Paolino on May 20,
2008 asserting that it had cause for the termination.  Mr. Paolino, in
an arbitration claim he has filed against the Company, is asserting that the
Company did not have cause for his termination and he is seeking to enforce the
termination payment under the 2.99 formula.


51


Change of Control
Provision for Mr. Krzemien.Mace currently employs Gregory M.
Krzemien, its CFO and Treasurer, under an employment contract entered into on
February 12, 2007. Under the employment contract, Mr. Krzemien is entitled to
receive a one time retention payment equal to his then annual base compensation
upon the occurrence of both of: (a) a change in control of the Company; and (b)
Louis D. Paolino, Jr. ceasing to be the CEO of the Company. Additionally, after
Mr. Krzemien is paid the retention payment, he is entitled to receive a
termination payment equal to his then annual base compensation, if his
employment contract is terminated without cause, or if the Company breaches his
employment contract. As of December 31, 2008, the annual base compensation of
Mr. Krzemien was $230,000. If a change of control occurred on the date of this
Annual Report, Mr. Krzemien would have received a retention payment of $230,000.
Additionally, if on the date of this Annual Report, a change in control
occurred, and the Company decided to either terminate Mr. Krzemien without cause
or the Company breached Mr. Krzemien’s employment contract, Mr. Krzemien would
have been paid a total of $460,000.
 
 Change of Control
Provision for Mr. Kramer.Mace currently employs Robert Kramer, its EVP
and General Counsel, under an employment contract entered on February 12, 2007.
Under the employment contract, Mr. Kramer is entitled to receive a one-time
retention payment equal to his then annual base compensation upon the occurrence
of both of: (a) a change in control of the Company and (b) Louis D. Paolino, Jr.
ceasing to be the CEO of the Company. Additionally, after Mr. Kramer is paid the
retention payment, he is entitled to receive a termination payment equal to his
then annual base compensation, if his employment contract is terminated without
cause, or if the Company breaches his employment contract. As of December 31,
2008, the annual base compensation of Mr. Kramer was $230,000. If a change of
control had occurred on the date of this Annual Report, Mr. Kramer would have
received a retention payment of $230,000. Additionally, if on the date of this
Annual Report, a change in control had occurred and the Company decided to
either terminate Mr. Kramer without cause or the Company breached Mr. Kramer’s
employment contract, Mr. Kramer would have been paid a total of
$460,000.
 
 Benefits and
Perquisites.With limited exceptions, the Committee supports
providing benefits and perquisites to the Executive Officers that are
substantially the same as those offered to other officers of the
Company.   In fiscal 2008, Mr. Paolino was entitled to $1,500 per
month car allowance. Mr. Kramer and Mr. Krzemien as of February 12, 2007 became
entitled to a $700 per month car allowance. Mr. Raefield in his employment
agreement is entitled to receive a company vehicle for his personal use, having
a lease cost of no more then $800 per month starting August 18,
2008.


Total
Compensation.In making decisions with respect to elements of an
Executive Officers’ compensation, the Compensation Committee considers the total
compensation of the executive, including salary, special awards/bonus and
long-term incentive compensation. In addition, in reviewing and approving
employment agreements for Executive Officers, the Compensation Committee
considers all benefits to which the officer is entitled by the agreement,
including compensation payable upon termination of the agreement.  The
Compensation Committee’s goal is to award compensation that is reasonable when
all elements of potential compensation are considered.
 
 Policy with
respect to the $1 million deduction limit.Section 162(m) of
the Internal Revenue Code generally disallows a tax deduction to public
corporations for compensation over $1,000,000 paid for any fiscal year to the
corporation’s Principal Executive Officer and the four other most highly
compensated executive officers as of the end of the fiscal year. However, the
statute exempts qualifying performance-based compensation from the deduction
limit if certain requirements are met.
  The
Compensation Committee designs certain components of Executive Officer
compensation to permit full deductibility. The Compensation Committee believes,
however, that shareholder interests are best served by not restricting the
Compensation Committee’s discretion and flexibility in crafting compensation
programs, even though such programs may result in certain non-deductible
compensation expenses. Accordingly, the Compensation Committee has from time to
time approved elements of compensation for certain officers that are not fully
deductible, and reserves the right to do so in the future in appropriate
circumstances.
 
 Compensation
Committee Report
 
 The
Compensation Committee of the Company’s Board of Directors consists of directors
Constantine N. Papadakis, Ph.D, and John C. Mallon of whom the Board has
determined are independent pursuant to the Nasdaq Stock Market, Inc.’s
Marketplace Rules.  This report shall not be deemed incorporated by
reference into any filing under the Securities Act or the Exchange Act, by
virtue of any general statement in such filing incorporating the Form 10-K by
reference, except to the extent that the Company specifically incorporates the
information contained in this section by reference, and shall not otherwise be
deemed filed under either the Securities Act or the Exchange Act.
 
 The
Compensation Committee has reviewed and discussed with management the Executive
Compensation Discussion and Analysis contained in this Form 10-K Annual Report
for year ended December 31, 2008. Based on the review and discussions, the
Compensation Committee recommended to the Board of Directors that the Executive
Compensation Discussion and Analysis be included in this Annual Report on Form
10-K.





52





The
Compensation Committee of the Board of Directors


Constantine N. Papadakis,
Ph.D.
 John C. Mallon
 
 EXECUTIVE
COMPENSATION TABLES AND NARRATIVES
 
 The
following table provides summary information concerning cash and certain other
compensation paid or accrued by Mace to, or on behalf of the Named Executive
Officers for the years ended December 31, 2008, 2007 and 2006.


SUMMARY COMPENSATION TABLE(1)Name and Principal
                                                                                                              Position
                                                                                                            
                                                                                                            Year
                                                                                                            
                                                                                                            Salary
                                                                                                              ($)
                                                                                                            
                                                                                                            
                                                                                                            Bonus ($)(4)
                                                                                                            
                                                                                                            
                                                                                                            Option
                                                                                                              Awards
                                                                                                              ($) (5)
                                                                                                            
                                                                                                            
                                                                                                            All
                                                                                                              Other
                                                                                                              Compensation
                                                                                                              ($) (6)
                                                                                                            
                                                                                                            
                                                                                                            TotalDennis R. Raefield. (2)
                                                                                                            
                                                                                                            2008
                                                                                                            
                                                                                                            $
                                                                                                            129,808
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            50,000
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            225,975
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            6,767
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            412,550President
      and Chief
                                                                                                              Executive
      OfficerGerald T. LaFlamme (3)
                                                                                                            
                                                                                                            2008
                                                                                                            
                                                                                                            $
                                                                                                            64,000
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            64,000Interim
      ChiefExecutive
      OfficerLouis D. Paolino, Jr.
                                                                                                            
                                                                                                            2008
                                                                                                            
                                                                                                            $
                                                                                                            190,385
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            124,969
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            27,526
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            7,615
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            350,495Chairman
      of the Board,
                                                                                                              President
      and Chief
                                                                                                              Executive
      Officer2007
                                                                                                            
                                                                                                            $
                                                                                                            450,000
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            637,000
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            415,630
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            19,545
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            1,522,1752006
                                                                                                            
                                                                                                            $
                                                                                                            417,307
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            790,119
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            26,728
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            1,234,154Robert M. Kramer
                                                                                                            
                                                                                                            2008
                                                                                                            
                                                                                                            $
                                                                                                            230,000
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            27,526
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            8,400
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            265,926Executive
      Vice President, General Counsel and Secretary2007
                                                                                                            
                                                                                                            $
                                                                                                            227,308
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            109,721
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            7,431
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            344,4602006
                                                                                                            
                                                                                                            $
                                                                                                            210,000
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            70,812
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            4,070
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            284,882Gregory M. Krzemien
                                                                                                            
                                                                                                            2008
                                                                                                            
                                                                                                            $
                                                                                                            230,000
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            27,526
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            8,400
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            265,926Chief
      Financial Officer and Treasurer2007
                                                                                                            
                                                                                                            $
                                                                                                            225,962
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            101,742
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            7,731
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            335,4352006
                                                                                                            
                                                                                                            $
                                                                                                            200,000
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            56,650
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            1,809
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            258,459





53





(1)
              The
      Company (i) granted no restricted stock awards, and (ii) maintained no
      other long-term incentive plan for any of    the Named
      Executive Officers, in each case during the fiscal years ended December
      31, 2008, 2007 and 2006.  Additionally, the Company has never
      issued any stock appreciation rights
(SARs).


(2)
              Dennis
      R. Raefield became President and Chief Executive Officer on August 18,
      2008.
 (3)
              Gerald
      T. LaFlamme served as interim Chief Executive Officer from May 20, 2008 to
      August 18, 2008.


(4)
                Mr.
      Raefield’s employee agreement provided for a $50,000 signing fee.
      Additionally, transaction bonuses were paid to Mr. Paolino during 2007 and
      2008 under the terms of his Employment
Contract.


(5)
              The
      amounts in this column reflect the dollar amount recognized for financial
      statement reporting purposes, including the impact of estimated for
      forfeitures, for the fiscal years ended December 31, 2008, 2007 and 2006,
      in accordance with SFAS 123(R) for all existing stock option awards and
      thus include amounts from awards granted in and prior to 2008. Assumptions
      used in the calculation of this amount are included in Note 2 to the
      Company’s Audited Financial Statements for the fiscal year ended December
      31, 2008.
 (6)
              Mr.
      Raefield received a car at a lease cost of $791 per month beginning in
      August 2008 and received a reimbursement of legal expenses of $2,812
      related to review of his employment contract. Mr. Paolino received a car
      at a lease cost of $1,500 per month through May 2007 and a car allowance
      upon expiration of his then current car lease of $1,500 per month
      beginning in June 2008 for the remainder of 2007 and through May 2008. Mr.
      Paolino also received a discount of $439, $1,545 and $8,728 on the
      purchase of security products from the Company during the fiscal years
      ended December 31, 2008, 2007 and 2006, respectively. Mr. Krzemien and Mr.
      Kramer received reimbursement for certain commuting expenses in 2006 and
      car allowances in 2007 and 2008. Additionally, during the first half of
      2007 and in 2006 the Company allowed Mr. Paolino’s assistant to aid him
      with his personal business, which had no incremental cost to the
      Company.


Dennis
R. Raefield Employment Agreement


Dennis R.
Raefield serves as the Company’s President and Chief Executive Officer under an
Employment Contract dated July 29, 2008 and expiring on August 18, 2011
(“Raefield Employment Agreement”).  Mr. Raefield’s base salary is
$375,000 annually.  As a one time incentive to execute the Raefield
Employment Agreement, Mr. Raefield was paid $50,000 and received a reimbursement
of legal expenses of $2,812 related to review of his employment
contract.





In
accordance with the Raefield Employment Agreement, Mr. Raefield has received an
option grant on July 30, 2008 exercisable into 250,000 shares of common stock at
an exercise price of $1.50 per share (“First Option”).  The First
Option was issued fully vested.  Mr. Raefield is to receive a second
option grant exercisable for 250,000 shares (“Second Option”) on July 26,
2009.  The Second Option is to vest over two years, with the first
125,000 option shares vesting 12 months from the date of grant and the second
125,000 option shares vesting 24 months from the date of grant.  The
Second Option will fully vest upon a change in control of the
Company.





54





The
Raefield Employment Agreement provides that Mr. Raefield and the Company are
required to develop a mutually acceptable annual bonus plan for Mr. Raefield,
within forty-five (45) days from the date of the Employment
Agreement.   No annual bonus plan was agreed upon for
2008.  The bonus plan is to be designed to provide profitability
targets for the Company, that if achieved will allow the Mr. Raefield to earn
annual bonuses of between thirty percent (30%) to fifty percent (50%) of his
base salary; if any bonus is paid under the annual bonus plan, and the Company
thereafter restates its financial statements such that the bonus or a portion
thereof would not have been earned based on the restated financial statements,
Mr. Raefield shall be obligated to repay to the Company the bonus he received or
portion thereof. The Raefield Employment Agreement further provides that Mr.
Raefield can be terminated by the Board of Directors for cause without any
severance or other payment.  The Board of Directors can also terminate
Mr. Raefield without cause, upon a payment of two times Mr. Raefield’s current
annual base salary.





Mr.
Raefield has also been provided a Company vehicle at a lease cost of
approximately $791 per month, plus all maintenance costs and Company standard
medical and other employee benefits. Mr. Raefield is prohibited from competing
with the Company during his period of employment and for a one year period
following a termination of employment.  The Company is obligated to
pay Mr. Raefield $375,000 in exchange for the one year non-compete obligation if
Mr. Raefield is employed through August 18, 2011 and the Company and Mr.
Raefield do not enter into a new employment agreement within sixty days after
August 18, 2011.





Louis
D. Paolino, Jr. Employment Agreement


Mace
employed Louis D. Paolino, Jr., as its President and Chief Executive Officer
under a three-year Employment Contract dated August 21, 2006 and expiring on
August 21, 2009 (“Paolino Employment Agreement”). The Company terminated Mr.
Paolino’s employment on May 20, 2008.  Before entering into the
Paolino Employment Agreement, the Company obtained a Compensation Study from
Compensation Resources, Inc., an independent third party consulting
firm.


The
initial base salary under the Paolino Employment Agreement was $450,000. The
Paolino Employment Agreement provides for three separate option grants to Mr.
Paolino for common stock under Mace’s 1999 Stock Option Plan at an exercise
price equal to the close of market on the date of grant. The first grant was
issued on August 21, 2006, and was an option exercisable into 450,000 shares of
common stock at an exercise price of $2.30. The second options grant (“Second
Grant”) was to have been awarded within five days of the August 21, 2007 (this
award in the amount of 300,000 was made on February 22, 2008).  Mr.
Paolino objected to the size of the Second Grant, taking the position that an
option for more shares should have been granted.  To satisfy the
objection of Mr. Paolino, the Company issued Mr. Paolino an additional option
for 35,000 shares on March 25, 2008.  Both options were fully vested
on the date of the grant.  The option agreements relating to the three
option grants described above, provided that the options may only be exercised
within ninety days after a termination for cause, as defined in the option
agreements.  The Company has taken the position that Mr. Paolino was
terminated for cause, as defined in the options agreements and that the three
described options are no longer exercisable.
 
 The
Paolino Employment Agreement provided for a third option grant (“Third Grant”)
that was to have been awarded within five days of August 21, 2008. The Third
Grant was not awarded as the Paolino Employment Agreement was
terminated.
 
 The
annual options issued to Mr. Paolino under the Paolino Employment Agreement were
required to be in an amount based on a formula administered by the Company’s
Compensation Committee.  The formula was based on a current
compensation study of the Principal Executive Officer position. The amount of
the annual option shares, at time of grant, plus the $450,000 annual
compensation paid to Mr. Paolino, was to equal no less than the “market
consensus total direct compensation,” amount paid by the comparable companies to
their chief executive officers, as set forth in a compensation study to be
obtained by the Compensation Committee. The options with respect to each of the
grants were to be fully vested on the date of the grant.


Under the
Paolino Employment Agreement, Mr. Paolino received a bonus of (a) one percent
(1%) of the sales price of any car washes sold (excepting one car wash under
contract on the date of the Paolino Employment Agreement and which has been
sold); and (b) three percent (3%) of the purchase or sale price of any other
business sold or purchased. The three percent (3%) amount was reduced by the
amount of any fee paid to an investment banker hired by the Company where the
investment banker located the transaction and conducted all negotiations. The
three percent (3%) commission was not reduced for fees paid to any investment
banker for a fairness opinion or other valuation.  In 2008 and 2007,
the described bonus paid to Mr. Paolino was $124,969 and $637,000,
respectively.





55





Upon
termination of employment by the Company without cause or upon a change in
control, Mr. Paolino was entitled to a payment of 2.99 times Mr. Paolino’s
average total compensation (base salary plus any bonuses plus the value of any
option award, valued using the Black-Scholes method) over the past five years.
If Mr. Paolino received the change of control bonus, his employment could then
be terminated by the Company without cause and without the payment of a second
2.99 times payment. The Company computed the 2.99 payment as of December 31,
2007 as $3,851,000.  The Company terminated Mr. Paolino on May 20,
2008 asserting that it had cause for the termination.  Mr. Paolino, in
an arbitration claim he has filed against the Company, is asserting that the
Company did not have cause for his termination and he is seeking to enforce the
termination payment under the 2.99 formula.


Under the
Paolino Employment Agreement, Mr. Paolino received a car at a lease cost of
$1,500 per month and Company standard medical and other employee benefits. Mr.
Paolino was prohibited from competing with the Company during his period of
employment and for a three-month period following a termination of
employment.
 
 Gregory
M. Krzemien Employment Agreement
 
 Mace
currently employs Gregory M. Krzemien as its CFO and Treasurer under an
Employment Contract dated February 12, 2007 and expiring on February 12, 2010
(“Krzemien Employment Agreement”). The Company’s Compensation Committee obtained
a Compensation Study from Compensation Resources, Inc. prior to entering into
the Krzemien Employment Agreement. The initial base salary under the Krzemien
Employment Agreement is $230,000. In accordance with the Krzemien Employment
Agreement, Mr. Krzemien received an option grant for 60,000 shares of common
stock under the Company’s Stock Option Plan at an exercise price of $2.73, the
close of market on the date of grant. The options were granted on February 12,
2007. The options vested one-third on the date of the grant, one-third on
February 12, 2008, and one-third on February 12, 2009.
 
 Under the
Krzemien Employment Agreement, Mr. Krzemien will receive a one-time retention
payment equal to Mr. Krzemien’s then annual base compensation (currently
$230,000) upon the occurrence of both of (a) a change in control of the Company
and (b) Louis D. Paolino, Jr. ceasing to be CEO of the Company (this event
occurred on May 20, 2008). After Mr. Krzemien receives the retention payment, if
Mr. Krzemien’s employment is then terminated without cause or if the Company
breaches the Krzemien Employment Agreement, Mr. Krzemien is entitled to an
additional one-time payment equal to Mr. Krzemien’s then annual base
compensation.  The current total amount of both the retention payment
and termination payment is $460,000.
 
 Mr.
Krzemien receives a monthly car allowance of $700, which began in February 2007,
and the Company’s standard medical and other employee benefits. Mr. Krzemien is
prohibited from competing with the Company during his period of employment and
for a three-month period following termination of employment.
 
 Robert
M. Kramer Employment Agreement
 
 Mace
currently employs Robert M. Kramer as its EVP, General Counsel and Secretary
under an Employment Contract dated February 12, 2007 and expiring on February
12, 2010 (“Kramer Employment Agreement”). The Company’s Compensation Committee
obtained a Compensation Study from Compensation Resources, Inc. prior to
entering into the Kramer Employment Agreement. The initial base salary under the
Kramer Employment Agreement is $230,000. In accordance with the Kramer
Employment Agreement, Mr. Kramer received an option grant for 60,000 shares of
common stock under the Company’s Stock Option Plan at an exercise price of
$2.73, the close of market on the date of grant. The options were granted on
February 12, 2007. The options vested one-third on the date of the grant,
one-third on February 12, 2008 and one-third on February 12, 2009.
 
 Under the
Kramer Employment Agreement, Mr. Kramer will receive a one-time retention
payment equal to Mr. Kramer’s then annual base compensation (currently $230,000)
upon the occurrence of both of (a) a change in control of the Company and (b)
Louis D. Paolino, Jr. ceasing to be CEO of the Company (this event occurred on
May 20, 2008). After Mr. Kramer receives the retention payment, if Mr. Kramer’s
employment is then terminated without cause or if the Company breaches the
Kramer Employment Agreement, Mr. Kramer is entitled to an additional one-time
payment equal to Mr. Kramer’s then annual base compensation.  The
current total amount of both the retention payment and termination payment is
$460,000.
 
 Mr.
Kramer receives a monthly car allowance of $700, beginning in February 2007, and
the Company’s standard medical and other employee benefits. Mr. Kramer is
prohibited against competing with the Company during his period of employment
and for a three-month period following termination of
employment.





Potential
Payments upon Termination or Change of Control
 
 For a
description of compensation that would become payable under existing
arrangements in the event of a change of control or termination of each Named
Executive Officers employment under several different circumstances, see the
discussion under “Change of Control Arrangements” in the “Compensation
Discussion and Analysis” Section which is part of the Executive Compensation
Section of this report.
 
 The
following tables quantify the amounts payable upon a change of control or the
termination of each of the Named Executive Officers.





56





Change of
Control Payment and Termination Payments – Dennis R. Raefield, Chief Executive
Officer


Event Triggering Payment
                  
                  Severance Payment
                  
                  
                  Acceleration of Option
                    Awards(9)Termination
      by Company For Cause (1)
                  
                  $
                  -
                  
                  
                  NoneTermination
      by Company without Cause (1)
                  
                  $
                  750,000
                  
                  
                  NoneNon-Compete
      Payment (2)
                  
                  $
                  375,000
                  
                  
                  NoneChange
      of Control (3)
                  
                  $
                  -
                  
                  
                  $
                  -


Change of
Control Payment and Termination Payments - Louis D. Paolino, Jr., former Chief
Executive Officer
 Calendar
Year 2007 and January 1, 2008 to May 20, 2008


Event Triggering Payment
                  
                  Severance Payment
                  
                  
                  Acceleration of Option
                    Awards(9)Termination
      by Company For Cause (4)
                  
                  $
                  -
                  
                  
                  NoneTermination
      without Cause or on a Change of Control(5)
                  
                  $
                  3,851,000
                  
                  
                  $
                  -


Change of
Control Payment and Termination Payments – Gregory Krzemien, Chief Financial
Officer


Event Triggering Payment
                  
                  Severance Payment
                  
                  
                  Acceleration of Option
                    Awards(9)Change
      of Control(3)(6)
                  
                  $
                  230,000
                  
                  
                  $
                  -Termination
      by Company before Change of Control(7)
                  
                  $
                  230,000
                  
                  
                  $
                  -Termination
      by Mr. Krzemien(8)
                  
                  $
                  230,000
                  
                  
                  $
                  -





Change of
Control Payment and Termination Payments – Robert M. Kramer, Executive Vice
President, General Counsel and Secretary


Event Triggering Payment
                  
                  Severance Payment
                  
                  
                  Acceleration of Option
                    Awards(9)Change
      of Control(3)(6)
                  
                  $
                  230,000
                  
                  
                  $
                  -Termination
      by Company before Change of Control(7)
                  
                  $
                  230,000
                  
                  
                  $
                  -Termination
      by Mr. Kramer(8)
                  
                  $
                  230,000
                  
                  
                  $
                  -





(1)   Cause
is defined in the Raefield Employment Agreement as “(a) Employee committing
against the Company fraud, gross misrepresentation, theft or embezzlement, (b)
Employee’s conviction of any felony (excluding felonies involving driving a
vehicle), (c) Employee’s material intentional violations of Company policies, or
(d) a material breach of the provisions of the Raefield Employment Agreement,
including specifically the failure of Employee to perform his duties after
written notice of such failure from the Company.”  The Raefield
Employment Agreement provides that Mr. Raefield can be terminated by the Board
of Directors for Cause, without any severance or other payment.  The
Board of Directors can also terminate Mr. Raefield without Cause, upon a payment
of two times Mr. Raefield’s then current annual base salary.  The
termination payment is calculated based on Mr. Raefield’s base salary of
$375,000 as of December 31, 2008.


(2)  Mr.
Raefield is prohibited from competing with the Company during his period of
employment and for a one year period following a termination of
employment.  The Company is obligated to pay Mr. Raefield $375,000 in
exchange for his one year agreement not to compete, if Mr. Raefield is employed
through August 18, 2011 and the Company and Mr. Raefield do not enter into a new
employment agreement within sixty days after August 18, 2011.


(3)  A
Change of Control Event is defined in the Named Executive Officer’s Employment
Agreement as any of the events set forth in items (i) through and including
(iii) below: (i) the acquisition in one or more transactions by any “Person,”
excepting the employee, as the term “Person” is used for purposes of Sections
13(d) or 14(d) of the Exchange Act, of  “Beneficial Ownership” (as the
term beneficial ownership is used for purposes or Rule 13d-3 promulgated under
the Exchange Act) of the fifty percent (50%) or more of the combined voting
power of the Company’s then outstanding voting securities (the “Voting
Securities”), for purposes of this item (i), Voting Securities acquired directly
from the Company and from third parties by any Person shall be included in the
determination of such Person’s Beneficial Ownership of Voting
Securities;  (ii) the approval by the shareholders of the Company of:
(A) a merger, reorganization or consolidation involving the Company, if the
shareholders of the Company immediately before such merger, reorganization or
consolidation do not or will not own directly or indirectly immediately
following such merger, reorganization or consolidation, more than fifty percent
(50%) of the combined voting power of the outstanding Voting Securities of the
corporation resulting from or surviving such merger, reorganization or
consolidation in substantially the same proportion as their ownership of the
Voting Securities immediately before such merger, reorganization or
consolidation, or (B) a complete liquidation or dissolution of the Company, or
(C) an agreement for the sale or other disposition of 50% or more of the assets
of the Company and a distribution of the proceeds of the sale to the
shareholders; or (iii) the acceptance by shareholders of the Company of shares
in a share exchange, if the shareholders of the Company immediately before such
share exchange do not or will not own directly or indirectly following such
share exchange own more than fifty percent  (50%) of  the
combined voting power of the outstanding Voting Securities of the
corporation  resulting from or surviving such share exchange in
substantially the same proportion as the ownership of the Voting Securities
outstanding immediately before such share exchange.





57





(4)   The
Company was permitted to terminate Mr. Paolino without payment under the Paolino
Employment Agreement, if Mr. Paolino caused material harm to the Company by Mr.
Paolino engaging in willful misconduct, or a felony.  Under the
Paolino Employment Agreement, material harm is defined as the Company incurring
expenses of Five Hundred Thousand ($500,000) Dollars or more.  As
described in Item 3 of this Annual Report on Form 10-K, the Company and Mr.
Paolino are in arbitration regarding whether, the Company was entitled to
terminate Mr. Paolino on May 20, 2008 under the provisions of the
Paolino Employment Agreement described in this footnote 4.


(5)   Upon the first to
occur of a Change of Control or the termination of Mr. Paolino, except for
terminations described in footnote 4 above, the Company was obligated to pay Mr.
Paolino 2.99 times Mr. Paolino’s average total compensation (base salary plus
any bonuses plus the value of any option award, valued using the Black-Scholes
formula) over the past five years.  The stated amount was calculated
based on Mr. Paolino’s average total compensation over the past five years as of
December 31, 2007. As described in Item 3 of this Annual Report on Form 10-K,
the Company and Mr. Paolino are in arbitration regarding whether the Company
owes Mr. Paolino the payment described in this footnote 5 due to the Company’s
termination of Mr. Paolino on May 20, 2008.


(6)  Payment is the amount of
the Named Executive Officer’s then current annual base salary.  The
named Executive’s current base salary as of December 31, 2008 is
$230,000.  Payment is due (“Retention Payment”) on the occurrence of a
Change of Control Event plus Mr. Paolino no longer serving as the Company’s CEO,
either before or after the Change of Control Event.


(7)  The payment is not due
upon a termination based on the inability of the Named Executive Officer to
perform his duties for 120 consecutive days because of illness or termination or
based on the Named Executive Officer being terminated for
cause.  Cause is the Named Executive Officer committing fraud,
misrepresentation, theft or embezzlement against the Company, conviction of a
felony, material intentional violations of the Company’s policies or a material
breach by the Named Executive Officer of his Employment
Agreement.  The Company does not have the right to terminate without
cause, until the Retention Payment has been paid (see footnote 6
above).


(8)  If the Company
breaches or defaults the Named Executive Officer’s Employment Agreement, the
Named Executive Officer may terminate his Employment Agreement and the Company
is then obligated to pay the Named Executive Officer his then annual base
salary.  Upon termination by the Named Executive Officers upon a
breach by the Company, the Company remains obligated to pay the Retention
Payment, if it would have become due but for the breach or default of the
Company.


(9) Assumes exercise of all in-the-money
stock options for which vesting accelerated at $0.80 per share (the closing
price of the Company’s common stock on December 31, 2008).





Grants
of Stock Options


The
following table sets forth certain information concerning individual grants of
stock options to the Named Executive Officers during the fiscal year ended
December 31, 2008.


GRANTS
OF PLAN-BASED AWARDS


Name
                
                Grant Date
                
                All other Option
                    Awards:
                    Number of
                    Securities
                    Underlying
                    Options
                
                
                Exercise Price
                    of Option
                    Awards per
                    Share
                
                
                Grant Date
                    Fair Value of
                    Stock and
                    Option
                    AwardsDennis
      R. Raefield
                
                7/30/08
                
                
                250,000
                
                
                $
                1.50
                
                
                $
                209,883Gregory
      M. Krzemien
                
                3/25/08
                
                
                40,000
                
                
                $
                1.44
                
                
                $
                31,459Robert
      M. Kramer
                
                3/25/08
                
                
                40,000
                
                
                $
                1.44
                
                
                $
                31,459


On July
30, 2008, as part of hiring Mr. Raefield, the Compensation Committee awarded Mr.
Raefield a vested option for 250,000 shares of the Company’s Common
Stock.  The option is exercisable at $1.50 per share.  The
Black Scholes value of the awarded option was $235,824.  The median
long term incentive compensation of chief executive officers, as set forth in
the Hay 2007 Report was $243,257. The Compensation Committee believed that the
option award was warranted due to the award being below the median of long term
incentive compensation granted to chief executive officers, as stated in the Hay
2007 Report, a compensation study for the Chief Executive Officer position from
the Hay Group dated December 12, 2007.  Mr. Raefield’s total direct
compensation under his employment agreement was below the median total direct
compensation market consensus for chief executive officers, as set forth in the
Hay 2007 Report.





58





Mr.
Kramer and Mr. Krzemien were each awarded an option for 40,000 shares on March
25, 2008 at a per share exercise price of $1.44 per share, vesting one half
immediately and the balance one year from the date of grant. The Black-Scholes
value of the option for 40,000 shares was $31,459.  According to a
report of the Hay Group finalized on March 31, 2008, the value of the option was
below the median of long term incentive compensation received by Chief Financial
Officers and Executive Vice Presidents/General Counsels.  The
Compensation Committee in an effort to conserve cash decided not to increase the
base salaries of Mr. Krzemien or Mr. Kramer for 2008.  The
Compensation Committee decided that an award of options would be appropriate to
provide incentive for Mr. Krzemien and Mr. Kramer for 2008.





Mr.
Paolino’s Employment Contract provided that he was to receive an option grant
within five days of August 21, 2007, based on a market
assessment.  The amount of option shares which were required to be
granted are determined by the Company’s Compensation Committee, based on a
current compensation study of the Chief Executive Officer position. The amount
of option shares, at time of grant, plus the $450,000 annual compensation paid
to Mr. Paolino, is to equal no less than the “market consensus total direct
compensation” amount paid by comparable companies to their chief executive
officers, as set forth in a compensation study to be obtained by the
Compensation Committee. The Compensation Committee obtained the Hay 2007 Report
on December 12, 2007.  The Hay 2007 Report indicated that the median
market consensus for Total Direct Compensation was $722,834 and the 75th
percentile market consensus for total direct compensation was $970,238. The
Compensation Committee decided to award Mr. Paolino with an amount of options
that would equal $335,800 in Black-Scholes value.  On February 22,
2008, Mr. Paolino was issued 300,000 options in satisfaction of the employment
contract obligation.  Mr. Paolino objected to the size of the option
grant, taking the position that an option for more shares should have been
granted.  To satisfy the objection of Mr. Paolino; the Company issued
Mr. Paolino an additional option for 35,000 shares on March 25,
2008.  Both options were fully vested on the date of the
grant.  The option agreements relating to the two option grants,
provided that the options may only be exercised within ninety days after a
termination for cause, as defined under the option agreements.  The
Company has taken the position that Mr. Paolino was terminated for cause, as
defined in the option agreements and that the two described options are no
longer exercisable.





59





Aggregated
Option and Warrant Exercises in Last Fiscal Year
 
 The
following table sets forth certain information regarding stock options held by
the Named Executive Officers during the fiscal year
ended December 31, 2008, including the number of exercisable and un-exercisable
stock options as of December 31, 2008 by grant.  No options were
exercised by any of the Named Executive Officers during the fiscal year ended
December 31, 2008.
 
 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-ENDName
                                                            
                                                            Number of
                                                              Securities
                                                              Underlying
                                                              Unexercised
                                                              Options
                                                              (#)
                                                              Exercisable
                                                            
                                                            
                                                            Number of
                                                              Securities
                                                              Underlying
                                                              Unexercised
                                                              Options
                                                              (#)
                                                              Unexercisable
                                                            
                                                            
                                                            Option
                                                              Exercise
                                                              Price
                                                              ($)
                                                            
                                                            Option
                                                              Grant Date
                                                            
                                                            Option
                                                              Expiration
                                                              DateDennis
      R. Raefield
                                                            
                                                            (3)       
       15,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            1.94
                                                            
                                                            1/8/2008
                                                            
                                                            1/8/2018(4)       250,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            1.50
                                                            
                                                            7/30/2008
                                                            
                                                            7/30/2018Louis
      D. Paolino, Jr.
                                                            
                                                            (1)         
       5,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            2.56
                                                            
                                                            10/18/2000
                                                            
                                                            10/18/2010(2)         87,500
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            2.36
                                                            
                                                            4/4/2002
                                                            
                                                            4/4/2012(1)       150,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            1.32
                                                            
                                                            7/14/2003
                                                            
                                                            7/14/2013(2)       568,182
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            4.21
                                                            
                                                            11/2/2004
                                                            
                                                            11/2/2014(2)         14,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            5.35
                                                            
                                                            11/19/2004
                                                            
                                                            11/19/2014(2)       150,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            5.35
                                                            
                                                            11/19/2004
                                                            
                                                            11/19/2014(2)         15,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            2.64
                                                            
                                                            10/31/2005
                                                            
                                                            10/31/2015(2)       150,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            2.40
                                                            
                                                            3/23/2006
                                                            
                                                            3/23/2016(2)       450,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            2.30
                                                            
                                                            8/21/2006
                                                            
                                                            8/21/2016Gregory
      M. Krzemien (5)
                                                            
                                                            
                                                            62,500
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            5.38
                                                            
                                                            3/26/1999
                                                            
                                                            3/26/200950,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            1.38
                                                            
                                                            3/30/2001
                                                            
                                                            3/30/201137,500
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            2.36
                                                            
                                                            4/4/2002
                                                            
                                                            4/4/2012150,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            1.32
                                                            
                                                            7/14/2003
                                                            
                                                            7/14/201350,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            5.35
                                                            
                                                            11/19/2004
                                                            
                                                            11/19/201460,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            2.40
                                                            
                                                            3/23/2006
                                                            
                                                            3/23/201640,000
                                                            
                                                            
                                                            
                                                            20,000
                                                            
                                                            
                                                            
                                                            2.73
                                                            
                                                            2/12/2007
                                                            
                                                            2/12/201720,000
                                                            
                                                            
                                                            
                                                            20,000
                                                            
                                                            
                                                            
                                                            1.44
                                                            
                                                            3/25/2008
                                                            
                                                            3/25/2018Robert
      M. Kramer (6)
                                                            
                                                            
                                                            81,395
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            5.38
                                                            
                                                            3/26/1999
                                                            
                                                            3/26/200918,605
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            11.00
                                                            
                                                            12/27/1999
                                                            
                                                            12/27/20095,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            2.56
                                                            
                                                            10/18/2000
                                                            
                                                            10/18/201050,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            5.38
                                                            
                                                            3/30/2001
                                                            
                                                            3/30/201137,500
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            2.36
                                                            
                                                            4/4/2002
                                                            
                                                            4/4/2012150,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            1.32
                                                            
                                                            7/14/2003
                                                            
                                                            7/14/201337,500
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            4.21
                                                            
                                                            11/2/2004
                                                            
                                                            11/2/201475,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            5.35
                                                            
                                                            11/19/2004
                                                            
                                                            11/19/201475,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            2.40
                                                            
                                                            3/23/2016
                                                            
                                                            3/23/201640,000
                                                            
                                                            
                                                            
                                                            20,000
                                                            
                                                            
                                                            
                                                            2.73
                                                            
                                                            2/12/2007
                                                            
                                                            2/12/201720,000
                                                            
                                                            
                                                            
                                                            20,000
                                                            
                                                            
                                                            
                                                            1.44
                                                            
                                                            3/25/2008
                                                            
                                                            3/25/2018





(1)
              Fully
      vested option.
 (2)
              The
      option agreement relating to the option grant provided that the option
      grant may only be exercised within ninety days after a termination for
      cause.  The Company has taken the position that Mr. Paolino was
      terminated for cause, as defined in the option agreement, and that the
      described option is no longer
exercisable.





60





(3)
              Fully
      vested options granted to Mr. Raefield during the period Mr. Raefield
      served as a Director.
 (4)
              Fully
      vested options granted to Mr. Raefield as part of Mr. Raefield being hired
      as the Company’s President and Chief Executive
  Officer.
 (5)
              All
      options are fully vested, except for the option for 60,000 shares granted
      on February 12, 2007; 20,000 shares vested immediately, 20,000 shares
      vested on February 12, 2008 and 20,000 will vest on February 12, 2009, and
      the option for 40,000 shares granted on March 25, 2008; 20,000 shares
      vested immediately and 20,000 shares will vest on March 25,
      2009.
 (6)
              All
      options are fully vested, except for the option for 60,000 shares granted
      on February 12, 2007; 20,000 shares vested immediately, 20,000 shares
      vested on February 12, 2008 and 20,000 will vest on February 12, 2009, and
      the option for 40,000 shares granted on March 25, 2008; 20,000 shares
      vested immediately and 20,000 shares will vest on March 25,
      2009.


DIRECTOR
COMPENSATION


The
following table provides summary information concerning cash and certain other
compensation paid or accrued by Mace to or on behalf of Mace’s Directors for the
year ended December 31, 2008, other than Louis D. Paolino, Jr. whose
compensation is described on page 52 of this Form 10K.  During 2008,
Louis D. Paolino, Jr. did not receive compensation for serving as a director.
Additionally, the amounts in the table below reflect the compensation paid to
Mr. Raefield for his services as a Director through the date of his employment.
After the date of Mr. Raefield employment, he did not receive compensation for
continuing to serve as a director.


Name
                                  
                                  Fees
                                    Earned or
                                    Paid in
                                    Cash
                                    ($)
                                  
                                  
                                  Option
                                    Awards
                                    ($) (1)
                                  
                                  
                                  All
                                    Other
                                    Compensation
                                    ($)
                                  
                                  
                                  TotalConstantine
      N. Papadakis, Ph.D
                                  
                                  $
                                  32,500
                                  
                                  
                                  $
                                  23,198
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  55,698Mark
      S. Alsentzer
                                  
                                  $
                                  33,000
                                  
                                  
                                  $
                                  23,198
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  56,198Dennis
      R. Raefield
                                  
                                  $
                                  27,000
                                  
                                  
                                  $
                                  23,198
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  50,198Gerald
      T. LaFlamme
                                  
                                  $
                                  30,000
                                  
                                  
                                  $
                                  23,198
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  53,198John
      C. Mallon
                                  
                                  $
                                  55,500
                                  
                                  
                                  $
                                  23,198
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  78,698





(1)
              The
      aggregate options outstanding at December 31, 2008 were as follows: Mark
      Alsentzer-137,500 options; Constantine Papadakis, Ph.D., 132,500 options;
      John C. Mallon, 30,000 options; and Gerald T. LaFlamme, 30,000 options.
      Assumptions used in the calculation of these amounts are included in Note
      2 to the Company’s Audited Financial Statements for the fiscal year ended
      December 31, 2008.  The amounts in this column reflect the
      dollar amount recognized, in accordance with the Statement of Financial
      Accounting Standards No. 123 (revised 2004) “Share-Based Payment” (“SFAS
      123(R)”), for financial reporting purposes for the fiscal year ended
      December 31, 2008. There were no options granted to non-employee directors
      in 2007. Options granted to non-employee directors in 2008 were for
      services on the Board for 2008 and
2009.


For the
year 2008, the Board of Directors, approved of the following fees to be paid to
directors who are not employees of the Company with respect to their calendar
year 2008 service: a $15,000 annual cash retainer fee to be paid in a lump sum;
a $1,000 fee to each non-employee director for each Board or Committee meeting
attended in person; a $500 fee to each non-employee director for each Board or
Committee meeting exceeding thirty minutes in length attended by telephone; a
grant of 15,000 options at the close of market on January 8, 2008 for services
on the Board for 2008; and a grant of 15,000 options at the close of market on
December 11, 2008 for services on the Board for 2009 to each non-employee
director. The grants vested immediately. The fees earned or paid in cash also
includes a special fee of $25,000 to Mr. Mallon for the significant amount of
time Mr. Mallon spent working on the Paolino Arbitration matter in
2008.





61





ITEM
12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
 
 Securities
Authorized for Issuance Under Equity Compensation Plans


The
Company has two Stock Option Plans that have been approved by the
shareholders.  The plans are the 1999 Stock Option Plan and the 1993
Stock Option Plan.  Stock options are issued under the 1999 Stock
Option Plan and 1993 Stock Option Plan at the discretion of the Compensation
Committee to employees at an exercise price of no less than the then current
market price of the common stock and generally expire ten years from the date of
grant.  Allocation of available options and vesting schedules are at
the discretion of the Compensation Committee and are determined by potential
contribution to, or impact upon, the overall performance of the Company by the
executives and employees. Stock options are also issued to members of the Board
of Directors at the discretion of the Compensation Committee. These options may
have similar terms as those issued to officers or may vest
immediately.  The purpose of both Stock Option Plans is to provide a
means of performance-based compensation in order to provide incentive for the
Company’s employees. Warrants have been issued in connection with the sale of
the shares of the Company’s stock, the purchase and sale of certain businesses
and to a director. The terms of the warrants have been established by the Board
of Directors of the Company.  Certain of the warrants have been
approved by stockholders.
 
 The
following table sets forth certain information regarding the Company’s Stock
Option Plan and warrants as of December 31, 2008.


Plan Category
                  
                  (a)
                      Number of securities to
                      be issued upon exercise of
                      outstanding options,
                      warrants and rights
                  
                  
                  (b)
                      Weighted average
                      exercise price of
                      outstanding options,
                      warrants and rights
                  
                  
                  (c)
                      Number of securities
                      remaining available
                      for future issuance
                      under equity
                      compensation plans
                      (excluding securities
                      reflected in column)1993
      Stock Option Plan
                  
                  
                  18,959
                  
                  
                  $
                  3.11
                  
                  
                  
                  56,9991999
      Stock Option Plan
                  
                  
                  5,113,722
                  
                  
                  $
                  3.18
                  
                  
                  
                  1,887,481Total
      of both Equity Compensation Plans approved by stockholders
                  
                  
                  5,132,681
                  
                  
                  $
                  3.18
                  
                  
                  
                  1,944,480Equity
      compensation plans not approved by stockholders
                  
                  
                  433,000
                  
                  
                  $
                  8.02
                  
                  
                  
                  N/ATotal
                  
                  
                  5,565,681
                  
                  
                  $
                  3.56
                  
                  
                  
                  1,944,480


Beneficial
Ownership
 
 The
following beneficial ownership table sets forth information as of February 28,
2009 regarding ownership of shares of Mace common stock by the following
persons:


·
              each
      person who is known to Mace to own beneficially more than 5% of the
      outstanding shares of Mace common stock, based upon Mace’s records or the
      records of the SEC;
 ·
              each
      director of Mace;
 ·
              each
      Named Executive Officer; and
 ·
              all
      directors and executive officers of Mace, as a
  group.





Unless
otherwise indicated, to Mace’s knowledge, all persons listed on the beneficial
ownership table below have sole voting and investment power with respect to
their shares of Mace common stock. Shares of Mace common stock subject to
options or warrants exercisable within 60 days of February 28, 2009 are
considered outstanding for the purpose of computing the percentage ownership of
the person holding such options or warrants, but are not deemed outstanding for
computing the percentage ownership of any other person.





62








Name and Address of
                                                Beneficial Owner
                                              
                                              Amount and Nature of Beneficial
                                                Ownership
                                              
                                              
                                              Percentage of
                                                Common Stock
                                                Owned (1)Lawndale
      Capital Management, LLC
                                                591
      Redwood Highway, Suite 2345
                                                Mill
      Valley, CA 94941
                                              
                                              
                                              1,574,479
                                              (2)
                                              
                                              
                                              9.7
                                              %Ancora
      Capital, Inc.
                                                One
      Chagrin Highlands
                                                2000
      Auburn Drive, Suite 300
                                                Cleveland,
      Ohio 44122
                                              
                                              
                                              1,327,500
                                              (3)
                                              
                                              
                                              8.2
                                              %Louis
      D. Paolino, Jr.
                                                2626
      Del Mar Place
                                                Fort
      Lauderdale, Florida 33301
                                              
                                              
                                              1,045,958
                                              (4)
                                              
                                              
                                              6.4
                                              %Robert
      M. Kramer
                                              
                                              
                                              709,539
                                              (5)
                                              
                                              
                                              4.2
                                              %Gregory
      M. Krzemien
                                              
                                              
                                              535,250
                                              (6)
                                              
                                              
                                              3.2
                                              %Mark
      S. Alsentzer
                                              
                                              
                                              437,500
                                              (7)
                                              
                                              
                                              2.7
                                              %Dennis
      R. Raefield
                                              
                                              
                                              275,000
                                              (8)
                                              
                                              
                                              1.7
                                              %Constantine
      N. Papadakis, PhD.
                                              
                                              
                                              142,500
                                              (9)
                                              
                                              
                                              *John
      C. Mallon
                                              
                                              
                                              40,000
                                              (10)
                                              
                                              
                                              *Gerald
      T. LaFlamme
                                              
                                              
                                              30,000
                                              (11)
                                              
                                              
                                              *All
      current directors and executive officers as a group (7
      persons)
                                              
                                              
                                              2,169,789
                                              (12)
                                              
                                              
                                              12.0
                                              %


* Less
than 1% of the outstanding shares of Mace common stock.


(1)   Percentage
calculation is based on 16,285,377 shares outstanding on February 28,
2009.
 (2)   According
to their Schedule 13D Amendment 7 filed with the SEC on October 16, 2007,
consists of 1,574,479 shares to which Lawndale Capital Management, LLC
(“Lawndale”) has shared voting and dispositive power. The Schedule 13D was filed
jointly by Lawndale, Andrew Shapiro and Diamond A. Partners, L.P.
(“Diamond”).  Lawndale is the investment advisor to and the general
partner of Diamond, which is an investment limited partnership.  Mr.
Shapiro is the sole manager of Lawndale.  Mr. Shapiro is also deemed
to have shared voting and dispositive power with respect to the shares reported
as beneficially owned by Lawndale.  Diamond has shared voting and
dispositive power with respect to 1,241,038 shares of the
Company.


(3)    According
to its Schedule 13D Amendment 4 filed with the SEC on January 14, 2008, Ancora
Group, which includes Ancora Capital, Inc.; Ancora Securities, Inc., the main
subsidiary of Ancora Capital, Inc.; Ancora Advisors, LLC; Ancora Trust, the
master trust for the Ancora Mutual Funds; Ancora Foundation, a private
foundation; Merlin Partners, an investment limited partnership; and various
owners and employees of the aforementioned entities have aggregate beneficial
ownership of 1,327,500 shares.  Ancora Securities, Inc. is registered
as a broker/dealer with the SEC and the National Association of Securities
Dealers. Ancora Advisors, LLC is registered as an investment advisor with the
SEC under the Investment Advisors Act of 1940, as amended.  The Ancora
Trust, which includes Ancora Income Fund, Ancora Equity Fund, Ancora Special
Opportunity Fund, Ancora Homeland Security Fund and Ancora Bancshares, are
registered with the SEC as investment companies under the Investment Company Act
of 1940, as amended. Mr. Richard Barone is the controlling shareholder of Ancora
Capital, controls 31% of Ancora Advisors, LLC owns approximately 15% of Merlin
Partners, and is Chairman of and has an ownership interest in the various Ancora
Funds. Ancora Advisors, LLC has the power to dispose of the shares owned by the
investment clients for which it acts as advisor, including Merlin Partners, for
which it is also the General Partner, and the Ancora Mutual
Funds.  Ancora Advisors, LLC disclaims beneficial ownership of such
shares, except to the extent of its pecuniary interest therein. Ancora
Securities, Inc. acts as the agent for its various clients and has neither the
power to vote nor the power to dispose of the shares.  Ancora
Securities, Inc. disclaims beneficial ownership of such shares.  All
entities named herein each disclaim membership in a Group within the meaning of
Section 13(d)(3) of the Exchange Act and the Rules and Regulations promulgated
there under.
 (4)    Includes
options to purchase 155,000 shares.


(5)    Includes
options to purchase 630,000 shares.


(6)    Includes
options to purchase 510,000 shares.





63





(7)    Includes
options to purchase 137,500 shares.  Does not include 200,000 shares
that Mr. Alsentzer delivered to Argyll Equities, LLC (“Argyll”), as collateral
for a $600,000 loan obtained by Mr. Alsentzer on April 27, 2004 (“Pledged
Shares”). Mr. Alsentzer has advised the Company that the shares were delivered
in street name.  By letter dated May 4, 2005, Mr. Alsentzer requested
that Argyll confirm in writing that the Pledged Shares were in Argyll's
possession and being held as collateral, under the terms of Mr. Alsentzer’s
agreement with Argyll. To date, Mr. Alsentzer has not received the requested
confirmation or any notice of default from Argyll. Based on the information the
Company has received, the Company has decided not to allow Mr. Alsentzer to vote
the 200,000 shares.
 (8)    Includes
options to purchase 265,000 shares.
 (9)    Includes
options to purchase 132,500 shares.


(10)  Includes
options to purchase 30,000 shares.


(11)  Represents
options to purchase 30,000 shares.
 (12)  See
Notes 1 and 5 through 11 above.


ITEM
13.     CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
 
 Certain
Relationships and Related Party Transactions
 
 The
Company’s Security Segment leases manufacturing and office space under a
five-year lease with Vermont Mill, Inc. (“Vermont Mill”). Vermont Mill is
controlled by Jon E. Goodrich, a former director and current employee of the
Company.  In November 2004, the Company exercised an option to
continue the lease through November 2009 at a rate of $10,576 per month. The
Company believes that the lease rate is lower than lease rates charged for
similar properties in the Bennington, Vermont area.  On July 22, 2002,
the lease was amended to provide Mace the option and right to cancel the lease
with proper notice and a payment equal to six months of the then current rent
for the leased space occupied by Mace. Rent expense under this lease was
$128,000 for the years ending December 31, 2008 and $127,000 for the years
ending December 31, 2007 and 2006.  The lease expires in
November  2009.


The
Company’s Audit Committee Charter, Section IV.E (vi), provides that the Audit
Committee annually reviews all existing related party transactions or other
conflicts of interest that exist between employees and directors and the
Company. The Audit Committee Charter also requires that the Audit Committee
review all proposed related party transactions. As provided in Section IV.E (iv)
of the Audit Committee Charter, the Company may not enter into a related party
transaction, unless the transaction is first approved by the Audit Committee.
The Audit Committee Charter is in writing and is available for review on the
Company’s website at www.mace.com, under
the Investor Relations heading. The current members of the Audit Committee are
Gerald T. LaFlamme, Constantine N. Papadakis, Ph.D., and Mark Alsentzer. When
reviewing related party transactions, the Audit Committee considers the benefit
to the Company of the transaction and whether the transaction furthers the
Company’s interest. The decisions of the Audit Committee are set forth in
writing in the minutes of the meetings of the Audit
Committee.





Director
Independence
 
 Mace has
Corporate Governance Guidelines.  The Corporate Governance Guidelines
provide that a majority of the Company’s directors should be independent, as
defined by the rules of the NASDAQ Global Market and Section 3.14 of the
Company’s ByLaws.Section 3.14 of the
Company’s ByLaws is available for review on the Company’s website at www.mace.com, under
the Investor Relations heading. The Boardhas determined that
Messers. Alsentzer, LaFlamme, Mallon, and Papadakis are independent under these
rules. In addition, all of the Audit Committee members are independent under the
Audit Committee independence standards established by the NASDAQ Global Market
and the rules promulgated by the SEC. The Boardhas an Audit Committee,
a Compensation Committee, a Nominating Committee and an Ethics and Corporate
Governance Committee. The independent directors are the sole members of all of
the named committees.
 
 ITEM
14.           PRINCIPAL
ACCOUNTING FEES AND SERVICES
 
 Audit
Fees.The
Company was billed $323,313 by Grant Thornton LLP for the audit of Mace’s annual
financial statements for the fiscal year ended December 31, 2008, and for the
review of the financial statements included in Mace’s Quarterly Reports on Forms
10-Q filed for the calendar quarters of 2008. The Company was billed $331,648 by
Grant Thornton LLP for the audit of Mace’s annual financial statements for the
fiscal year ended December 31, 2007, and for the review of the financial
statements included in Mace’s Quarterly Reports on Forms 10-Q for the calendar
quarters of 2007.





Tax Fees.The Company was billed $187,336 and $70,139 for tax compliance services
rendered by Grant Thornton LLP during 2008 and 2007,
respectively.  The services aided the Company in the preparation of
federal, state and local tax returns.





All Other
Fees.The Company did
not incur any other fees from Grant Thornton LLP during 2008 or
2007.





64





Other
Matters.  The Audit
Committee of the Board of Directors has considered whether the provision of
financial information systems design and implementation services and other
non-audit services is compatible with maintaining the independence of Mace’s
registered public accountants, Grant Thornton LLP. The Audit Committee
pre-approves all auditing services and permitted non-audit services (including
the fees and terms thereof) to be performed for the Company by its independent
auditors. All auditing services and permitted non-audit services in 2007 and
2008 were pre-approved. The Audit Committee may delegate authority to the
chairman, or in his or her absence, a member designated by the chairman to grant
pre-approvals of audit and permitted non-audit services, provided that decisions
of such person or subcommittee to grant pre-approvals shall be presented to the
full Audit Committee at its next scheduled meeting.





PART
IV


ITEM
      15.
              EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES


(a)
      (1)
              Consolidated
      Financial Statements:
 Report of
Independent Registered Public Accounting Firm
 Consolidated
Balance Sheets as of December 31, 2008 and 2007
 Consolidated
Statements of Operations for the years ended December 31, 2008, 2007, and
2006
 Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2008, 2007
and 2006
 Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007, and
2006
 Notes to
Consolidated Financial Statements





(a)(2)
                The
      requirements of Schedule II have been included in the Notes to
      Consolidated Financial Statements.  All other schedules for
      which provision is made in the applicable accounting regulations of the
      SEC are not required under the related instructions or are inapplicable,
      and therefore, have been
omitted.





(a)
      (3)
              Exhibits:





The
following Exhibits are filed as part of this report (exhibits marked with an
asterisk have been previously filed with the Commission and are incorporated
herein by this reference):





*
              3.3
              Amended
      and Restated Bylaws of Mace Security International, Inc. (Exhibit 3.1 to
      the Company’s Current Report on Form 8-K dated October 16,
      2007.


*
              3.4
              Amended
      and Restated Certificate of Incorporation of Mace Security International,
      Inc. (Exhibit 3.4 to the 1999 Form
10-KSB)
 *
              3.5
              Certificate
      of Amendment of Amended and Restated Certificate of Incorporation of Mace
      Security International, Inc. (Exhibit 3.5 to the 2000 Form
      10-KSB)
 *
              3.6
              Certificate
      of Amendment of Amended and Restated Certificate of Incorporation of Mace
      Security International, Inc. (Exhibit 3.6 to the 2002 Form
      10-K)


*
              3.7
              The
      Company’s Amended and Restated Certificate of Incorporation (Exhibit 4.1
      to the June 16, 2004 Form
S-3)


*
              10.1
              1993
      Non-Qualified Stock Option Plan (1)
 *
              10.2
              Trademarks(1)
 *
              10.3
              Warrants
      in connection with the acquisition of the assets of the KinderGard
      Corporation (2)
 *
              10.4
              Mace
      Security International, Inc. 1999 Stock Option Plan. (Exhibit 10.98 to the
      June 30, 1999 Form 10-QSB dated August 13, 1999)
  (3)


*
              10.5
              Business
      Loan Agreement dated January 31, 2000, between the Company, its subsidiary
      - Colonial Full Service Car Wash, Inc., and Bank One, Texas, N.A.;
      Promissory Note dated February 2, 2000 between the same parties as above
      in the amount of $400,000 (pursuant to instruction 2 to Item 601 of
      Regulation S-K, two additional Promissory Notes, which are substantially
      identical in all material respects except as to the amount of the
      Promissory Notes) are not being filed in the amount of: $19,643.97 and
      $6,482; and a Modification Agreement dated as of January 31, 2000 between
      the same parties as above in the amount of $110,801.55 (pursuant to
      instruction 2 to Item 601 of Regulation S-K, Modification Agreements,
      which are substantially identical in all material respects except to the
      amount of the Modification Agreement) are not being filed in the amounts
      of: $39,617.29, $1,947,884.87, $853,745.73, and $1,696,103.31.(Exhibit
      10.124 to the December 31, 1999 Form 10-KSB dated March 29,
      2000)
 *
              10.6
              Amendment
      dated March 13, 2001, to Business Loan Agreement between the Company, its
      subsidiary Colonial Full Service Car Wash, Inc., and Bank One, Texas, N.A.
      (pursuant to instruction 2 to Item 601 of Regulation S-K, one additional
      amendment which is substantially identical in all material respects,
      except as to the borrower being Eager Beaver Car Wash, Inc., is not being
      filed).(Exhibit 10.132 to the December 31, 2000 Form 10-KSB dated March
      20, 2001)





65





*
              10.7
              Modification
      Agreement between the Company, its subsidiary - Colonial Full Service Car
      Wash, Inc., and Bank One, Texas, N.A. in the amount of $2,216,000
      (pursuant to Instruction 2 to Item 601 of Regulation S-K, Modification
      Agreements, which are substantially identical in all material respects
      except to amount and extension date of the Modification Agreement are not
      being filed in the original amounts of $984,000 (extended to August 20,
      2004) and $1,970,000 (extended to June 21, 2004).(Exhibit 10.133 to the
      June 30, 2001 Form 10-Q dated August 9,
2001)
 *
              10.8
              Term
      Note dated November 6, 2001, between the Company, its subsidiary, Colonial
      Full Service Car Wash, Inc., and Bank One, Texas, N.A. in the amount of
      $380,000.(Exhibit 10.134 to the September 30, 2001 Form 10-Q dated
      November 9, 2001)
 *
              10.9
              Amendment
      dated February 25, 2002 to Lease Agreement between the Company and Vermont
      Mill Properties, Inc. and original Lease Agreement dated November 15, 1999
      to which the amendment relates.(Exhibit 10.136 to the December 31, 2001
      Form 10-K dated March 11,
2002)


*
              10.10
              Master
      Lease Agreement dated June 10, 2002, between the Company, its subsidiary,
      Colonial Full Service Car Wash, Inc., and Banc One Leasing Corporation in
      the amount of $193,055. (Exhibit 10.140 to the June 30, 2002 Form 10-Q
      dated August 14, 2002)
 *
              10.11
              Amendment
      dated July 22, 2002 to Lease Agreement between the Company and Vermont
      Mill Properties, Inc. (Exhibit 10.142 to the June 30, 2002 Form 10-Q dated
      August 14, 2002)
 *
              10.12
              Lease
      Schedule and Addendum dated August 28, 2002 in the amount of $39,434 to
      Master Lease Agreement dated June 10, 2002, between the Company, its
      subsidiary, Colonial Full Service Car Wash, Inc., and Banc One Leasing
      Corporation. (Exhibit 10.144 to the September 30, 2002 Form 10-Q dated
      November 12, 2002)
 *
              10.13
              Line
      of Credit Note and Credit Agreement dated December 15, 2002 between the
      Company, its subsidiary, Mace Security Products, Inc. and Bank One Texas,
      N.A. in the amount of $500,000. (Exhibit 10.146 to the December 31, 2002
      Form 10-K dated March 19, 2003)
 *
              10.14
              Note
      Modification Agreement dated February 21, 2003, between the Company, its
      subsidiary, Colonial Full Service Car Wash, Inc. and Bank One, Texas, N.A.
      in the amount of $348,100. (Exhibit 10.148 to the December 31, 2002 Form
      10-K dated March 19, 2003)
 *
              10.15
              Note
      Modification Agreement and Amendment to Credit Agreement dated December
      15, 2003, between the Company, its subsidiary, Mace Security Products,
      Inc. and Bank One, Texas, N.A. in the amount of $500,000.(Exhibit 10.156
      to the December 31, 2004 Form 10-K dated March 12,
  2004)


*
              10.16
              Note
      Modification Agreement and Amendment to Credit Agreement dated January 21,
      2004, between the Company, its subsidiary, Colonial Full Service Car Wash,
      Inc. and Bank One, Texas, N.A. in the amount of $48,725.50.(Exhibit 10.157
      to the December 31, 2004 Form 10-K dated March 12,
  2004)
 *
              10.17
              Credit
      Agreement dated as of December 31, 2003 between the Company, its
      subsidiary, Eager Beaver Car Wash, Inc., and Bank One Texas, N.A.
      (pursuant to instruction 2 to Item 601of Regulation S-K, four additional
      credit agreements which are substantially identical in all material
      respects, except as to the borrower being Mace Car Wash - Arizona, Inc.,
      Colonial Full Service Car Wash, Inc., Mace Security Products, Inc. and
      Mace Security International, Inc., are not being filed.) (Exhibit 10.158
      to the December 31, 2004 Form 10-K dated March 12,
  2004.)
 *
              10.18
              Amendment
      to Credit Agreement dated April 27, 2004, effectiveness of March 31, 2004
      between Mace Security International, Inc., and Bank One Texas, N.A.
      (Pursuant to instruction 2 to Item 601 of Regulation S-K, four Additional
      credit agreements which are substantially identical in all material
      respects, except as to borrower being the Company’s subsidiaries, Mace Car
      Wash-Arizona, Inc., Colonial Full Service Car Wash, Inc. Mace Security
      Products Inc. and Eager Beaver Car Wash, Inc., are not being filed)
      (Exhibit 10.159 to the March 31, 2004 Form 10-Q dated May 5,
      2004)
 *
              10.19
              Warrant
      dated May 26, 2004 to purchase 183,000 shares of the Company’s common
      stock, issued to Langley Partners, L.P. (Exhibit 4.3 to the June 16, 2004
      Form S-3)
 *
              10.20
              Securities
      Purchase Agreement dated May 26, 2004 between the Company and Langley
      Partners, L.P. as set forth on the Signature pages thereof (Exhibit 10.1
      to the June 16, 2004 Form S-3)
 *
              10.21
              Registration
      Rights Agreement dated May 26, 2004 between the Company and Langley
      Partners, L.P. as set forth on the Signature pages thereof (Exhibit 10.2
      to the June 16, 2004 Form S-3)
 *
              10.22
              First
      Amendment to the Securities Purchase Agreement, dated June 8, 2004
      (Exhibit 10.3 to the June 16, 2004 Form
S-3)


*
              10.23
              Modification
      Agreement between the Company , its subsidiary - Colonial Full Service Car
      Wash,  Inc., and Bank One, Texas, N.A. in the original amount of
      $984,000 (pursuant to Instruction 2 to Item 601 of Regulation S-K,
      Modification Agreements, which are substantially identical in all material
      respects except to amount and extension date of the Modification
      Agreement, are not being filed in the original amounts of $2,216,000
      (extended to August 20, 2009) and $380,000 (extended to October 6, 2009)).
      (Exhibit 10.167 to the September 30, 2004 Form 10-Q dated November 12,
      2004)


*
              10.24
              Promissory
      Note dated September 15, 2004, between the Company, its subsidiary, Mace
      Security Products, Inc.,  and Bank One, Texas, N.A. in the
      amount of $825,000. (Exhibit 10.168 to the September 30, 2004 Form 10-Q
      dated November 12, 2004)


*
                10.25
                Securities
      Purchase Agreement between Mace and Langley Partners, L.P. (Exhibit 99.2
      to the December 14, 2004 Form 8-K dated December 16,
  2004)





66




*
                  10.26
                  Registration
      Rights Agreement between Mace and Langley Partners, L.P. (Exhibit 99.3 to
      the December 14, 2004 Form 8-K dated December 16,
  2004)
 *
                  10.27
                  Warrant
      to be issued to Langley Partners, L.P. (Exhibit 99.4 to the December 14,
      2004 Form 8-K dated December 16,
2004)
 *
                  10.28
                  Registration
      Rights Agreement between Mace and JMB Capital, L.P. (Exhibit 99.6 to the
      December 14, 2004 Form 8-K dated December 16,
  2004)
 *
                  10.29
                  Warrant
      to be issued to JMB Capital Partners, L.P. (Exhibit 99.7 to the December
      14, 2004 Form 8-K dated December 16,
2004)
 *
                  10.30
                  Note
      Modification Agreement dated December 22, 2004 between the Company, its
      subsidiary, Mace Security Products Inc. and Bank One, Texas, N.A. in the
      amount of $500,000. (Exhibit 10.1 to the March 31, 2005 Form 10-Q dated
      May 10, 2005)
 *
                  10.31
                  Note
      Modification Agreement dated December 1, 2005 between the Company, its
      subsidiary Mace Security Products, Inc. and JPMorgan Bank One Bank, N.A.
      in the amount of $500,000. (Exhibit 10.179 to the December 31, 2005 Form
      10-K dated July 14, 2006)
 Form 8-K
dated March 6, 2006) +
 *
                  10.32
                  Amendment
      to Credit Agreement dated October 31, 2006, effective September 30, 2006
      between Mace Security International, Inc., and JP Morgan Chase Bank, N.A.
      (Pursuant to instruction 2 to Item 601 of Regulation S-K, five additional
      credit agreements which are substantially identical in all material
      respects, except as to borrower being the Company’s subsidiaries, Mace
      Truck Wash, Inc., Mace Car Wash-Arizona, Inc., Colonial Full Service Car
      Wash, Inc., Mace Security Products Inc., and Eager Beaver Car Wash, Inc.,
      are not being filed). (Exhibit 10.1 to the September 30, 2006 Form 10-Q
      dated November 13, 2006)
 *
                  10.33
                  Employment
      Agreement dated August 21, 2006 between Mace Security International, Inc.
      and Louis D. Paolino, Jr. (Exhibit 10.1 to the August 21, 2006 Form 8-K
      dated August 22, 2006) (3)
 *
                  10.34
                  Employment
      Agreement dated February 12, 2007 between Mace Security International,
      Inc. and Gregory M. Krzemien (Exhibit 10.1 to the February 8, 2007 Form
      8-K dated February 14, 2007) (3)
 *
                  10.35
                  Employment
      Agreement dated February 12, 2007 between Mace Security International,
      Inc., and Robert M. Kramer. (Exhibit 10.2 to the February 8, 2007 Form 8-K
      dated February 14, 2007) (3)
 *
                  10.36
                  Employment
      Agreement dated July 29, 2008 between Mace Security International, Inc.
      and Dennis R. Raefield (Incorporated by reference as Exhibit 10.1 to the
      July 29, 2008 Form 8-K dated July 31, 2008)
(3)
 11
                    Statement
      Regarding: Computation of Per Share
Earnings.
 *
                  14
                  Code
      of Ethics and Business Conduct (Exhibit 14 to the December 31, 2003 Form
      10-K dated March 12, 2004)
 21
                  Subsidiaries
      of the Company
 23.1
                  Consent
      of Grant Thornton LLP
 24
                  Power
      of Attorney (included on signature
page)
 31.1
                  Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.
 31.2
                  Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.
 32.1
                  Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.
 32.2
                  Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.
 *
                  99.1
                  Corporate
      Governance Guidelines dated October 16, 2007 (Exhibit 99.1 to the October
      16, 2007 8-K dated October 16,
2007)
 *Incorporated
by reference


+Schedules
and other attachments to the indicated exhibit have been omitted.  The
Company agrees to furnish supplementally to the Commission upon request a copy
of any omitted schedules or attachments.


(1)
                Incorporated
      by reference to the exhibit of the same number filed with the Company's
      registration statement on Form SB-2 (33-69270) that was declared effective
      on November 12, 1993.
 (2)
                Incorporated
      by reference to the Company's Form 10-QSB report for the quarter ended
      September 30, 1994 filed on November 14, 1994. It should be noted that
      Exhibits 10.25 through 10.34 were previously numbered 10.1 through 10.10
      in that report.


(3)
              Indicates
      a management contract or compensation plan or
  arrangement.





67


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


MACE
SECURITY INTERNATIONAL, INC.
 
 By:
                      /s/
      Dennis R.
Raefield.
 Dennis R.
Raefield
 President
and Chief Executive Officer
 
 DATED the
25 day of March, 2009
 
 KNOW ALL
MEN BY THESE PRESENTS that the undersigned does hereby constitute and appoint
Dennis R. Raefield and Gregory M. Krzemien, or either of them acting alone, his
true and lawful attorney-in-fact and agent, with full power of substitution and
revocation for him and in his name, place and stead, in any and all capacities,
to sign this Annual Report on Form 10-K of Mace Security International, Inc. and
any and all amendments to the Report and to file the same with all exhibits
thereto, and other documents in connection therewith, with the United States
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated:


Name
              
              Title
              
              Date/s/ Dennis R. Raefield
              
              President,
      Chief Executive Officer
              
              March
      25, 2009Dennis
      R. Raefield.
              
              and
      Director(Principal
      Executive Officer)/s/ Gregory M. Krzemien
              
              Chief
      Financial Officer
              
              March
      25, 2009Gregory
      M. Krzemien
              
              and
      Treasurer(Principal
      Financial Officer andPrinciple
      Accounting Officer)/s/ Mark S. Alsentzer
              
              Director
              
              March
      25, 2009Mark
      S. AlsentzerDirector
              
              March
      25, 2009Constantine
      N. Papadakis, Ph.D./s/Gerald T. LaFlamme
              
              Director
              
              March
      25, 2009Gerald
      T. LaFlamme/s/John C. Mallon
              
              Chairman
      of the Board
              
              March
      25 2009John
      C. Mallon





68





Mace
Security International, Inc.
 Audited
Consolidated Financial Statements
 Years
ended December 31, 2008, 2007, and 2006
 
 Contents
 
 Report
      of Independent Registered Public Accounting Firm
                F-2Audited
      Consolidated Financial StatementsConsolidated
      Balance Sheets
                F-3Consolidated
      Statements of Operations
                F-5Consolidated
      Statements of Stockholders’ Equity
                F-6Consolidated
      Statements of Cash Flows
                F-7Notes
      to Consolidated Financial Statements
                F-8
 F-1
 Report of Independent
Registered Public Accounting Firm
 Board of
Directors
 Mace
Security International, Inc. and Subsidiaries
 
 We have audited the accompanying
consolidated balance sheets of Mace Security International, Inc. (a Delaware
corporation) and Subsidiaries (the Company) as of December 31, 2008 and 2007 and
the related consolidated statements of operations, changes in stockholders’
equity and cash flows for each of the three years in the period ended December
31, 2008.  These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
 
 We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
 
 In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Mace Security International, Inc. and
Subsidiaries as of December 31, 2008 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, 2008, in conformity with accounting principles generally
accepted in the United States of America.
 /s/ Grant Thornton
      LLPPhiladelphia, PennsylvaniaMarch
      25, 2009
 
 F-2
 Mace Security International,
Inc. and
Subsidiaries
 Consolidated
Balance Sheets
 
 (In
thousands, except share and par value information)
 
 December 31,2008
                    
                    
                    2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    8,314
                    
                    
                    $
                    8,103Short-term
      investments
                    
                    
                    1,005
                    
                    
                    
                    4,249Accounts
      receivable, less allowance for doubtful accounts of $760 and $791 in 2008
      and 2007, respectively
                    
                    
                    1,852
                    
                    
                    
                    2,920Inventories,
      less reserve for obsolescence of $1,463 and $1,027 in 2008 and 2007,
      respectively
                    
                    
                    7,743
                    
                    
                    
                    9,296Prepaid
      expenses and other current assets
                    
                    
                    1,994
                    
                    
                    
                    2,241Assets
      held for sale
                    
                    
                    4,680
                    
                    
                    
                    5,665Total
      current assets
                    
                    
                    25,588
                    
                    
                    
                    32,474Property
      and equipment:Land
                    
                    
                    6,874
                    
                    
                    
                    12,322Buildings
      and leasehold improvements
                    
                    
                    12,642
                    
                    
                    
                    17,418Machinery
      and equipment
                    
                    
                    5,332
                    
                    
                    
                    6,353Furniture
      and fixtures
                    
                    
                    511
                    
                    
                    
                    558Total
      property and equipment
                    
                    
                    25,359
                    
                    
                    
                    36,651Accumulated
      depreciation and amortization
                    
                    
                    (7,164
                    )
                    
                    
                    (8,477
                    )Total
      property and equipment, net
                    
                    
                    18,195
                    
                    
                    
                    28,174Goodwill
                    
                    
                    6,887
                    
                    
                    
                    8,231Other
      intangible assets, net of accumulated amortization  of $1,472
      and $1,123 in 2008 and 2007, respectively
                    
                    
                    3,449
                    
                    
                    
                    5,565Other
      assets
                    
                    
                    917
                    
                    
                    
                    992Total
      assets
                    
                    $
                    55,036
                    
                    
                    $
                    75,436
 
 The
accompanying notes are an integral
 part
of these consolidated financial statements.
  F-3
 
 December 31,2008
                    
                    
                    2007LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Current
      portion of long-term debt and notes payable
                    
                    $
                    2,502
                    
                    
                    $
                    2,022Accounts
      payable
                    
                    
                    2,287
                    
                    
                    
                    4,661Income
      taxes payable
                    
                    
                    350
                    
                    
                    
                    778Deferred
      revenue
                    
                    
                    131
                    
                    
                    
                    174Accrued
      expenses and other current liabilities
                    
                    
                    2,649
                    
                    
                    
                    2,581Liabilities
      related to assets held for sale
                    
                    
                    1,644
                    
                    
                    
                    4,494Total
      current liabilities
                    
                    
                    9,563
                    
                    
                    
                    14,710Long-term
      debt, net of current portion
                    
                    
                    2,306
                    
                    
                    
                    7,160Commitments
                    
                    
                    -
                    
                    
                    
                    -Stockholders’
      equity:Preferred
      stock, $.01 par value: authorized shares-10,000,000, issued and
      outstanding shares-none
                    
                    
                    -
                    
                    
                    
                    -Common
      stock, $.01 par value: authorized shares-100,000,000, issued and
      outstanding shares of 16,285,377 and 16,465,253 in 2008 and 2007,
      respectively
                    
                    
                    163
                    
                    
                    
                    165Additional
      paid-in capital
                    
                    
                    94,161
                    
                    
                    
                    93,685Accumulated
      other comprehensive (loss) income
                    
                    
                    (5
                    )
                    
                    
                    322Accumulated
      deficit
                    
                    
                    (51,147
                    )
                    
                    
                    (40,495
                    )43,172
                    
                    
                    
                    53,677Less
      treasury stock at cost – 5,532 and 53,909 shares in 2008 and 2007,
      respectively
                    
                    
                    (5
                    )
                    
                    
                    (111
                    )Total
      stockholders’ equity
                    
                    
                    43,167
                    
                    
                    
                    53,566Total
      liabilities and stockholders’ equity
                    
                    $
                    55,036
                    
                    
                    $
                    75,436
 The
accompanying notes are an integral
 part
of these consolidated financial statements.
  F-4
 Mace
Security International, Inc. and Subsidiaries
 Consolidated
Statements of Operations
 
 (In
thousands, except share and per share information)
 Year ended December
    31,2008
                    
                    
                    2007
                    
                    
                    2006Revenues:Car
      wash and detailing services
                    
                    $
                    8,327
                    
                    
                    $
                    8,493
                    
                    
                    $
                    9,123Lube
      and other automotive services
                    
                    
                    2,631
                    
                    
                    
                    2,761
                    
                    
                    
                    3,089Fuel
      and merchandise
                    
                    
                    1,821
                    
                    
                    
                    1,098
                    
                    
                    
                    1,338Security
                    
                    
                    20,788
                    
                    
                    
                    22,278
                    
                    
                    
                    23,366Digital
      media marketing
                    
                    
                    17,290
                    
                    
                    
                    7,625
                    
                    
                    
                    -50,857
                    
                    
                    
                    42,255
                    
                    
                    
                    36,916Cost
      of revenues:Car
      wash and detailing services
                    
                    
                    6,591
                    
                    
                    
                    6,704
                    
                    
                    
                    7,203Lube
      and other automotive services
                    
                    
                    2,015
                    
                    
                    
                    2,114
                    
                    
                    
                    2,393Fuel
      and merchandise
                    
                    
                    1,826
                    
                    
                    
                    975
                    
                    
                    
                    1,232Security
                    
                    
                    15,071
                    
                    
                    
                    16,223
                    
                    
                    
                    17,427Digital
      media marketing
                    
                    
                    10,769
                    
                    
                    
                    6,120
                    
                    
                    
                    -36,272
                    
                    
                    
                    32,136
                    
                    
                    
                    28,255Selling,
      general and administrative expenses
                    
                    
                    20,639
                    
                    
                    
                    17,757
                    
                    
                    
                    15,563Depreciation
      and amortization
                    
                    
                    1,281
                    
                    
                    
                    1,219
                    
                    
                    
                    1,114Goodwill
      and asset impairment charges
                    
                    
                    5,449
                    
                    
                    
                    447
                    
                    
                    
                    151Operating
      loss
                    
                    
                    (12,784
                    )
                    
                    
                    (9,304
                    )
                    
                    
                    (8,167
                    )Interest
      expense, net
                    
                    
                    (102
                    )
                    
                    
                    (378
                    )
                    
                    
                    (701
                    )Other
      (loss) income
                    
                    
                    (2,160
                    )
                    
                    
                    1,003
                    
                    
                    
                    848Loss
      from continuing operations before income tax expense
                    
                    
                    (15,046
                    )
                    
                    
                    (8,679
                    )
                    
                    
                    (8,020
                    )Income
      tax expense
                    
                    
                    100
                    
                    
                    
                    98
                    
                    
                    
                    156Loss
      from continuing operations
                    
                    
                    (15,146
                    )
                    
                    
                    (8,777
                    )
                    
                    
                    (8,176
                    )Income
      from discontinued operations, net of tax expense of $0 in 2008, 2007
      and  2006
                    
                    
                    4,494
                    
                    
                    
                    2,192
                    
                    
                    
                    1,394Net
      loss
                    
                    $
                    (10,652
                    )
                    
                    $
                    (6,585
                    )
                    
                    $
                    (6,782
                    )Per
      share of common stock (basic and diluted):Loss
      from continuing operations
                    
                    $
                    (0.92
                    )
                    
                    $
                    (0.56
                    )
                    
                    $
                    (0.53
                    )Income
      from discontinued operations, net of tax
                    
                    
                    0.27
                    
                    
                    
                    0.14
                    
                    
                    
                    0.09Net
      loss
                    
                    $
                    (0.65
                    )
                    
                    $
                    (0.42
                    )
                    
                    $
                    (0.44
                    )Weighted
      average shares outstanding:Basic
                    
                    
                    16,464,760
                    
                    
                    
                    15,810,705
                    
                    
                    
                    15,274,498Diluted
                    
                    
                    16,464,760
                    
                    
                    
                    15,810,705
                    
                    
                    
                    15,274,498
 The
accompanying notes are an integral
 part
of these consolidated financial statements.
  F-5




Mace
Security International, Inc. and Subsidiaries
 Consolidated
Statements of Stockholders' Equity
 (In
thousands, except share information)
 
 CommonStock
                                        
                                        
                                        Additional
                                          Paid-in
                                        
                                        
                                        Accumulated
                                          Other
                                          Comprehensive
                                        
                                        
                                        Accumulated
                                        
                                        
                                        TreasuryShares
                                        
                                        
                                        Amount
                                        
                                        
                                        Capital
                                        
                                        
                                        Income (Loss)
                                        
                                        
                                        Deficit
                                        
                                        
                                        Stock
                                        
                                        
                                        TotalBalance
      at December 31, 2005
                                        
                                        
                                        15,272,882
                                        
                                        
                                        
                                        153
                                        
                                        
                                        
                                        88,458
                                        
                                        
                                        
                                        167
                                        
                                        
                                        
                                        (27,128
                                        )
                                        
                                        
                                        
                                        
                                        
                                        61,650Stock-based
      compensation expense
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,388
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,388Exercise
      of common stock options
                                        
                                        
                                        2,500
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        4
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        4Change
      in fair value of cash flow hedge
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        6
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        6Unrealized
      gain on short-term investments, net of tax
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        240
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        240Net
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (6,782
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (6,782
                                        )Total
      comprehensive loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (6,536
                                        )Balance
      at December 31, 2006
                                        
                                        
                                        15,275,382
                                        
                                        
                                        
                                        153
                                        
                                        
                                        
                                        89,850
                                        
                                        
                                        
                                        413
                                        
                                        
                                        
                                        (33,910
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        56,506Common
      stock issued in purchase acquisition
                                        
                                        
                                        1,176,471
                                        
                                        
                                        
                                        12
                                        
                                        
                                        
                                        2,883
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,895Exercise
      of common stock options
                                        
                                        
                                        13,400
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        28
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        28Purchase
      of treasury stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (111
                                        )
                                        
                                        
                                        (111
                                        )Stock-based
      compensation expense
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        924
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        924Change
      in fair value of cash flow hedge
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (17
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (17
                                        )Unrealized
      gain (loss) on short-term investments, net of tax
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (74
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (74
                                        )Net
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (6,585
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (6,585
                                        )Total
      comprehensive loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (6,676
                                        )Balance
      at December 31, 2007
                                        
                                        
                                        16,465,253
                                        
                                        
                                        $
                                        165
                                        
                                        
                                        $
                                        93,685
                                        
                                        
                                        $
                                        322
                                        
                                        
                                        $
                                        (40,495
                                        )
                                        
                                        $
                                        (111
                                        )
                                        
                                        $
                                        53,566Purchase
      and retirement of treasury stock
                                        
                                        
                                        (179,876
                                        )
                                        
                                        
                                        (2
                                        )
                                        
                                        
                                        (246
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        106
                                        
                                        
                                        
                                        (142
                                        )Stock-based
      compensation expense (see note 6)
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        629
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        629Adjustment
      to common stock value issued in purchase acquisition
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        93
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        93Unrealized
      loss on short-term investments
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (327
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (327
                                        )Net
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (10,652
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (10,652
                                        )Total
      comprehensive loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (10,979
                                        )Balance
      at December 31, 2008
                                        
                                        
                                        16,285,377
                                        
                                        
                                        $
                                        163
                                        
                                        
                                        $
                                        94,161
                                        
                                        
                                        $
                                        (5
                                        )
                                        
                                        $
                                        (
      51,147
                                        )
                                        
                                        $
                                        (5
                                        )
                                        
                                        $
                                        43,167
 The  accompany
notes are an integral
 part
of these consolidated financial statements.
  F-6
 Mace
Security International, Inc. and Subsidiaries
 Consolidated
Statements of Cash Flows
 (In
thousands)
  Year ended December
      31,2008
                                                        
                                                        
                                                        2007
                                                        
                                                        
                                                        2006Operating
      activitiesNet
      loss
                                                        
                                                        $
                                                        (10,652
                                                        )
                                                        
                                                        $
                                                        (6,585
                                                        )
                                                        
                                                        $
                                                        (6,782
                                                        )Income
      from discontinued operations, net of tax
                                                        
                                                        
                                                        4,494
                                                        
                                                        
                                                        
                                                        2,192
                                                        
                                                        
                                                        
                                                        1,394Loss
      from continuing operations
                                                        
                                                        
                                                        (15,146
                                                        )
                                                        
                                                        
                                                        (8,777
                                                        )
                                                        
                                                        
                                                        (8,176
                                                        )Adjustments
      to reconcile loss from continuing operations to net cash used in operating
      activities:Depreciation
      and amortization
                                                        
                                                        
                                                        1,281
                                                        
                                                        
                                                        
                                                        1,229
                                                        
                                                        
                                                        
                                                        1,148Stock-based
      compensation
                                                        
                                                        
                                                        626
                                                        
                                                        
                                                        
                                                        896
                                                        
                                                        
                                                        
                                                        1,375Provision
      for losses on receivables
                                                        
                                                        
                                                        (31
                                                        )
                                                        
                                                        
                                                        377
                                                        
                                                        
                                                        
                                                        297Loss
      (gain) on sale of property and equipment
                                                        
                                                        
                                                        9
                                                        
                                                        
                                                        
                                                        (3
                                                        )
                                                        
                                                        
                                                        (663
                                                        )Loss
      (gain) on short-term investments
                                                        
                                                        
                                                        2,338
                                                        
                                                        
                                                        
                                                        (752
                                                        )
                                                        
                                                        
                                                        (311
                                                        )Goodwill
      and asset impairment charges
                                                        
                                                        
                                                        5,449
                                                        
                                                        
                                                        
                                                        447
                                                        
                                                        
                                                        
                                                        151Changes
      in operating assets and liabilities, net of acquisition:Accounts
      receivable
                                                        
                                                        
                                                        1,083
                                                        
                                                        
                                                        
                                                        (39
                                                        )
                                                        
                                                        
                                                        62Inventories
                                                        
                                                        
                                                        1,316
                                                        
                                                        
                                                        
                                                        (2,262
                                                        )
                                                        
                                                        
                                                        439Prepaid
      expenses and other assets
                                                        
                                                        
                                                        262
                                                        
                                                        
                                                        
                                                        (457
                                                        )
                                                        
                                                        
                                                        849Accounts
      payable
                                                        
                                                        
                                                        (2,056
                                                        )
                                                        
                                                        
                                                        634
                                                        
                                                        
                                                        
                                                        (225
                                                        )Deferred
      revenue
                                                        
                                                        
                                                        109
                                                        
                                                        
                                                        
                                                        58
                                                        
                                                        
                                                        
                                                        20Accrued
      expenses
                                                        
                                                        
                                                        297
                                                        
                                                        
                                                        
                                                        801
                                                        
                                                        
                                                        
                                                        (419
                                                        )Income
      taxes payable
                                                        
                                                        
                                                        (421
                                                        )
                                                        
                                                        
                                                        66
                                                        
                                                        
                                                        
                                                        (51
                                                        )Net
      cash used in operating activities-continuing operations
                                                        
                                                        
                                                        (4,884
                                                        )
                                                        
                                                        
                                                        (7,782
                                                        )
                                                        
                                                        
                                                        (5,504
                                                        )Net
      cash (used in) provided by operating activities-discontinued
      operations
                                                        
                                                        
                                                        (1,578
                                                        )
                                                        
                                                        
                                                        (1,473
                                                        )
                                                        
                                                        
                                                        2,387Net
      cash (used in) provided by operating activities
                                                        
                                                        
                                                        (6,462
                                                        )
                                                        
                                                        
                                                        (9,255
                                                        )
                                                        
                                                        
                                                        (3,117
                                                        )Investing
      ActivitiesAcquisition
      of business, net of cash acquired
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (6,947
                                                        )
                                                        
                                                        
                                                        -Purchase
      of property and equipment
                                                        
                                                        
                                                        (684
                                                        )
                                                        
                                                        
                                                        (553
                                                        )
                                                        
                                                        
                                                        (456
                                                        )Proceeds
      from sale of property and equipment
                                                        
                                                        
                                                        1,875
                                                        
                                                        
                                                        
                                                        259
                                                        
                                                        
                                                        
                                                        1,845Payments
      for intangibles
                                                        
                                                        
                                                        (22
                                                        )
                                                        
                                                        
                                                        (15
                                                        )
                                                        
                                                        
                                                        (20
                                                        )Net
      cash provided by investing activities-continuing
operations
                                                        
                                                        
                                                        1,169
                                                        
                                                        
                                                        
                                                        (7,256
                                                        )
                                                        
                                                        
                                                        1,369Net
      cash provided by investing activities-discontinued
    operations
                                                        
                                                        
                                                        8,326
                                                        
                                                        
                                                        
                                                        22,358
                                                        
                                                        
                                                        
                                                        146Net
      cash provided by investing activities
                                                        
                                                        
                                                        9,495
                                                        
                                                        
                                                        
                                                        15,103
                                                        
                                                        
                                                        
                                                        1,515Financing
      activitiesPayments
      on long-term debt and capital lease obligations
                                                        
                                                        
                                                        (2,629
                                                        )
                                                        
                                                        
                                                        (713
                                                        )
                                                        
                                                        
                                                        (1,247
                                                        )Proceeds
      from issuance of common stock
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        28
                                                        
                                                        
                                                        
                                                        4Purchase
      and retirement of treasury stock
                                                        
                                                        
                                                        106
                                                        
                                                        
                                                        
                                                        (111
                                                        )
                                                        
                                                        
                                                        -Net
      cash used in financing activities-continuing operations
                                                        
                                                        
                                                        (2,523
                                                        )
                                                        
                                                        
                                                        (796
                                                        )
                                                        
                                                        
                                                        (1,243
                                                        )Net
      cash used in financing activities-discontinued operations
                                                        
                                                        
                                                        (299
                                                        )
                                                        
                                                        
                                                        (1,003
                                                        )
                                                        
                                                        
                                                        (1,459
                                                        )Net
      cash used in financing activities
                                                        
                                                        
                                                        (2,822
                                                        )
                                                        
                                                        
                                                        (1,799
                                                        )
                                                        
                                                        
                                                        (2,703
                                                        )Net
      increase (decrease) in cash and cash equivalents
                                                        
                                                        
                                                        211
                                                        
                                                        
                                                        
                                                        4,048
                                                        
                                                        
                                                        
                                                        (4,305
                                                        )Cash
      and cash equivalents at beginning of year
                                                        
                                                        
                                                        8,103
                                                        
                                                        
                                                        
                                                        4,055
                                                        
                                                        
                                                        
                                                        8,360Cash
      and cash equivalents at end of year
                                                        
                                                        
                                                        8,314
                                                        
                                                        
                                                        $
                                                        8,103
                                                        
                                                        
                                                        $
                                                        4,055
 
 The
accompanying notes are an integral
 part
of these consolidated financial statements.
  F-7
 Mace
Security International, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 
 1.
                    Description
      of Business and Basis of
Presentation
 The
accompanyingconsolidated financial
statements include the accounts of Mace Security International, Inc. and its
wholly owned subsidiaries (collectively, the “Company” or “Mace”). All
significant intercompany transactions have been eliminated in consolidation. The
Company currently operates in three business segments: the Security Segment,
producing for sale, consumer safety and personal defense products, as well as
electronic surveillance and monitoring products; the Digital Media Marketing
Segment, selling consumer products on the internet and providing online
marketing services; and the Car Wash Segment, supplying complete car care
services (including wash, detailing, lube, and minor repairs).  The
Company entered the Digital Media Marketing business with its acquisition of
Linkstar Interactive, Inc. (“Linkstar”) on July 20, 2007. See Note 4. Business Acquisitions and
Divestitures. The Company’s remaining car wash operations as of December
31, 2008 were located in Texas. As of December 31, 2008, the results for the
Arizona, Northeast, Florida, San Antonio, Texas and Lubbock, Texas car wash
regions and the Company’s truck washes have been classified as discontinued
operations in the statement of operations and the statement of cash flows. The
statements of operations and the statements of cash flows for the prior years
have been restated to reflect the discontinued operations in accordance with
Statement of Financial Accounting Standards (“SFAS”) 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. See Note 5. Discontinued Operations and
Assets Held for Sale.
 
 2.
                    Summary
      of Significant Accounting Policies
 
 Revenue Recognition and Deferred
Revenue
 
 The
Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”)
No. 104, Revenue Recognition
in Financial Statements. Under SAB No. 104, the Company recognizes
revenue when the following criteria have been met: persuasive evidence of an
arrangement exists, the fees are fixed and determinable, no significant
obligations remain and collection of the related receivable is reasonably
assured. Allowances for sales returns, discounts and allowances, are estimated
and recorded concurrent with the recognition of the sale and are primarily based
on historical return rates.
 Revenue
from the Company’s Security Segment is recognized when shipments are made, or
for export sales when title has passed. Shipping and handling charges and costs
of $669,000, $713,000 and $745,000 in 2008, 2007 and 2006 respectively, are
included in revenues and selling, general, and administrative (SG&A)
expenses.
 
 The
e-commerce division recognizes revenue and the related product costs for trial
product shipments after the expiration of the trial period. Marketing costs
incurred by the e-commerce division are recognized as incurred. The online
marketing division recognizes revenue and cost of sales consistent with the
provisions of the Emerging Issues Task Force (“EITF”) Issue No. 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent, the Company records revenue based on
the gross amount received from advertisers and the amount paid to the publishers
placing the advertisements as cost of sales. Shipping and handling charges
related to the e-commerce division of  the Company’s Digital Media
Marketing Segment of $1.4 million and $384,000 are included in SG&A expenses
for the year ended December 31, 2008 and 2007, respectively.
 Revenue
from the Company’s Car Wash Segment is recognized, net of customer coupon
discounts, when services are rendered or fuel or merchandise is sold. Sales tax
collected from customers and remitted to the applicable taxing authorities is
accounted for on a net basis, with no impact to revenues. The Company records a
liability for gift certificates, ticket books, and seasonal and annual passes
sold at its car wash locations but not yet redeemed. The Company estimates these
unredeemed amounts based on gift certificates and ticket book sales and
redemptions throughout the year as well as utilizing historical sales and
redemption rates per the car washes’ point-of-sale systems. Seasonal and annual
passes are amortized on a straight-line basis over the time during which the
passes are valid.
  F-8
 Cash
and Cash Equivalents
 Cash and
cash equivalents consist of cash and highly liquid short-term investments with
original maturities of three months or less, and credit card deposits which are
converted into cash within two to three business days.
 Short-Term
Investments
 At
December 31, 2008 the Company had approximately $1.0 million of investments on
short term investments classified as available for sale in one broker account
consisting of $190,000 of auction rate securities and $814,000 in certificate of
deposits.  The auction rate securities were sold in January 2009 at a
realized gain of $10,000. The Company realized a total (loss) gain of $(2.34)
million, $758,000 and $323,000, respectively, in the years ended December 31,
2008, 2007 and 2006. Additionally, a cumulative unrealized loss, net of tax, of
approximately $5,000 is included as a separate component of equity in
Accumulated Other Comprehensive Income at December 31, 2008. The loss of $(2.34)
million in 2008, included a $2.2 million loss on the Company’s investment in the
Victory Fund, Ltd. Hedge fund investment. We requested redemption of this hedge
fund investment on June 18, 2008. Under the Limited Partnership Agreement with
the hedge fund, the redemption request was timely for a return of the investment
account balance as of September 30, 2008, payable ten business days after the
end of the September 30, 2008 quarter. The hedge fund acknowledged that the
redemption amount owed was $3,206,748; however, on October 15, 2008 the hedge
fund asserted the right to withhold the redemption amount due to extraordinary
market circumstances. After negotiations, the hedge fund agreed to pay the
redemption amount in two installments, $1,000,000 on November 3, 2008 and
$2,206,748 on January 15, 2009. The Company received the first installment of
$1,000,000 on November 5, 2008.  The Company has not received the
second installment.  On January 21, 2009, the principal of the Victory
Fund, Ltd, Arthur Nadel, was criminally charged with operating a “Ponzi”
scheme.  Additionally, the SEC has initiated a civil case against Mr.
Nadel and others alleging that Arthur Nadel defrauded investors in the Victory
Fund, LLC and five other hedge funds by massively overstating the value of
investments in these funds and issuing false and misleading account statements
to investors. The SEC also alleges that Mr. Nadel transferred large sums of
investor funds to secret accounts which only he controlled.  A
receiver (“Receiver”) has been appointed in the civil case and has been directed
to administer and manage the business affairs, funds, assets, and any other
property of Mr. Nadel (“Defendant”), the Victory Fund, LLC and the five other
hedge funds and conduct and institute such legal proceedings that benefit the
hedge fund investors.  Accordingly, we recorded a charge of $2,206,748
as an investment loss at December 31, 2008. If we recover any of the investment
loss, such amounts will be recorded as recoveries in future periods when
received. The original amount invested in the hedge fund was
$2,000,000.
 Accounts
Receivable
 The
Company’s accounts receivable are due from trade customers.  Credit is
extended based on evaluation of customers’ financial condition and, generally,
collateral is not required.  Accounts receivable payment terms vary
and amounts due from customers are stated in the financial statements net of an
allowance for doubtful accounts.  Accounts outstanding longer than the
payment terms are considered past due.  The Company determines its
allowance by considering a number of factors, including the length of time trade
accounts receivable are past due, the Company’s previous loss history, the
customer’s current ability to pay its obligation to the Company, and the
condition of the general economy and the industry as a whole.  The
Company writes off accounts receivable when they are deemed uncollectible, and
payments subsequently received on such receivables are credited to the allowance
for doubtful accounts. Risk of losses from international sales within the
Security Segment are reduced by requiring substantially all international
customers to provide either irrevocable confirmed letters of credit or cash
advances.
 Inventories
 Inventories
are stated at the lower of cost or market.  Cost is determined using
the first-in first-out (FIFO) method for security, e-commerce and car care
products.  Inventories at the Company’s car wash locations consist of
various chemicals and cleaning supplies used in operations and merchandise and
fuel for resale to consumers.  Inventories within the Company’s
Security Segment consist of defense sprays, child safety products, electronic
security monitors, cameras and digital recorders, and various other consumer
security and safety products. Inventories within the e-commerce division of the
Digital Media Marketing segment consist of several health and beauty products.
The Company continually and at least on a quarterly basis reviews the book value
of slow moving inventory items, as well as, discontinued product lines to
determine if inventory is properly valued. The Company identifies slow moving or
discontinued product lines by a detail review of recent sales volumes of
inventory items as well as a review of recent selling prices versus cost and
assesses the ability to dispose of inventory items at a price greater than cost.
If it is determined that cost is less than market value, then cost is used for
inventory valuation. If market value is less than cost, than an adjustment is
made to the Company’s obsolescence reserve to adjust the inventory to market
value. When slow moving items are sold at a price less than cost, the difference
between cost and selling price is charged against the established obsolescence
reserve.
  F-9
 Property
and Equipment
 Property
and equipment are stated at cost.  Depreciation is recorded using the
straight-line method over the estimated useful lives of the assets, which are
generally as follows: buildings and leasehold improvements - 15 to 40 years;
machinery and equipment - 5 to 20 years; and furniture and fixtures - 5 to 10
years.  Significant additions or improvements extending assets' useful
lives are capitalized; normal maintenance and repair costs are expensed as
incurred. Depreciation expense is approximately $1.3 million, $1.2 million and
$1.1 million for the years ended December 31, 2008, 2007 and 2006
respectively.  Maintenance and repairs are charged to expense as
incurred and amounted to approximately $273,000 in 2008, $306,000 in 2007 and
$347,000 in 2006.
 
 Asset
Impairment Charges
 
 In
accordance with the Statement of Financial Accounting Standards (“SFAS”) 144,
Accounting for the Impairment
or Disposal of Long-Lived Assets, we periodically review the carrying
value of our long-lived assets held and used, and assets to be disposed of, for
possible impairment when events and circumstances warrant such a review. Also see Note 18. Asset Impairment
Charges.
 
 Goodwill
 Goodwill
represents the premium paid over the fair value of the net tangible and
intangible assets we have acquired in business combinations.  SFAS No.
142, Goodwill and Other
Intangible Assets (“SFAS 142”), requires the Company to perform a
goodwill impairment test on at least an annual basis. Application of the
goodwill impairment test requires significant judgments including estimation of
future cash flows, which is dependent on internal forecasts, estimation of the
long-term rate of growth for the businesses, the useful life over which cash
flows will occur and determination of our weighted average cost of
capital.  Changes in these estimates and assumptions could materially
affect the determination of fair value and/or conclusions on goodwill impairment
for each reporting unit.  The Company conducts its annual goodwill
impairment test as of November 30 for its Security Segment and as of June 30 for
its Digital Media Marketing Segment, or more frequently if indicators of
impairment exist.  We periodically analyze whether any such indicators
of impairment exist.  A significant amount of judgment is involved in
determining if an indicator of impairment has occurred. Such indicators may
include a sustained, significant decline in our share price and market
capitalization, a decline in our expected future cash flows, a significant
adverse change in legal factors or in the business climate, unanticipated
competition and/or slower expected growth rates, among others.  The
Company compares the fair value of each of its reporting units to their
respective carrying values, including related goodwill.  Future
changes in the industry could impact the results of future annual impairment
tests.  Goodwill at December 31, 2008 and 2007 was $6.9 million and
$8.2 million, respectively.  There can be no assurance that future
tests of goodwill impairment will not result in impairment charges. Alsosee Note 5.
Goodwill.
 
 Other
Intangible Assets
 
 Other
intangible assets consist of deferred financing costs, trademarks, customer
lists, non-compete agreements, product lists, and patent costs. In accordance
with SFAS 142, our trademarks are considered to have indefinite lives and as
such, are not subject to amortization. These assets will be tested for
impairment annually and whenever there is an impairment indicator. Estimating
future cash requires significant judgment and projections may vary from cash
flows eventually realized. Several impairment indicators are beyond our control,
and determining whether or not they will occur cannot be predicted with any
certainty.  Customer lists, product lists, software costs, patents and
non-compete agreements are amortized on a straight-line or accelerated basis
over their respective estimated useful lives. Amortization of other intangible
assets was approximately $509,000, $417,000 and $283,000 for the years ended
December 31, 2008, 2007, and 2006, respectively. Also see Note 18. Asset Impairment
Charges.
 
 Insurance
 The
Company insures for auto, general liability, and workers’ compensation claims
through participation in a captive insurance program with other unrelated
businesses. The Company maintains excess coverage through occurrence-based
policies.  With respect to participating in the captive insurance
program, the Company set aside an actuarially determined amount of cash in a
restricted “loss fund” account for the payment of claims under the policies. The
Company funds these accounts annually as required by the captive insurance
company. Should funds deposited exceed claims ultimately incurred and paid,
unused deposited funds are returned to the Company with interest on or about the
fifth anniversary of the policy year-end.  The Company’s participation
in the captive insurance program is secured by a letter of credit in the amount
of $827,747 at December 31, 2008.  The Company records a monthly
expense for losses up to the reinsurance limit per claim based on the Company’s
tracking of claims and the insurance company’s reporting of amounts paid on
claims plus an estimate of reserves for possible future losses on reported
claims as well as claims incurred but not reported.
  F-10
 Income
Taxes
 Deferred
income taxes are determined based on the difference between the financial
accounting and tax bases of assets and liabilities. Deferred income tax expense
(benefit) represents the change during the period in the deferred income tax
assets and deferred income tax liabilities.  Deferred tax assets
include tax loss and credit carryforwards and are reduced by a valuation
allowance if, based on available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, Accounting for Uncertainty
in Income Taxes (“FIN 48”), an interpretation of FASB Statement No. 109
(“SFAS 109”). FIN 48 prescribes a model for the recognition and measurement of a
tax position taken or expected to be taken in a tax return, and provides
guidance on recognition, classification, interest and penalties, disclosure and
transition. Implementation of FIN 48 did not result in a cumulative effect
adjustment to retained earnings.  At December 31, 2008 the Company did
not have any significant unrecognized tax benefits.
 Supplementary
Cash Flow Information
 
 Interest
paid on all indebtedness was approximately $479,000, $1.5 million and $2.0
million for the years ended December 31, 2008, 2007 and 2006,
respectively.
 
 Income
taxes paid were approximately $447,000, $81,000 and $146,000 for the year ended
December 31, 2008, 2007, and 2006, respectively.
 
 Noncash
investing and financing activity of the Company includes the recording of a
$500,000 note payable to Company Shareholders issued as part of the
consideration paid for the acquisition of Linkstar, a $920,000 note receivable
recorded as part of the consideration received from the sale of the Company’s
truck washes, and the sale of property and simultaneous pay down of related
mortgages of $9.2 million, all in 2007. Additionally, the Company sold a Dallas,
Texas car wash property in 2008 and simultaneously paid down a related mortgage
of $1.2 million.
 
 Advertising
 
 The
Company expenses advertising costs, including advertising production costs, as
they are incurred or when the first time advertising takes place.  The
Company’s costs of coupon advertising are recorded as a prepaid asset and
amortized to advertising expense during the period of distribution and customer
response, which is typically two to four months.  Prepaid advertising
costs were $30,000 and $22,000 at December 31, 2008 and 2007,
respectively.  Advertising expense was approximately $766,000,
$664,000 and $879,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.
 
 Stock
Based Compensation
 
 The
Company has two stock-based employee compensation plans. Prior to January 1,
2006, the Company accounted for those plans under the recognition and
measurement principles of APB 25, Accounting for Stock Issued to
Employees, and related interpretations.
 
 On
January 1, 2006, the Company adopted SFAS 123(R), Share-Based Payment, which
requires that the compensation cost relating to share-based payment transactions
be recognized in the financial statements. We adopted SFAS 123 (R) using the
modified prospective method, which results in recognition of compensation
expense for all share-based awards granted or modified after December 31, 2005
as well as all unvested awards outstanding at the date of adoption. The cost is
recognized as compensation expense on a straight-line basis over the life of the
instruments, based upon the grant date fair value of the equity or liability
instruments issued. Total stock compensation expense is approximately $629,000
for the year ended December 31, 2008, ($626,000 in SG&A expense and $3,000
in discontinued operations); $924,000 for the year ended December 31, 2007,
($896,000 in SG&A expense and $28,000 in discontinued operations), and $1.39
million for the year ended December 31, 2006, ($1.36 million in SG&A
expense, $15,000 in cost of revenues, and $13,000 in discontinued
operations).
    F-11
 Year
      ended December,2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006Expected
      term (years)
                                      
                                      10
                                      
                                      
                                      10
                                      
                                      
                                      10Risk-free
      interest rate
                                      
                                      3.50%
      to 4.25%
                                      
                                      
                                      4.24%
      to 5.16%
                                      
                                      
                                      4.36%
      to 5.14%Volatility
                                      
                                      46%
      to 49%
                                      
                                      
                                      52%
                                      
                                      
                                      44%
      to 52%Dividend
      yield
                                      
                                      0%
                                      
                                      
                                      0%
                                      
                                      
                                      0%Forfeiture
      Rate
                                      
                                      11%
      to 31%
                                      
                                      
                                      33%
                                      
                                      
                                      0%
 Expected
term: The Company’s expected life is based on the period the options are
expected to remain outstanding. The Company estimated this amount based on
historical experience of similar awards, giving consideration to the contractual
terms of the awards, vesting requirements and expectations of future
behavior.
 
 Risk-free
interest rate: The Company uses the risk-free interest rate of a U.S. Treasury
Note with a similar term on the date of the grant.
 
 Expected
volatility: The Company calculates the volatility of the stock price based on
historical value and corresponding volatility of the Company’s stock price over
the prior four years, to correspond with the Company’s focus on the Security
Segment.
 
 Dividend
yield: The Company uses a 0% expected dividend yield as the Company has not paid
and does not anticipate declaring dividends in the near future.
 
 Forfeitures:
The Company estimates forfeitures based on historical experience and factors of
known historical or future projected work force reduction actions to anticipate
the projected forfeiture rates.
 
 The
weighted-averages of the fair value of stock option grants are $1.50, $1.67 and
$1.53 per share in 2008, 2007 and 2006, respectively. As of December 31, 2008,
total unrecognized stock-based compensation expense is $252,000, which has a
weighted average period to be recognized of approximately 1.2
years.
 
 The Black
Scholes option valuation model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company’s employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those
estimates.
 
 Fair
Value of Financial Instruments
 
 The
Company’s financial instruments consist primarily of cash and cash equivalents,
trade receivables, trade payables and debt instruments.  The carrying
values of cash and cash equivalents, trade receivables, and trade payables are
considered to be representative of their respective fair values.
 
 Based on the borrowing rates currently
available to the Company for bank loans with similar terms and average
maturities, the carrying values and fair values of the Company’s fixed and
variable rate debt instruments at December 31, 2008 and 2007, including debt
recorded as liabilities related to assets held for sale, were as follows (in
thousands):
  F-12
 2008
                            
                            
                            2007Carrying
                              Value
                            
                            
                            Fair
                              Value
                            
                            
                            Carrying
                              Value
                            
                            
                            Fair
                              ValueFixed
      rate debt
                            
                            $
                            24
                            
                            
                            $
                            24
                            
                            
                            $
                            500
                            
                            
                            $
                            500Variable
      rate debt
                            
                            
                            6,428
                            
                            
                            
                            6,564
                            
                            
                            
                            13,058
                            
                            
                            
                            13,279Total
                            
                            $
                            6,452
                            
                            
                            $
                            6,588
                            
                            
                            $
                            13,558
                            
                            
                            $
                            13,779
 Derivative
Instruments
 
 SFAS 133,
Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133"), as amended by SFAS 137
and SFAS 138, specifies the accounting and disclosure requirements for such
instruments.
 
 On
October 14, 2004, we entered into an interest rate cap arrangement that
effectively changed our interest rate exposure on approximately $7 million of
variable rate debt. The variable rate debt floated at prime plus .25%. The hedge
contract had a 36-month term and capped the interest rate on the $7 million of
variable rate debt at 6.5%. The contract expired on September 30,
2007.
 
 The
interest rate cap arrangement was effective in hedging changes in cash flows
related to certain debt obligations during 2007 and 2006.
 
 Business
Combinations
 
 In
accordance with SFAS 141, Business Combinations, the
Company allocates the cost of an acquired business to the assets acquired and
the liabilities assumed based on estimates of fair values
thereof.  These estimates are revised during the allocation period as
necessary when, and if, information regarding contingencies becomes available to
define and quantify assets acquired and liabilities assumed.  The
allocation period varies but does not exceed one year.  To the extent
contingencies such as pre-acquisition environmental matters, pre-acquisition
liabilities including deferred revenues, litigation and related legal fees are
resolved or settled during the allocation period, such items are included in the
revised allocation of the purchase price.  After the allocation
period, the effect of changes in such contingencies is included in results of
operations in the period in which the adjustment is determined.
 
 New
Accounting Standards
 The
Company has partially adopted SFAS No. 157, Fair Value Measurements,
(“SFAS 157”) which defines fair value, establishes guidelines for measuring
fair value and expands disclosures regarding fair value measurements for those
assets and liabilities measured at fair value on a recurring and nonrecurring
basis. SFAS 157
does not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements.
The provisions of SFAS 157 were deferred for those nonfinancial assets and
nonfinancial liabilities that are typically valued by the Company on a
nonrecurring basis which include long-lived assets, goodwill and other
intangible assets.
 
 The
following table shows the assets included in the accompanying balance sheet
which are measured at fair value on a recurring basis and the source of the fair
value measurement:
 
 (In
      thousands)
                                                
                                                Fair
      Value Measurement UsingDescription
                                                
                                                Fair
      Value at
                                                  December
      31,
                                                  2008
                                                
                                                
                                                Quoted
      Market
                                                  Prices(1)
                                                
                                                
                                                Observable
                                                  Inputs(2)
                                                
                                                
                                                Unobservable
                                                  Inputs(3)Short-term
      investments
                                                
                                                $
                                                1,005
                                                
                                                
                                                $
                                                1,005
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                -
 
 (1)  This
is the highest level of fair value input and represents inputs to fair value
from quoted prices in active markets for identical assets and liabilities to
those being valued.
 (2)  Directly
or indirectly observable inputs, other than quoted prices in active markets, for
the assets or liabilities being valued including but not limited to, interest
rates, yield curves, principal-to principal markets, etc.
 (3)   Lowest
level of fair value input because it is unobservable and reflects the Company’s
own assumptions about what market participants would use in pricing assets and
liabilities at fair value.
  F-13
  SFAS No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities, was also effective at the
beginning of the Company’s 2008 fiscal year. The Company has elected not to
apply the fair value option to measure any of the financial assets and
liabilities on its balance sheet not already valued at fair value under other
accounting pronouncements. These other financial assets and liabilities are
primarily accounts receivable, accounts payable and debt which are reported at
historical value. The fair value of these financial assets and liabilities
approximate their fair value because of their short duration and, in the case of
the debt, because it carries variable interest rates which are reset
frequently.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations. This
statement replaces SFAS No. 141, Business Combinations, and
requires an acquirer to recognize the assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited exceptions. SFAS No.
141R requires costs incurred to effect the acquisition to be recognized
separately from the acquisition as period costs. SFAS No. 141R also requires the
acquirer to recognize restructuring costs that the acquirer expects to incur,
but is not obligated to incur, separately from the business combination. In
addition, this statement requires an acquirer to recognize assets and
liabilities assumed arising from contractual contingencies as of the acquisition
date, measured at their acquisition-date fair values. Other key provisions of
this statement include the requirement to recognize the acquisition-date fair
values of research and development assets separately from goodwill and the
requirement to recognize changes in the amount of deferred tax benefits that are
recognizable due to the business combination in either income from continuing
operations in the period of the combination or directly in contributed capital,
depending on the circumstances. With the exception of certain tax-related
aspects described above, this statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period after December 15, 2008. The Company will comply
with the provisions of SFAS No. 141R should the Company complete an acquisition
subsequent to December 31, 2008.
 
 In March
2008, the FASB issued SFAS No. 161,Disclosures about Derivative
Instruments and Hedging Activities- an amendment of FASB Statement No.
133. This Statement amends and expands the disclosure requirements for
derivative instruments and hedging activities, with the intent to provide users
of financial statements with an enhanced understanding of how and why an entity
uses derivative instruments, how derivative instruments and related hedged items
are accounted for, and how derivative instruments and related hedged items
affect an entity’s financial statements. SFAS No. 161 is effective for fiscal
years and interim periods beginning after November 15, 2008. This statement is
effective for the Company beginning in 2009 and is not expected to have an
impact on the Company’s Consolidated Financial Statements.
 
 In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles.SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. This statement will be effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board’s
amendments to AU section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.We do not
expect the adoption of SFAS No. 162 to have material impact on our financial
position, results of operations and cash flow.
 
 3.
                    Business Acquisitions
      and
      Divestitures
 
 Acquisitions
 On July
20, 2007, the Company completed the purchase of all of the outstanding common
stock of Linkstar from Linkstar’s shareholders. Linkstar is an online internet
advertising and e-commerce direct marketing company. Linkstar’s primary assets
at the time of purchase were inventory, accounts receivable, proprietary
software, customer contracts, and its business methods. The acquisition of
Linkstar enabled the Company to expand the marketing of its security products
through online channels and provides the Company with a presence in the online
and digital media services industry. The Company paid approximately $10.5
million to the Linkstar shareholders consisting of $7.0 million in cash at
closing, $500,000 of promissory notes with interest at  5% paid on
January 18, 2008 and 1,176,471 unregistered shares of the Company’s common
stock. The Company’s stock was issued based on a closing price of $2.55 per
share or a total value of $2.9 million. In addition to the $10.5 million of
consideration at closing, the Company incurred approximately $261,000 in related
acquisition costs and recorded an additional estimated receivable of $132,000
for working capital acquired below the minimum working capital requirement of
$500,000, as per the purchase agreement.  The purchase price was
allocated as follows: approximately (i) $248,000 for cash; (ii) $183,000 for
inventory; (iii) $1.12 million for accounts receivable; (iv) $41,000 for prepaid
expenses; (v) $80,000 for equipment; (vi) the assumption of $1.26 million of
liabilities, and (vii) the remainder, or $10.18 million, allocated to goodwill
and other intangible assets. Of the $10.18 million of acquired intangible
assets, $478,000 was assigned to trademarks and $6.89 million was assigned to
goodwill, neither of which is subject to amortization expense. The amount
assigned to goodwill was deemed appropriate based on several factors, including:
(i) multiples paid by market participants for business in the digital media
marketing and e-commerce business; (ii) levels of Linkstar’s current and future
projected cash flows; (iii) the Company’s strategic business plan, which
included utilizing the professional expertise of Linkstar’s staff and the
propriety software acquired in the Linkstar transaction to expand the marketing
of the Company’s Security Segment products using internet media marketing
channels, thus potentially increasing the value of its existing business
segment; and (iv) the Company’s plan to substitute the cash flows of the Car and
Truck Wash Segment, which the Company is exiting, with cash flow from the
digital media and e-commerce business.  The remaining intangible
assets were assigned to customer relationships for $1.57 million, non-compete
agreements for $367,000 and software for $883,000. The allocation of the
purchase price of the Linkstar acquisition reflects certain reclassifications
from the allocation reported as of September 30, 2007 as a result of refinements
to certain data utilized for the acquisition valuation. Customer relationships,
non-compete agreements, and software costs were assigned a life of nine, seven,
and six years, respectively. The acquisition was accounted for as a business
combination in accordance with SFAS 141, Business
Combinations.
  F-14
 
 Unaudited
proforma financial information, assuming the Linkstar acquisition occurred on
January 1, 2006, is as follows (in thousands, except per shares
amounts):
 
 Year
      Ended December 31,2007
                        
                        
                        2006Revenues
                        
                        $
                        57,475
                        
                        
                        $
                        46,063Net
      Loss
                        
                        $
                        (6,458
                        )
                        
                        $
                        (7,147
                        )Loss
      per share-basic and dilutive
                        
                        $
                        (0.39
                        )
                        
                        $
                        (0.
      43
                        )
 
 Divestitures
 On June
19, 2006, the Company, through a wholly owned subsidiary, sold an exterior-only
car wash facility in New Jersey. Proceeds from the sale of this facility were
approximately $1.0 million, resulting in a $202,000 gain on
disposal.
 
 On
September 28, 2006, the Company, through a wholly owned subsidiary, sold a full
service car wash facility in Dallas, Texas. Proceeds from the sale of this
facility were approximately $1.85 million, resulting in a $461,000 gain on
disposal.
 In the
first quarter ended March  31, 2007, the Company sold seven car washes
consisting of: (i) three full service car washes in the Philadelphia area on
January 29, 2007 and a full service car wash in Cherry Hill, New Jersey on
February 1, 2007 for a total of $7.8 million in cash at a gain of approximately
$1.0 million; (ii) an exterior car wash in Moorestown, New Jersey on January 5,
2007 for $350,000 cash, which approximates book value; (iii) an exterior car
wash in Philadelphia, Pennsylvania on March 1, 2007 for $475,000 in cash at a
gain of approximately $141,000; and (iv) a full service car wash in Fort Worth,
Texas on March 7, 2007 for $285,000 in cash at a gain of approximately
$9,000.
 
 In the
second quarter ended June 30, 2007, the Company sold 14 car washes consisting
of: (i) an exterior car wash in Yeadon, Pennsylvania on May 14, 2007 for
$100,000 in cash at a gain of approximately $90,000; (ii) twelve full service
car washes in the Phoenix, Arizona area representing our entire Arizona region
on May 17, 2007 for $19,380,000 in cash at a gain of approximately $413,000; and
(iii) an exterior car wash in Smyrna, Delaware on May 31, 2007 for $220,000 in
cash at a gain of approximately $202,000.
 
 In the
third quarter ended September 30, 2007, the Company sold its two remaining
exterior car wash sites in Camden and Sicklerville, New Jersey on August 3, 2007
for total cash consideration of $1.38 million at a gain of approximately
$179,000.
 
 In the
fourth quarter ending December 31, 2007, the Company sold two of its San
Antonio, Texas car wash sites in two separate transactions on November 8, 2007
and November 13, 2007 for total cash consideration of $2.96 million at a total
gain of approximately $38,000.
 
 On
December 31, 2007, the Company completed its sale of its five truck washes under
its lease-to-sell agreement with Eagle United Truck Wash, LLC (“Eagle”). Eagle
purchased the five truck washes for total consideration of $1.2 million,
consisting of $280,000 cash and a $920,000 five year note payable to Mace, which
has a balance of $892,000 at December 31, 2008, is secured by mortgages on the
truck washes. The current portion of the note payable, approximately $31,000, is
included in prepaid expenses and other current assets and the non-current
portion, approximately $861,000, is included in other assets. The Company
recorded a gain of approximately $279,000 on the sale of the truck
washes.
 
 In the
first quarter ending March 31, 2008, the Company sold its six full service car
washes in Florida in three separate transactions from January 4, 2008 to March
3, 2008 for total cash consideration of approximately $12.5 million at a gain of
approximately $6.9 million. Simultaneously with the sale, $4.2 million of cash
was used to pay down related mortgage debt.
  F-15
 
 On May
17, 2008 and June 30, 2008, the Company entered into two separate agreements to
sell two of its three full service car washes in Lubbock, Texas for total cash
consideration of $3.66 million. Additionally, on August 7, 2008, the Company
entered into an agreement to sell a full service car wash in Arlington, Texas
for total cash consideration of $3.6 million. The agreements to sell the two
Lubbock, Texas car washes and the Arlington, Texas car wash were terminated by
the buyers through the exercise of contingency clauses. The Company received
$10,700 in cancellation payments from the buyers’ exercise of the contingency
clauses.
 
 On July
18, 2008, the Company entered into an agreement to sell one of its full service
car washes in Dallas, Texas for a total cash consideration of $1.8 million. The
Company completed the sale of the Dallas, Texas car wash on October 14, 2008.
Simultaneously with the sale, $1.24 million of cash was used to pay down related
mortgage debt.
 
 4.
                    Discontinued Operations
      and Assets Held for
      Sale
 On
December 7, 2006, the Company signed an agreement with Twisted Cactus
Enterprises, LLC to sell its Arizona car washes. This transaction closed on May
17, 2007. Additionally, the Company sold nine of its Northeast region car washes
in the nine months ended September 30, 2007 which represent all of the revenues
within the Northeast region. The Company completed the sale of its truck washes
on December 31, 2007 under a lease-to-sell agreement executed on December 31,
2005 with Eagle to lease Mace’s five truck washes beginning January 1, 2006
through December 31, 2007. The Company did not recognize revenue or operating
expenses during the term of the lease other than rental income, depreciation
expense and interest expense. The Company also entered into two separate
agreements on November 8, 2007 and November 19, 2007 to sell five of its six
full service car washes and a third agreement in January 2008 to sell its final
car wash in the Sarasota, Florida area. All six Florida car washes were sold
from January 4, 2008 to March 3, 2008. On August 7, 2008, the Company entered
into an agreement to sell a full service car wash  in Arlington, Texas
for total cash consideration of $3.6 million. Finally, On May 17, 2008 and June
30, 2008, the Company entered into two separate agreements to sell two of its
three full service car washes in Lubbock, Texas for total cash consideration of
$3.66 million. The agreements provide for due diligence periods of up to 180
days. The agreements to sell the two Lubbock, Texas car washes and the
Arlington, Texas car wash were terminated by the buyers through the exercise of
contingency clauses. The Company received $10,700 in cancellation payments from
the buyers’ exercise of the contingency clauses. Accordingly, for financial
statement purposes, the assets, liabilities, results of operations and cash
flows of the operations of our Arizona, Northeast, Florida, San Antonio, Texas
and Lubbock, Texas car washes and our truck washes have been segregated from
those of continuing operations and are presented in the Company’s consolidated
financial statements as discontinued operations.
 
 Revenues
from discontinued operations were $3.4 million, $14.8 million and $26.4 million
for the years ended 2008, 2007 and 2006, respectively.
Operating (loss) income from discontinued operations was $(1.6) million,
$155,000 and $1.8 million for the years 2008, 2007 and 2006,
respectively.
 
 Assets
and liabilities held for sale are comprised of the following at December 31,
2008 (in thousands):
 
 As of December 31, 2008Dallas and
                                    Fort Worth,
                                    Texas
                                  
                                  
                                  Lubbock,
                                    Texas
                                  
                                  
                                  San Antonio,
                                    Texas
                                  
                                  
                                  TotalAssets held for sale:Inventory
                                  
                                  $
                                  51
                                  
                                  
                                  $
                                  126
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  177Property,
      plant and equipment, net
                                  
                                  
                                  927
                                  
                                  
                                  
                                  2,599
                                  
                                  
                                  
                                  977
                                  
                                  
                                  
                                  4,503Total
      assets
                                  
                                  $
                                  978
                                  
                                  
                                  $
                                  2,725
                                  
                                  
                                  $
                                  977
                                  
                                  
                                  $
                                  4,680Liabilities
      related to assets held for sale sale:Current
      portion of long-term debt
                                  
                                  $
                                  589
                                  
                                  
                                  $
                                  201
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  790Long-term
      debt, net of current portion
                                  
                                  
                                  -
                                  
                                  
                                  
                                  854
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  854Total
      liabilities
                                  
                                  $
                                  589
                                  
                                  
                                  $
                                  1,055
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  1,644
  F-16
  As of December 31, 2007Fort Worth,
                    Texas
                  
                  
                  Florida
                  
                  
                  TotalAssets held for sale:Inventory
                  
                  $
                  61
                  
                  
                  $
                  133
                  
                  
                  $
                  194Property,
      plant and equipment, net
                  
                  
                  918
                  
                  
                  
                  4,471
                  
                  
                  
                  5,389Intangibles
                  
                  
                  -
                  
                  
                  
                  82
                  
                  
                  
                  82Total
      assets
                  
                  $
                  979
                  
                  
                  $
                  4,686
                  
                  
                  $
                  5,665Liabilities
      related to assets held for sale:Deferred
      Revenue
                  
                  $
                  -
                  
                  
                  $
                  118
                  
                  
                  $
                  118Current
      portion of long-term debt
                  
                  
                  180
                  
                  
                  
                  3,592
                  
                  
                  
                  3,772Long-term
      debt, net of current portion
                  
                  
                  604
                  
                  
                  
                  -
                  
                  
                  
                  604Total
      liabilities
                  
                  $
                  784
                  
                  
                  $
                  3,710
                  
                  
                  $
                  4,494
 
 5.
                    Goodwill
 In
assessing goodwill for impairment, we first compare the fair value of our
reporting units with their net book value. We estimate the fair value of the
reporting units using discounted expected future cash flows, supported by the
results of various market approach valuation models. If the fair value of the
reporting units exceeds their net book value, goodwill is not impaired, and no
further testing is necessary. If the net book value of our reporting units
exceeds their fair value, we perform a second test to measure the amount of
impairment loss, if any. To measure the amount of any impairment loss, we
determine the implied fair value of goodwill in the same manner as if our
reporting units were being acquired in a business combination. Specifically, we
allocate the fair value of the reporting units to all of the assets and
liabilities of that unit, including any unrecognized intangible assets, in a
hypothetical calculation that would yield the implied fair value of goodwill. If
the implied fair value of goodwill is less than the goodwill recorded on our
balance sheet, we record an impairment charge for the difference.
  We
performed extensive valuation analyses, utilizing both income and market
approaches, in our goodwill assessment process. The following describes the
valuation methodologies used to derive the fair value of the reporting
units.
 
 ·
                    Income Approach: To
      determine fair value, we discounted the expected cash flows of the
      reporting units. The discount rate used represents the estimated weighted
      average cost of capital, which reflects the overall level of inherent risk
      involved in our reporting units and the rate of return an outside investor
      would expect to earn. To estimate cash flows beyond the final year of our
      model, we used a terminal value approach. Under this approach, we used
      estimated operating income before interest, taxes, depreciation and
      amortization in the final year of our model, adjusted to estimate a
      normalized cash flow, applied a perpetuity growth assumption and
      discounted by a perpetuity discount factor to determine the terminal
      value. We incorporated the present value of the resulting terminal value
      into our estimate of fair value.
 
 ·
                    Market-Based Approach:To corroborate the results of the income approach described above,
      we estimated the fair value of our reporting units using several
      market-based approaches, including the value that we derive based on our
      consolidated stock price as described above. We also used the guideline
      company method which focuses on comparing our risk profile and growth
      prospects to select reasonably similar/guideline publicly traded
      companies.
  The
determination of the fair value of the reporting units requires us to make
significant estimates and assumptions that affect the reporting unit’s expected
future cash flows. These estimates and assumptions primarily include, but are
not limited to, the discount rate, terminal growth rates, operating income
before depreciation and amortization and capital expenditures forecasts. Due to
the inherent uncertainty involved in making these estimates, actual results
could differ from those estimates. In addition, changes in underlying
assumptions would have a significant impact on either the fair value of the
reporting units or the goodwill impairment charge.
 
 The
allocation of the fair value of the reporting units to individual assets and
liabilities within reporting units also requires us to make significant
estimates and assumptions. The allocation requires several analyses to determine
fair value of assets and liabilities including, among others, customer
relationships, non-competition agreements and current replacement costs for
certain property, plant and equipment.
  F-17
 
 As of
November 30, 2008, we conducted our annual assessment of goodwill for impairment
for our Security Segment and as of June 30 for our Digital Media Marketing
Segment. We conduct assessments more frequently if indicators of impairment
exists. As of November 30, 2008, we experienced a sustained, significant decline
in our stock price. The Company believes the reduced market capitalization
reflects the financial market’s reduced expectations of the Company’s
performance, due in large part to overall deteriorating economic conditions that
may have a materially negative impact on the Company’s future performance. We
also updated our forecasted cash flows of the reporting units during the fourth
quarter. This update considered current economic conditions and trends;
estimated future operating results, our views of growth rates, anticipated
future economic and regulatory conditions. Additionally, based upon our
procedures, we determined impairment indicators existed at December 31, 2008
relative to our Digital Media Marketing Segment and accordingly, we performed an
updated assessment of goodwill for impairment. Based on the results of our
assessment of goodwill for impairment, the net book value of our Mace Security
Products, Inc. (Florida and Texas operations) reporting unit exceeded its fair
value. Our Digital Media Marketing Segment reporting unit fair value as
determined exceeded its net book value.
 
 With the
noted potential impairment in Mace Security Products, Inc., we performed the
second step of the impairment test to determine the implied fair value of
goodwill. Specifically, we hypothetically allocated the fair value of the
impaired reporting units as determined in the first step to our recognized and
unrecognized net assets, including allocations to intangible assets such as
trademarks, customer relationships and non-competition
agreements.  The resulting implied goodwill was $(5.9) million;
accordingly, we recorded an impairment charge to write off the goodwill of this
reporting unit totaling $1.34 million. We also performed impairment testing of
certain other intangible assets relating to Mace Security Products, Inc.,
specifically, the value assigned to trademarks. We recorded an additional
impairment charge to trademarks of approximately $223,000 related to our
consumer direct electronic surveillance operations and our high end digital and
machine vision cameras and professional imaging component
operations.
 
 In the
fourth quarter of 2007, as a result of our annual impairment test of goodwill
and other intangibles, we recorded a goodwill impairment charge of approximately
$280,000 and an impairment of trademarks of approximately $66,000 related to our
consumer direct electronic surveillance operations and an impairment of
trademarks of approximately $101,000 related to our high end digital and machine
vision cameras and professional imaging components operations, both located in
Texas.
 
 In the
fourth quarter of 2006, as a result of the annual impairment test of goodwill
and other intangibles in accordance with SFAS 142, we recorded an impairment
charge of approximately $105,000 related to our high end digital and machine
vision cameras and professional imaging components operation in Texas. The
impairment charge was due to reduction in our future projected cash flows as
sales levels in this division continue to deviate from historic levels as a
result of competitive pressures. The Company cannot guarantee that there will
not be impairments in subsequent years.
    F-18





Car Washes
                  
                  
                  Security
                    Segment
                  
                  
                  Digital Media
                    Marketing
                    Segment
                  
                  
                  TotalBalance
      at December 31, 2005
                  
                  $
                  1,092
                  
                  
                  $
                  1,728
                  
                  
                  $
                  -
                  
                  
                  
                  2,820Impairment
      loss
                  
                  
                  -
                  
                  
                  
                  (105
                  )
                  
                  
                  -
                  
                  
                  
                  (105
                  )Reclass
      to assets held for sale
                  
                  
                  (1,092
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,092
                  )Balance
      at December 31, 2006
                  
                  
                  -
                  
                  
                  
                  1,623
                  
                  
                  
                  -
                  
                  
                  
                  1,623Acquisition
      of Linkstar
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,887
                  
                  
                  
                  6,887Impairment
      loss
                  
                  
                  -
                  
                  
                  
                  (280
                  )
                  
                  
                  -
                  
                  
                  
                  (280
                  )Balance
      at December 31, 2007
                  
                  $
                  -
                  
                  
                  $
                  1,343
                  
                  
                  $
                  6,887
                  
                  
                  $
                  8,230Impairment
      loss
                  
                  
                  -
                  
                  
                  
                  (1,343
                  )
                  
                  
                  -
                  
                  
                  
                  (1,343
                  )Balance
      at December 31, 2008
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  6,887
                  
                  
                  $
                  6,887
  6.
              Allowance
      for Doubtful Accounts
 
 The
changes in the allowance for doubtful accounts are summarized as
follows:
 Year ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006(In
      thousands)Balance
      at beginning of year
                      
                      $
                      791
                      
                      
                      $
                      690
                      
                      
                      $
                      593Additions
      (charged to expense)
                      
                      
                      295
                      
                      
                      
                      354
                      
                      
                      
                      302Adjustments
                      
                      
                      (3
                      )
                      
                      
                      (4
                      )
                      
                      
                      (12
                      )Deductions
                      
                      
                      (323
                      )
                      
                      
                      (249
                      )
                      
                      
                      (193
                      )Balance
      at end of year
                      
                      $
                      760
                      
                      
                      $
                      791
                      
                      
                      $
                      690


7.
              Inventories
 
 Inventories
consist of the following:
  As of December 31,2008
                    
                    
                    2007(In
      thousands)Finished
      goods
                    
                    $
                    6,295
                    
                    
                    $
                    8,171Work
      in process
                    
                    
                    89
                    
                    
                    
                    69Raw
      materials and supplies
                    
                    
                    890
                    
                    
                    
                    413Fuel,
      merchandise inventory and car wash supplies
                    
                    
                    469
                    
                    
                    
                    643$
                    7,743
                    
                    
                    $
                    9,296


F-19
  The
changes in the reserve for obsolete inventory are summarized as
follows:
  Year ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006(In
      thousands)Balance
      at beginning of year
                    
                    $
                    1,027
                    
                    
                    $
                    833
                    
                    
                    $
                    569Additions
      (charged to expense)
                    
                    
                    801
                    
                    
                    
                    338
                    
                    
                    
                    451Deductions
                    
                    
                    (365
                    )
                    
                    
                    (144
                    )
                    
                    
                    (187
                    )Balance
      at end of year
                    
                    $
                    1,463
                    
                    
                    $
                    1,027
                    
                    
                    $
                    833


8.
              Other
      Intangible Assets


December 31, 2008
                        
                        
                        December 31, 2007Gross
                            Carrying
                            Amount
                        
                        
                        Accumulated
                            Amortization
                        
                        
                        Gross
                            Carrying
                            Amount
                        
                        Accumulated
                            Amortization(In
      thousands)Amortized
      intangible assets:Non-compete
      agreements
                        
                        $
                        465
                        
                        
                        $
                        164
                        
                        
                        $
                        465
                        
                        
                        $
                        91Customer
      lists
                        
                        
                        1,184
                        
                        
                        
                        654
                        
                        
                        
                        2,751
                        
                        
                        
                        591Product
      lists
                        
                        
                        590
                        
                        
                        
                        266
                        
                        
                        
                        590
                        
                        
                        
                        207Software
                        
                        
                        883
                        
                        
                        
                        208
                        
                        
                        
                        883
                        
                        
                        
                        61Patent
      Costs
                        
                        
                        16
                        
                        
                        
                        -
                        
                        
                        
                        5
                        
                        
                        
                        -Deferred
      financing costs
                        
                        
                        231
                        
                        
                        
                        180
                        
                        
                        
                        231
                        
                        
                        
                        173Total
      amortized intangible assets
                        
                        
                        3,369
                        
                        
                        
                        1,472
                        
                        
                        
                        4,925
                        
                        
                        
                        1,123Non-amortized
      intangible assets:Trademarks
      - Security Segment
                        
                        
                        1,074
                        
                        
                        
                        -
                        
                        
                        
                        1,285
                        
                        
                        
                        -Trademarks
      – Digital Media Marketing Segment
                        
                        
                        478
                        
                        
                        
                        -
                        
                        
                        
                        478
                        
                        
                        
                        -Total
      non-amortized intangible assets
                        
                        
                        1,552
                        
                        
                        
                        -
                        
                        
                        
                        1,763
                        
                        
                        
                        -Total
      other intangible assets
                        
                        $
                        4,921
                        
                        
                        $
                        1,472
                        
                        
                        $
                        6,688
                        
                        
                        $
                        1,123





The
following sets forth the estimated amortization expense on intangible assets for
the fiscal years ending December 31 (in thousands):





2009
                        
                        $
                        3862010
                        
                        $
                        3772011
                        
                        $
                        3772012
                        
                        $
                        3672013
                        
                        $
                        267





Amortization expense of other
intangible assets was approximately $509,000, $417,000 and $283,000 for the
years ended December 31, 2008, 2007 and 2006, respectively. The weighted average
useful life of amortizing intangible assets was 8.12 years at December
31, 2008.


F-20


9.
              Long-Term
      Debt, Notes Payable, and Capital Lease
  Obligations
 
 Long-term
debt notes and notes payable, including debt related to discontinued operations,
consist of the following:


As of December 31,2008
                  
                  
                  2007(In
      thousands)Note
      payable to JPMorgan Chase Bank, N.A. (“Chase”), the successor of Bank One,
      Texas, N.A.,  interest rate of prime plus  0.25%
      (7.50% at December 31, 2007), was due in  monthly installments
      of $61,109 including interest (adjusted annually), through November 2008,
      collateralized by real  property  and equipment of
      Eager Beaver Car Wash, Inc. Paid in full, March 3, 2008 upon sale of the
      car wash sites.
                  
                  $
                  -
                  
                  
                  $
                  4,311Notes
      payable to Chase, interest rate of prime
      plus  0.25%  (3.50% at  December 31, 2008)
      due in monthly  installments totaling $42,081 per month
      including interest (adjusted annually)  through various dates
      ranging from August 2009 to February 2013, collateralized by real property
      and equipment of  certain of the Colonial Car Wash
      locations.
                  
                  
                  2,117
                  
                  
                  
                  2,512Note
      payable to Chase, which refinanced a note payable to Cornett Ltd.
      Partnership on February 17, 2000.  The Chase note, which
      provides for an interest rate of prime plus 0.25% (3.50% at December 31,
      2008), is due in monthly installments of $46,811 including interest
      (adjusted annually), renewed through February 2013, collateralized by real
      property and equipment of the Genie Car Wash
    locations.
                  
                  
                  2,586
                  
                  
                  
                  2,990Note
      payable to Western National Bank, interest rate of 5.25%, (the interest
      rate is established every 5 years, based on prime rate plus
      0.5%),  due in monthly installments of $20,988 including
      interest,  through October 2014, collateralized by real property
      and equipment in Lubbock, Texas.
                  
                  
                  1,056
                  
                  
                  
                  1,246Note
      payable to Business Loan Express, interest rate of prime plus 2.5% (9.75%
      at December 31, 2007), was due in monthly installments of $13,473
      including interest (adjusted annually), through December 2022,
      collateralized by real  property and equipment of the Blue
      Planet Car Wash in Dallas, Texas. Paid in full on October 14, 2008 upon
      sale of the car wash site.
                  
                  
                  -
                  
                  
                  
                  1,275Note
      payable to Chase, interest rate of prime plus 0.25% (3.50% at December 31,
      2008) due in monthly installments of $8,203 including interest (adjusted
      annually), through September 2009, collateralized by real property and
      equipment of Mace Security Products, Inc. in Farmers Branch,
      Texas.
                  
                  
                  669
                  
                  
                  
                  724Term
      note payable to Linkstar shareholders as part of purchase with an interest
      rate of 5%. Paid in full in January 2008 (principal plus
      interest).
                  
                  
                  -
                  
                  
                  
                  500Note
      payable to Lyon Financial Services, interest rate of 7.99% due in monthly
      installments of $510 including interest, through September 2013,
      collateralized by a vehicle.
                  
                  
                  24
                  
                  
                  
                  -6,452
                  
                  
                  
                  13,558Less:
      current portion
                  
                  
                  4,146
                  
                  
                  
                  6,398$
                  2,306
                  
                  
                  $
                  7,160


Of the 14
car washes owned or leased by us at December 31, 2008, eight properties and
related equipment with a net book value totaling $14.9 million had secured first
mortgage loans totaling $5.8 million.
 
 At
December 31, 2008, we had borrowings, including borrowings related to
discontinued operations, of approximately $6.5 million, substantially all of
which are secured by mortgages against certain of our real
property.  Of such borrowings, approximately $4.1 million, including
$1.6 million of long-term debt included in liabilities related to assets held
for sale, is reported as current as it is due or expected to be repaid in less
than twelve months from December 31, 2008.


F-21


We have
two letters of credit outstanding at December 31, 2008, totaling $831,000 as
collateral relating to workers’ compensation insurance policies. We maintain a
$500,000 revolving credit facility to provide financing for additional
electronic surveillance product inventory purchases.  There were no
borrowings outstanding under the revolving credit facility at December 31,
2008.The Company
also maintains a $300,000 bank commitment for commercial letters of credit for
the importation of inventory. There were no outstanding commercial letters of
credit under this commitment at December 31, 2008.
 
 Maturities
of long-term debt, including debt related to discontinued operations, are as
follows: 2009 - $3.3 million, 2010 - $747,000, 2011 - $777,000, 2012 - $810,000,
2013 - $826,000.


10.
              Accrued
      Expenses and Other Current
Liabilities
 
 Accrued
expenses and other current liabilities consist of the following:


As of December 31,2008
                  
                  
                  2007(In
      thousands)Accrued
      compensation
                  
                  $
                  534
                  
                  
                  $
                  662Other
                  
                  
                  2,115
                  
                  
                  
                  1,919$
                  2,649
                  
                  
                  $
                  2,581


11.
              Interest
      Expense, net
 
 Interest
expense, net of interest income consists of the following (in
thousands):


Year Ended December 31,2008
                
                
                2007
                
                
                2006Interest
      expense
                
                $
                (410
                )
                
                $
                (834
                )
                
                $
                (881
                )Interest
      income
                
                
                308
                
                
                
                456
                
                
                
                180$
                (102
                )
                
                $
                (378
                )
                
                $
                (701
                )





12.
                Other
      (Loss) Income


Other
(loss) income consists of the following (in thousands):





Year Ended December 312008
                
                
                2007
                
                
                2006Investment
      (loss) income
                
                $
                (2,338
                )
                
                $
                752
                
                
                $
                323Deposit
      recovery
                
                
                -
                
                
                
                150
                
                
                
                -Rental
      income
                
                
                116
                
                
                
                39
                
                
                
                43Other
                
                
                62
                
                
                
                62
                
                
                
                482$
                (2,160
                )
                
                $
                1,003
                
                
                $
                848


13.
              Stock
      Option Plans
 
 During
September 1993, the Company adopted the 1993 Stock Option Plan (“the 1993
Plan”). The 1993 Plan provides for the issuance of up to 630,000 shares of
common stock upon exercise of the options. The Company has reserved 630,000
shares of common stock to satisfy the requirements of the 1993 Plan. The options
are non-qualified stock options and are not transferable by the
recipient.  The 1993 Plan is administered by the Compensation
Committee (“the Committee”) of the Board of Directors, which may grant options
to employees, directors and consultants to the Company. The term of each option
may not exceed fifteen years from the date of grant. Options are exercisable
over either a 10 or 15 year period and exercise prices are not less than the
market value of the shares on the date of grant.


F-22


In
December 1999, the Company’s stockholders approved the 1999 Stock Option Plan
(“the 1999 Plan”) providing for the granting of incentive stock options or
nonqualified stock options to directors, officers, or employees of the
Company.  Under the 1999 Plan, 15,000,000 shares of common stock are
reserved for issuance.  Incentive stock options and nonqualified
options have terms which are determined by the Committee with exercise prices
not less than the market value of the shares on the date of
grant.  The options generally expire ten years from the date of grant
and are exercisable based upon graduated vesting schedules as determined by the
Committee.
 
 As
of December 31, 2008, 3,362,999 options have been granted under the 1993 and
1999 Plans including 3,147,156 nonqualified stock options.
 
 Activity
with respect to these plans is as follows:


2008
                    
                    
                    2007
                    
                    
                    2006Number
                    
                    
                    Weighted
                        Average
                        Exercise
                        Price
                    
                    
                    Number
                    
                    
                    Weighted
                        Average
                        Exercise
                        Price
                    
                    
                    Number
                    
                    
                    Weighted
                        Average
                        Exercise
                        PriceOptions outstanding
      beginning of period
                    
                    
                    4,440,015
                    
                    
                    $
                    3.51
                    
                    
                    
                    3,995,015
                    
                    
                    $
                    3.63
                    
                    
                    
                    3,108,682
                    
                    
                    $
                    4.00Options
      granted
                    
                    
                    1,055,500
                    
                    
                    $
                    1.50
                    
                    
                    
                    555,000
                    
                    
                    $
                    2.45
                    
                    
                    
                    984,500
                    
                    
                    $
                    2.36Options
      exercised
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    (13,400
                    )
                    
                    $
                    2.10
                    
                    
                    
                    (2,500
                    )
                    
                    $
                    1.80Options
      forfeited
                    
                    
                    (2,132,516
                    )
                    
                    $
                    2.37
                    
                    
                    
                    (96,600
                    )
                    
                    $
                    2.63
                    
                    
                    
                    (95,667
                    )
                    
                    $
                    2.73Options
      outstanding end of period
                    
                    
                    3,362,999
                    
                    
                    $
                    3.18
                    
                    
                    
                    4,440,015
                    
                    
                    $
                    3.51
                    
                    
                    
                    3,995,015
                    
                    
                    $
                    3.63Options
      exercisable
                    
                    
                    2,962,829
                    
                    
                    
                    
                    
                    
                    
                    3,767,013
                    
                    
                    
                    
                    
                    
                    
                    3,479,015Shares
      available for granting of options
                    
                    
                    3,657,163
                    
                    
                    
                    
                    
                    
                    
                    2,637,149
                    
                    
                    
                    
                    
                    
                    
                    3,095,549


Stock
options outstanding at December 31, 2008 under both plans are summarized as
follows:


Options Outstanding
                  
                  
                  Options ExercisableRange of
                      Exercise Prices
                  
                  Number
                      Outstanding
                  
                  
                  Weighted Avg.
                      Remaining
                      Contractual Life
                  
                  
                  Weighted
                      Avg. Exercise
                      Price
                  
                  
                  Number
                      Exercisable
                  
                  
                  Weighted Avg.
                      Remaining
                      Contractual Life
                  
                  
                  Weighted
                      Avg. Exercise
                      Price$0.79-$1.15
                  
                  
                  168,000
                  
                  
                  
                  3.6
                  
                  
                  $
                  0.94
                  
                  
                  
                  60,000
                  
                  
                  
                  10.0
                  
                  
                  $
                  0.94$1.28-$1.91
                  
                  
                  1,157,209
                  
                  
                  
                  5.1
                  
                  
                  $
                  1.45
                  
                  
                  
                  1,037,209
                  
                  
                  
                  5.7
                  
                  
                  $
                  1.50$1.94-$2.88
                  
                  
                  1,112,479
                  
                  
                  
                  5.4
                  
                  
                  $
                  2.45
                  
                  
                  
                  940,309
                  
                  
                  
                  6.5
                  
                  
                  $
                  2.40$2.97-$4.45
                  
                  
                  243,793
                  
                  
                  
                  5.6
                  
                  
                  $
                  3.46
                  
                  
                  
                  243,793
                  
                  
                  
                  5.6
                  
                  
                  $
                  3.99$5.00-$5.59
                  
                  
                  468,290
                  
                  
                  
                  3.1
                  
                  
                  $
                  5.34
                  
                  
                  
                  468,290
                  
                  
                  
                  3.1
                  
                  
                  $
                  5.34$7.63-$11.00
                  
                  
                  52,555
                  
                  
                  
                  1.1
                  
                  
                  $
                  9.47
                  
                  
                  
                  52,555
                  
                  
                  
                  1.1
                  
                  
                  $
                  9.47$11.75-$17.50
                  
                  
                  134,435
                  
                  
                  
                  0.6
                  
                  
                  $
                  14.30
                  
                  
                  
                  134,435
                  
                  
                  
                  0.6
                  
                  
                  $
                  14.30$17.75-$22.00
                  
                  
                  26,238
                  
                  
                  
                  0.4
                  
                  
                  $
                  20.01
                  
                  
                  
                  26,238
                  
                  
                  
                  0.4
                  
                  
                  $
                  20.01





The
Company received cash from options exercised during the fiscal years 2007
and  of $28,000 and $4,500, respectively. The impact of these cash
receipts is included in financing activities in the accompanying consolidated
statements of cash flows.
 
 During
2008, the Company granted a total of 1,055,500 stock options at a weighted
average fair value of $1.50. Also, during the year ended December 31, 2008, the
Company vested a total of 913,216 shares at a weighted average fair value of
$1.81. As of  December 31, 2008, there are a total of 400,170 options
that remain non-vested at a weighted average fair value of
$1.76.


F-23


In 1999,
the Company issued warrants to purchase a total of 1,328,250 shares of the
Company’s common stock at a weighted average exercise price of $4.22 per share
(shares and exercise price are adjusted for one-for-two reverse stock split) in
connection with the purchase of certain businesses and to a director. The terms
of the warrants were established by the Board of Directors. The warrants are
exercisable at various dates through August 2, 2009 and have exercise prices
ranging from $2.75 to $18.50 per share. Through December 31, 2005, 281,818
warrants to purchase common stock have been exercised and 996,432 warrants to
purchase common stock have expired.
 
 In 2004,
the Company issued warrants to purchase a total of 383,000 shares of the
Company’s common stock at a weighted average price of $6.65 per share which
expire in 2009. The Company has a total of 433,000 warrants to purchase common
stock outstanding at December 31, 2008, all of which are
exercisable.
 
 During
the exercise period, the Company will reserve a sufficient number of shares of
its common stock to provide for the exercise of the rights represented by option
and warrant holders.


14.
              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
Company's deferred tax assets and liabilities at December 31, 2008 and 2007 are
as follows:


As
      of December 31,2008
                
                
                2007(In
      thousands)Deferred
      tax assets:Allowance
      for doubtful accounts
                
                $
                285
                
                
                $
                329Inventories
                
                
                450
                
                
                
                28Net
      operating loss carryforwards
                
                
                11,853
                
                
                
                11,452Deferred
      revenue
                
                
                12
                
                
                
                111Compensation
                
                
                -
                
                
                
                39Car
      damage reserve
                
                
                109
                
                
                
                84Accrued
      workers compensation costs
                
                
                40
                
                
                
                38Federal
      Tax Credit
                
                
                152
                
                
                
                152Vesting
      Stock Options
                
                
                1,262
                
                
                
                547Other,
      net
                
                
                225
                
                
                
                188Total
      deferred tax assets
                
                
                14,388
                
                
                
                12,968Valuation
      allowance for deferred tax assets
                
                
                (15,032
                )
                
                
                (10,683
                )Deferred
      tax (liability) assets after valuation allowance
                
                
                (644
                )
                
                
                2,285Deferred
      tax liabilities:Property,
      equipment and intangibles
                
                
                644
                
                
                
                (2,285
                )Net
      deferred tax assets
                
                $
                -
                
                
                $
                -


F-24


At
December 31, 2008, the Company had U.S. federal net operating loss carryforwards
(“NOLs”) of approximately $28.9 million. The U.S. federal net operating loss
carryforwards expire as follows:


Year of Expiration
                        
                        Amount2018
                        
                        $
                        9512019
                        
                        
                        4,5072020
                        
                        
                        3,2412021
                        
                        
                        1,5832022
                        
                        
                        2,8222023
                        
                        
                        4,4112024
                        
                        
                        52025
                        
                        
                        1,2502026
                        
                        
                        6,8972028
                        
                        
                        3,207$
                        28,874


Realization
of the future tax benefits related to the deferred tax assets is dependent upon
many factors, including the Company’s ability to generate taxable income in
future years. The Company performed a detailed review of the considerations
influencing our ability to realize the future benefit of the NOLs, including the
extent of recently used NOLs, the turnaround of future deductible temporary
differences, the duration of the NOL carryforward period, and the Company’s
future projection of taxable income. Utilization of our net operating loss and
tax credit carryforwards may be subject to annual limitations due to the
ownership change limitations provided by the Internal Revenue Code and similar
state provisions. Such an annual limitation could result in the expiration of
the net operating loss or tax credits before utilization. The Company increased
its valuation allowance against deferred tax assets by $4.3 million in 2008,
$3.9 million in 2007 and $2.6 million in 2006 with a total valuation allowance
of $15.0 million at December 31, 2008 representing the amount of its deferred
income tax assets in excess of the Company’s deferred income tax liabilities.
The valuation allowance was recorded because management was unable to conclude
that realization of the net deferred income tax asset was more likely than not.
This determination was a result of the Company’s continued losses in its fiscal
year ended December 31, 2008, the uncertainty of the timing of the Company’s
transition from the Car Wash business, and the ultimate extent of growth in the
Company’s Digital Media Marketing and Security Segments.





Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, Accounting for Uncertainty
in Income Taxes (“FIN 48”), an interpretation of FASB Statement No. 109
(“SFAS 109”). FIN 48 prescribes a model for the recognition and measurement of a
tax position taken or expected to be taken in a tax return, and provides
guidance on recognition, classification, interest and penalties, disclosure and
transition. Implementation of FIN 48 did not result in a cumulative effect
adjustment to retained earnings.  At December 31, 2008, the Company
did not have any significant unrecognized tax benefits. The total amount of
interest and penalties recognized in the statements of operations for each of
the years in the three-year period ended December 31, 2008 was insignificant and
when incurred is reported as interest expense.


The
components of income tax expense (benefit) are:


Year ended December
    31,2008
                
                
                2007
                
                
                2006(In
      thousands)Current
      (principally state taxes)
                
                $
                100
                
                
                $
                98
                
                
                $
                156Deferred
                
                
                -
                
                
                
                -
                
                
                
                -Total
      income tax expense (benefit)
                
                $
                100
                
                
                $
                98
                
                
                $
                156





F-25


The
significant components of deferred income tax expense (benefit) attributed to
the loss for the years ended December 31, 2008, 2007, and 2006 are as
follows:


Year ended December 31,2008
                
                
                2007
                
                
                2006(In
      thousands)Deferred
      tax (benefit) expense
                
                $
                (3,948
                )
                
                $
                (1,710
                )
                
                $
                62Loss
      carryforward
                
                
                (401
                )
                
                
                (2,223
                )
                
                
                (2,686
                )Valuation
      allowance for deferred tax assets
                
                
                4,349
                
                
                
                3,933
                
                
                
                2,624$
                -
                
                
                $
                -
                
                
                $
                -


A
reconciliation of income tax benefit computed at the U.S. federal statutory tax
rates to total income tax expense is as follows:


Year ended December 31,2008
                
                
                2007
                
                
                2006(In
      thousands)Tax
      at U.S. federal statutory rate
                
                $
                (3,693
                )
                
                $
                (3,728
                )
                
                $
                (2,322
                )State
      taxes, net of federal benefit
                
                
                (192
                )
                
                
                (107
                )
                
                
                (151
                )Nondeductible
      costs and other acquisition  accounting
      adjustments
                
                
                (364
                )
                
                
                -
                
                
                
                5Valuation
      allowance for deferred tax assets
                
                
                4,349
                
                
                
                3,933
                
                
                
                2,624Total
      income tax expense (benefit)
                
                $
                100
                
                
                $
                98
                
                
                $
                156


15.
              Loss
      Per Share
 
 The
following table sets forth the computation of basic and diluted loss per share
(in thousands except loss per share):
  Year ended December 31,2008
              
              
              2007
              
              
              2006Numerator
      (In Thousands):Net
      loss
              
              $
              (10,652
              )
              
              $
              (6,585
              )
              
              $
              (6,782
              )Denominator:Denominator
      for basic loss per share - weighted average shares
              
              
              16,464,760
              
              
              
              15,810,705
              
              
              
              15,274,498Dilutive
      effect of options and warrants
              
              
              -
              
              
              
              -
              
              
              
              -Denominator
      for diluted loss per share - weighted average shares
              
              
              16,464,760
              
              
              
              15,810,705
              
              
              
              15,274,498Basic
      loss per share:Net
      loss
              
              $
              (0.65
              )
              
              $
              (0.42
              )
              
              $
              (0.44
              )Diluted
      loss per share:Net
      loss
              
              $
              (0.65
              )
              
              $
              (0.42
              )
              
              $
              (0.44
              )
  The
dilutive effect of options and warrants of  127,397, 375,292, and
334,055 at December 31, 2008, 2007, and 2006, respectively, have not been
included in the calculation of diluted earnings per share because they are
anti-dilutive.


16.
              Concentration
      of Credit Risk
 
 The
Company maintains its cash accounts in high quality financial
institutions.  At times, these balances may exceed insured
amounts.


F-26


17.
              Commitments
      and Contingencies
 
 The
Company is obligated under various operating leases, primarily for certain
equipment, vehicles, and real estate.  Certain of these leases contain
purchase options, renewal provisions, and contingent rentals for the
proportionate share of taxes, utilities, insurance, and annual cost of living
increases.  Future minimum lease payments under operating leases with
initial or remaining non-cancellable lease terms in excess of one year as of
December 31, 2008, for continuing operations are as follows:  2009 -
$811,000; 2010 - $674,000;  2011 - $668,000; 2012 - $568,000; 2013 -
$297,000 and thereafter - $655,000.  Rental expense under these leases
was $1.05 million, $876,000 and $662,000 for the year ended December 31, 2008 ,
2007 and 2006, respectively.
 
 The
Company subleases a portion of the building space at several of its car wash
facilities and its California leased office space related to its Digital Media
Marketing Segment either on a month-to-month basis or under cancelable
leases.  During the years ending December 31, 2008, 2007 and 2006,
revenues under these leases were approximately $116,000, $39,000, and $43,000,
respectively.  These amounts are classified as other income in the
accompanying consolidated statements of operations.
 
 As a
result of its continued cost saving efforts, the Company decided to terminate a
leased office in Fort Lauderdale, Florida during the second quarter
2008.  Effective December 31, 2008, the lease’s termination date, the
executives in the terminated office were moved to other offices of the Company.
The lease termination resulted in a one time fee of $38,580, which was paid and
included in SG&A expense in the second quarter of 2008.
 
 The
Company is subject to federal and state environmental regulations, including
rules relating to air and water pollution and the storage and disposal of oil,
other chemicals, and waste.  The Company believes that it complies, in
all material respects, with all applicable laws relating to its business. See
also the discussion below concerning the environmental remediation occurring at
the Bennington, Vermont location.
 
 Certain
of the Company’s executive officers have entered into employee stock option
agreements whereby options issued to them shall immediately vest upon a change
in control of the Company.


The Board
of Directors of the Company terminated Mr. Paolino as the Chief Executive
Officer of the Company on May 20, 2008.  On June 9, 2008, the Company
received a Demand for Arbitration from Mr. Paolino (“Arbitration
Demand”).  The Arbitration Demand has been filed with the American
Arbitration Association in Philadelphia, Pennsylvania (“Arbitration
Proceeding”).  The primary allegations of the Arbitration Demand are:
(i) Mr. Paolino alleges that he was terminated by the Company wrongfully and is
owed a severance payment of $3,918,120 due to the termination; (ii) Mr. Paolino
is claiming that the Company owes him $322,606 because the Company did not issue
him a sufficient number of stock options in August 2007, under provisions of the
Employment Contract between Mr. Paolino and the Company dated August 21, 2006;
(iii) Mr. Paolino is claiming damages against the Company in excess of
$6,000,000, allegedly caused by the Company having defamed Mr. Paolino’s
professional reputation and character in the Current Report on Form 8-K dated
May 20, 2008 filed by the Company and in the press release the Company issued on
May 21, 2008, relating to Mr. Paolino’s termination; and (iv)  Mr.
Paolino is also seeking punitive damages, attorney’s fees and costs in an
unspecified amount. The Company has disputed the allegations made by Mr. Paolino
and is defending itself in the Arbitration Proceeding. The Company has also
filed a counterclaim in the Arbitration Proceeding demanding damages from Mr.
Paolino of $1,000,000.  The arbitrators, who will decide claims of the
parties, have scheduled hearing dates in the late spring of 2009. Discovery in
the Arbitration Proceeding has not been concluded; the Company believes that the
hearing dates will be rescheduled for dates later than the spring of
2009.  It is not possible to predict the outcome of the Arbitration
Proceeding. No accruals have been made with respect to Mr. Paolino’s
claims.





On June
25, 2008, Mr. Paolino filed a claim with the United States Department of Labor
claiming that his termination as Chief Executive Officer of the Company was an
“unlawful discharge” in violation of 18 U.S.C. Sec. 1514A, a provision of the
Sarbanes-Oxley Act of 2002 (“DOL Complaint”). Mr. Paolino has alleged that he
was terminated in retaliation for demanding that certain risk factors be set
forth in the Company’s Form 10-Q for the quarter ended March 31, 2008, filed by
the Company on May 15, 2008. Even though the risk factors demanded by Mr.
Paolino were set forth in the Company’s Form 10-Q for the quarter ended March
31, 2008, Mr. Paolino in the DOL Complaint asserts that the demand was a
“protected activity” under 18 U.S.C. Sec. 1514A which protects Mr. Paolino
against a “retaliatory termination”.  In the DOL Complaint, Mr.
Paolino demands the same damages he requested in the Arbitration Demand and
additionally requests reinstatement as Chief Executive Officer with back pay
from the date of termination.  On September 23, 2008 the Secretary of
Labor, acting through the Regional Administrator for the Occupational Safety and
Health Administration, Region III dismissed the DOL Complaint and issued
findings (“Findings”) that there was no reasonable cause to believe that the
Company violated 18 U.S.C. Sec. 1514A of the Sarbanes-Oxley Act of
2002.  The Findings further stated that: (i) the investigation
revealed that Mr. Paolino was discharged for non-retaliatory reasons that were
unrelated to his alleged protected activity; (ii) Mr. Paolino was discharged
because of his failure to comply with a Board directive to reduce costs; (iii)
the Board terminated Mr. Paolino’s employment because of his failure to follow
its directions and for his failure to reduce corporate overhead and expenses;
and (iv) a preponderance of the evidence indicates that the alleged protected
activity was not a contributing factor in the adverse action taken against Mr.
Paolino.  Mr. Paolino has filed objections to the
Findings.  As a result of the objections, an Administrative Law Judge
set a date for a “de novo” hearing on Mr. Paolino’s claims.  A “de
novo hearing” is a proceeding where evidence is presented to the Administrative
Law Judge and the Administrative Law Judge rules on the claims based on the
evidence presented at the hearing.  Upon the motion of Mr. Paolino,
the de novo hearing and the claims made in the DOL Complaint  have
been stayed pending the conclusion of the
Arbitration  Proceeding.  The Company will defend itself
against the allegations made in the DOL Complaint, which the Company believes
are without merit. Though the Company is confident in prevailing, it is not
possible to predict the outcome of the DOL Complaint or when the matter will
reach a conclusion.


F-27


As
previously disclosed, on May 8, 2008, Car Care, Inc., a defunct subsidiary of
the Company that owned four of the Company’s Northeast region car
washes,  the Company’s former Northeast region car wash manager and
four former general managers of four Northeast region car washes, were indicted
with one count of conspiracy to defraud the government, harboring illegal aliens
and identity theft.  To resolve the indictment, Car Care entered into
a written Guilty Plea Agreement on June 23, 2008 with the government, to plead
guilty to the one count of conspiracy charged in the
indictment.  Under this agreement, on June 27, 2008, Car Care paid a
criminal fine of $100,000 and forfeited $500,000 in proceeds from the sale of
the four car washes. A charge of $600,000 was recorded as a component of income
from discontinued operations as of March 31, 2008, as prescribed by SFAS No.5,
Accounting for
Contingencies. The Company was not named in the indictment and, according
to the plea agreement, will not be charged.  The Company fully
cooperated with the government in its investigation of this matter.




In
connection with the investigation which resulted in the indictment of Car Care
on May 8, 2008, the Company’s Audit Committee retained independent outside
counsel (“Special Counsel”) to conduct an independent investigation of the
Company’s hiring practices at the Company’s car washes and other related
matters. Special Counsel’s findings included, among other things, a finding that
the Company’s internal controls for financial reporting at the corporate level
were adequate and appropriate, and that there was no financial statement impact
implicated by the Company’s hiring practices, except for a potential contingent
liability. The Company incurred $704,000 in legal, consulting and accounting
expenses associated with the Audit Committee investigations in fiscal 2006 and a
total of $1.7 million ($244,000, $674,000, and $796,000 in 2008, 2007 and 2006,
respectively), in legal fees associated with the governmental investigation and
Company’s defense and negotiations with the government. As a result of this
matter, the Company has incorporated additional internal control procedures at
the corporate, regional and site level to further enhance the existing internal
controls with respect to the Company’s hiring procedures at the car wash
locations to prevent the hiring of undocumented workers.





During
January 2008, the Environmental Protection Agency (“EPA”) conducted a site
investigation at the Company’s Bennington, Vermont location and the building
within which the facility is located.  The Company leases 44,000
square feet of the building from Vermont Mill Properties, Inc. (“Vermont
Mill”).  The site investigation was focused on whether hazardous
substances were being improperly stored.  Subsequent to the
investigation, the EPA notified the Company and the building owner that
remediation of certain hazardous wastes were required.  The EPA, the
Company and the building owner entered into an Administrative Consent Order
under which the hazardous materials and waste were remediated. All remediation
required by the Administrative Consent Order was completed within the time
allowed by the EPA and a final report regarding the remediation was submitted to
the EPA in October 2008, as required by the Administrative Consent
Order.  The Company has not received any comments from the EPA
regarding the final report. A total estimated cost of approximately $710,000
relating to the remediation, which includes disposal of the waste materials, as
well as expenses incurred to engage environmental engineers and legal counsel
and reimbursement of the EPA’s costs, has been recorded through December 31,
2008. This amount represents management’s best estimate of probable loss, as
defined by SFAS No. 5, Accounting for Contingencies.
Approximately $593,000 has been paid to date, leaving an accrual balance of
$117,000 at December 31, 2008 for estimated EPA costs. The initial accrual of
$285,000 recorded at December 31, 2007 was increased by $380,000 in the first
quarter and $65,000 in the second quarter due to there being more hazardous
waste to dispose of than originally estimated, increased cost estimates for
additional EPA requirements in handling and oversight related to disposing of
the hazardous waste, and the cost of obtaining additional engineering reports
requested by the EPA. The accrual for waste disposal was decreased by $27,000 in
the third quarter when the final hazardous materials and waste were disposed of
and the actual cost of disposal of the waste was determined and increased by
$7,000 in the fourth quarter due to the actual cost of preparing final
engineering reports exceeding original estimated costs.





In
addition to the EPA site investigation, the United States Attorney for the
District of Vermont (“U.S. Attorney”) conducted a search of the Company’s
Bennington, Vermont location and the building in which the facility is located,
during February 2008, under a search warrant issued by the U.S. District Court
for the District of Vermont.  On May 2, 2008, the U.S. Attorney issued
a grand jury subpoena to the Company.  The subpoena required the
Company to provide the U.S. Attorney documents related to the storage, disposal
and transportation of materials at the Bennington, Vermont
location.  The Company has supplied the documents and fully cooperated
with the U.S. Attorney’s investigation and will continue to do
so.  The Company is unable at this time to determine whether further
action will be taken by the U.S. Attorney or if any charges, fines or penalties
will be imposed on the Company.  The Company has made no provision for
any future costs associated with the investigation.


F-28


On
September 19, 2008, the Company received a proposed assessment from a sales tax
audit in the State of Florida for the audit period of August 2004 through July
2007. In the proposed assessment, audit deficiency, including interest, totaled
$600,307. The Company believes this assessment does not accurately represent the
liability and has formally challenged this assessment with the State. The
Company has to date been able to provide a portion of the documentation to the
State to support its position. Based on the results of the Company’s findings to
date, an estimated settlement accrual of approximately $140,000, representing
our current estimate of sales tax and related interest, has been recorded at
September 30, 2008. Based on further documentation provided to the state in the
fourth quarter of 2008, the Company adjusted its estimated settlement accrual to
approximately $70,000.





The
Company is a party to various other legal proceedings related to its normal
business activities.  In the opinion of the Company’s management, none
of these proceedings are material in relation to the Company’s results of
operations, liquidity, cash flows, or financial condition.





18.
              Asset
      Impairment Charges
 
 In
accordance with SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets(“SFAS144”), we periodically review the
carrying value of our long-lived assets held and used, and assets to be disposed
of, for possible impairment when events and circumstances warrant such a review.
Assets classified as held for sale are measured at the lower of carrying value
or fair value, net of costs to sell.
 
 Continuing
Operations





In June
2008, management made a decision to discontinue marketing efforts by its
subsidiary, PromoPath, the on-line marketing division of Linkstar, to
third-party customers on a non-exclusive CPA basis, both brokered and through
promotional sites. Management’s decision was the result of business environment
changes in which the ability to maintain non-exclusive third-party relationships
at an adequate profit margin became increasingly difficult. PromoPath will
continue to market and acquire customers for the Company’s e-commerce operation,
Linkstar. As a result of this decision, the value assigned to customer
relationships at the time of the acquisition of PromoPath in accordance with
SFAS 141,Business
Combinations, was determined to be impaired as of June 30, 2008 in that
future undiscounted cash flows relating to this asset were insufficient to
recover its carrying value. Accordingly, in the second quarter of 2008, in
accordance with SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we recorded an impairment charge of
approximately $1.4 million representing the net book value of the PromoPath
customer relationship intangible asset at June 30, 2008.





During
the quarter ended September 30, 2006, we wrote down assets related to a full
service car wash in Fort Worth, Texas by approximately $40,000. During the
quarter ended June 30, 2008, we wrote down assets related to two full service
car washes in Arlington, Texas by approximately $1.2
million.  Additionally, during the quarter ended December 31, 2008, we
wrote down the assets of two of our Arlington, Texas area car wash sites by
approximately $1.0 million. We determined that based on current data utilized to
estimate the fair value of these car wash facilities, the future expected cash
flows would not be sufficient to recover their carrying values.





In the
fourth quarter of 2008, we consolidated the inventory in our Ft. Lauderdale,
Florida warehouse into our Farmers Branch, Texas facility. Certain of our
administrative and sales staff of our Security Segment’s electronic surveillance
products division remain in the Ft. Lauderdale, Florida building which we listed
for sale with a real estate broker. We performed an updated market valuation of
this property, listing the facility for sale at a price of $1,950,000. We
recorded an impairment charge of $275,000 related to this property at December
31, 2008 to write-down the property to our estimate of net realizable
value.





Discontinued
Operations





During
the quarter ended September 30, 2006, we wrote down assets related to a full
service car wash in Moorestown, New Jersey, by approximately $40,000.
Additionally, during the quarter ended December 31, 2007, we wrote down assets
related to a full service car wash in San Antonio, Texas by approximately
$180,000.  We also closed the two remaining car wash locations in San
Antonio, Texas in the quarter ended September 30, 2008. In connection with the
closing of these two facilities, we wrote down the assets of these sites by
approximately $310,000 to our estimate of net realizable value based on our plan
to sell the two facilities for real estate value. Additionally, during the
quarter ending December 31, 2008, we closed a full service car wash location in
Lubbock, Texas and wrote down the assets of this site by approximately $670,000
to an updated appraisal value based on our plan to sell this facility for real estate
value. We also wrote down an additional Lubbock, Texas location by approximately
$250,000. We have determined that due to further reductions in car wash volumes
at these sites resulting from increased competition and a deterioration in
demographics in the immediate geographic areas of these sites, current economic
pressures, along with current data utilized to estimate the fair value of these
car wash facilities, future expected cash flows would not be sufficient to
recover their carrying values.


F-29


19.
              Related
      Party Transactions
 
 The
Company’s Security Segment leases manufacturing and office space under a
five-year lease with Vermont Mill. Vermont Mill is controlled by Jon E.
Goodrich, a former director and current employee of the Company. In November
2004, the Company exercised an option to continue the lease through November
2009 at a rate of $10,576 per month. The Company amended the lease in 2008 to
occupy additional space for an additional $200 per month. We also began leasing
in November 2008 on a month-to-month basis approximately 3,000 square feet of
temporary inventory storage space at a monthly cost of $1,200. Rent expense
under this lease was $128,000 for the year ending December 31, 2008 and $127,000
for the years ending December 31, 2007 and 2006. Mace has the option to cancel
the lease with proper notice and a payment equal to six months of the then
current rent.


20.
              Segment
      Reporting
 
 The
Company currently operates in three segments: the Security Segment, the Digital
Media Marketing Segment, and the Car Wash Segment.
 
 The
Company evaluates performance and allocates resources based on operating income
of each reportable segment rather than at the operating unit
level.  The Company defines operating income as revenues less cost of
revenues, selling, general and administrative expense, and depreciation and
amortization expense.  The accounting policies of the reportable
segments are the same as those described in the Summary of Significant Accounting
Policies (see Note 2).  There is no intercompany profit or loss
recognized on intersegment sales.
 
 The
Company’s reportable segments are business units that offer different services
and products.  The reportable segments are each managed separately
because they provide distinct services or produce and distribute distinct
products through different processes.
 
 Selected
financial information for each reportable segment from continuing operations is
as follows:




Year ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006(In
      thousands)Revenues:Car
      and truck wash - external customers
                          
                          $
                          12,779
                          
                          
                          $
                          12,352
                          
                          
                          $
                          13,550Security
      - external customers
                          
                          
                          20,788
                          
                          
                          
                          22,278
                          
                          
                          
                          23,366Digital
      media marketing - external customers
                          
                          
                          17,290
                          
                          
                          
                          7,625
                          
                          
                          
                          -$
                          50,857
                          
                          
                          $
                          42,255
                          
                          
                          $
                          36,916Segment
      (loss) Operating income:Corporate
      (1)
                          
                          $
                          (5,325
                          )
                          
                          $
                          (6,186
                          )
                          
                          $
                          (6,291
                          )Car
      and truck wash
                          
                          
                          327
                          
                          
                          
                          460
                          
                          
                          
                          743Security
                          
                          
                          (2,612
                          )
                          
                          
                          (2,445
                          )
                          
                          
                          (2,468
                          )Digital
      media marketing
                          
                          
                          275
                          
                          
                          
                          (686
                          )
                          
                          
                          -$
                          (7,335
                          )
                          
                          $
                          (8,857
                          )
                          
                          $
                          (8,016
                          )Assets:Car
      and truck wash
                          
                          $
                          26,305
                          
                          
                          $
                          37,962
                          
                          
                          $
                          42,771Security
                          
                          
                          14,303
                          
                          
                          
                          18,748
                          
                          
                          
                          19,082Digital
      media marketing
                          
                          
                          9,748
                          
                          
                          
                          13,061
                          
                          
                          
                          -$
                          50,356
                          
                          
                          $
                          69,771
                          
                          
                          $
                          61,853Capital
      expenditures:Corporate
                          
                          $
                          26
                          
                          
                          $
                          35
                          
                          
                          $
                          12Car
      and truck wash
                          
                          
                          197
                          
                          
                          
                          301
                          
                          
                          
                          103Security
                          
                          
                          438
                          
                          
                          
                          205
                          
                          
                          
                          341Digital
      media marketing
                          
                          
                          23
                          
                          
                          
                          12
                          
                          
                          
                          -$
                          684
                          
                          
                          $
                          553
                          
                          
                          $
                          456Depreciation
      and amortization:Corporate
                          
                          $
                          9
                          
                          
                          $
                          30
                          
                          
                          $
                          32Car
      and truck wash
                          
                          
                          494
                          
                          
                          
                          527
                          
                          
                          
                          565Security
                          
                          
                          468
                          
                          
                          
                          497
                          
                          
                          
                          517Digital
      media marketing
                          
                          
                          310
                          
                          
                          
                          165
                          
                          
                          
                          -$
                          1,281
                          
                          
                          $
                          1,219
                          
                          
                          $
                          1,114


1)
Corporate functions include the corporate treasury, legal, public company
financial reporting, information technology, corporate tax, corporate insurance,
human resources, investor relations, and other typical centralized corporate
administrative functions.


F-30


A
reconciliation of operating income for reportable segments to total reported
operating loss is as follows:
  Year
      ended December 31,2008
                
                
                2007
                
                
                2006(In
      thousands)Total
      operating loss for reportable segments
                
                $
                (7,335
                )
                
                $
                (8,857
                )
                
                $
                (8,016
                )Goodwill
      and asset impairment charges
                
                
                (5,449
                )
                
                
                (447
                )
                
                
                (151
                )Total
      reported operating loss
                
                $
                (12,784
                )
                
                $
                (9,304
                )
                
                $
                (8,167
                )


21.
              Subsequent
      Events


On
January 14, 2009, we sold our two remaining San Antonio, Texas car washes. The
sales price of the car washes was $1,000,000, resulting in a loss of
approximately $7,000. The sales price was paid by the buyer issuing us a secured
promissory note  in the amount of $750,000 bearing interest at 6% per
annum plus cash of $250,000, less closing costs. Additionally, on January 15,
2009, we entered into an agreement of sale for two of the three car washes we
own in Austin, Texas for a sale price of $6,000,000. The net book value of these
two washes is approximately $5,300,000. The transaction is conditioned upon the
buyer being satisfied with a Phase 2 environmental study that is being conducted
on the two sites. No assurances can be given that the transaction will be
consummated.


22.
              Florida
      Security Division
 
 In April
2007, we determined that the former divisional controller of the Florida
Security division embezzled funds from the Company.  We initially
conducted an internal investigation, and our Audit Committee subsequently
engaged a consulting firm to conduct an independent forensic investigation. As a
result of the investigation, we identified that the amount embezzled by the
employee during fiscal 2006 was approximately $240,000, with an additional
$99,000 in the first quarter of fiscal 2007.  The embezzlement
occurred from a local petty cash checking account and from diversion of customer
cash payments at the Florida Security division. Additionally, the investigation
uncovered an unexplained inventory shortage in 2006 in the Florida Security
division of approximately $350,000 which may be due to theft.  We
filed a civil complaint against the former employee in June 2007 and intend to
pursue all legal measures to recover our losses.  SG&A expenses
include charges of $240,000 and $99,000 in fiscal year 2006 and 2007,
respectively, representing embezzled funds at our Florida Security
division.  As embezzled funds are recovered, such amounts will be
recorded as recoveries in the periods they are received.  In January
2009, we recovered $41,510 of funds from an investment account of the former
divisional controller where certain of the embezzled funds were deposited. The
recovered funds will be reported as a component of operating income in the first
quarter of 2009.


F-31


23.
                  Selected
      Quarterly Financial Information (In thousands, except per share
      information) (Unaudited)
 Year
      Ended December 31, 20081st
      Quarter
                            
                            
                            2nd
      Quarter
                            
                            
                            3rd
      Quarter
                            
                            
                            4th
      Quarter
                            
                            
                            TotalRevenues
                            
                            $
                            13,621
                            
                            
                            $
                            14,868
                            
                            
                            $
                            12,042
                            
                            
                            $
                            10,326
                            
                            
                            $
                            50,857Gross
      profit
                            
                            $
                            3,904
                            
                            
                            $
                            4,549
                            
                            
                            $
                            3,655
                            
                            
                            $
                            2,477
                            
                            
                            $
                            14,585Loss
      from continuing operations
                            
                            $
                            (2,081
                            )
                            
                            $
                            (3,776
                            )
                            
                            $
                            (1,677
                            )
                            
                            $
                            (7,612
                            )
                            
                            $
                            (15,146
                            )Income
      (loss) from discontinued operations
                            
                            $
                            6,054
                            
                            
                            $
                            (153
                            )
                            
                            $
                            (384
                            )
                            
                            $
                            (1,023
                            )
                            
                            $
                            4,494Net
      loss
                            
                            $
                            3,973
                            
                            
                            $
                            (3,929
                            )
                            
                            $
                            (2,061
                            )
                            
                            $
                            (8,635
                            )
                            
                            $
                            (10,652
                            )Diluted
      (loss) income per share:Continuing
      operations
                            
                            $
                            (0.13
                            )
                            
                            $
                            (0.23
                            )
                            
                            $
                            (0.10
                            )
                            
                            $
                            (0.46
                            )
                            
                            $
                            (0.92
                            )Discontinued
      operations
                            
                            $
                            0.37
                            
                            
                            $
                            (0.01
                            )
                            
                            $
                            (0.02
                            )
                            
                            $
                            (0.06
                            )
                            
                            $
                            0.27Net
      loss
                            
                            $
                            0.24
                            
                            
                            $
                            (0.24
                            )
                            
                            $
                            (0.12
                            )
                            
                            $
                            (0.52
                            )
                            
                            $
                            (0.65
                            )
 
 Year
      Ended December 31, 20071st
      Quarter
                          
                          
                          2nd
      Quarter
                          
                          
                          3rd
      Quarter
                          
                          
                          4th
      Quarter
                          
                          
                          TotalRevenues
                          
                          $
                          8,555
                          
                          
                          $
                          8,518
                          
                          
                          $
                          11,786
                          
                          
                          $
                          13,396
                          
                          
                          $
                          42,255Gross
      profit
                          
                          $
                          2,030
                          
                          
                          $
                          1,943
                          
                          
                          $
                          2,696
                          
                          
                          $
                          3,450
                          
                          
                          $
                          10,119Loss
      from continuing operations
                          
                          $
                          (2,154
                          )
                          
                          $
                          (1,862
                          )
                          
                          $
                          (3,043
                          )
                          
                          $
                          (1,718
                          )
                          
                          $
                          (8,777
                          )Income
      (loss) from discontinued operations
                          
                          $
                          1,496
                          
                          
                          $
                          598
                          
                          
                          $
                          (186
                          )
                          
                          $
                          284
                          
                          
                          $
                          2,192Net
      loss
                          
                          $
                          (658
                          )
                          
                          $
                          (1,264
                          )
                          
                          $
                          (3,229
                          )
                          
                          $
                          (1,434
                          )
                          
                          $
                          (6,585
                          )Diluted
      (loss) income per share:Continuing
      operations
                          
                          $
                          (0.13
                          )
                          
                          $
                          (0.12
                          )
                          
                          $
                          (0.19
                          )
                          
                          $
                          (0.11
                          )
                          
                          $
                          (0.54
                          )Discontinued
      operations
                          
                          $
                          0.09
                          
                          
                          $
                          0.04
                          
                          
                          $
                          (0.01
                          )
                          
                          $
                          0.02
                          
                          
                          $
                          0.16Net
      loss
                          
                          $
                          (0.04
                          )
                          
                          $
                          (0.08
                          )
                          
                          $
                          (0.20
                          )
                          
                          $
                          (0.09
                          )
                          
                          $
                          (0.42
                          )
 
 Year
      Ended December 31, 20061st
      Quarter
                          
                          
                          2nd
      Quarter
                          
                          
                          3rd
      Quarter
                          
                          
                          4th
      Quarter
                          
                          
                          TotalRevenues
                          
                          $
                          9,815
                          
                          
                          $
                          9,536
                          
                          
                          $
                          9,222
                          
                          
                          $
                          8,343
                          
                          
                          $
                          36,916Gross
      profit
                          
                          $
                          2,562
                          
                          
                          $
                          2,378
                          
                          
                          $
                          2,282
                          
                          
                          $
                          1,439
                          
                          
                          $
                          8,661Loss
      from continuing operations
                          
                          $
                          (1,390
                          )
                          
                          $
                          (2,213
                          )
                          
                          $
                          (1,928
                          )
                          
                          $
                          (2,645
                          )
                          
                          $
                          (8,176
                          )Income
      (loss) from discontinued operations
                          
                          $
                          424
                          
                          
                          $
                          334
                          
                          
                          $
                          (341
                          )
                          
                          $
                          977
                          
                          
                          $
                          1,394Net
      loss
                          
                          $
                          (966
                          )
                          
                          $
                          (1,879
                          )
                          
                          $
                          (2,269
                          )
                          
                          $
                          (1,668
                          )
                          
                          $
                          (6,782
                          )Diluted
      (loss) income per share:Continuing
      operations
                          
                          $
                          (0.09
                          )
                          
                          $
                          (0.14
                          )
                          
                          $
                          (0.13
                          )
                          
                          $
                          (0.17
                          )
                          
                          $
                          (0.53
                          )Discontinued
      operations
                          
                          $
                          0.03
                          
                          
                          $
                          0.02
                          
                          
                          $
                          (0.02
                          )
                          
                          $
                          0.06
                          
                          
                          $
                          0.09Net
      loss
                          
                          $
                          (0.06
                          )
                          
                          $
                          (0.12
                          )
                          
                          $
                          (0.15
                          )
                          
                          $
                          (0.11
                          )
                          
                          $
                          (0.44
                          )
  All
quarters have been restated to reflect our Arizona, Northeast, San Antonio,
Texas, Lubbock, Texas and Florida car wash regions and our Truck washes as
discontinued operations, consistent with our presentation at December 31,
2008.


In the
fourth quarter of 2006, the Company recorded adjustments, (i) to reverse
previously recorded depreciation expense on assets held for sale of
approximately $357,000, (ii) to reverse an accrual for accounting fees of
approximately $120,000, and (iii) adjustments to certain balance sheet accounts
as a result of our investigation into the irregularities in the accounting
information in Florida Security Products division (approximately $500,000 in
additional expenses, including approximately $130,000 of embezzled funds.) These
adjustments which total a net expense of approximately $23,000, which related to
activity in the first three quarters of 2006, were recorded in the fourth
quarter of 2006.
 
 In the fourth quarter of 2007, the
Company recorded an adjustment to reclass an unrealized gain on short-term
investments of $167,000 from Other Comprehensive Income to a realized gain on
short-term investments in other income. The realized gains related to prior
years.


F-32


EXHIBIT
INDEX





ExhibitNo.
            
            Description11
            
            Statement
      Re: Computation of Per Share Earnings21
            
            Subsidiaries
      of the Company23.1
            
            Consent
      of Grant Thornton LLP24
            
            Power
      of Attorney (included on signature page)31.1
            
            Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            
            Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            
            Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
            
            Certification
      of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


F-33