(Amounts in thousands)

We had cash and cash equivalents at June 30, 2004 and December 31, 2003 of approximately $3,400 and $2,300 respectively.

Our primary source of liquidity as of June 30, 2004 consisted of cash and cash equivalents of approximately $3,400. During the second quarter of 2004, we used approximately $33 in cash. The slight increase in the use of cash was primarily due to an increase in inventory, lower accounts payable and accrued expenses which were offset by higher net income and reduced accounts receivable as a result of increased collections. For the six months ended June 30, 2004 we generated $1,650 in cash from operations, compared to $442 in the same 2003 period. This was primarily due to increased cash collections associated the higher sales. In addition increased income taxes led to a reduction in receivable from Parent. Our inventory balances increased 18% in the six months ended June 30, 2004, as a result of increased sales and in support of new product introductions. In light of this, we expect a modest increase in inventory during the balance of 2004.

Available bank borrowings were $6,100, all of which were unused at June 30, 2004. The Company's revolving line of credit was renewed through June 30, 2005.

We believe that our existing cash and cash equivalent balances and anticipated cash flows from operations will be sufficient to meet our operating and capital requirements for at least the next 12 months. However, revenues could decline below our expectations resulting in insufficient cash flow from operations or we may require additional financing to fund new product development, strategic investments in new markets, and strategic acquisitions. As a result, we could be required, or could elect, to raise additional funds during that period and we may need to raise additional capital in the future. Additional capital may not be available at all, or may only be available on terms unfavorable to us. With the exception of operating leases, we have not entered into any off-balance sheet financing arrangements, we have not established any variable interest entities, we do not have any unconditional purchase obligations, nor do we have non-cancelable commitments for capital expenditures

There were no material changes in any of our critical accounting estimates or judgments during the second quarter of 2004.

A majority of our sales are through third party distributors, system integrators and original equipment manufacturers. Revenue from product sales to customers is recognized upon shipment when shipped FOB our plant or upon receipt by the customer when shipped FOB destination, if a signed purchase order exists, the price is fixed or determinable, collection of the resulting receivable is considered reasonably assured and product returns can be reasonably estimated. Subsequent to the sale of the products, we have no obligation to provide any modification or customization, upgrades, enhancements or post contract customer support. Upon revenue recognition, we provide for the estimated costs that may be incurred for product warranties. We estimate sales returns and warranty costs based on historical experience and the best information we have at the time we report our financial statements. Actual results could differ from these estimates.

Sales agreements with our distributors provide stock rotation rights to our distributors and price allowance rights to certain distributors for products sold to specific customers approved by the Company in advance. In accordance with Statement of Financial Accounting Standards (SFAS) No. 48, paragraph 6, we record revenue upon shipment to distributors because at the time of shipment, we can reasonably estimate returns and price allowances based on historical experience. Estimated accruals for stock rotation and price allowance are recorded at the time of shipment as reductions of sales. Price allowances are accrued as a voluntary sales incentive in accordance with Emerging Issues Task Force (EITF) 01-09. Therefore, price allowances are accrued at the later of the date of revenue recognition or when the sales incentive is offered to the distributor.

Installation and engineering service revenue is recognized when services are rendered, or when an identifiable portion of the contract is completed, no significant post-delivery obligations exist and collection of the resulting receivable is considered reasonably assured. As of June 30, 2004, the Company had $55,000 in deferred revenue.

We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our historical consumption and our estimated forecast of product demand and production requirements. Demand for our products can fluctuate significantly. In addition, our industry is characterized by technological change, new product development, and product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Our estimates of future product demand may differ from actual results, in which case we may adjust the provision required for excess and obsolete inventory. In the future, if our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if our inventory is determined to be undervalued, we may have over-reported our costs of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.

We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we had in the past. A significant change in the liquidity or financial position of any one of our customers could have an adverse impact on the collectability of our accounts receivable and our future operating results.

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We review the recoverability of our long-lived assets, such as fixed assets, goodwill and intangible assets, when events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between the estimated fair value and carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-termed assets. Approximately half of our intangible assets result from the acquisition of MSD, which is part of our SPG segment. As of June 30, 2004, we have determined that the recorded value of our intangible assets were fully recoverable. We will continue to assess the fair value of our intangible assets including those associated with MSD.

Because of the variety of factors and uncertainties affecting our operating results, past financial performance and historical trends may not be a reliable indicator of future performance. These factors, as well as other factors affecting our operating performance, may result in significant volatility in our common stock price. Among the factors which could affect our future business, financial condition or operating results are the following:

We have experienced fluctuations in annual and quarterly operating results and anticipate that these fluctuations will continue. Our operating results may fluctuate for many reasons, including but not limited to:

• variations in the timing and size of, or cancellations or reductions of, customer orders and shipments;
• variations in the availability, cost and quality of components from our suppliers, particularly from our single source suppliers and suppliers of scarce components;
• competitive factors, including pricing, availability and demand for competing products;
• constraints on our manufacturing capacity;
• variability of the product development and sales cycle with our customers;
• variations in our manufacturing yields and other factors affecting our manufacturing costs;
• changes in our sales prices;
• changes in the mix of products with different gross margins;
• failure to meet milestones under any significant development contracts;
• obsolescence of our component inventories;
• hiring and loss of personnel, particularly in manufacturing, research and development and sales and marketing;
• product defect claims and associated warranty expenses; and
• changes in the overall economic conditions that we, our customers, and our suppliers experience.

The industrial manufacturing equipment industry in which we compete has historically been subject to seasonality. This is also true with respect to European markets in which we compete where business activity declines due to vacations taken in the summer months. This seasonality, combined with other factors such as the variability in our operating results described above, renders quarter-to-quarter comparisons of our results of operations unreliable as indicators of our overall performance.

The market for automation safeguarding and specialty sensors is highly competitive. Many competitors have substantially greater name recognition and technical, marketing and financial resources than we have. Competitive pressures could reduce market acceptance of our products and result in price reductions, decreased revenues and increases in expenses.

The market for our products is characterized by changing technology, evolving industry standards, changes in customer needs and new product introductions. Our future success will depend on our ability to respond to emerging industry standards, enhance current products, develop new products, and achieve market acceptance of those products, all on a timely and cost- effective basis. The introduction of new products also requires that we manage the transition from older products in order to minimize disruption of customer orders, avoid excessive levels of older product inventories and ensure that adequate supplies of new products can be delivered to meet customer demands.

A majority of our sales are through third party distributors, system integrators and original equipment manufacturers. These resellers are not required to offer our products exclusively. We cannot assure you that a reseller will continue to offer our products. In addition many of our resellers are privately owned firms which may not be well capitalized, as was demonstrated by the failure of two of our distributors during 2001. If our ability to sell products through these third parties is impaired, our results of operations would likely suffer.

Our international sales may be disrupted by currency fluctuations or other events beyond our control, including political or regulatory changes. If our international sales were disrupted for any reason, our revenue levels would decline.

We rely on a combination of patent, trademark, trade secret laws and contractual restrictions to establish and protect proprietary rights in our products and services. There can be no assurance that our patents, trademarks, or contractual arrangements or other steps taken by us to protect our intellectual property will prove sufficient to prevent misappropriation of our technology or defer independent third party development of similar technologies. Moreover, there can be no assurance that the technology licenses granted to us from our parent company will continue to be available. The loss of any of our proprietary technology could require us to obtain technology of lower quality or performance standards or at greater cost, which could materially adversely affect our business, results of operations and financial condition. Also, competitors may develop their own intellectual property or technologies, obtain their own patents, or challenge the validity of, or be able to design around, our patents. The laws of certain foreign countries may not protect our products, services or intellectual property rights to the same extent as do the laws of the United States.

We may initiate claims or litigation against other third parties for infringement of proprietary rights or to establish the validity of proprietary rights. Similarly, our competitors may initiate claims or litigation against us alleging infringement of their proprietary rights or improper use of their intellectual property. Litigation relating to intellectual property to which we may become a party is subject to numerous risks and uncertainties, including the risk of counterclaims or other litigation against us, and we may not be successful in any such litigation.

Our business may suffer as a result of general economic and political conditions in the U.S. and abroad. In 2002 and 2001, there was a rapid and severe downturn in the U.S. market and global economy. Terrorist acts or acts of war could cause damage or disruption to us or to our suppliers and our customers. Fears of global recession, war, and terrorism may have serious detrimental effects on the U.S. and global economies. Such conditions could further dampen consumer confidence and cause our customers to slow or cease spending on our products.

The principal components of our products are purchased from outside vendors. We generally buy components under purchase orders, do not have long-term agreements with our suppliers, and we generally do not maintain large inventories of components. Any termination of, or significant disruption of, our relationships with the suppliers of our product components may prevent us from filling customer orders in a timely manner which could result in customer dissatisfaction and lost sales. We rely on third party manufacturers for subassembly of products and for final assembly, quality assurance, and testing of some of our products. These outsourcing arrangements and any future outsourcing arrangements involve numerous risks, including reduced control over product quality, delivery schedules, manufacturing yields, and costs.

We are greatly dependent on the ability to retain key management and technical personnel, and our future success is highly dependent upon the personal efforts of our management and technical personnel. The loss of services of any one of them could have a negative effect on our business, financial condition, and results of operations. Our success will also be dependent in part upon our ability to attract, retain, and motivate highly skilled employees. We may need to offer additional compensation or incentives to attract and retain these and other employees.

We have to develop, integrate, and expand our international distribution networks in an effort to increase international sales of our products. We may not be successful in developing or expanding the international distribution network or in marketing and selling products in foreign markets. If the revenues generated by our international sales are not adequate to recover the expense of establishing, expanding, and maintaining an international distribution network, our business, financial condition, and results of operations could be negatively affected. If international sales become a more significant component of net sales, our business could become more vulnerable to the risks inherent in doing business internationally, including: