SENTRY TECHNOLOGY CORP - 10-K Annual Report

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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, 2002

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM -__________ TO ___________----

COMMISSION FILE NUMBER: 1-12727
_________________

SENTRY TECHNOLOGY CORPORATION

(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 96-11-3349733
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

350 WIRELESS BOULEVARD, HAUPPAUGE, NEW YORK 11788
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 232-2100
---------------

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

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

Title of each class:
--------------------

Common Stock, $.001 par value

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regula-tion 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.

At March 28, 2003, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $751,000 based upon the
closing price of such securities on the OTC Bulletin Board on that date. At
March 28, 2003, the Registrant had outstanding 82,560,347 shares of Common
Stock.

Documents Incorporated by Reference
- --------------------------------------

None.

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PART I
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ITEM 1. BUSINESS
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GENERAL

Sentry Technology Corporation ("Sentry") was formed in connection with the
February 1997 merger of Knogo North America Inc., a Delaware corporation, and
Video Sentry Corporation, a Minnesota corporation. As a result of the merger, we
became the parent corporation of two wholly-owned Delaware subsidiaries:
Knogo North America Inc. ("Knogo") and Video Sentry Corporation ("Video"). This
series of transactions is referred to herein collectively as the "Merger."

Knogo is engaged in the design, manufacture, sale, installation and servicing of
a complete line of electronic article surveillance equipment. Knogo was
incorporated in Delaware in October 1996. Its corporate predecessors had been in
business for more than 30 years.

Video designs, manufactures, markets, installs and services a programmable
traveling closed circuit television surveillance system that delivers a high
quality video picture which is used in a wide variety of applications. Video
also acts as a system integrator for conventional CCTV products that it markets,
installs and services. Video's predecessor was founded in 1990 and made its
first sales in 1992. Video was merged into Knogo as of December 31, 2000.

RECENT DEVELOPMENTS

Our strategy following the Merger in 1997 was to use Knogo's engineering staff
and excess manufacturing capacity resulting from a 1994 restructuring for the
reengineering and production of its proprietary and patented SentryVision
programmable traveling closed circuit television surveillance ("CCTV") systems.
With the reengineering completed, management believed that sales of SentryVision
, which had fallen in the final year that Video was a separate corporation,
would rebound.

While the engineering staff was able to resolve substantially the design and
manufacturing problems associated with SentryVision , the sales of the system
did not achieve the levels anticipated by the Company.

Furthermore, while still profitable, sales of Knogo's Electronic Article
Surveillance ("EAS") systems have continued to erode due to the attention we
gave to the reengineering and marketing of SentryVision as well as competition
from lower-priced "off-the-shelf" systems and competition from larger,
better-financed competitors such as Sensormatic Electronics Corporation and
Checkpoint Systems Inc. In addition, due to a non-compete provision entered into
by Knogo in 1994, we were not permitted to market our EAS products outside of
the United States and Canada. The non-compete provision expired at the end of
1999.

We recognized that, because of our continuing operating losses and the depletion
of our tangible assets to fund ongoing operations, our ability to continue to
market our existing SentryVision and EAS products and to develop new products
and product extensions to allow us to remain competitive would require
additional investment.

On January 8, 2001, Dialoc ID Holdings, B.V. ("Dialoc ID"), formerly known as
Dutch A&A Holding, B.V., acquired 23,050,452 shares of the Company's common
stock for $3.0 million, $1.0 million of which was paid in January 2001, and the
remaining balance was paid in equal $1.0 million installments on April 30, 2001
and August 31, 2001. Dialoc ID is a Netherlands company which, through its
subsidiaries, is in the business of development, manufacture, sale and
distribution of various kinds of RFID, access control and anti-theft electronic
article surveillance products and accessories. Concurrent with the share
purchase agreement, the Company entered into a distribution agreement with
Dialoc ID allowing the Company access to new products of Dialoc ID and allowing
Dialoc ID access to the Company's products for an initial period of not less
than two years.

As of January 8, 2001, Dialoc ID owned 37.5 percent of the outstanding common
stock of the Company. Under the share purchase agreement, at any time prior to
January 8, 2002, Dialoc ID had the right to increase its ownership of the
Company's common stock to a total of 51% of the shares of common stock then
outstanding. If the average market value of the Company's common stock, measured
over any 10-day trading period during the one year period following January 8,
2001, was at least $15.0 million, the purchase price for the additional shares
was to be determined by multiplying the actual number of shares to be purchased
by $.001. In November 2001, this market capitalization threshold was met. At
that time, our Board of Directors agreed to extend Dialoc ID's purchase right
until January 8, 2003 in exchange for an extension of the distribution agreement
for one year. On May 14, 2002, Dialoc ID exercised their right to purchase
14,500,000 additional common stock shares at a price of $.001 per share,
increasing its percentage of our outstanding common stock to 48.1% of the
Company's common stock. On January 7, 2003, Dialoc exercised its right to
purchase 4,516,475 additional shares of our common stock at a price of $.001 per
share, increasing its percentage of our outstanding common stock to 51% and it
total common stock ownership to 42,066,927 shares. As a condition to the
investment by Dialoc ID, the Company's stockholders elected three nominees of
Dialoc ID to the Board of Directors at a Special Meeting of Stockholders on
December 8, 2000.

In addition to the election of three nominees of Dialoc ID to the Board of
Directors, other matters which were approved at the December 8, 2000 Special
Meeting of Stockholders, and became effective as of January 8, 2001, were
proposals to amend the Company's certificate of incorporation to: (i) permit the
payment of a dividend of additional shares of Class A Preferred Stock at the
rate of 0.075 shares of Class A Preferred Stock for each share of Class A
Preferred Stock held; (ii) to reclassify Class A Preferred Stock into shares of
common stock on a ratio of five shares of common stock for each share of Class A
Preferred Stock outstanding; and (iii) to increase the number of the Company's
authorized shares of common stock to 140,000,000. As a result of the dividend
and reclassification, 28,666,660 common shares were issued to former Class A
Preferred Stockholders.

The Company has incurred reduced revenue levels, decreased financial position
and recurring operating losses over the past several years. During 2002, delays
in orders received and the loss of other purchase orders caused the Company to
operate in a cash flow deficit, borrow the maximum amounts available under our
credit facility, and pursue potential sources of debt or equity financing.
While the Company was successful in completing many of its business plan goals
for 2002, we were unable to meet our projected revenue growth targets. As a
result, On January 7, 2003, we initiated our restructuring plan. We believe the
successful implementation of this restructuring will result in substantial gross
margin improvements and reductions in operating expenses beginning after the
first quarter of 2003. There can be no assurance, however, that changes in our
plans or other events affecting our operations will not result in accelerated or
unexpected cash requirements, or that we will be successful in achieving
positive cash flow from operations or that additional debt or equity financing
will be available on terms that are satisfactory to Sentry, or that any such
debt or equity financing will be sufficient to provide the full amount of
funding necessary. Our future cash requirements are expected to depend on
numerous factors, including, but not limited to: (i) the ability to generate
positive cash flow from operations, and the extent thereof, (ii) the ability to
raise additional capital or obtain additional financing, and (iii) economic
conditions. Sentry will require liquidity and working capital to finance
increases in receivables and inventory associated with sales growth, payments to
past due vendors and, to a lesser extent, for capital expenditures.

THE SENTRYVISION SYSTEM

SentryVision refers to our family of traveling CCTV surveillance systems. Over
the years, Video has developed various generations of traveling CCTV
surveillance systems including the H-System, OH-System, the original
SentryVision and currently the new and improved SmartTrack system.

All versions of the product consist of a camera carriage unit, a continuous
track enclosed with tinted or mirrored glass enclosure and electronic control
equipment. The carriage unit moves within the enclosure and carries one or two
PTZ CCTV cameras, electronic transmission components and motor drives. The
carriage track and enclosure are designed to custom lengths for more complete
viewing. The carriage unit transmits video and control signals from the
camera(s) through two copper conductors running inside the enclosure to a
receiver unit located at one end of the carriage track. The copper conductors
also carry power to the camera carriage, eliminating the need for power or
communication cables. From the receiver unit, the video signals are relayed to a
central monitoring location by wire or fiber optics, where a system operator can
position or move the camera carriage to obtain the best vantage point while
viewing and recording the continuous, live video pictures. The system design
supports conventional peripheral devices, such as analog and digital
videocassette recorders, alarm inputs, fixed cameras, PTZ dome cameras,
switches/multiplexers, voice intercom systems, panic buttons and remote viewing
capability using dedicated phone lines or internet technology.

Unlike our previous products, our recently developed SentryVision SmartTrack
system features one or two state-of-the-art pan, tilt and zoom ("PTZ") domes
providing for 360 unobstructed views to eliminate most blind spots.
Additionally, SmartTrack utilizes sophisticated software that provides six tours
and up to 60 presets per camera carriage to allow programmable viewing and
recording with or without an operator. The improvements made to the carriage
make the new SmartTrack system the fastest and most reliable traveling CCTV
surveillance system in the history of SentryVision product offerings.
SmartTrack is our premier product, replacing all previous generations of
SentryVision products.

Sentry's proprietary CCTV system, called SentryVision , is designed to provide
enhanced loss prevention surveillance in retail stores and distribution centers
as well as to provide monitoring and deterrence of illegal and unsafe activities
in a variety of other locations such as parking garages, correctional
facilities, warehouses, transportation centers and public transit terminals.
SentryVision may also be employed in a broad range of operational and process
monitoring applications in commercial manufacturing and industrial settings. As
of December 31, 2002, 1,272 SentryVision systems had been installed in
customer locations in North America. Current customers include Lowe's Home
Centers, Target Stores, Mills Fleet Farm, Winn Dixie, Federal Express, Symbol
Technologies, Menards, UPS, J.C. Penney, Canadian Tire, Reno Depot, Estee
Lauder, Kohl's Department Stores, Disney Direct Marketing and Duke University.
In addition, during 2002, the Company's international distributors installed 60
SentryVision systems in customer locations throughout Western and Eastern
Europe, Latin America and Asia. Our international customers include Carrefour,
Auchon, Cora, Castorama, B & Q, and Coop. We believe that, by providing expanded
surveillance coverage and enhanced flexibility to select the locations watched,
SentryVision has enabled customers to significantly reduce inventory
shrinkage, increase theft apprehension rates and improve safety and security.
Based on the price of its system and the experience of Sentry's customers to
date, we believe SentryVision is a cost-effective solution which can improve
the operations of our customers.

Sentry sold its first systems in 1992 for installation in parking garage
security surveillance applications, but quickly moved its market focus into the
retail sector. In this sector, we have identified a number of specific market
segments for which SentryVision is well suited for loss prevention
surveillance, including home centers, mass merchandise chains, supermarkets,
hypermarkets and drug stores, as well as related distribution centers. The key
application is inventory loss prevention in the stores, stock rooms and
distribution centers.

SentryVision is typically installed in large retail stores which use a
checkout area at the front of the store and product display configurations and
high merchandise shelving which form rows and aisles. Video specializes in
designing system applications which are customized to fit a customer's specific
needs and which integrate the customer's existing surveillance equipment (PTZ
dome and fixed-mount cameras) with SentryVision . The flexibility of the
system allows the customer to specify target-coverage areas ranging from stock
rooms to total store coverage and focus on shoplifting, employee theft or
performance evaluation of client personnel. Typically, SentryVision has been
installed near the ceiling between the rows of cash registers and the ends of
the merchandise aisles. This allows the retailer to easily observe both the cash
handling activities of cashiers in the checkout area and customer activities
between the merchandise rows, despite the presence of hanging signs and other
obstructions. The entire sales floor can be monitored efficiently by focusing up
and down the aisles and by moving the carriage horizontally from aisle to aisle,
or from cash register to cash register. In addition, with the use of camera pan,
tilt and zoom lens features, activities in each area can be monitored in greater
detail. Results from Video's current installations indicate significant
improvements in detecting shoplifting and employee theft.

More recently, retailers have integrated SentryVision with "front end"
packages of conventional CCTV cameras, dedicated to monitoring the registers and
allowing users to locate the traveling camera track where the maximum coverage
of in-store traffic can be monitored. The SentryVision system is today
generally sold in conjunction with conventional CCTV applications. Customers
using the SentryVision system have reported significant reductions in
theft-related inventory shrinkage.

RETAIL MARKET APPLICATIONS
- ----------------------------
- - Home Centers. Video has installed 839 systems in more than 340 store locations
for 8 customers in the home center segment of the retail market. Typical of our
customers in this market are Lowe's Home Centers, with more than 850 stores in
45 states, and Mills Fleet Farm, a 24 store regional hardware, home supply and
discount retail chain. Both companies required systems for total floor coverage.
We applied different solutions to this common problem in each case. Lowe's Home
Centers chose to integrate track cameras with PTZ dome and fixed-mount cameras,
while Mills Fleet Farm chose to use only the track camera system.

- - Mass Merchandise Chains. Video has installed 101 systems for customers in this
segment, including Sears, Navy Exchange and Target Stores. The targeted coverage
varies extensively in these installations from only stock rooms to total store
coverage. The equipment package provided in each case varies with the
application and location of the need.

- - Supermarkets. Video has installed 34 systems in 32 store locations for 7
supermarket customers. The targeted coverage in most of these installations has
been the entire retail space. Supermarket chains using SentryVision include
Kroger, Marsh, Cub Foods, Winn-Dixie and Fiesta Mart.

INDUSTRIAL MARKET APPLICATIONS
- --------------------------------
- - Distribution Centers. Video also provides loss prevention surveillance for
distribution centers and warehouses, and has installed 101 systems in
distribution centers for 41 different retailers including Kohl's Department
Stores, Target Stores, Borders Group, Disney Direct Marketing, Barnes & Noble,
Robinsons-May, Ross, Saks, Guess, Tower Records, Big Dog, Food Lion, the Gap,
Bealls and J.C. Penney. Traveling through a facility from an overhead position,
the SentryVision system can monitor activities occurring between the stacked
rows of cartons or lines of hanging garments. The system can also move a
surveillance camera into position to monitor shipping and receiving docks and
parked delivery trucks. To achieve surveillance capabilities equivalent to those
of the SentryVision system, a conventional PTZ dome system or fixed-mount CCTV
camera would have to be installed at every desired vantage point, requiring
numerous cameras, additional equipment and wiring and increased installation and
operating costs.

- - Manufacturing and Transportation Facilities. So far SentryVision use in
factories has been limited, but the benefits of continuous tracking of
industrial operations and processes indicate future growth potential. Continued
expansion of the SentryVision dealer program is expected to generate increased
installations in factories manufacturing electronics, pharmaceuticals, computers
and other high value products and in various wholesale distribution and
transportation facilities. Express package and other high throughput
distribution facilities are also good prospects for a continuous tracking CCTV
system for theft prevention. Installations include Symbol Technologies, AT&T
Wireless, Federal Express, UPS, Wyeth-Ayerst Labs, USF Logistics and Thompson
Electronics.

- - Internet Data Centers. Video markets SentryVision systems to internet data
centers (IDC's). Most IDC's are full service business internet providers with
state-of-the-art systems that host, monitor and maintain mission-critical
web-sites, e-commerce platforms and business applications for small to medium
sized businesses. SentryVision systems are used to heighten security through
remote video monitoring. Installations include FirstWorld Communications, Inc.,
Savvis and The Discovery Channel.

INSTITUTIONAL MARKET APPLICATIONS
- -----------------------------------
- - Parking, Corrections, and Government Institutions. We have installed 108
systems in three parking garages at Duke University's Medical Center with major
benefits identified as savings in guard costs, vandalism, safety and theft.
SentryVision has been installed in correctional facilities in Texas, Michigan,
New Mexico and Illinois, with reported safety benefits of continuous coverage in
dormitory, recreation and visitation areas. SentryVision installations have
also been completed in various government agencies including the Federal Reserve
Bank, U.S. Postal Service and U.S. Immigration Service.

CONVENTIONAL CCTV SYSTEMS

Conventional CCTV is cost effective in many applications and is the most widely
used loss prevention system in North America. Conventional CCTV uses all the
basic components of the video surveillance industry including fixed and dome
cameras, VCR's, monitors, switchers, multiplexers and controllers. As all of
this equipment is manufactured for Video by outside vendors, we can provide our
customers with state-of-the-art equipment for specific applications at favorable
costs. We believe that, while less profitable than SentryVision and
traditional EAS products, the CCTV products complement our other surveillance
systems and provide retailers with further protection against internal theft and
external shoplifting activities. CCTV systems can also be electronically
connected to EAS systems, causing a video record to be generated when a theft
alarm is triggered.

While we believe that conventional CCTV and SentryVision are complementary
security solutions, many companies have traditionally viewed them as competing
solutions and have selected between conventional CCTV systems and SentryVision
systems for their security solutions.

Remote video transmission and digital recording are other potential growth areas
for Video. These systems allow customers to monitor remote sites using existing
communication lines and a PC-based system. Video camera images are stored and
manipulated digitally, substituting the PC for the VCR and multiplexer, and
eliminating the videotape. Video markets digital video recording and a remote
video transmission unit developed by third-party vendors including Kalatel and
Integral.

We continue to expand conventional CCTV installations in industrial and
institutional facilities. Significant installations have been made for express
package companies, including Federal Express, United Parcel Service, Emery Air
Freight and Airborne Express. The use of CCTV surveillance also continues to
grow in both new and existing correctional facilities and Sentry now has CCTV
installations in both state and county facilities.

In 2002, we continued marketing CCTV to the school market. Successful
installations were completed with reported benefits including decreased
vandalism and improved safety. In schools, conventional CCTV is an extremely
cost effective security option with Digital Recording and Remote Video
Transmission becoming attractive options for large school districts.

Our largest single school CCTV installation was at the Norristown (PA) High
School with 111 cameras, using digital recording and fiber optic cabling. It is
an advanced cost effective system with video from all cameras instantly
accessible on their network.

EAS SYSTEMS

EAS systems consist of detection devices which are triggered when articles or
persons tagged with reusable tags or disposable labels, (referred to as tags),
pass through the detection device. The EAS systems which Sentry manufactures are
based upon three distinct technologies. One, the Radio Frequency ("Knoscape RF")
System, uses medium radio frequency transmissions in the two to nine megahertz
range. Second, the "Ranger " system uses ultra-high frequency radio signals in
the 902 megahertz and 928 megahertz bands. Third, the Magnetic ("Knoscape MM ")
system uses very low frequency electromagnetic signals in the range of 218 hertz
to nine kilohertz. Since 1996, Sentry has been an authorized distributor of the
library security systems and related products of Minnesota Mining and
Manufacturing Company ("3M"). We cancelled our distribution agreement with 3M
effective December 31, 2002.

The principal application of Sentry's products is to detect and deter
shoplifting and employee theft in supermarket, department, discount, specialty
and various other types of retail stores including bookstores, video, liquor,
drug, shoe, sporting goods and other stores. The use of these products reduces
inventory shrinkage by deterring shoplifting, increases sales potential by
permitting the more open display of greater quantities of merchandise, reduces
surveillance responsibilities of sales and other store personnel and, as a
result, increases profitability for the retailer. In addition, Sentry's EAS
systems are used in non-retail establishments to detect and deter theft, in
office buildings to control the loss of office equipment and other assets, in
nursing homes and hospitals for both asset and patient protection, and in a
variety of other applications.

The U.S. market for retail EAS systems and tags is estimated by industry sources
at $570 million and is growing at an estimated rate of 8 percent per year.

At December 31, 2002, the approximate number of EAS Systems sold or leased by
Sentry and its predecessors exceeded 25,500.

RADIO FREQUENCY AND RANGER DETECTION SYSTEMS

Sentry manufactures and distributes the Knoscape RF system, the principal
application of which is to detect and deter shoplifting and employee theft of
clothing and hard goods in retail establishments. Sentry also manufactures and
distributes the Ranger system, which the Company believes is a particularly
useful and cost efficient EAS system for high fashion retail stores with wide
mall-type exit areas which ordinarily would require multiple Knoscape RF systems
for adequate protection. The Knoscape RF and Ranger systems consist of radio
signal transmission and monitoring equipment installed at exits of protected
areas, such as doorways, elevator entrances and escalator ramps. The devices are
generally located in panels or pedestals anchored to the floor for a vertical
arrangement or mounted in or suspended from the ceiling (Silver Cloud) and
mounted in or on the floor in a horizontal arrangement. The panels or pedestals
are designed to harmonize with the decor of the store. The monitoring equipment
is activated by tags, containing electronic circuitry, attached to merchandise
transported through the monitored zone. The circuitry in the tag interferes with
the radio signals transmitted through the monitoring system, thereby triggering
alarms, flashing lights or indicators at a central control point, or triggering
the transmission of an alarm directly to the security authorities. By means of
multiple installations of horizontal Knoscape RF systems or installation of one
or more Ranger systems, the Company's products have the ability to protect any
size entrance or exit.

Non-deactivatable reusable tags are manufactured in a variety of sizes and types
and are attached directly to the articles to be protected by means of specially
designed fastener assemblies. A reusable tag is removed from the protected
article, usually by a clerk at the checkout desk, by use of a decoupling device
specially designed to facilitate the removal of the fastener assemblies with a
minimum of effort. Removal of the tag without a decoupler is very difficult and
unauthorized removal will usually damage the protected article and thereby
reduce its value to a shoplifter. Optional reminder stations automatically
remind the store clerk, by means of audiovisual indicators, to remove the tag
when the article is placed on the cashier's desk.

Disposable labels can be applied to products either by placing them directly on
the outside packaging of the item or hidden within the product by the
manufacturer. These labels can be deactivated, at the checkout desk, through the
use of a deactivation device.

Knoscape RF and Ranger systems generally have an economic useful life of six
years (although many of Knogo's systems have been operating for longer periods),
have a negligible false alarm rate and are adaptable to meet the diversified
article surveillance needs of individual retailers.

MAGNETIC DETECTION SYSTEMS

The primary application of Knoscape MM systems is to detect and deter theft in
"hard goods" applications such as supermarkets, bookstores and in other
specialty stores such as video, drug, liquor, shoe, record and sporting goods.

Knoscape MM systems use detection monitors which are activated by
electromagnetically sensitized strips. The MM targets are typically attached to
the articles to be protected and are easily camouflaged on a wide array of
products. The detection monitors used by the Knoscape MM systems are installed
at three to five foot intervals at the exits of protected areas. The magnetic
targets can be supplied in many forms and are attractively priced, making them
suitable for a variety of retail applications. In addition, the MM targets can
be manufactured to be activated and deactivated repeatedly while attached to the
articles to be protected. Accurate deactivation is also very important when the
item to be protected is a personal accessory that will be carried by its owner
from place to place, such as pocket books, pens, lipstick, shoes, camera film
and cameras.

The Knoscape MM system offers retailers several features not available in
Knoscape RF and Ranger systems. Since the target is very small, relatively
inexpensive and may be inserted at the point of manufacture or packaging, it
provides retailers with a great deal of flexibility and is practical for
permanent attachment to a wide variety of hard goods, especially low
profit-margin products. The target can be automatically deactivated at
check-out, eliminating the risk of triggering alarms when merchandise leaves the
store and saving sales personnel valuable time. Since the targets can be
incorporated directly into a price tag or the article itself, they are
convenient to use.

BOOKINGS

Of Sentry's bookings for the year ended December 31, 2002, approximately 32
percent were attributable to SentryVision , 45 percent to CCTV, 20 percent to
EAS and 3 percent to 3M library security systems. Of Sentry's bookings for the
year ended December 31, 2001, approximately 23 percent were attributable to
SentryVision , 40 percent to CCTV, 31 percent to EAS and 6 percent to 3M library
security systems. For the year ended December 31, 2000, approximately 17 percent
were attributable to SentryVision , 39 percent to CCTV, 39 percent to EAS, and 5
percent to 3M library security systems.

MAJOR CUSTOMERS

Although the composition of our largest customers has changed from year to year,
a significant portion of our revenues has been attributable to a limited number
of major customers. In 2002, 2001 and 2000, Lowe's Home Centers accounted for
40%, 22% and 14%, respectively, of total revenues. In 2001 and 2000, Goody's
Family Clothing accounted for 11% and 15%, respectively, of total revenues.
While we believe that one or more major customers could account for a
significant portion of our sales for at least the next two years, we anticipate
that our customer base will continue to expand and that in the future we will be
less dependent on major customers.

PRODUCTION

SENTRYVISION AND CCTV PRODUCTS
- ---------------------------------

Sentry's manufacturing operations consist primarily of the assembly of its
camera carriages and control units using materials and manufactured components
purchased from third parties. Sentry is not dependent upon any particular
supplier for these materials or components. Some parts are stock,
"off-the-shelf" components, and other materials and system components are
designed by Sentry and manufactured to Sentry's specifications. Final assembly
operations are conducted at the Company's facilities in Hauppauge, New York.
System components and parts include cameras, circuit boards, electric motors and
a variety of machined parts. Each system component and finished assembly
undergoes a quality assurance check by Sentry prior to its shipment to an
installation site. All SmartTrack electronic circuit board enclosures are tested
and burned in for 72 hours. Upon completion, the finished product is tested and
run for an additional 24 hours resulting in approximately 3,000 travel and PTZ
cycles prior to quality assurance sign off. Sentry is not subject to any state
or federal environmental laws, regulations or obligations to obtain related
licenses or permits in connection with its manufacturing and assembly
operations.

EAS PRODUCTS
- -------------

Sentry produces at our facilities in Hauppauge, New York, or purchases through
suppliers, its Knoscape RF, Ranger, Knoscape MM and KnoGlo, or their components.
Production consists of final assembly operations of printed circuitry,
electronic and mechanical components that Sentry purchases from various
suppliers. Independent contractors using existing molds and tooling produce
plastic cases and antenna coils for the tags to Sentry's specifications. Through
product redesign efforts, final assembly machines were modified to reduce
production complexities. As a result, increased production run rates of this
product have been realized, simultaneously increasing production quality and
reducing manpower. Sentry is not dependent on any one supplier or group of
suppliers of components for its systems. Our policy is to maintain our inventory
at a level that is sufficient to meet projected demand for its products. We do
not anticipate any difficulties in continuing to obtain suitable components for
EAS products at competitive prices in sufficient quantities as and when needed.

MARKETING

In 2002, we marketed our products through the direct efforts of approximately 13
salespersons located in select metropolitan areas across the United States and
Canada, as well as through dealers/system integrators. Marketing efforts include
participation in trade shows, targeted direct mailings and telemarketing. In
addition, the effort is augmented through our Website which provides enhanced
product and market oriented information. Internationally, we market SentryVision
through large system integrators and distributors including Ultrak, Chubb,
Cegelec, Intrepid and BSC. As part of the 2003 restructuring plan we have
reduced the number of direct salespersons to four, whose efforts are now
supplemented through six in-house sales support staff and independent sales
representatives.

SENTRYVISION AND CCTV PRODUCTS
- ---------------------------------

To date, most SentryVision and conventional CCTV Systems have been sold on a
direct sale basis. Typical billing arrangements for SentryVision systems
involve invoicing 50% of total sale upon shipment of the product and 50% on the
completion of the installation.

While most of the current SentryVision and conventional CCTV sales have been
made to home centers, retail chains and distribution centers, our marketing plan
for Video also emphasized a dealer program for institutional, industrial and
international prospects.

Beginning in mid-1998, we began a program to market SentryVision through
qualified security dealers and integrators. Much of the industrial and
institutional SentryVision /CCTV prospects are serviced by local security
companies who design and install integrated CCTV, access control and alarm
systems. By working with these companies, we are able to reach a far larger
number of SentryVision prospects and penetrate the market more rapidly. The
program has generated interest through trade advertising, direct mail and trade
show participation. Domestic dealers did not generate significant SentryVision
installations in industrial and institutional facilities in 2002. Prior sales
were made through ADT, STG, Siemans, Mosler and Security Link.

In addition, we market SentryVision internationally using independent
distributors. The agreements require the distributor to purchase a minimum
dollar amount of the Company's product during the term of the agreement to
retain distributor status. We sell our products to independent distributors at
prices below those charged to end-users because distributors typically make
volume purchases and assume marketing, customer training, installation,
servicing and financing responsibilities. As of December 31, 2002, we have
distributors in Canada, UK, France, Mexico, Belgium, Holland, Italy, Singapore,
Brazil, Argentina, Hungary and Romania.

During 2002, Video placed in service 186 SentryVision systems and 4,449 CCTV
cameras, as compared to 97 SentryVision systems and 4,257 CCTV cameras in 2001
and 84 SentryVision systems and 3,424 CCTV cameras in 2000.

EAS PRODUCTS
- -------------

Sentry EAS systems are marketed on both a direct sales and lease basis, with
direct sales representing the majority of the business. The terms of the
standard leases are generally from one to five years. The sales prices and lease
rates vary based upon the type of system purchased or leased, number and types
of targets included, the sophistication of the system employed and, in the case
of a lease, its term. In the case of the Knoscape MM systems, detection targets
which are permanently attached to the item to be protected are sold to the
customer even when the system is leased. Therefore, in the case of either a sale
or lease of a Knoscape MM system, as the customer replenishes its inventory,
additional targets will be required for those items to be protected. We also
market a more expensive, removable, reusable detection tag for use with the
Knoscape MM systems on certain products such as clothing and other soft goods.

During each of the years ended December 31, 2002, 2001 and 2000 Sentry placed in
service 590, 675 and 347, respectively, Knoscape RF, Ranger, and Knoscape MM
systems.

RF and Ranger systems continue to be used by apparel and department stores which
have wide exit areas and a desire for deterrence based on reusable hard tags.
Both the Silver Cloud and Knoscape RF systems are universal in that they can
detect both 2 MHz hard tags and 8 MHz labels. Knogo also markets an 8MHz P-2000
RF system designed for both hard and soft good customers. The P-2000 system is
economical and self-installable by the customer.

Supermarkets, bookstores, video stores and specialty stores remain good
prospects for MM systems due to the small size and low cost of Micro-Magnetic
strips. Since 2000, Knoscape MM Systems feature updated digital electronics.
Knoscape MM Systems detect virtually all manufacturers' magnetic strips and can
universally replace older magnetic strip systems manufactured by various EAS
vendors.

The library market continues to be a substantial market for magnetic technology.
In March 1996, 3M and Sentry entered into a strategic alliance to provide
universal asset protection to libraries across North America. The agreement
permitted Sentry to act as a distributor of all of 3M's library products,
including the 3M Tattle-Tape Security Strips, detection systems, 3M SelfCheck
System hardware and software and other 3M library materials flow management
products and accessories to public, academic and government libraries. Under
the agreement, 3M provided service and installation for all new and existing
Sentry library customers throughout North America. In exchange for these
agreements, we agreed not to compete against 3M for sales and service of EAS
Systems in the library market until March 2004.

Sales of 3M library products declined in 2002 and 2001 due to 3M's direct sales
practices in competition with Sentry making it uneconomical to sell these
products. As a result, we have discontinued our distribution agreement with 3M
effective December 31, 2002.

DIALOC ID SECURITY PRODUCTS

In February 2001, we introduced a new EAS system manufactured by Dialoc ID,
which is housed in slender, self-contained Plexiglas panels. The new 9000 PL 8.2
MHz system provides retailers with clear lines of sight at the front end along
with the durability of solid Plexiglas. The panels can be custom printed with
the retailer's logo for enhanced image and trade name awareness. The system's
electronics, which are built-in to the base of the Plexiglas antenna, provide
detection of 8.2 MHz labels and hard tags in aisles up to six feet wide. The
9000 PL system is offered in both single and dual aisle configurations and is
compatible with all existing 8.2 MHz tags and checkout accessories. The
Plexiglas RF system is the first in a series of new products being brought to
market by the Company as a result of a distribution agreement with Dialoc ID.
In addition, through Sentry, Dialoc ID will introduce LaserFuse, a new RF label
technology, which is compatible with, and an alternative to, the labels offered
by Checkpoint Systems, Inc. In the future, we will also sell Dialoc ID products
in the proximity access control and RFID markets.

BACKLOG

Our backlog of orders was approximately $5.2 million at December 31, 2002, as
compared to approximately $6.0 million at December 31, 2001 and approximately
$5.8 million at December 31, 2000. We anticipate that substantially all of the
backlog present as of December 31, 2002 will be delivered within 12 months.

SEASONAL ASPECTS OF THE BUSINESS

Our current customers are primarily dependent on retail sales which are seasonal
and subject to significant fluctuations which are difficult to predict.

SERVICE

Installation services are performed by our personnel and by carefully screened
and supervised subcontractors as well as authorized dealers and distributors.
Repair and maintenance services are performed primarily by the Company's
personnel. All products sold or leased are covered by a warranty period,
generally, one year. After the warranty period, we offer our customers the
option of entering into a maintenance contract with the Company or paying for
service on a per call basis.

Installations of SentryVision systems typically take from three days to
several weeks and involve mounting the enclosures, installing the controller
unit, installing the carriage assembly, and connecting control and transmission
cables to the central monitoring location. Items such as high voltage power
termination wiring are typically the responsibility of the end user.

Throughout 1999, a great deal of our efforts were directed at servicing the
existing SentryVision systems, as reliability problems were not completely
resolved. Our engineering efforts were directed at resolving electronic
problems, which resulted in numerous service calls and in the re-design of
printed circuit boards to upgrade them and increase their performance and
reliability. These issues were substantially resolved in the first half of 1999.
Mechanical reliability issues then became our focus in the latter half of 1999
as system problems continued. These issues appear to have been largely resolved
with the development and introduction in 1999 of new drive and idler wheels,
brush block assemblies and wire harnesses.

The use of subcontractors supervised by Company employees proved cost effective
with no sacrifice in quality. A network of qualified contractors was
established. In the second half of 1999, we released 34 installation employees
and retained only our most technically skilled employees. We intend to continue
to focus on EAS, SentryVision and CCTV technical service and maintenance and
continue to expand our contractor network for installation work.

This strategy has resulted in significant cost savings. In addition, we retain
our reputation of technical expertise within the industry and management efforts
can be focused on increased electronics training for our employees, distributors
and sub-contractors.

Since 2000, we have added Service Partners and installation contractors in 25
key market areas. In total, we have more than 86 trained service technicians in
the field to augment service provided by Company employees. Many of these
partners are factory trained and have contractual commitments to provide prompt,
quality service at our direction. The field service management structure was
also modified so that two of our most experienced managers will focus
exclusively on quality control with our service partners.

In addition, our Call Center was reorganized and a new supervisor appointed.
Technical support functions were transferred to our Design Center personnel and
all service requests are now screened extensively via telephone. Initial results
have been highly successful in lowering the number of on-site visits required to
resolve service issues.

In 2001, we focused on improving the quality of our service delivery system and
we were successful. Telephone surveys were conducted after installations were
completed and we achieved a 96% approval rating. Our employees remained focused
on technical service and maintenance.

Technician headcount was reduced to 29 at the end of 2002 as we continued to
develop expertise among our service and installation partner companies. Company
employees now perform only technical service and our well-established partner
network performs all installations. The model remains cost-effective and allows
us to scale our efforts up or down as business requires without the risk of a
fixed cost structure.

Our Design Center personnel continued to screen all service requests and were
able to close almost 500 calls over the telephone, avoiding costly service
calls. In addition, careful screening allowed us to ship replacement parts in
advance of the technician's arrival increasing our ability to complete calls in
a single visit.

Customer service is a priority and we are focused on continued improvements in
2003. We anticipate that increased installation and service work can be
supported by the existing headcount and infrastructure.

COMPETITION

We operate in a highly competitive market with many companies engaged in the
business of furnishing security services designed to protect against shoplifting
and theft. In addition to EAS systems using the concept of tagged merchandise,
such services use, among other things, conventional PTZ dome and fixed mount
CCTV systems, traveling CCTV systems, mirrors, guards, private detectives and
combinations of the foregoing. We compete principally on the basis of the nature
and quality of its products and services and the adaptability of these products
to meet specific customer needs and price requirements.

To our knowledge, there are several other companies that market, directly or
through distributors, conventional closed circuit video systems and/or EAS
equipment to retail stores, of which Sensormatic (acquired by Tyco/ADT),
Checkpoint Systems, Inc., Philips, Inc., Pelco Manufacturing, Inc., Panasonic,
Inc., and Ultrak, Inc. (recently purchased by Honeywell) are the Company's
principal competitors. ADT has also begun marketing a traveling CCTV system in
the U.S. Outside the U.S., we are aware of other companies that market other
types of traveling CCTV systems including Lextar Technologies, Ltd. in
Australia, T.E.B., Sensormatic and DETI in France and Moving Cameras Ltd. in the
UK. Some of our competitors have far greater financial resources, more
experienced marketing organizations and a greater number of employees than the
Company.

In connection with the merger of Knogo's international EAS business with
Sensormatic in December 1994, Knogo agreed with Sensormatic that Knogo would not
compete with Sensormatic in selling EAS and conventional CCTV products in areas
outside of the United States, Canada and Puerto Rico through the period ending
December 29, 1999. Since then, Sentry has promoted selected EAS systems and tags
through a distribution network outside of North America although Sentry is not
permitted to use the Knogo name outside of the United States and Canada.

PATENTS AND OTHER INTELLECTUAL PROPERTY

Although patent protection is advantageous to Sentry, we do not consider any
single patent or patent license we own or hold to be material to our operations.
We believe that our competitive position ultimately will depend on our
experience, know-how and proprietary data, engineering, marketing and service
capabilities and business reputation, all of which are outside the scope of
patent protection.

SENTRYVISION
- ------------

Sentry has a United States patent covering the cable-free transmission of a
video signal to and from the carriage. This technology prevents degradation of
the video signal which can result from the movement of and prolonged friction
caused by the carriage. Three additional U.S. patents were received for
improvements made to the original technology which has been incorporated into
the SmartTrack product. Sentry also has received a corresponding European patent
and eleven foreign country patents. We intend to seek patent protection on
specific aspects of the SentryVision system, as well as for certain aspects of
new systems which may be developed for Sentry. There can be no assurance that
any patents applied for will be issued, or that the patents currently held, or
new patents, if issued, will be valid if contested or will provide any
significant competitive advantage to Sentry.

We are not aware of any infringement of patents or intellectual property held by
third parties. However, if Sentry is determined to have infringed on the rights
of others, Sentry may be required to obtain licenses from such other parties.
There can be no assurance that the persons or organizations holding desired
technology would grant licenses at all or, if licenses were available, that the
terms of such licenses would be acceptable to the Company. In addition, we could
be required to expend significant resources to develop non-infringing
technology.

Sentry has also relied on the registration of trademarks and trade names, as
well as on trade secret laws and confidentiality agreements with its employees.
While we intend to continue to seek to protect Sentry's proprietary technology
and developments through patents, trademark registration, trade secret laws and
confidentiality agreements, we do not rely on such protection to establish and
maintain Sentry's position in the marketplace. Management believes that
improvement of Sentry's existing products, reliance upon trade secrets and on
unpatented proprietary know-how, and the development of new products will be as
important as patent protection in establishing and maintaining a competitive
advantage.

EAS PRODUCTS
- -------------

Sentry has 26 United States and Canadian patents and one patent applications
relating to (i) the method and apparatus for the detection of movement of
articles and persons and accessory equipment employed by Sentry in its Knoscape
RF, Ranger and Knoscape MM systems, (ii) various specific improvements used in
the Knoscape RF, Ranger and Knoscape MM systems and (iii) various electrical
theft detection methods, apparatus and improvements not presently used in any of
Sentry's EAS systems.

Sensormatic and Knogo license certain patent rights and technology to each
other, for use in their respective territories, pursuant to the License
Agreement dated December 29, 1994, entered into in connection with the 1994
Sensormatic transaction.

RESEARCH AND DEVELOPMENT

As of December 31, 2002, Sentry Technology Corporation had 9 full time employees
engaged in research, engineering and product development. In addition, the
Company may retain consultants to assist in specific areas related to research,
engineering and product development. For the years ended December 31, 2002,
2001 and 2000, approximately $0.5 million, $0.7 million and $0.9 million,
respectively, was expended on Company-sponsored research.

As a direct result of prior efforts to improve product reliability, most
engineering tasks in 2002 focused on adding features to the SmartTrack System
and towards reducing the cost of manufactured products. Enhancements were made
to the electro-mechanical, electronic, software, and optical portions of the
SmartTrack System.

Mechanical reliability and extended service life was accomplished through
various improvements in material and the application of new assembly techniques.

Electronics controlling video modulation were improved resulting in sharper
images. Improved circuit design also contributed to greater system reliability.

Extensive development in software during 2002 resulted in improved user
interfaces, additional support for industry protocols, and allowed the use of a
wider range of camera options.

Improved optics through the use of higher-grade plastic enclosures have
eliminated image distortion and reduced the cost of the system.

Additional projects included revisions to EAS products.

RF systems have been enhanced through improvements in the electronics resulting
in shorter installation times and greater system stability. Introducing acrylic
antenna panels for a more modern look enhanced visual aesthetics of the Knoscape
RF product.

The Ranger system has been upgraded to use recently available integrated
circuits resulting in greater system stability.

REGULATION

Because Sentry's EAS and CCTV systems use radio transmission and electromagnetic
wave principles, such systems are subject to regulation by the Federal
Communications Commission ("FCC") under the Communications Act of 1934. In those
instances where it has been required, certification of such products by the FCC
has been obtained. As new products are developed by the Company, application
will be made to the FCC for certification or licensing when required. No
assurance can be given that such certification or licensing will be obtained or
that current rules and regulations of the FCC will not be changed in an adverse
manner.

Sentry's business plan calls for the sale and use of Sentry's products in
domestic markets and, where consistent with contractual obligations, in
international markets. Sentry's products may be subject to regulation by
governmental authorities in various countries having jurisdiction over
electronic and communication use. Sentry intends to apply for certification of
its products to comply with the requirements under the regulations of the
countries in which it plans to market its products. No assurance can be given
that such certification will be obtained or that current rules and regulations
in such countries will not be changed in a manner adverse to Sentry.

We believe we are in material compliance with applicable United States, state
and local laws and regulations relating to the protection of the environment.

Industry Canada, the department of the Canadian federal government that
regulates and licenses the radio frequency spectrum in Canada, has brought to
our attention that several hundred of the units of the earlier generation of
Ranger 1 and 2 EAS devices sold by our Knogo subsidiary to retailers in Canada
do not comply with the relevant Industry Canada technical standards, and may
cause interference to other users of the radio spectrum. Industry Canada has
written to the customers concerned to apprise them of the situation, and to
demand that the non-compliant devices be removed or replaced with compliant
ones. The Company worked with Industry Canada officials and the retailers
concerned to put in place a replacement program and a schedule that will satisfy
both the retailers and Industry Canada. All identified retailers have
subsequently upgraded to compliant EAS devices. Under the Radiocommunication Act
(Canada) (the "Act") which it administers, Industry Canada has extensive powers
to, among other measures, confiscate radio equipment that is non-compliant, and
to initiate prosecutions for alleged violations of the regulatory provisions in
the Act. However, Industry Canada's normal practice is to use co-operative
approaches to problems of technical non-compliance or radio interference, and to
work with the parties concerned to resolve such problems within a reasonable
time frame. As a result of our continuing efforts in co-operating with Industry
Canada, we believe that all remaining issues relating to the Ranger 1 and 2
problems have been resolved.

EMPLOYEES

At December 31, 2002, the Company and its subsidiaries employed 117 full-time
employees, of whom 19 were employed in administrative and clerical capacities, 6
in engineering, research and development, 26 in production, 20 in marketing and
sales and 46 in customer service and support. None of our employees are employed
pursuant to collective bargaining agreements. As part of our restructuring
plan, our headcount was reduced by approximately 50% on March 7, 2003.

PROPERTIES

The Company's principal executive, sales and administrative offices, and its
production, research and development and distribution facilities are located in
Hauppauge, New York, in a 68,000 square foot facility leased by the Company.

LEGAL PROCEEDINGS

Although we are involved in ordinary, routine litigation incidental to our
business, we are not presently a party to any other legal proceeding, the
adverse determination of which, either individually or in the aggregate, would
be expected to have a material adverse affect on the Company's business or
financial condition.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fiscal year ended December 31, 2002, there were no matters submitted
to a vote of the Company's security holders through the solicitation of proxies
or otherwise.

PART II
-------

Item 5. Market for the Company's Common Equity and Related Stockholder
- ------- -------------------------------------------------------------------
Matters.
- -------

(a) Price Range of Common Stock.

The following table sets forth, for the periods indicated, the high, low
and closing sales prices per share of common stock as reported on the
over-the-counter bulletin board.

Stock Prices
------------
High Low Close
---- --- -----
2001
First Quarter $ 0.093 $ 0.040 $ 0.045
Second Quarter 0.210 0.045 0.125
Third Quarter 0.200 0.080 0.110
Fourth Quarter 0.255 0.100 0.150

2002
First Quarter $ 0.220 $ 0.120 $ 0.140
Second Quarter 0.210 0.080 0.100
Third Quarter 0.100 0.050 0.080
Fourth Quarter 0.070 0.010 0.020

2003
First Quarter
(through March 28,2003) $ 0.030 $ 0.010 $ 0.020

The Company's Common Stock is quoted on the OTC Bulletin Board ("OTCBB") using
the symbol SKVY. The Company's Class A Preferred Stock ("SKVYP") traded on the
OTCBB prior to its redemption effective January 8, 2001.

(b) Holders of Common Stock.

The Common Stock began trading on the American Stock Exchange on February
13, 1997 under the symbol "SKV." Prior to such date, no public market for the
Common Stock existed. As of March 28, 2003, the Company had 82,560,347 shares
of Common Stock issued and outstanding, which were held by 293 holders of record
and approximately 2,900 beneficial owners.

(c) Dividends.

The payment of future dividends will be a business decision to be made by
the Board of Directors of Sentry from time-to-time based upon the results of
operations and financial condition of Sentry and such other factors as the Board
of Directors considers relevant. Sentry has not paid, and does not presently
intend to pay or consider the payment of, any cash dividends on the Common
Stock. In addition, covenants in the Company's credit agreement prohibit the
Company from paying cash dividends without the consent of the lender.

(d) Redemption of Class A Preferred Stock.

At a special meeting of shareholders held on December 8, 2000, a proposal
was adopted to pay a one-time stock dividend of .075 of a share of preferred
stock to preferred stockholders on the effective date of the Dialoc ID
investment, and immediately thereafter each share of preferred stock was
reclassified into five shares of common stock. The Dialoc ID investment took
place on January 8, 2001, at which time the preferred shares were reclassified
into 28,666,660 shares of common stock.

For additional information with respect to the Class A Preferred Stock, see
Note 1 to the Consolidated Financial Statements.

Item 6. Selected Financial Data
- ------- -------------------------

The table below sets forth selected consolidated historical financial data
of the Company for the years ended December 31, 1998, 1999, 2000, 2001 and 2002.
This consolidated financial data includes certain assets and liabilities of
Knogo, on a historical basis, relating to Knogo's operations in the United
States, Canada and Puerto Rico prior to February 12, 1997 and includes the
results of operations of Video Sentry after that date. The selected
consolidated historical financial data should be read in conjunction with the
audited Consolidated Financial Statements of the Company included in Item 8 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7.

(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)

Years Ended December 31,. . . . . . . . . . . . . . . . . . . . . 1998 1999 2000 2001 2002
-------- --------- --------- -------- --------

SELECTED STATEMENT OF OPERATIONS DATA:
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . $28,156 $ 22,281 $ 19,865 $17,299 $14,536
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . 14,412 14,339 11,120 8,879 7,382
Customer service expenses . . . . . . . . . . . . . . . . . . . . 6,253 5,457 4,464 4,361 4,240
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 10,118 9,169 7,576 5,773 5,227
Restructuring and impairment
charges . . . . . . . . . . . . . . . . . . . . . . . . . . . - 3,026 2,981 - -
Gain on sale of assets. . . . . . . . . . . . . . . . . . . . . . - 503 - - -
Loss before income taxes. . . . . . . . . . . . . . . . . . . . . (4,483) (11,034) (7,821) (2,911) (3,356)
Loss before cumulative effect
of change in accounting principal . . . . . . . . . . . . . . (4,504) (11,034) (7,821) (2,911) (3,356)

Cumulative effect of change in accounting principal . . . . . . . - - 301 - -
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,504) (11,034) (8,122) (2,911) (3,356)
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . 1,263 1,326 1,337 25 -

Return to common shareholders from redemption of preferred stock. - - - 27,198 -
Net income (loss) available to
common shareholders. . . . . . . . . . . . . . . . . . . . . . (5,767) (12,360) (9,459) 24,262 (3,356)
Net income (loss) per common share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.59) (1.27) (0.97) 0.40 (0.05)
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.59) (1.27) (0.97) 0.39 (0.05)

As of December 31,

SELECTED BALANCE SHEET DATA:. . . . . . . . . . . . . . . . . . . 1998 1999 2000 2001 2002
-------- --------- --------- -------- --------
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . $12,668 $ 6,290 $ 2,173 $ 2,235 $ (768)
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 33,496 22,007 13,845 11,561 7,992
Property, plant and equipment, net. . . . . . . . . . . . . . . . 4,348 3,934 3,324 2,962 2,563
Obligations under capital leases. . . . . . . . . . . . . . . . . 3,241 3,058 2,892 2,751 2,652
Redeemable cumulative preferred stock . . . . . . . . . . . . . . 26,517 27,843 29,180 - -

Total common shareholders' equity (deficit) . . . . . . . . . . . (3,975) (16,335) (25,794) 2,891 (451)

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

CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of its financial position and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates. Management believes that the critical accounting policies
and areas that require the most significant judgments and estimates to be used
in the preparation of the consolidated financial statements are allowance for
doubtful accounts, inventory obsolescence and accrued warranty.

Allowance for Doubtful Accounts -- We maintain an allowance for doubtful
trade accounts receivable for estimated losses resulting from the inability of
our customers to make required payments. In determining collectibility, we
review available customer financial statement information, credit rating reports
as well as other external documents and public filings. When it is deemed
probable that a specific customer account is uncollectible, that balance is
included in the reserve calculation. Actual results could differ from these
estimates under different assumptions.

Inventory Obsolescence --We write down our inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual future demand or market conditions are
less favorable than those we project, additional inventory write-downs may be
required.

Accrued Warranty -- We provide for the estimated cost of product warranty at the
time revenue is recognized. We calculate the reserve utilizing historical
product failure rates and service repair costs by product family. These rates
are reviewed and adjusted periodically. We utilize judgment for estimating these
costs and adjust our estimates as actual results become available.

Related Party Transactions -- Details of related party transactions are
included in Item 13 and in Notes 2 and 12 of the Financial Statements of this
Form 10-K.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001

Consolidated revenues were 16% lower in the year ended December 31, 2002
than in the year ended December 31, 2001. We sell our products predominantly
into the retail market. Our overall domestic revenues continued to be impacted
by the post September 11 soft economic environment, resulting in a slowdown or
delay in new retail store openings of some of our customers. The backlog of
orders, which we expect to deliver within twelve months, decreased to $5.2
million at December 31, 2002 as compared to $6.0 million at December 31, 2001.
Total revenues for the periods presented are broken out as follows:

2002 2001 Change
---- ---- ------
(in thousands)
EAS $ 2,530 $ 5,600 (55%)
CCTV 4,578 4,833 (5%)
SentryVision 2,368 1,772 34%
3M library products 256 622 (59%)
-------- --------
Total sales 9,732 12,827 (24%)
Service, installation and other 4,804 4,472 7%
-------- --------
Total revenues $ 14,536 $ 17,299 (16%)
= ====== = ====== ====

The decline in EAS sales in 2002 is primarily a result of lower sales to
two of our largest EAS customers, which have opened fewer new stores in 2002,
and lower sales to our Mexican distributor. The decrease in CCTV revenues and
increase in SentryVision revenues is primarily a result of a decision by our
largest customer to resume purchasing our traveling camera products in 16
existing store locations in 2002. We continue to see a growing trend for
product acceptance and increased market opportunities for traveling camera
systems both domestically and internationally. Sales of 3M library products
declined due to 3M's direct sales practices in competition with Sentry, making
it uneconomical for us to sell 3M products in the library marketplace. As a
result, we have cancelled our distribution agreement with 3M effective December
31, 2002. Service revenues increased as a result of the higher base of
installed systems no longer under warranty but were partially offset by lower
installation revenues resulting from lower EAS and CCTV sales.
Cost of sales, as a percentage of sales, were 76% in 2002 as compared to
69% in 2001. The reduction of sales in 2002 and related decrease in production
levels resulted in significant manufacturing inefficiencies, including the under
absorption of labor and overhead. In addition, there were higher scrap and
rework costs and higher provisions for slow moving inventories in 2002 as
compared to 2001.
Customer service expenses decreased 3% in 2002 as compared to 2001 despite
an increase in maintenance and service revenues. This is primarily a result of
the successful implementation of a new service delivery model, which reduced our
fixed costs through a reduction in the number of the Company's customer service
employees and a greater reliance on trained and qualified installation and
service partners.
Selling, general and administrative expenses decreased 9% to $5.2 million
in 2002 from $5.8 million in 2001 primarily as a result of continuing cost
saving measures including further subleasing of our office space, lower phone
costs, lower selling expenses and lower bad debt and warranty costs.

Research and development costs continued to decrease in 2002 when compared
to the previous year primarily due to a reduction in prototype costs associated
with the development of the SentryVision SmartTrack system, which was released
in 2001.

Interest expense decreased slightly in 2002 over 2001 primarily due to
lower average borrowings under our revolving credit agreement and lower interest
rates.

Due to net losses, we have not provided for income taxes in either of the
periods presented. The book benefit for taxable losses generated in both
periods presented was offset by recording a full valuation allowance. Such
valuation allowance was recorded because management does not believe that the
utilization of the tax benefits from operating losses, and other temporary
differences are "more likely than not" to be realized, as required by accounting
principles generally accepted in the United States of America.

As a result of the foregoing, Sentry had a net loss of $3.4 million in the
year ended December 31, 2002 as compared to a net loss of $2.9 million in the
year ended December 31, 2001.

We recorded preferred stock dividends of $25,000 in the first quarter of
2001 prior to the redemption of the Class A Preferred Stock on January 8, 2001.

Effective January 8, 2001, and just prior to the Dialoc ID investment, there was
a payment of a dividend of additional shares of Class A Preferred Stock at the
rate of 0.075 shares of Class A Preferred Stock for each share of Class A
Preferred Stock held and immediately thereafter a reclassification of the Class
A Preferred Stock into common stock at a ratio of five shares of common stock
for each share of Class A Preferred Stock outstanding. The reclassification of
the Class A Preferred Shares resulted in a return to the common shareholders of
$27.2 million, which was recorded in the first quarter of 2001. This amount
represents the difference between the fair market value of the common stock
issued and the carrying amount of the preferred stock redeemed.

YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000

Consolidated revenues were 13% lower in the year ended December 31, 2001
than in the year ended December 31, 2000. Our overall domestic revenues
continued to be impacted by the soft economic environment resulting in a
slowdown or delay in new retail store openings of some of our customers. As
part of our reorganization of our sales department, more than one-third of our
account executives were terminated by June 2001. Following the release to the
sales force in September of the new SmartTrack traveling camera system, we were
able to hire replacements in the middle of the fourth quarter. In addition,
some large contracts expected earlier in the last quarter of the year were not
received until the latter part of December 2001, delaying revenue recognition
until the installations could be completed in 2002. The backlog of orders,
which we expect to deliver within twelve months, increased to $6.0 million at
December 31, 2001 as compared to $5.8 million at December 31, 2000. Also
Sensormatic stopped ordering EAS OEM equipment resulting in a $1.5 million
reduction of revenues. Total revenues for the periods presented are broken out
as follows:

2001 2000 Change
---- ---- ------
(in thousands)
EAS $ 5,600 $ 7,545 (26%)
CCTV 4,833 5,340 (9%)
SentryVision 1,772 1,713 3%
3M library products 622 1,103 (44%)
------- -------
Total sales 12,827 15,701 (18%)
Service, installation and other 4,472 4,164 7%
------- -------
Total revenues $17,299 $19,865 (13%)
======= ======= ====

The decline in EAS sales in 2001 is primarily a result of lower OEM sales
to Sensormatic and lower sales to one of our major customers. We do not
currently expect an increase in sales to Sensormatic in the future. The decline
in CCTV was primarily related to a decrease in sales to the same customer. We
are encouraged by the increase in SentryVision SmartTrack sales which gained
momentum since the product was released to production in September 2001. Part
of our sales strategy was to offer system trials to new and existing customers
under a "Test-A-Track" program. Under this program, we install a system on a
nominal cost trial basis. At the end of the trial, if satisfied, the customer
purchases the system. To date, we have received only positive feedback from our
customers on the features and reliability of SmartTrack resulting in new sales
opportunities. In addition, we have offered new SmartTrack carriage upgrades to
existing customers that result in lower revenue than new system sales. We have
been successful selling SmartTrack to several domestic and international
large-scale security dealer integrators with repeat order opportunities. We see
a growing trend for product acceptance and increased market opportunities for
traveling camera systems both domestically and internationally. Sales of 3M
library products declined as we focused our sales efforts on Sentry produced
products. Service revenues increased as a result of the higher installed
equipment base of systems no longer under warranty.

Cost of sales as a percentage of sales were 69% in 2001 as compared to 64%
in 2000, excluding special charges described below. Higher scrap and rework
costs and production inefficiencies due to reduced volume in our manufacturing
operations were the primary cause of the increase in the percentage in the
current year. In 2000, as part of our restructuring plan, we included in cost
of sales special charges of $1.0 million primarily representing provisions for
obsolete or excess inventory. Those charges, in 2000, were a result of a
combination of the introduction of SmartTrack, which replaced earlier generation
SentryVision systems, and the substitution of certain Dialoc ID systems which
were expected to replace systems in our EAS product lines.

Customer service expenses decreased 2% in 2001 as compared to 2000 and the
department generated a small profit due primarily to the successful
implementation of a new service delivery model which included a reduction in the
number of our customer service representatives and increased use of trained and
qualified installation and service partners.

Selling, general and administrative expenses decreased 24% to $5.8 million
in 2001 from $7.6 million in 2000 primarily as a result of continuing cost
saving measures, reduced infrastructure, lower selling expenses due to reduced
sales and the elimination of the amortization of the goodwill, which was
written-off in 2000.

Research and development costs continued to decrease in 2001 when compared
to the previous year due to further consolidation of facilities. The primary
emphasis in the current year continued to be directed towards the completion of
the new SentryVision SmartTrack system, which was released to production at the
end of the third quarter. Additional savings were achieved through the shared
research and development activities with Dialoc ID as a result of their
investment.

Interest expense decreased by $0.1 million in 2001 over 2000 primarily due
to lower average borrowings under our revolving credit agreement and lower
interest rates.

In February 1997, we acquired the SentryVision product line through the
merger with Video Sentry Corporation and assigned a value of $4.4 million to its
patent and existing technology. At that time, we assigned a seven-year life to
the technology. After the merger, we encountered severe liquidity problems due
to declining sales of this premier product due to design faults, repeated
repairs and the customer's perception that SentryVision was a costly and
unreliable product. The cost of conventional CCTV products also declined during
that period and added features made these systems more competitive when compared
to SentryVision. In addition, several competitors, including the industry's
leader - Sensormatic, produced their own cable free traveling camera systems
that competed directly with us. We considered pursuing a claim for patent
infringement against Sensormatic, but have decided not to pursue the claim at
this time. We have made such significant changes from the original traveling
CCTV system acquired from Video Sentry that they have become the basis for a new
product, which we have named SmartTrack. With the development of the
SentryVision SmartTrack system completed in the fourth quarter of 2000, we
re-assessed the remaining carrying value of the intangible assets related to the
original SentryVision products. Based on our review of the technological
developments in the marketplace, we determined that the original traveling CCTV
surveillance system goodwill and related patents no longer provide us with a
competitive advantage, and as a result, we recorded an impairment charge in 2000
of approximately $3.0 million related to these assets. These impairment charges
were calculated by comparing future discounted net cash flows to the goodwill's
carrying value. Factors leading to the impairment were a combination of
historical losses and insufficient estimated future cash flows from the
SentryVision system.

Due to net losses, we have not provided for income taxes in either of the
periods presented.

As a result of the foregoing, Sentry had a net loss of $2.9 million in the
year ended December 31, 2001 as compared to a net loss of $8.1 million in the
year ended December 31, 2000.

We recorded preferred stock dividends of $25,000 and $1.3 million in 2001
and 2000. In connection with the waiver of certain financial covenants under
the agreement with our commercial lender, we were not allowed to pay cash
dividends, including the cash dividend on our preferred stock which would
otherwise have been payable in August of 1999, February and August 2000. At a
special meeting of shareholders held on December 8, 2000, a proposal was adopted
to pay a one-time stock dividend of .075 of a share of Class A Preferred Stock
to preferred stockholders in lieu of accrued dividends on the effective date of
the Dialoc ID investment, and immediately thereafter to reclassify each share of
preferred stock into five shares of common stock. The Dialoc ID investment took
place on January 8, 2001. The reclassification of the Class A Preferred Stock
resulted in a return to the common shareholders of $27.2 million, which was
recorded in the first quarter of 2001. This amount represents the difference
between the fair market value of the common stock issued and the carrying amount
of the preferred stock redeemed.

LIQUIDITY AND CAPITAL RESOURCES

On March 22, 2002, we entered into a new three-year revolving line of
credit and term loan with the CIT Group/Business Credit, Inc. ("CIT") for
maximum borrowings of $8 million, which are subject to certain limitations based
on a percentage of eligible accounts receivable and inventories as defined in
the agreement. Interest on the revolving line of credit is payable monthly at
the JPMorgan Chase Bank prime rate (4.25% at December 31, 2002), plus 2% per
annum. We are required to pay a commitment fee of 0.375% per annum on any
unused portion of the credit facility. Borrowings under the line are secured by
substantially all of our assets. The terms of the agreement, among other
matters, places restrictions on capital expenditures and prohibits the payment
of dividends. As of December 31, 2002, we had borrowings of approximately $2.0
million, the maximum amount available under the facility. In addition, we
entered into a $100,000 term loan with CIT. The principal is being repaid to
CIT in twelve equal monthly installments of $8,333 beginning May 1, 2002.
Interest on the term note is at prime plus 2.25%. The balance on the term loan
at December 31, 2002 was $33,000. In December 2002, we hired the consulting
firm of Clear Thinking Group, to provide us with crisis management services and
to assist us in presenting a plan to CIT to fund an over-advance facility to
assist Sentry through its transition to its restructuring plan. Subsequent to
year-end, we were successful in obtaining from CIT an over-advance facility of
up to $300,000.

We will require positive cash flow from operations to meet our working capital
needs over the next twelve months. We anticipated receiving significant
additional purchase orders from specific customers during 2002. While some of
these purchase orders were eventually received, the delay of those received and
loss of other orders caused us to: (i) operate in a cash flow deficit for the
year; (ii) borrow the maximum amounts available under our credit facility; and
(iii) pursue potential sources of debt or equity financing.

On October 10, 2002, we entered into a purchase order financing facility
with EPK Financial Corporation ("EPK"). Purchase order financing is short term
funding used to finance the purchase or manufacture of specific goods that we
have pre-sold to credit worthy end customers. Funding entails EPK providing
funds directly to vendors to allow us to secure the inventory we need to fulfill
customers' orders. Sentry's costs for each financing transaction will be equal
to 3.5% of Sentry's selling price, plus 1.85% on the maximum outstanding funded
amount each ten calendar days or portion thereof, until EPK is paid in full,
plus expenses. In connection with this facility, an Intercreditor Agreement was
entered into between EPK, CIT and Sentry. Under this agreement, CIT
subordinated its rights and interests in the collateral related to each
transaction to EPK. Currently, under the terms of the Intercreditors Agreement,
the maximum amount subordinated to EPK at any time is limited to $440,000.
Sentry will use the funds provided by EPK to fund vendor purchases to complete
orders currently in backlog.

Through 2002, we were not successful in achieving positive cash flow from
operations and as a result, our payables to vendors are substantially in excess
of terms. Most of our vendors have us on a COD basis. We are currently working
with several investment banking firms to assist the Company in conducting an
organized search and evaluation regarding a possible corporate transaction to
gain access to greater resources and to exploit Sentry's products and
technological advances. We are looking to raise in excess of $4 million in debt
or equity financing to assist the Company in satisfying our trade payables
situation and to achieve our longer-term goals.

We have incurred reduced revenue levels, decreased financial position and
recurring operating losses over the past several years. To further address the
continuing losses, our business plan for 2002 included the following:

- - Entering into a new three-year financing agreement.
- - Addition of new products, including high-end EAS systems and disposable
tags and labels, proximity access control and RFID, through our
distribution agreement with Dialoc ID.
- - Increased promotion of SmartTrack, our new entry in the SentryVision
family of products.
- - Strengthening our international dealer network with new and financially
stronger business partners.
- - Joint participation with Dialoc ID in trade show activity and a refocus on
expanding business with existing customers.
- - Continuation and expansion of our Service Partner program to augment
service provided by our employees.
- - Further subletting of office space in our corporate offices.
- - Continued emphasis on growing international dealer base.
- - Various additional cost cutting and cost saving initiatives.

While we were successful in completing the above named goals, we were unable to
meet our projected revenue growth targets. Our order flow with our largest
customer, Lowe's Home Center increased, but we were unable to replace other lost
business with sufficient new customer orders. While indications appear that
the retail economy is picking up, we believe that our markets will remain
sluggish for the next year. In addition, the uncertainties surrounding the
impact of the war could have a further impact on our 2003 results.

As a result, in December 2002, the Board of Directors approved a restructuring
plan to strengthen our operating efficiencies and to better align our operations
with current economic and market conditions. The revised business plan calls
for the following:

- - Significantly downsize our operations including the elimination of
approximately 60 of 117 positions to support a business with sales
of approximately $15 million.
- - Negotiate with the current landlord to move out of its present corporate
facility and relocate to a smaller and less costly facility.
- - Dedicate a substantial portion of our remaining resources towards
maintaining and improving our relationships with our 30 largest
customers.
- - Outsource all non-essential manufacturing and assembly operations to
qualified subcontractors.
- - Further expand our Service Partner program to augment service provided by
our employees.
- - Negotiate a settlement with past due trade vendors.

On January 7, 2003, we initiated our restructuring plan. Due to the size of the
layoff, Sentry was required to give the terminated employees a 60-day notice
period. The costs associated with these restructuring activities will be
expensed as they are incurred. We believe the successful implementation of this
restructuring will result in substantial gross margin improvements and
reductions in operating expenses beginning after the first quarter of 2003.

There can be no assurance, however, that changes in our plans or other events
affecting our operations will not result in accelerated or unexpected cash
requirements, or that we will be successful in achieving positive cash flow from
operations or that additional debt or equity financing will be available on
terms that are satisfactory to Sentry, or that any such debt or equity financing
will be sufficient to provide the full amount of funding necessary. Our future
cash requirements are expected to depend on numerous factors, including, but not
limited to: (i) the ability to generate positive cash flow from operations, and
the extent thereof, (ii) the ability to raise additional capital or obtain
additional financing, and (iii) economic conditions.

Sentry will require liquidity and working capital to finance increases in
receivables and inventory associated with sales growth, payments to past due
vendors and, to a lesser extent, for capital expenditures. We had no material
capital expenditure or purchase commitments as of December 31, 2002.

Under the terms of the share purchase agreement, Dialoc ID had the right to
acquire up to 51% of our common stock. On May 13, 2002, Dialoc ID exercised
their purchase right for an additional 14,500,000 shares of newly issued common
stock at an exercise price of $0.001 per share. As a result of this
transaction, as of December 31, 2002, Dialoc ID owned 42,067,017 shares
representing 48.1% of our common stock outstanding. On January 7, 2003, they
brought their ownership to 51% through the exercise of 4,516,475 shares of newly
issued common stock at an exercise price of $0.001 per share.

Currently, Dialoc ID is not able to provide additional financial support for
Sentry. If we are not able to raise additional debt or equity financing, we
could be forced into a bankruptcy or be required to liquidate our assets. In
this scenario, most likely, our secured lender would receive the bulk of any
proceeds.

The table below summarizes aggregate maturities of future minimum lease
payments under noncancelable operating and capital leases as of December 31,
2002.

Contractual Less than 1-3 4-5 After 5
Obligations Total 1 Year Years Years Years
- ----------- --------- ----- ----- -------
(In Thousands)

Operating Leases $ 2,877 $ 205 $ 617 $ 411 $ 1,644
Capital Leases 5,301 394 1,148 753 3,006
------- ------ ------- ------- -------
Total $ 8,178 $ 599 $ 1,765 $ 1,164 $ 4,650
======= ====== ======= ======= =======

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. Under SFAS No. 142, goodwill and some
intangible assets will no longer be amortized, but rather reviewed for
impairment on a periodic basis. The provisions of this Statement are required to
be applied starting with fiscal years beginning after December 15, 2001. This
Statement is required to be applied at the beginning of the Company's fiscal
year and to be applied to all goodwill and other intangible assets recognized in
its financial statements at that date. Impairment losses for goodwill and
certain intangible assets that arise due to the initial application of this
Statement are to be reported as resulting from a change in accounting principle.
Goodwill and intangible assets acquired after June 30, 2001, will be subject
immediately to the provisions of this Statement. The adoption of SFAS No. 142
did not have a material impact on our financial statements.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. We are required to adopt the provisions of
SFAS No. 143 effective January 1, 2003. The adoption of SFAS No. 143 is not
expected to have a material impact on our financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No.144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The adoption of SFAS No. 144 did not have a material impact on our financial
statements.

In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued.
This statement provides guidance on the classification of gains and losses from
the extinguishment of debt and on the accounting for certain specified lease
transactions. Certain provisions of this statement related to the classification
of gains and losses from extinguishment of debt are required to be adopted by
the Company beginning with the year ended December 31, 2003. All other
provisions are required to be adopted after May 15, 2002 and early application
is encouraged. It is not anticipated that the adoption of this statement will
have a material impact on the consolidated financial position, consolidated
results of operations or liquidity of the Company.

In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal activities
and is effective for the Company on January 1, 2003. The costs associated with
our restructuring plan, which are not expected to be material, will be expensed
as incurred in 2003 in accordance with SFAS No. 146.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123," which amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. The
transition and annual disclosure provisions of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002. In addition, SFAS No. 148 amends
the disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company will continue to account for stock-based compensation to
employees under APB Opinion No. 25 and related interpretations.

INFLATION

The Company does not consider inflation to have a material impact on the
results of operations.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other sections of this Annual Report on Form 10-K
contain "forward-looking statements" (as defined in the Private Securities
Litigation Reform Act of 1995 or the "PSLRA") that are based on current
expectations, estimates and projections about the industry in which the Company
operates, as well as management's beliefs and assumptions. Words such as
"expects," "anticipates" and "believes" and variations of such words and similar
expressions generally indicate that a statement is forward-looking. The Company
wishes to take advantage of the "safe harbor" provisions of the PSLRA by
cautioning readers that many important factors discussed herein, among others,
may cause the Company's results of operations to differ from those expressed in
the forward-looking statements. These factors include: (i) the risk that any
delay or cancellation of orders from one or more of Sentry's two major customers
may have a material adverse effect on the Company's financial condition; (ii)
the risk that anticipated growth in the demand for the Company's products in the
retail, commercial and industrial sectors will not develop as expected, whether
due to competitive pressures in these markets or to any other failure to gain
market acceptance of the Company's products; (iii) the risk that anticipated
revenue growth through the domestic and international dealers programs does not
develop as expected; (iv) the risk that the Company may not find sufficient
qualified Service Partners to provide future installation services; (v) the risk
that the Company will not be able to retain key personnel due to its current
financial condition; (vi) the risk that the borrowing availability under the new
credit facility will not be adequate to meet the Company's growth requirements;
and (vii) the risk arising from the large market position and greater financial
and other resources of Sentry's principal competitors, as described under "Item
1. Business-Competition."

24

Item 8. Financial Statements and Supplementary Data.
- ------- -----------------------------------------------

SENTRY TECHNOLOGY CORPORATION
-----------------------------
AND SUBSIDIARIES
----------------

REPORT ON AUDITS OF
-------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
AND SUPPLEMENTARY INFORMATION
-----------------------------

YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
--------------------------------------------

CONTENTS
--------

Page
----
CONSOLIDATED FINANCIAL STATEMENTS:

Independent auditors' reports F-1 - F-2

Balance sheets F-3

Statements of operations F-4

Statements of shareholders' equity F-5

Statements of cash flows F-6

Notes to financial statements F-7 - F-23

SUPPLEMENTARY INFORMATION:

Schedule II - Valuation and Qualifying Accounts F-24

------
Independent Auditors' Report
----------------------------

To the Board of Directors and Stockholders of
Sentry Technology Corporation
Hauppauge, New York

We have audited the accompanying consolidated balance sheet of Sentry Technology
Corporation and subsidiaries (the "Company") as of December 31, 2002, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the year then ended. Our audit also includes information as
of and for the year ended December 31, 2002 included in the financial statement
schedule listed in the Index at item 15(a)(2). These financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements and the financial statement schedule based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sentry Technology Corporation and
subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such information as of and for the year ended December 31, 2002
included in the financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 4 to the
consolidated financial statements, the Company's recurring losses from
operations and negative cash flow position raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 4. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

/s/ Holtz Rubenstein & Co., LLP

Melville, New York
February 28, 2003

INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Sentry Technology Corporation
Hauppauge, New York

We have audited the accompanying consolidated balance sheet of Sentry Technology
Corporation and subsidiaries (the "Company") as of December 31, 2001, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended December 31, 2001. Our
audits also included the financial statement schedule for each of the two years
in the period ended December 31, 2001 listed in the Index at item 15(a)(2).
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements and the financial statement
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sentry Technology Corporation and
subsidiaries as of December 31, 2001, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 2001
in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic 2001 and 2000 consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

/s/ Deloitte & Touche LLP

Jericho, New York
March 22, 2002

SENTRY TECHNOLOGY CORPORATION
-----------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)

December 31,

2002 2001
-------------- ---------
ASSETS
- ----------------------------------------------------------------------
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 266 $ 423
Accounts receivable, less allowance for doubtful accounts
of $303 and $763, respectively. . . . . . . . . . . . . . . . . 1,472 2,713
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,145 4,740
Prepaid expenses and other current assets . . . . . . . . . . . . . 237 399
Total current assets . . . . . . . . . . . . . . . . . . . . 5,120 8,275
-------------- ---------
PROPERTY, PLANT AND EQUIPMENT, net . . . . . . . . . . . . . . . . . . 2,563 2,962
PATENTS, less accumulated amortization of $338 and $296, respectively. 207 234
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 90
$ 7,992 $ 11,561
-------------- ---------

LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------
Current Liabilities:
Revolving line of credit and term loan. . . . . . . . . . . . . . . $ 2,067 $ 2,599
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . 1,807 1,153
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . 1,523 1,864
Obligations under capital leases - current portion. . . . . . . . . 97 121
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . 394 303
Total current liabilities. . . . . . . . . . . . . . . . . . 5,888 6,040
-------------- ---------

OBLIGATIONS UNDER CAPITAL LEASES, noncurrent portion . . . . . . . . . 2,555 2,630
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 8,443 8,670
-------------- ---------

COMMITMENTS AND CONTINGENCIES (Notes 2, 8 and 13)
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value; authorized 140,000 shares,
issued and outstanding 78,044 and 61,543 shares, respectively. . 78 62
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . 44,521 44,403
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . (44,930) (41,574)
Note receivable from shareholder. . . . . . . . . . . . . . . . . . (120) -
---------
Total shareholders' equity (deficit). . . . . . . . . . . . . (451) 2,891
--------------

$ 7,992 $ 11,561

See notes to consolidated financial statements

SENTRY TECHNOLOGY CORPORATION
-----------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended
December 31,
-------------

2002 2001 2000
----------- -------------- -----------
REVENUES:
Sales. . . . . . . . . . . . . . . . . . . . $ 9,732 $ 12,827 $ 15,701
Service revenues and other . . . . . . . . . 4,804 4,472 4,164
----------- -------------- -----------
14,536 17,299 19,865
----------- -------------- -----------
COST AND EXPENSES:
Cost of sales. . . . . . . . . . . . . . . . 7,382 8,879 11,120
Customer service expenses. . . . . . . . . . 4,240 4,361 4,464
Selling, general and administrative expenses 5,227 5,773 7,576
Research and development . . . . . . . . . . 548 661 862
Asset impairment charges . . . . . . . . . . - - 2,981
----------- -------------- -----------
17,397 19,674 27,003
----------- -------------- -----------
OPERATING LOSS . . . . . . . . . . . . . . . . (2,861) (2,375) (7,138)
INTEREST EXPENSE . . . . . . . . . . . . . . . 495 536 683
----------- -------------- -----------
LOSS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT ON CHANGE IN ACCOUNTING PRINCIPLE. . (3,356) (2,911) (7,821)

INCOME TAXES . . . . . . . . . . . . . . . . . - - -
----------- -------------- -----------
NET LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE. . . . . . . (3,356) (2,911) (7,821)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE. . . . . . . . . . . . - - (301)
----------- -------------- -----------
NET LOSS . . . . . . . . . . . . . . . . . . . (3,356) (2,911) (8,122)
PREFERRED STOCK DIVIDENDS. . . . . . . . . . . - (25) (1,337)
RETURN TO COMMON SHAREHOLDERS FROM
REDEMPTION OF PREFERRED STOCK . . . . . . . - 27,198 -
----------- -------------- -----------
NET INCOME (LOSS) ATTRIBUTED TO
COMMON SHAREHOLDERS . . . . . . . . . . . . $ (3,356) $ 24,262 $ (9,459)
=========== ============== ===========
NET INCOME (LOSS) PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE:
Basic . . . . . . . . . . . . . . . . . . . $ (0.05) $ 0.40 $ (0.94)
=========== ============== ===========
Diluted . . . . . . . . . . . . . . . . . . $ (0.05) $ 0.39 $ (0.94)
=========== ============== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Basic . . . . . . . . . . . . . . . . . . . $ (0.05) $ 0.40 $ (0.97)
=========== ============== ===========
Diluted . . . . . . . . . . . . . . . . . . $ (0.05) $ 0.39 $ (0.97)
=========== ============== ===========
WEIGHTED AVERAGE COMMON SHARES:
Basic . . . . . . . . . . . . . . . . . . . 72,193 60,468 9,751
=========== ============== ===========
Diluted . . . . . . . . . . . . . . . . . . 72,193 62,008 9,751
=========== ============== ===========

See notes to consolidated financial statements

SENTRY TECHNOLOGY CORPORATION
-----------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
--------------------------------------------

Note
Additional Receivable
Common Stock Paid-in Accumulated from
Shares Amount Capital Deficit Shareholder
------ ------

BALANCE, January 1, 2000 . . . . . . . . . . . . . 9,751 $ 10 $ 14,196 $ (30,541) $ -

Net loss and comprehensive loss. . . . . . . . . . - - - (8,122) -
Preferred stock dividends. . . . . . . . . . . . . - - (1,337) - -
------- -------- ---------- ---------- -----------

BALANCE, December 31, 2000 . . . . . . . . . . . . 9,751 10 12,859 (38,663) -

Net loss and comprehensive loss. . . . . . . . . . - - - (2,911) -
Preferred stock dividends. . . . . . . . . . . . . - - (25) - -
Redemption of preferred stock for common stock . . 28,667 29 29,176 - -
Net proceeds from common stock issued to Dialoc ID 23,050 23 2,388 - -
Exercise of stock options. . . . . . . . . . . . . 75 - 5 - -
------- -------- ---------- ---------- -----------

BALANCE, December 31, 2001 . . . . . . . . . . . . 61,543 62 44,403 (41,574) -

Net loss and comprehensive loss. . . . . . . . . . - - - (3,356) -
Net proceeds from common stock issued to Dialoc ID 14,500 14 - - -
Exercise of stock options. . . . . . . . . . . . . 2,001 2 118 - (120)
------- -------- ---------- ---------- -----------

BALANCE, December 31, 2002 . . . . . . . . . . . . 78,044 $ 78 $ 44,521 $ (44,930) $ (120)
======= ======== ========== ========== ===========

Total
Common Redeemable
Shareholders' Cumulative
Equity Preferred
(Deficit) Stock
------------ ----------
BALANCE, January 1, 2000 . . . . . . . . . . . . . $ (16,335) $ 27,843

Net loss and comprehensive loss. . . . . . . . . . (8,122) -
Preferred stock dividends. . . . . . . . . . . . . (1,337) 1,337
----------- ---------

BALANCE, December 31, 2000 . . . . . . . . . . . . (25,794) 29,180

Net loss and comprehensive loss. . . . . . . . . . (2,911) -
Preferred stock dividends. . . . . . . . . . . . . (25) 25
Redemption of preferred stock for common stock . . 29,205 (29,205)
Net proceeds from common stock issued to Dialoc ID 2,411 -
Exercise of stock options. . . . . . . . . . . . . 5 -
----------- ---------

BALANCE, December 31, 2001 . . . . . . . . . . . . 2,891 -

Net loss and comprehensive loss. . . . . . . . . . (3,356) -
Net proceeds from common stock issued to Dialoc ID 14 -
Exercise of stock options. . . . . . . . . . . . . - -
----------- ---------

BALANCE, December 31, 2002 . . . . . . . . . . . . $ (451) $ -
=========== =========

See notes to consolidated financial statements

SENTRY TECHNOLOGY CORPORATION
-----------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(IN THOUSANDS)

Years Ended
December 31,

2002 2001 2000
--------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $ (3,356) $(2,911) $ (8,122)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization. . . . . . . . . . 474 505 632
Amortization of intangibles and other assets . . 42 33 1,010
Provision for bad debts . . . . . . . . . . . . . . . . . (226) 37 224
Loss on impairment of assets. . . . . . . . . . . . . . . - - 2,981
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . 1,467 428 3,436
Inventories. . . . . . . . . . . . . . . . . . . . . . 1,595 534 (16)
Prepaid expenses and other assets. . . . . . . . . . . 142 188 (232)
Accounts payable and accrued liabilities . . . . . . . 313 (1,079) 239
Deferred income. . . . . . . . . . . . . . . . . . . . 91 (49) 133
Net cash provided by (used in) operating activities. 542 (2,314) 285
--------- -------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment . . . . . . . . (41) (124) 23
Intangibles . . . . . . . . . . . . . . . . . . . . . . . (15) (20) (11)
Net cash provided by (used in) investing activities . (56) (144) 12
--------- -------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under the revolving line of credit . . . . (566) (321) (155)
Proceeds of term loan . . . . . . . . . . . . . . . . . . 100 - -
Repayment of term loan. . . . . . . . . . . . . . . . . . (67) - -
Repayment of obligations under capital leases . . . . . . (124) (141) (166)
Proceeds from exercise of stock options . . . . . . . . . - 5 -
Proceeds of sale of stock, net. . . . . . . . . . . . . . 14 2,411 -
Net cash provided by (used in) financing activities. . (643) 1,954 (321)
--------- -------- ---------

DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . (157) (504) (24)
CASH AND CASH EQUIVALENTS, beginning of year. . . . . . . . 423 927 951
--------- -------- ---------
CASH AND CASH EQUIVALENTS, end of year. . . . . . . . . . . $ 266 $ 423 $ 927
========= ======== =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . $ 524 $ 548 $ 680
========= ======== =========

Income taxes. . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ -
========= ======== =========

See notes to consolidated statements

SENTRY TECHNOLOGY CORPORATION
-----------------------------
AND SUBSIDIARIES
----------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
--------------------------------------------

1. BASIS OF PRESENTATION:
-----------------------

Sentry Technology Corporation ("Sentry") a publicly traded Delaware
Corporation, was established to effect the merger of Knogo North America Inc.
("Knogo N.A.") and Video Sentry Corporation ("Video Sentry") which was
consummated on February 12, 1997. The merger resulted in Knogo N.A. and Video
Sentry becoming wholly owned subsidiaries of Sentry. The term "Company" refers
to Sentry as of and subsequent to February 12, 1997 and to Knogo N.A. prior to
such date. Prior to the merger, Video Sentry was engaged in the design,
development and marketing of a traveling closed circuit television security
surveillance system throughout the United States.

Pursuant to the merger agreement, Sentry issued one share of common stock
for each one share of Video Sentry common stock outstanding at the effective
time of the merger. Sentry also issued one share of common stock and one share
of Class A Preferred Stock for each 1.2022 shares of Knogo N.A. common stock
outstanding. The Sentry Class A Preferred Stock had a face value of $5.00 per
share and a cumulative dividend rate of 5.0% (the first two years of which are
paid-in-kind). The preferred was nonvoting and subject to a mandatory
redemption four years from the date of issuance and optional redemption by
Sentry at any time after one year from the date of issuance. The redemption
price was equal to $5.00 per preferred share (plus accrued and unpaid dividends
as of the redemption date). The preferred stock was non convertible, but the
redemption price could, in certain circumstances, be paid in common stock at
Sentry's option. The total number of Sentry preferred shares authorized is
10,000,000.

In January 2001, the Company entered into a capital transaction with Dialoc
ID Holding B.V. ("Dialoc ID"). All preferred stock was redeemed prior to that
transaction.

2. INVESTMENT BY DIALOC ID:
--------------------------

On January 8, 2001, Dialoc ID, formerly known as Dutch A&A Holding, B.V.,
acquired 23,050,452 shares of our common stock for $3 million, of which $1
million was paid in January 2001, $1 million was paid on April 30, 2001 and the
remaining $1 million was paid on August 31, 2001. Dialoc ID is a Netherlands
company which, through its subsidiaries, is in the business of development,
manufacture, sale and distribution of various kinds of identification, access
control and anti-theft electronic article surveillance systems and accessories.
Concurrent with the share purchase agreement, the Company entered into a
distribution agreement with Dialoc ID allowing the Company access to new
products of Dialoc ID and allowing Dialoc ID access to the Company's products
for an initial period of not less than two years.

As of January 8, 2001, Dialoc ID owned 37.5% of the Company's outstanding
common stock. Under the share purchase agreement, at any time prior to January
8, 2002, Dialoc ID had the right to increase its ownership of the Company's
common stock to a total of 51% of the shares of common stock then outstanding.
If the average market value of the Company's common stock, measured over any
10-day trading period during the one year period following January 8, 2001, was
at least $15.0 million, the purchase price for the additional shares shall be
determined by multiplying the actual number of shares to be purchased by $.001.
In November 2001, this market capitalization threshold was met. At that time,
the Board of Directors agreed to extend Dialoc ID's purchase right until January
8, 2003 in exchange for an extension of the distribution agreement for one year.
On May 14, 2002, Dialoc ID exercised its right to purchase 14,500,000 additional
common shares at a price of $.001 per share. As a result of this transaction,
as of December 31, 2002, Dialoc ID owned 42,067,017 shares representing 48.1% of
the Company's common stock outstanding. On January 7, 2003, they brought their
ownership to 51% through the exercise of 4,516,475 additional shares of newly
issued common stock at an exercise price of $0.001 per share.

In addition to the election of three nominees of Dialoc ID to the Board of
Directors, other matters which were approved at the December 8, 2001 Special
Meeting of Stockholders and became effective on January 8, 2001 were amendments
to the Company's certificate of incorporation to: (i) permit the payment of a
dividend of additional shares of Class A Preferred Stock at the rate of 0.075
shares of Class A Preferred Stock for each share of Class A Preferred Stock
held; (ii) to reclassify Class A Preferred Stock into shares of common stock on
a ratio of five shares of common stock for each share of Class A Preferred Stock
outstanding; and (iii) to increase the number of the Company's authorized shares
of common stock to 140,000,000. As a result of the dividend and
reclassification, 28,666,660 common shares were issued to former Class A
Preferred shareholders.

The reclassification of the Class A Preferred Shares resulted in a
return to the common shareholders of $27.2 million, which was recorded in the
first quarter of 2001. This amount represents the difference between the fair
market value of the common stock issued and the carrying amount of the preferred
stock redeemed.

3. SIGNIFICANT ACCOUNTING POLICIES:
---------------------------------

a. Business
--------

The Company is engaged in one segment and line of business, the
design, manufacture, distribution, installation and service of systems designed
to be used by retailers to deter shoplifting and employee theft and by
commercial, manufacturing and governmental customers to protect people and
assets.

b. Principles of consolidation
-----------------------------

The consolidated financial statements include the accounts of the
Company and its wholly owned and majority owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.

c. Revenue recognition and change in accounting principle
------------------------------------------------------------

The Company manufactures security devices which it offers for sale or
lease. For the years ended December 31, 2002, 2001 and 2000, leases of security
devices were not material.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. The
SAB summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in the financial statements.

In accordance with SAB 101, the Company changed its accounting method
for recognizing revenue on the sale of equipment where post-shipment obligations
exist. Previously, the Company recognized revenue for equipment when title
transferred, generally upon shipment. Beginning with the first quarter of 2000,
the Company began recognizing revenue when installation is complete or other
post-shipment obligations have been satisfied. The cumulative effect of the
change in accounting method is a non-cash increase in net loss of $301,000, or
$0.03 per share for the year ended December 31, 2000.

Service revenues are recognized when earned and maintenance revenues
are recognized ratably over the service contract period.

Included in accounts receivable at December 31, 2002 and 2001 is
unbilled accounts receivable of $21,000 and $41,000, respectively.

d. Cash and cash equivalents
----------------------------

The Company considers all highly liquid temporary investments with
original maturities of less than ninety days to be cash equivalents.

e. Allowance for doubtful accounts
----------------------------------

Losses from uncollectible accounts are provided for by utilizing the
allowance for doubtful accounts method based upon management's estimate of
uncollectible accounts. Management specifically analyzed accounts receivable
and analyzes potential bad debts, customer concentrations, credit worthiness,
current economic trends and changes in customer payment terms when evaluating
the allowance for doubtful accounts.

f. Inventories
-----------

Inventories are stated at the lower of cost (first-in, first-out
method) or market.

g. Product warranty
-----------------

Provisions for estimated expenses related to product warranties are
made at the time products are sold. These estimates are established using
historical information on the nature, frequency, and average cost of warranty
claims.

h. Depreciation and amortization
-------------------------------

Depreciation of security devices on lease and property, plant and
equipment is provided
for using the straight-line method over their related estimated useful lives.
Security devices on lease generally have estimated useful lives of six years,
except the cost of security devices related to operating leases with purchase
options are depreciated over the life of the lease.

i. Patents
-------

Cost and expenses incurred in obtaining patents are amortized over the
remaining life of the patents, not exceeding 17 years, on a straight-line basis.
Estimated annual amortization expense for the next five succeeding fiscal years
will range from $20,000 to $26,000.

j. Impairment of long-lived assets
----------------------------------

The Company reviews its long-lived assets, property and equipment,
intangible assets and other assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets may not be fully
recoverable. To determine recoverability of its long-lived assets, the Company
evaluates the probability that future undiscounted net cash flows, without
interest charges, will be less than the carrying amount of the assets.
Impairment is measured at fair value.

k. Fair value of financial instruments
---------------------------------------

It is management's belief that the carrying amounts of the Company's
financial instruments (cash and cash equivalents, accounts receivable, revolving
line of credit, accounts payable and obligations under capital leases)
approximate their fair value at December 31, 2002 and 2001 due to the short
maturity of these instruments or due to the terms of such instruments
approximating instruments with similar terms currently available to the Company.

l. Deferred income
----------------

Deferred income consist of rentals related to operating leases and
maintenance contracts billed or paid in advance.

m. Income taxes
-------------

The Company accounts for income taxes under SFAS No. 109, Accounting
for Income Taxes, which requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.

The Company and its subsidiaries file consolidated tax returns.

n. Stock-based compensation
-------------------------

The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees."

o. Foreign currency translation
------------------------------

The functional currency of the Company's foreign entity is the U.S.
dollar. Unrealized foreign exchange transaction losses are included in selling,
general and administrative expenses and amounted to approximately $16,000,
$28,000 and $31,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.

p. Shipping and handling costs
------------------------------

The Company includes shipping and handling costs in cost of goods
sold.

q. Use of estimates
------------------

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

r. Reclassifications
-----------------

Certain prior year balances have been reclassified to conform with
current year classifications.

s. Recent accounting pronouncements
----------------------------------

In June 2001, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. Under SFAS No. 142, goodwill and some
intangible assets will no longer be amortized, but rather reviewed for
impairment on a periodic basis. The provisions of this Statement are required to
be applied starting with fiscal years beginning after December 15, 2001. This
Statement is required to be applied at the beginning of the Company's fiscal
year and to be applied to all goodwill and other intangible assets recognized in
its financial statements at that date. Impairment losses for goodwill and
certain intangible assets that arise due to the initial application of this
Statement are to be reported as resulting from a change in accounting principle.
Goodwill and intangible assets acquired after June 30, 2001, will be subject
immediately to the provisions of this Statement. The adoption of SFAS No. 142
did not have a material impact on the Company's financial statements.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company is required to
adopt the provisions of SFAS No. 143 effective January 1, 2003. The adoption of
SFAS No. 143 is not expected to have a material impact on the financial
statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No.144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The adoption of SFAS No. 144 did not have a material impact on our financial
statements.

In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued.
This statement provides guidance on the classification of gains and losses from
the extinguishment of debt and on the accounting for certain specified lease
transactions. Certain provisions of this statement related to the classification
of gains and losses from extinguishment of debt are required to be adopted by
the Company beginning with the year ended December 31, 2003. All other
provisions are required to be adopted after May 15, 2002 and early application
is encouraged. It is not anticipated that the adoption of this statement will
have a material impact on the consolidated financial position, consolidated
results of operations or liquidity of the Company.

In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal activities
and is effective for the Company on January 1, 2003. The costs associated with
our restructuring plan, which are not expected to be material, will be expensed
as incurred in 2003 in accordance with SFAS No. 146.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123," which amends SFAS No, 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. The
transition and annual disclosure provisions of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002. In addition, SFAS No. 148 amends
the disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company will continue to account for stock-based compensation to
employees under APB Opinion No. 25 and related interpretations.

4. FINANCIAL CONDITION AND LIQUIDITY:
------------------------------------

The Company anticipated receiving significant additional purchase orders
from specific customers during 2002. While some of these purchase orders
eventually were received, the delays experienced have caused the Company to:
(i) operate in a cash flow deficit for the year; (ii) borrow the maximum amounts
available under its credit facility; and (iii) pursue potential sources of debt
or equity financing.

On October 10, 2002, the Company entered into a purchase order financing
facility with EPK Financial Corporation ("EPK"). Funding entails EPK providing
funds directly to vendors to allow the Company to secure the inventory needed to
fulfill customer orders. Sentry's costs for each financing transaction will be
equal to 3.5% of Sentry's selling price, plus 1.85% on the maximum outstanding
funded amount each ten calendar days or portion thereof, until EPK is paid in
full, plus expenses. In connection with this facility, an Intercreditor
Agreement was entered into between EPK, the CIT Group/Business Credit, Inc.
("CIT"), with whom the Company has a revolving line of credit (see Note 8), and
Sentry. Under this agreement, CIT subordinated its rights and interests in the
collateral related to each transaction to EPK. Currently, under the terms of
the Intercreditors Agreement, the maximum amount subordinated to EPK at any time
is limited to $440,000. Sentry uses the funds provided by EPK to fund vendor
purchases to complete orders currently in backlog. At December 31, 2002, the
amount owed to EPK was approximately $6,000.

Through 2002, Sentry was not successful in achieving positive cash flow
from operations and as a result, its payables to vendors are substantially in
excess of terms. Many of its vendors are currently providing products to the
Company on a COD basis. The Company is currently working with several
investment banking firms to assist it in conducting an organized search and
evaluation regarding a possible corporate transaction to gain access to greater
resources and to exploit Sentry's products and technological advances. Sentry
is looking to raise in excess of $4 million in debt or equity financing to
assist the Company in satisfying its trade payables situation and to achieve its
longer-term goals.

The Company has incurred reduced revenue levels, decreased financial
position and recurring operating losses over the past several years. To further
address the continuing losses, Sentry's business plan for 2002 included the
following:

- - Entering into a new three-year financing agreement.

- - Signing of a distribution agreement with Dialoc ID, providing Sentry with
access to new products and shared technologies.

- - Improvements in existing products and service capabilities.

- - Continued emphasis on growing international dealer base.

- - Various cost cutting and cost saving initiatives.

While Sentry was successful in completing the above named goals, it was
unable to meet its projected revenue growth targets. The Company's order flow
with our largest customer, Lowe's Home Center increased, but it was unable to
replace other lost business with sufficient new customer orders.

As a result, in December 2002, the Board of Directors approved a
restructuring plan for 2003 to strengthen the Company's operating efficiencies
and to better align its operations with current economic and market conditions.
The revised business plan calls for the following:

- - Significantly downsize operations including the elimination of
approximately 60 of 117 positions to support a business with sales of
approximately $15 million.

- - Negotiate with the current landlord to move out of the Company's present
corporate facility and relocate to a smaller and less costly facility.

- - Outsource all non-essential manufacturing and assembly operations to
qualified subcontractors.

- - Further expand Sentry's Service Partner program to augment service
provided by our employees.

- - Negotiate a settlement with past due trade vendors.

On January 7, 2003, Sentry initiated its restructuring plan. Due to the
size of the layoff, Sentry was required to give the terminated employees a
60-day notice period. The costs associated with these restructuring activities
will be expensed as they are incurred. The Company believes the successful
implementation of this restructuring will result in substantial gross margin
improvements and reductions in operating expenses beginning after the first
quarter of 2003.

There can be no assurance, however, that changes in Sentry's plans or other
events affecting its operations will not result in accelerated or unexpected
cash requirements, or that the Company will be successful in achieving positive
cash flow from operations or that additional debt or equity financing will be
available on terms that are satisfactory to Sentry, or that any such debt or
equity financing will be sufficient to provide the full amount of funding
necessary. Sentry's future cash requirements are expected to depend on numerous
factors, including, but not limited to: (i) the ability to generate positive
cash flow from operations, and the extent thereof, (ii) the ability to raise
additional capital or obtain additional financing, and (iii) economic
conditions.

Sentry will require liquidity and working capital to finance increases in
receivables and inventory associated with sales growth, payments to past due
vendors and, to a lesser extent, for capital expenditures. The Company had no
material capital expenditure or purchase commitments as of December 31, 2002.

Currently, Sentry's major shareholder, Dialoc ID, is not able to provide
additional financial support for Sentry. If the Company is not able to raise
additional debt or equity financing, we could be forced into a bankruptcy or be
required to liquidate its assets. In this scenario, most likely, Sentry's
secured lender would receive the bulk of any proceeds.

5. INVENTORIES:
-----------

Inventories consist of the following:

December 31,
------------
2002 2001
---- ----
(In Thousands)
--------------
Raw materials $ 513 $ 1,139
Work-in-process 618 520
Finished goods 2,014 3,081

Total $ 3,145 $ 4,740

The components of inventory shown are net of reserves for excess and
obsolete inventory totaling $3,610,000 and $3,497,000 as of December 31, 2002
and 2001, respectively.

6. PROPERTY, PLANT AND EQUIPMENT:
--------------------------------

Property, plant and equipment are stated at cost and are summarized as
follows:

Estimated
Useful
Lives December 31,
(Years) 2002 2001
---- ----
(In Thousands)
--------------

Building 20 $ 3,033 $ 3,033
Machinery and equipment 3 - 10 2,076 2,060
Furniture, fixtures and
office equipment 3 - 10 3,700 3,691
Leasehold improvements 3 - 10 312 312
-------- ---------
9,121 9,096
-------- ---------
Less allowance for depreciation 6,558 6,134
-------- ---------
$ 2,563 $ 2,962
======== =========

Depreciation expense on property, plant and equipment in 2002, 2001 and 2000
totaled $466,000, $486,000 and $587,000, respectively.

7. ACCRUED LIABILITIES:
--------------------

Accrued liabilities consist of the following:
December 31,
------------
2002 2001
---- ----
(In Thousands)
--------------

Accrued salaries, employee benefits and payroll taxes $ 522 $ 621
Accrued warranty 268 337
Other accrued liabilities 733 906
------ -------
$1,523 $1,864

8. REVOLVING LINE OF CREDIT:
---------------------------

On March 22, 2002, the Company entered into a new three year revolving line
of credit and term loan with CIT for maximum borrowings of $8 million, which are
subject to certain limitations based on a percentage of eligible accounts
receivable and inventories as defined in the agreement. Interest on the
revolving line of credit is payable monthly at the JPMorgan Chase Bank prime
rate (4.25% at December 31, 2002), plus 2% per annum. The Company is required
to pay a commitment fee of 0.375% per annum on any unused portion of the credit
facility. Borrowings under the line are secured by substantially all of the
Company's assets. The terms of the agreement, among other matters, places
restrictions on capital expenditures and prohibits the payment of dividends.
The Company had borrowings on the line of credit totaling $2,034,000 as of
December 31, 2002. In addition, the Company entered into a $100,000 term loan
with CIT. The principal is currently being repaid to CIT in twelve equal
monthly installments of $8,333, which began May 1, 2002. The balance on the
term loan at December 31, 2002 was $33,000. Interest on the term note is at the
JPMorgan Chase Bank prime plus 2.25%. At December 31, 2001, the Company had
borrowings of $2,599,000 under a line of credit with another financial
institution at an interest rate of 6.52%.

9. OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES:
---------------------------------------------------

In December 1996, the Company completed a sale-leaseback transaction on the
Company's corporate headquarters. The Company received net proceeds of
approximately $4.5 million which approximated the carrying amount of the land
and building. The lease covers a period of 20 years with quarterly payments of
$145,000. The lease agreement allows for an increase in lease payments for
years 4 through 20 based on a formula tied to the Consumer Price Index. Because
the fair market value of the land on which the principal premises is built was
greater than 25 percent of the total fair value of the leased premises at the
inception of the lease, the land and building have been considered separately
for the purposes of applying the criteria of SFAS No. 13, Accounting for Leases.
The land portion of the lease has been classified as an operating lease. Future
minimum payments related to the land portion of the lease are as follows (in
thousands):

Year Ending
December 31,
------------

2003 $ 206
2004 206
2005 206
2006 206
2007 206
Thereafter 1,847
------
$ 2,877

Rent expense for 2002, 2001 and 2000 was $173,000, $155,000 and $155,000
per year, respectively.

The building portion of the lease has been classified as a capital lease.
The Company also leases certain computer and office equipment and related items
under noncancellable capital lease arrangements at varying interest rates
expiring through 2007.

Minimum annual rentals are as follows (in thousands):

Year Ending
December 31,
------------

2003 $ 394
2004 383
2005 383
2006 383
2007 377
Thereafter 3,381
-------
5,301
-------
Less amount representing interest 2,649
Present value of minimum rentals 2,652
-------
Less current portion 97
-------
Noncurrent portion $ 2,555

As a result of the sale-leaseback transaction, a capitalized lease asset
and obligation in the amount of $3,033,000 was recorded at the inception of the
lease. The net book value of the building was $2,123,000 and $2,275,000 at
December 31, 2002 and 2001, respectively. The building is being amortized on a
straight-line basis over the 20-year lease term. The capitalized lease
obligation is being amortized under the interest method over the 20-year lease
period, utilizing an imputed interest rate of approximately 11%.

The Company has entered into sublease agreements with two parties for
portions of its present corporate facility. Rental income under these
agreements, included in selling, general and administrative expenses,
approximated $370,000, $200,000, and $139,000 in 2002, 2001 and 2000,
respectively. Minimum future rental payments due under these agreements
approximated $469,000 at December 31, 2002.

Computer and office equipment and related items under capital leases are
included in property and equipment and other assets with a gross value of
$325,000 and $299,000 at December 31, 2002 and 2001 and a net book value of
$29,000 and $65,000 at December 31, 2002 and 2001, respectively.

10. COMMON SHAREHOLDERS' EQUITY:
-----------------------------

a. Earnings Per Share ("EPS")
-----------------------------

Basic EPS is determined by using the weighted average number of common
shares outstanding during each period. Diluted EPS further assumes the issuance
of common shares for all dilutive potential common shares outstanding. The
calculations for earnings per share are as follows:

2002 2001 2000
-------- -------- --------
(In Thousands, Except Per Share Amounts)
--------------------------------------------
Numerator:
Net Income (Loss):
Loss before cumulative effect of
accounting change . . . . . . . . . . . . $(3,356) $(2,911) $(7,821)
Effect of preferred stock dividends . . . . - (25) (1,337)
Return to common shareholders from
redemption of preferred stock . . . . . . - 27,198 -
- 24,262 (9,158)
-------- -------- --------
Cumulative effect of accounting change. . . - - (301)
Net income (loss) attributed to
common shareholders . . . . . . . . . . . $(3,356) $24,262 $(9,459)

Denominator:
Denominator for basic earning per share -
weighted average shares . . . . . . . . . 72,193 60,468 9,751
Effect of dilutive stock options. . . . . . - 1,540 -

Denominator for diluted earnings per share. 72,193 62,008 9,751

Basic Earnings per Common Share:
Before cumulative effect of accounting
change. . . . . . . . . . . . . . . . . . $ (0.05) $ 0.40 $ (0.94)
Cumulative effect of accounting change. . . - - (0.03)
Basic earnings per common share . . . . . . $ (0.05) $ 0.40 $ (0.97)
-------- -------- --------

Diluted earnings per common share . . . . . $ (0.05) $ 0.39 $ (0.97)

Since the Company had a net loss for 2002 and 2000, the effect of
common stock options and warrants would be antidilutive.

b. Stock options
--------------

In February 1997, the Company adopted the 1997 Stock Incentive Plan of
Sentry Technology Corporation (the "1997 Plan"). The 1997 Plan initially
provided for grants up to 2,250,000 options to purchase the Company's common
stock. Under the antidilution provisions of the 1997 Plan, the shares available
for grant were increased by 1,719,365 shares, as a result of the preferred stock
redemption in January 2001. In March 2001, the Board of Directors approved an
additional increase of 3,600,000 shares available for grant pending ratification
by Sentry's shareholders. The stock option committee may grant awards to
eligible employees in the form of stock options, restricted stock awards,
phantom stock awards or stock appreciation rights. Stock options may be granted
as incentive stock options or nonqualified stock options. Such options normally
become exercisable at a rate of 20% per year over a five-year period and expire
ten years from the date of grant. However, the Dialoc ID investment constituted
a change in control under the 1997 Plan, resulting in the immediate vesting of
all shares issued prior to January 8, 2001. All outstanding stock options were
issued at not less than the fair value of the related common stock at the date
of grant. At December 31, 2002, 7,257,738 common shares were reserved for
issuance in connection with the exercise of stock options.

In January 2001, the Company issued 2,000,000 non-qualified stock
options to Mr. Murdoch, its Chief Executive Officer, at the price of $0.06 per
share, which was the fair value on the date of the grant. On March 27, 2002,
Mr. Murdoch exercised the option through the issuance of a promissory note in
the amount of $120,000. The principal of the note is secured by the option
shares and is repayable no later than January 8, 2006. Mr. Murdoch will not
have any personal liability for the principal of the note if the value of the
option shares is not sufficient to repay the note. The note bears interest at
prime (currently 4.25%) less .75%. The note has been reflected as a reduction
of shareholders' equity on the consolidated balance sheet.

In connection with redemption of Sentry Class A Preferred Stock
described in Note 2, employees and directors who held options to purchase units
of preferred stock were granted substitute options under the 1997 Plan to
purchase an aggregate of 1,719,365 shares of Sentry Common Stock at the ratio of
five (5) common shares to each preferred share under option.

In October 1999, the Company issued 200,000 non-qualified stock
options to the Interim Chief Executive Officer at the price of $0.19 per share,
which was the fair value on the date of grant. The options are fully vested at
December 31, 2002 and expired on January 8, 2003.

Stock option transactions for the years ended December 31, 2002, 2001
and 2000 are as follows:

Weighted Average
Number Exercise
of Shares Price

Balance, January 1, 2000 . 1,658,259 $ 2.21

Granted. . . . . . . . . . 612,000 0.07
Exercised. . . . . . . . . - -
Canceled . . . . . . . . . (255,886) 2.66
Balance, December 31, 2000 2,014,373 1.50
----------- ---------

Granted. . . . . . . . . . 4,259,365 0.32
Exercised. . . . . . . . . (75,000) 0.07
Canceled . . . . . . . . . (377,258) 0.90
Balance, December 31, 2001 5,821,480 0.49
----------- ---------

Granted. . . . . . . . . . - -
Exercised. . . . . . . . . (2,001,000) 0.06
Canceled . . . . . . . . . (479,188) 0.87

Balance, December 31, 2002 3,341,292 $ 0.69

Significant option groups outstanding at December 31, 2002 and related
option price and life information were as follows:

Weighted
Average
Remaining
Range of. . . . Number Contractual Number
Exercise Price. Outstanding Life Exercisable
- ---------------
0.05 - 0.09. . 1,001,500 7.38 640,300
0.31 - 0.62. . 1,157,356 3.87 1,157,356
1.05 - 3.00. . 1,182,436 4.52 1,182,436
---------- ----- ---------
3,341,292 5.15 2,980,092
========== ===== =========

At December 31, 2002, options to purchase an aggregate of 2,980,092
common shares were vested and currently exercisable at a weighted average
exercise price of $0.76 and an additional 361,200 options vest at dates
extending through the year 2006, expiring through 2011. At December 31, 2002,
options for 3,916,466 common shares were available for future grants.

As discussed in Note 3, the Company accounts for its stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees and its related
interpretations. Accordingly, as all options have been granted at exercise
prices equal to fair market value on the date of grant, no compensation expense
has been recognized in the financial statements for employee stock arrangements.

SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under SFAS
No. 123, the fair value of stock-based awards to employees is calculated through
the use of option pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock
options awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. No options were granted in 2002. The weighted
average fair value of the options granted for the year ended December 31, 2001
and 2000 is estimated at $0.05, and $0.06, using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life of
five years; stock volatility, 147% in 2001 and 260.5% in 2000; risk free
interest rates, 4.8% in 2001 and 6.2% in 2000, and no dividends during the
expected term. The Company's calculations are based on a multiple option
valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the post 1995 awards had been amortized to expense over
the vesting period of the awards, pro forma net income (loss) attributed to
common shareholders would have been $(3,350,000) (($0.05) per diluted share) in
2002, $23,600,000 ($0.38 per diluted share) in 2001 and $(9,929,000) (($1.02)
per diluted share) in 2000. However, the impact of outstanding nonvested stock
options granted prior to 1995 has been excluded from the pro forma calculation;
accordingly, the 2002, 2001 and 2000 pro forma adjustments are not indicative of
future period pro forma adjustments, when the calculation will apply to all
applicable stock options.

c. Warrants
--------

In 1999 the Company issued warrants to purchase 150,000 shares of
common stock at an exercise price of $0.13. Such warrants expire in March 2008.
At December 31, 2002, 150,000 common shares were reserved for issuance in
connection with these warrants.

11. INCOME TAXES:
-------------

The reconciliation between total tax expense and the expected U.S. Federal
income tax is as follows:

2002 2001 2000
-------- ------ --------
(In Thousands)
--------------------------

Expected tax benefit at 34%. . . . . . $(1,141) $(990) $(2,761)
Add:
Nondeductible expenses. . . . . . . . 26 27 386
U.S. losses producing no tax benefit. 1,115 963 2,375

$ - $ - $ -

As of December 31, 2002, the Company had net operating loss carryforwards
of approximately $30 million, which expire through the year 2022. The
utilization of these net operating loss carryforwards will likely be subject to
substantial annual limitations imposed by the Internal Revenue Code Section 382.

Significant components of deferred tax assets and liabilities at December
31, 2002 and 2001 are comprised of:

Deferred Tax Assets
(Liabilities)
2002 2001
------------------------------
(In Thousands)
- -----------------------------------
Assets:
Accounts receivable. . . . . . . . $ 121 $ 305
Inventories. . . . . . . . . . . . 1,569 1,550
Accrued liabilities. . . . . . . . 107 142
Property, plant and equipment. . . 181 85
Net operating loss carryforwards . 11,993 10,521
Tax credit carryforwards . . . . . - 209
Gross deferred tax assets. . . . . 13,971 12,812
------------ --------
Less valuation allowance . . . . . 13,971 12,782
- 30
------------ --------
Liabilities:
Tollgate taxes . . . . . . . . . . - (30)
Gross deferred tax liabilities . . - (30)
------------ --------

Net deferred tax asset (liability) $ - $ -

The increase in the valuation allowance for the years ended December 31,
2002 and 2001 was primarily attributable to the increase in net operating loss
carryforwards. A full valuation allowance has been recorded against the net
deferred tax assets because it is more likely than not that such asset will not
be realized in the foreseeable future.

12. RELATED PARTY TRANSACTIONS:
----------------------------

As a result of the Dialoc ID investment, Sentry entered into a distribution
agreement with Dialoc ID, which contemplates a two-way distribution relationship
between the companies. Under the agreement, Sentry has the rights to sell
Dialoc ID's EAS, access control and RFID products and accessories and Sentry
gives Dialoc ID the rights to sell its EAS and CCTV products and accessories.
Pricing for products under the agreements are at the lowest prices charged to
affiliates. In addition, Dialoc ID received an annual management fee for
product marketing and product engineering management from Sentry in the amount
of $50,000 and $100,000 in 2002 and 2001, respectively. Also, Peter Murdoch, a
shareholder of Dialoc ID through a trust, receives an annual salary of $150,000
in the capacity of President of Sentry. This amount has been reduced to $50,000
for 2003. Purchases from Dialoc ID were $30,000 and $182,000 in 2002 and 2001,
respectively. Services and sales to Dialoc ID were $79,000 and $19,000 in 2002
and 2001, respectively. The net amount payable to Dialoc ID as of December 31,
2002 was $140,000.

13. COMMITMENTS AND CONTINGENCIES:
-------------------------------

a. 401(k) Plan
------------

In January 1997, the Company adopted the Sentry Technology Corporation
Retirement Savings 401(k) Plan (the "Plan"). The Plan permits eligible
employees to make voluntary contributions to a trust, up to a maximum of 35% of
compensation, subject to certain limitations, with the Company making a matching
contribution equal to a designated percentage of the eligible employee's
deferral election. The Company may also contribute a discretionary
contribution, subject to certain conditions, as defined in the Plan. The
Company contributed approximately $48,000, $68,000, and $117,000 to the Plan for
the years ended December 31, 2002, 2001 and 2000, respectively.

b. Employment agreements
----------------------

The Company and several key executives entered into employment
agreements with remaining terms of one to two years for which the Company will
have a minimum commitment of $339,000.

c. Litigation
----------

The Company is a party to litigation matters and claims which are
normal in the course of its operations. While the results of such litigation
and claims cannot be predicted with certainty, management believes that the
final outcome of such matters will not have a materially adverse effect on the
Company's consolidated financial position, results of operations and cash flows.

14. MAJOR CUSTOMERS AND CREDIT CONCENTRATIONS:
---------------------------------------------

The Company grants credit to customers who are principally in the retail
industry and libraries. During 2002, 2001 and 2000, revenues from a single
customer represented approximately 40%, 22% and 14% of total revenues,
respectively. During 2001 and 2000, revenues from a different customer
represented 11% and 15% of total revenues, respectively. No other customer
accounted for more than 10% of total revenues for fiscal 2002, 2001 and 2000.

15. REVENUE BY PRODUCT LINE:
--------------------------

Revenues by product line are as follows:

2002 2001 2000
------- ------- -------
(In Thousands)
- ---------------------------

EAS . . . . . . . . . . . . $ 2,530 $ 5,600 $ 7,545
CCTV. . . . . . . . . . . . 4,578 4,833 5,340
Sentry Vision . . . . . . . 2,368 1,772 1,713
3 M library products. . . . 256 622 1,103
Service revenues and other. 4,804 4,472 4,164
------- ------- -------
Total revenues. . . . . . . $14,536 $17,299 $19,865
======= ======= =======

16. ASSET IMPAIRMENT:
-----------------

In the fourth quarter of 2000, the Company reassessed the carrying value of
the goodwill and related patents generated from the Video Sentry merger as a
result of the introduction of SmartTrack, the next generation in the
SentryVision family of products. Based on a review of the technological
developments in the marketplace, the Company determined that the goodwill and
related patents associated with the Company's original traveling CCTV
surveillance system no longer provided the Company with a competitive advantage.
As a result, the Company recorded an impairment charge of $2,981,000 for the
year ended December 31, 2000.

This impairment charge was calculated by comparing future discounted net
cash flows to the goodwill's carrying value. Factors leading to the impairment
were a combination of historical losses and insufficient estimated future cash
flows from the earlier generation SentryVision system.

17. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
---------------------------------------------------------

The table below sets forth selected unaudited financial data for each
quarter of the last two years. Loss per share data is computed independently
for each of the quarters presented and therefore may not sum to the total for
the year.

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
------------ ------------ ------------ ------------ ----
(In Thousands, Except Per Share Data)
2002
- ----
Revenue 4,742 3,181 3,425 3,188 14,536
Gross Profit (Loss) 1,315 568 564 467 2,914
Net Loss (350) (1,085) (1,048) (873) (3,356)
Basic Income (Loss)
Per Common Share $ (0.01) $ (0.02) $ (0.01) $ (0.01) $ (0.05)
Diluted Income (Loss)
Per Common Share $ (0.01) $ (0.02) $ (0.01) $ (0.01) $ (0.05)

2001
----
Revenue 4,670 4,005 4,329 4,295 17,299
Gross Profit (Loss) 1,150 878 936 1,095 4,059
Net Loss (694) (861) (717) (639) (2,911)
Basic Income (Loss)
Per Common Share $ 0.46 $ (0.01) $ (0.01) $ (0.01) $ 0.40
Diluted Income (Loss)
Per Common Share $ 0.46 $ (0.01) $ (0.01) $ (0.01) $ 0.39

SUPPLEMENTARY INFORMATION
-------------------------
SENTRY TECHNOLOGY CORPORATION
-----------------------------
AND SUBSIDIARIES
----------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
--------------------------------------------

COLUMN C
--------
COLUMN A COLUMN B Additions COLUMN D COLUMN E
- ----------------------------------------- ----------- --------- --------- ---------

Balance, Charged to Other Balance,
Beginning Cost and Accounts/ Deductions/ End
Descriptions of Year Expenses Describe Describe of Year
(1) (2)
----------- ------------ ---------- ----------- --------
Year Ended December 31, 2002:
Allowance for doubtful accounts . . . . . $ 763 $ (225) $ 2 $ 237 $ 303
=========== ============ ========== ============ ========

Reserve for excess and obsolete inventory $ 3,497 $ 819 $ 706 $ 3,610
=========== ============ ============ ========

Year Ended December 31, 2001:
Allowance for doubtful accounts . . . . . $ 890 $ 37 $ - $ 164 $ 763
=========== ============ ========== ============ ========

Reserve for excess and obsolete inventory $ 3,354 $ 535 $ 392 $ 3,497
=========== ============ ============ ========

Year Ended December 31, 2000:
Allowance for doubtful accounts . . . . . $ 683 $ 224 $ 42 $ 59 $ 890
=========== ============ ========== ============ ========

Reserve for excess and obsolete inventory $ 3,404 $ 1,186 $ 1,236 $ 3,354
=========== ============ ============ ========

(1) Recoveries of accounts written off.
(2) Amounts written off.

Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ------------------------------------------------------------------
Financial Disclosure.
- ---------------------

None.

PART III
---------

Item 10. Directors and Executive Officers of the Registrant.
- -------- --------------------------------------------------------

DIRECTORS

The following sets forth information regarding the persons serving as
Directors of Sentry:

PETER L. MURDOCH, age 49, has been the President and Chief Executive
Officer, Director and Chairman of the Board since January 8, 2001. He is also
the President of ID Security Systems Canada Inc. Mr. Murdoch has extensive
experience in the retail security industry as well as in the sales of
technology-based products. He has been Managing Director of ID Security Systems
Canada, Inc. since its inception in 1987. Beginning in 1997 he has served as
member of the management committee of Dialoc ID. Prior to joining ID Security
Systems Canada, Inc., Mr. Murdoch was Vice President of Sales for Catalyst
International Business Systems. He is an economics graduate from the University
of Western Ontario. Mr. Murdoch's term as a Director expires at the 2003 Annual
Meeting.

WILLEM ANGEL, age 70, has been a Director of Sentry Technology since
January 8, 2001. Mr. Angel was appointed to the Board of Directors when it was
expanded from five to seven members. Mr. Angel is Chairman & C.E.O. of Dialoc
ID and has a long history in the EAS and identification business dating to the
start of ID Engineering in 1970. In 1977 he co-founded ID Engineering Europe
creating an EAS manufacturing and sales organization serving Western Europe. In
1987, his company expanded into Canada, opening ID Security Systems Canada Inc,
leading to the creation of Dialoc ID in 1989 and the Dialoc International in
1991 which manufactures and markets EAS, Access Control, and RFID products to
dealers and distributors worldwide. Mr. Angel's term as a Director expires at
the next Annual Meeting.

COR S.A. DE NOOD, age 58, has been a Director of Sentry Technology since January
8, 2001. Mr. De Nood is the Vice President and Chief Technical Officer of
Dialoc ID. In 1977, he co-founded the ID Engineering Europe, Dialoc ID in 1989
and Dialoc International B.V. in 1991. As co-founder of ID Engineering, Cor de
Nood has more than 30 years of experience developing, designing, and
manufacturing EAS and identification systems. In his capacity as Chief
Technical Officer of Dialoc ID, Mr. De Nood has developed key ongoing
relationships with Philips Electronics, TNO (the Dutch research council) and the
University of Eindhoven which greatly assist his companies in developing
products and pursuing fundamental research projects. Mr. De Nood's term as a
Director expires at the 2003 Annual Meeting.

ROBERT D. FURST, JR., age 50, has been a Director of Sentry Technology
since its inception. Prior thereto he was a Director of Video Sentry
Corporation, our predecessor, from January 1993 until February 1997. He was
Chairman of the Board of Video Sentry from July 1996 and Chief Executive Officer
from August 1996 until February 1997. Mr. Furst was one of the original
shareholders of Video Sentry. He is also the founder and managing principal of
Alternative Strategy Advisers LLC, an alternative investment management firm.
Mr. Furst is a member of the Chicago Board of Trade and has been a securities
and commodities trader since 1980. Mr. Furst is a continuing director on the
Board of Directors after the completion of the Dialoc ID Investment. Mr.
Furst's term as a Director expires at the next Annual Meeting.

JONATHAN G. GRANOFF, age 52, has been a Director of Sentry Technology since
January 8, 2001. Mr. Granoff was appointed to the Board of Directors when it
was expanded from five to seven members. Mr. Granoff is the President of the
Global Security Institute and United Nations representative for Lawyers Alliance
for World Security. He is also Chairman of the American Bar Association
Committee on Arms Control and Disarmament. Mr. Granoff has been in the practice
of law since 1979. Formerly Mr. Granoff served at Nutri Systems Inc. as an
attorney and Director of Franchising. Mr. Granoff's term as a Director expires
at the 2002 Annual Meeting.

EXECUTIVE OFFICERS EXECUTIVE OFFICERS

The following sets forth information regarding the persons serving as
executive officers of the Company:

NAME AGE
---- ------
Peter L. Murdoch 49

OFFICE
- ------
Our President and Chief Executive Officer since January 8, 2001. He is also
President of ID Security Systems Canada, Inc. Mr. Murdoch has extensive
experience in the retail security industry as well as in the sales of
technology-based products. He was Managing Director of ID Security Systems
Canada, Inc. since its inception in 1987. Beginning in 1997 he has served as
member of the management committee of Dialoc ID. Prior to joining ID Security
Systems Canada, Inc., Mr. Murdoch was Vice President of Sales for Catalyst
International Business Systems. He is an economics graduate from the University
of Western Ontario.

NAME AGE
---- ------
Peter J. Mundy 46

OFFICE
- ------
Our Vice President-Finance and Chief Financial Officer. Mr. Mundy also serves as
our Secretary and Treasurer. Mr. Mundy was Vice President - Finance, Chief
Financial Officer, Secretary and Treasurer of Knogo North America Inc. from
December 1994. Prior thereto, Mr. Mundy served as an officer of Knogo
Corporation where he was Vice President - Corporate Controller from May 1994
and, prior to such time, Corporate Controller and Controller since 1982. Mr.
Mundy is a Certified Public Accountant.

NAME AGE
---- ------
John F. Whiteman 44

OFFICE
- ------
Mr. Whiteman became our Senior Vice President - Sales and Marketing in January
1998. Prior thereto he was Senior Vice President - Sales and Marketing of Knogo
North America Inc. since January 1997; Vice President Sales - West of Knogo
North America Inc. and Knogo Corporation from 1994 to 1996; and, prior to such
time, served in various sales positions with Knogo Corporation since 1986. Mr.
Whiteman resigned effective December 2002.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's officers, Directors and persons who own more than
10% of a registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the American Stock Exchange. Officers, Directors and greater than
ten-percent Stockholders are required by Securities and Exchange Commission
regulations to furnish the Company with copies of all such reports they file.

Based solely on a review of the copies of reports furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the fiscal year ended December 31, 2002, all Section 16(a)
filing requirements applicable to its officers, Directors and greater than
ten-percent beneficial owners were complied with.

- ------
Item 11. Executive Compensation.
- -------- -----------------------

SUMMARY COMPENSATION TABLE

The following table summarizes the compensation for our fiscal year ended
December 31, 2002 of our Chief Executive Officer and two other executive
officers:

LONG-TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION COMPENSATION (1)
--------------------- -------------- -----------------

NAME AND . . . . . . . . . . . . . . . . . . . . . SECURITIES
PRINCIPAL POSITION . . . . . . . . . . . . . . . . YEAR SALARY BONUS UNDERLYING
OPTIONS(#)
- -------------------------------------------------- --------- ----------- ----------- ---------------

Peter L. Murdoch . . . . . . . . . . . . . . . . . 2002 $ 87,500(2) - - -
President and CEO. . . . . . . . . . . . . . . . . 2001 150,000 - 2,000,000 -

Peter J. Mundy, 2002 131,160 - - $1,967
Vice President, Finance, 2001 131,160 - - 2,492
Secretary and Treasurer 2000 126,970 $ 25,394(4) 150,000 4,568
Vice President - Finance, Secretary and Treasurer

John F. Whitemen 2002 161,051 - - $2,416
Former Sr. Vice President 2001 161,051 - - 3,060
Sales and Marketing (3) 2000 155,906 31,181(4) 150,000 5,100
________________________

(1) Amounts shown consist of our matching contributions under the Retirement
Savings 401(k) Plan.

(2) Mr. Murdoch deferred $62,500 of salary in 2002.

(3) Mr. Whiteman resigned effective December 2002.

(4) Amounts represent retention bonuses paid on December 31, 2000.

As to various items of personal benefits, we have concluded that the
aggregate amount of such benefits with respect to each individual does not
exceed the lesser of $50,000 or 10% of the annual salary and bonus reported in
the table for such individual.

OPTIONS GRANTED IN LAST FISCAL YEAR Options Granted in Last Fiscal Year

No options were granted during fiscal year 2002.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUESAggregated Option Exercises In Last Fiscal Year And Fiscal Year End Option
Values

The following table sets forth for each of the persons named in the Summary
Compensation Table the number of options exercised during 2002 and the amount
realized by each such officer. In addition, the table shows the number of
options that the named executive officer held as of December 31, 2002, both
exercisable (E) and unexercisable (U), and the value of such options as of that
date.

NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN
OPTIONS AT YEAR-END (#) THE MONEY OPTIONS AT
YEAR END ($)
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------- ------------- ------------- -------------
Peter L. Murdoch 2,000,000(1) 260,000 E - E -
U - U -

Peter J. Mundy - - E 669,218 E -
U - U -

John F. Whiteman - - E - E -
U - U -

28

(1) In March 2002, Mr. Murdoch exercised a non-qualified stock option
through the issuance of a promissory note in the amount of $120,000. The
principal of the note is secured by the option shares and is repayable no later
than January 8, 2006. Mr. Murdoch will have no personal liability for the
principal on the note if the value of the option shares is not sufficient to
repay the note. The note bears interest at prime less .75%.

_______________

COMPENSATION OF DIRECTORSCompensation Of Directors

Directors who are also our full-time employees receive no additional
compensation for their services as Directors. In response to Sentry's financial
condition, the Directors agreed to waive their annual retainer for 2002.

In addition, each non-employee Director is eligible to participate in our
1997 Stock Incentive Plan. On February 20, 2001, each non-employee Director,
at that time, received a grant of options to purchase 30,000 shares of our
common stock at an exercise price of $0.0625, vesting in equal portions over a
three-year period.

EMPLOYMENT AGREEMENTS AND COMPENSATION OF EXECUTIVE OFFICERS; CHANGE OF CONTROL
ARRANGEMENTS Employment Agreements And Compensation Of Executive Officers;
Change Of Control Arrangements

The Board set Peter L. Murdoch's compensation, in the capacity of
President, at an annual salary of $150,000 per year for 2001 and 2002. For 2003
the amount has been set at $50,000. In addition, he received options for
2,000,000 shares of Sentry common stock at an option price of $0.06 per share.
These options were exercised on March 27, 2002.Report Of The Board Of Directors
With Respect To Compensation

Our Board of Directors approves the compensation paid to our other
executive officers, approving or disapproving the recommendation of the Chief
Executive Officer. The Board of Directors also determines the amount of shares
and exercise prices for any stock option grants under our 1997 Stock Incentive
Plan, and the amount of our matching contribution percentage under our
Retirement Savings 401(k) Plan, respectively.

Currently, Mr. Mundy is compensated pursuant to a written employment
agreement providing for his base salary. This agreement provides for annual
salary increases intended to maintain his base salary against increases in the
cost of living as measured by the United States Department of Labor. Mr. Mundy
has waived these increases for the years 2002 and 2003.

The employment agreement for Mr. Mundy renews automatically on January 8
for one-year terms. His annual salary is presently $131,160.

The employment agreement for Mr. Mundy also provides that in the event of a
change in control, the term of his employment will be automatically extended for
a period of one year, following the date of such change in control. Following
such change in control, Mr. Mundy will have the right to terminate his
employment for good reason, as defined, while continuing to receive the salary
and bonus otherwise payable thereunder for the remainder of the employment term.
Additionally, the employment agreement provides that in the event of a change in
control all options held by Mr. Mundy, whether or not then vested, would fully
vest. If the change in control was not approved by a majority of the Existing
Directors (as defined in our Certificate of Incorporation), he would be entitled
to receive, for each option for which the exercise price is less than the market
price of our common stock, cash in cancellation of such options in an amount
equal to such difference.

On July 17, 2000, we established a retention arrangement for several of our
senior officers, including Messrs. Mundy and Whiteman. They each were entitled
to receive a bonus payment equal to 20% of their annual base compensation if
they were our employee on the earlier of December 31, 2000 or the closing of the
Dialoc ID investment. These amounts were paid on December 31, 2000. Each also
received a grant of 150,000 options to purchase our common stock at $0.065 per
share. These options initially were to vest one-third on grant, one-third six
months from the date of grant, and the remainder on July 17, 2001. However, as
a result of the change of control, these options became fully vested.

The Board of Directors endorses the view that the value of compensation paid to
our executive officers, and the Chief Executive Officer in particular, should be
closely linked to increases in the value of our common stock. Accordingly, our
Board supports option awards under our 1997 Stock Incentive Plan and
participation by executive officers in the Retirement Savings 401(k) Plan, which
includes our common stock fund among its investment alternatives. A substantial
portion of the total compensation of the executive officers, including the Chief
Executive Officer, is wholly dependent on increases in the value of our common
stock.

The number of stock options granted to executive officers is not determined by
reference to any formulas but is determined by the Board's evaluation of the
particular officer's ability to influence our long-term growth and
profitability. Our Board also considers our performance against certain
competitors, its general performance against internal goals established by
management and the executive's relative contribution thereto.

SENTRY TECHNOLOGY CORPORATION
STOCK PERFORMANCE DATA
(APPEARS AS A LINE GRAPH)
12/31/98 TO 12/31/02

12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
Sentry Technology Corporation. . . . . $ 100 $ 15 $ 10 $ 24 $ 3
S&P 600 Small Cap Index. . . . . . . . $ 100 $ 112 $ 111 $ 106 $ 85
S&P Elec. Equip. Index . . . . . . . . $ 100 $ 206 $ 170 $ 87 $ 42

Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------- ----------------------------------------------------------------

The following table sets forth the beneficial ownership of our common stock
at March 28, 2003, as to each (i) beneficial owner of five percent or more of
the common stock, (ii) Sentry Director, (iii) executive officer of Sentry, and
(iv) all Directors and executive officers as a group. On March 28, 2003,
82,560,347 shares of common stock were outstanding.

SHARES OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNERS. . . . . . . . . . . . . . . COMMON STOCK OF CLASS(1)
- ------------------------------------------------------------------ ------------- -----------

Dialoc ID Holdings B.V.
Daltonstraat 42-44
3846 BX Harderwijk . . . . . . . . . . . . . . . . . . . . . . . .
The Netherlands. . . . . . . . . . . . . . . . . . . . . . . . . . 42,067,017 51%
William A. Perlmuth
c/o Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, NY 10038. . . . . . . . . . . . . . . . . . . . . . . . 6,100,052 (2) 7.4%

Walter & Edwin Schloss
Associates L.P.
350 Park Avenue
New York, NY 10022. . . . . . . . . . . . . . . . . . . . . . . . 4,095,958 5.0%

SHARES OF PERCENT
DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . COMMON STOCK OF CLASS(1)
- ------------------------------------------------------------------ ------------- -----------
Peter L. Murdoch(5). . . . . . . . . . . . . . . . . . . . . . . . 2,101,500 2.5%
Peter J. Mundy . . . . . . . . . . . . . . . . . . . . . . . . . . 865,185 (3) 1.0%
Willem Angel(5). . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 (4) *
Cor S. A. De Nood(5) . . . . . . . . . . . . . . . . . . . . . . . 20,000 (4) *
Jonathan G. Granoff. . . . . . . . . . . . . . . . . . . . . . . . 80,000 (4) *
Robert D. Furst, Jr. . . . . . . . . . . . . . . . . . . . . . . . 608,916 (6) *
All Sentry Directors and executive officers as a group (6 persons) 3,725,601 (7) 4.5%

___________________
* Less than one percent

(1) Based on 82,560,347 shares of common stock outstanding as of March 28,
2003. Each figure showing the percentage of outstanding shares beneficially
owned has been calculated by treating as outstanding and owned the shares of
common stock that could be purchased by the indicated person within 60 days upon
the exercise of stock options.

(2) Consists of (a) 5,199,499 shares of common stock held by Mr. Perlmuth as
Executor of the Estate of Arthur J. Minasy, (b) 877,516 shares of common stock
held by Mr. Perlmuth as trustee under trusts for the benefit of Mr. Minasy's
adult children, and (c) 23,037 shares of common stock beneficially owned by Mr.
Perlmuth. Under the policies of the law firm of which he is of counsel, Mr.
Perlmuth will share any economic benefits of the options with the other members
of such firm. Mr. Perlmuth resigned his position as a member of the Board of
Directors on June 18, 2002.

(3) Includes 669,218 shares of common stock issuable upon the exercise of
stock options exercisable within 60 days from the date hereof.

(4) Includes 20,000 shares of common stock exercisable upon the exercise of
stock options exercisable within 60 days from the date hereof.

(5) Excludes shares of Common Stock owned by Dialoc ID of which Messrs.
Murdoch, Angel and DeNood are shareholders.

(6) Includes 44,000 shares of common stock issuable upon the exercise of
stock options exercisable within 60 days from the date hereof.

(7) Includes 773,218 shares of common stock issuable upon the exercise of
stock options exercisable within 60 days from the date hereof.

Item 13. Certain Relationships and Related Transactions.
- -------- --------------------------------------------------

As a result of the Dialoc ID investment, Sentry entered into a distribution
agreement with Dialoc ID, which contemplates a two-way distribution relationship
between the companies. Under the agreement, Sentry has the rights to sell
Dialoc ID's EAS, access control and RFID products and accessories and Sentry
gives Dialoc ID the rights to sell its EAS and CCTV products and accessories and
Sentry gives Dialoc ID the rights to sell its EAS and CCTV products and
accessories. Pricing for products under the agreements are at the lowest prices
charged to affiliates. In addition, Dialoc ID received an annual management fee
for product marketing and product engineering management from Sentry in the
amount of $50,000 and 100,000 in 2002 and 2001, respectively. Also, Peter
Murdoch, a shareholder of Dialoc ID through a trust, receives an annual salary
of $150,000 in the capacity of President of Sentry. Purchases from Dialoc ID
were $30,000 and $182,000 in 2002 and 2001, respectively. Services and sales to
Dialoc ID were $79,000 and $19,000 in 2002 and 2001, respectively. The net
amount payable to Dialoc ID as of December 31, 2002 was $140,000.

PART IV
-------

Item 14. Controls and Procedures.
- -------- -------------------------

(a) Evaluation of disclosure controls and procedures. An evaluation was
performed under the supervision and with the participation of the Company's
management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures within 90 days before the filing date of this
Form 10-K. Based on their evaluation, the Company's principal executive officer
and principal financial officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.

(b) Changes in internal controls. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to their evaluation. There were no
significant deficiencies or material weaknesses, and therefore there were no
corrective actions taken.

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------- --------------------------------------------------------------------

(a) The following documents are filed as a part of this report on Form 10-K:

(1) (2) Consolidated Financial Statements of the Company and its
subsidiaries for the year ended December 31, 2002 and Financial Statement
Schedules required to be filed by Items 8 and 14(d) of Form 10-K. See Table of
Contents to Consolidated Financial Statements of Sentry Technology Corporation
and its subsidiaries on page 24.

(3) Exhibits required to be filed by Item 601 of Regulation S-K:

Management Contracts or Compensatory Plans or Arrangements:
-----------------------------------------------------------------

10.1 1997 Stock Incentive Plan. Incorporated by reference to Exhibit 10.5
to the Company's Registration Statement on Form S-4 (No. 333-20135).

10.2 Retirement Savings 401(k) Plan. Incorporated by reference to Exhibit
10.6 to the Company's Registration Statement on Form S-4 (No. 333-20135).

10.3 Employment Agreement, dated as of February 12, 1997, between the
Company and Peter J. Mundy. Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-4 (No. 333-20135).

Other Exhibits:
- ---------------

2.1 Amended and Restated Agreement and Plan of Reorganization and Merger,
dated as of November 27, 1996 among Video Corporation, Knogo North America Inc.,
Sentry Technology Corporation, Viking Merger Corp. and Strip Merger Corp., as
amended by Amendment No. 1 to Amended and Restated Agreement and Plan of
Reorganization and Merger, dated as of January 10, 1997. Incorporated by
reference to Exhibit 2.1 to Company's Registration Statement on Form S-4 (No.
333-20135).

3.1 Amended and Restated Certificate of Incorporation of the Company,
together with Form of Certificate of Designations of Sentry Technology
Corporation Class A Preferred Stock. Incorporated by reference to Exhibit 3.1
to Company's Registration Statement on Form S-4 (No. 333-20135).

3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2 to
Company's Registration Statement on Form S-4 (No. 333-20135).

10.6 Contribution and Divestiture Agreement dated December 29, 1994 between
Knogo Corporation and Knogo North America Inc. Incorporated by reference to
Exhibit 10.8 to the Company's annual report on Form 10-K for fiscal 1997.

10.7 License Agreement dated December 29, 1994 between Knogo Corporation and
Knogo North America Inc. Incorporated by reference to Exhibit 10.9 to the
Company's annual report on Form 10-K for fiscal 1997.

10.8 Lease Agreement dated December 24, 1996 between Knogo North America
Inc. and NOG (NY) QRS 12-23, Inc. Incorporated by reference to Exhibit 10.10 to
the Company's annual report on Form 10-K for fiscal 1997.

10.9 Distribution Agreement dated March 26, 1996 between Knogo North America
Inc. and Minnesota Mining and Manufacturing Company. Incorporated by reference
to Exhibit 10.11 to the Company's annual report on Form 10-K for fiscal 1997.

10.11 Amendment No. 1 dated December 22, 1998, to the Distribution Agreement
dated March 26, 1996 between Knogo North America Inc. and Minnesota Mining and
Manufacturing Company. Incorporated by reference to Exhibit 10.13 to the
Company's annual report on Form 10-K for fiscal 1998.

10.16 First Amendment, dated September 18, 2000, to Lease Agreement (dated
December 24, 1996) between the Company and NOG (NY) QRS 12-23, Inc.,
incorporated by reference to Exhibit 10.19 to Company's Registration Statement
on Form S-4 (No. 333-47018).

10.19 Warrant between the Company and NOG (NY) QRS 12-23, Inc., dated
September 13, 2000, for 150,000 shares at $0.125 per share, incorporated by
reference to Exhibit 10.22 to Company's Registration Statement on Form S-4 (No.
333-47018).

10.24 Securities Purchase Agreement, dated August 8, 2000, between Sentry
Technology Corporation and Dialoc ID, incorporated by reference to Exhibit 10.1
to Company's Current Report on Form 8-K, dated August 10, 2000.

10.25 Distribution Agreement, dated January 8, 2001, between Sentry and
Dialoc ID, incorporated by reference to Exhibit B of Exhibit 10.1 to the
Company's Current Report on Form 8-K, dated August 10, 2000.

10.29 Financing Agreement between Knogo North America Inc. and The CIT
Group/Business Credit, Inc. dated March 22, 2002, incorporated by reference to
Exhibit 10.29 to Company's annual report on Form 10-K for fiscal 2001.

10.30 Master Agreement between Sentry Technology Corporation and EPK
Financial Corporation, dated October 10, 2002, incorporated by reference to
Exhibit 10.30 to the Company's Quarterly Report on Form 10-Q dated November 14,
2002.

10.31 Master Agreement between Knogo North America Inc. and EPK Financial
Corporation, dated October 10, 2002, incorporated by reference to Exhibit 10.31
to the Company's Quarterly Report on Form 10-Q dated November 14, 2002.

10.32 Intercreditor Agreement between Knogo North America Inc., EPK
Financial Corporation and The CIT Group/Business Credit, Inc., dated October 16,
2002, incorporated by reference to Exhibit 10.32 to the Company's Quarterly
Report on Form 10-Q dated November 14, 2002.

10.33 Letter amendment to the Intercreditor Agreement between Knogo North
America Inc., EPK Financial Corporation and The CIT Group/Business Credit, Inc.,
dated January 14, 2003.

21 Subsidiaries of the Company. Incorporated by reference to Exhibit 21 to
the Company's annual report on Form 10-K for fiscal 1997.

23.1 Consent of Holtz Rubenstein & Co., LLP

23.2 Consent of Deloitte & Touche LLP

99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.

There were no Forms 8-K filed by the registrant during the fourth quarter of
2002.

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.

SENTRY TECHNOLOGY CORPORATION

By: /s/ Peter J. Mundy
---------------------
Peter J. Mundy
Vice President-Finance,
Chief Financial Officer,
Secretary and Treasurer

Dated: March 31, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons in the
capacities and on the date indicated.

Signature Title
- --------- -----

/s/ Peter L. Murdoch Chief Executive Officer and Director
- -----------------------
Peter L. Murdoch

/s/ Peter J. Mundy Vice President-Finance,
- ---------------------
Peter J. Mundy Chief Financial and Accounting Officer,
Secretary and Treasurer

/s/ Willem Angel Director
- ------------------
Willem Angel

/s/ Robert D. Furst, Jr. Director
- --------------------------
Robert D. Furst, Jr.

- -------------------------- Director
Jonathan G. Granoff

/s/ Cor S.A. De Nood Director
- --------------------------
Cor S.A. De Nood

Dated: March 31, 2003

CERTIFICATION PURSUANT TO RULE 13-A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT
OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Peter L. Murdoch, certify that:

1. I have reviewed this annual report on Form 10-K of Sentry Technology
Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure the
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls.

6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Dated: March 31, 2003

By: /s/ Peter L. Murdoch
-----------------------
Name: Peter L. Murdoch
Title: Chief Executive Officer

CERTIFICATION PURSUANT TO RULE 13-A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT
OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Peter J. Mundy, certify that:

1. I have reviewed this annual report on Form 10-K of Sentry Technology
Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure the
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls.

6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Dated: March 31, 2003

By: /s/ Peter J. Mundy
---------------------
Name: Peter J. Mundy
Title: Chief Financial Officer

EXHIBIT INDEX

10.33 Letter amendment to the Intercreditor Agreement between Knogo North
America Inc., EPK Financial Corporation and The CIT Group/Business Credit, Inc.,
dated January 14, 2003.

23.1 Consent of Holtz Rubenstein & Co., LLP

23.2 Consent of Deloitte & Touche LLP

99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

EXHIBIT 10.33

LETTER AMENDMENT TO THE INTERCREDITOR AGREEMENT BETWEEN KNOGO NORTH AMERICA
INC., EPK FINANCIAL CORPORATION AND THE CIT GROUP/BUSINESS CREDIT, INC., DATED
JANUARY 14, 2003.

This letter shall serve as an amendment to the Intercreditor Agreement between
KNOGO NORTH AMERICA INC. ("KNOGO"), EPK FINANCIAL CORPORATION ("EPK") and THE
CIT GROUP/BUSINESS CREDIT, INC. ("CIT") dated October 16, 2002.

Point 2(a) shall now read as follows: "Notwithstanding anything herein to the
contrary, CIT subordination of its liens hereunder is limited solely to EPK
Collateral which has been designated in a Purchase Order Certificate and in
which EPK has filed and perfected its security interest and shall apply to EPK
Obligations not to exceed $440,300.00 "

All other terms and conditions of the Intercreditor Agreement dated October 16,
2002 and the amendment to the Intercreditor Agreement dated November 20, 2002
shall remain unchanged.

Dated on this 14 day of January, 2003.

KNOGO NORTH AMERICA INC.

By: /s/ Peter J. Mundy
---------------------------------

Title: VP-CFO
-------------------------------

EPK FINANCIAL CORPORATION

By: /s/ Edward King
---------------------------------

Title: President
-------------------------------

THE CIT GROUP/BUSINESS CREDIT, INC.

By: /s/ Andrew Hausspiegel
---------------------------------

Title: Vice President
------------------------------

Exhibit 23.1

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the incorporation by reference in Registration Statement No.
333-34929 and 333-34867 of Sentry Technology Corporation on Form S-8 of our
report dated February 28, 2003 appearing in this Annual Report on Form 10-K of
Sentry Technology Corporation for the year ended December 31, 2002.

/s/ Holtz Rubenstein & Co., LLP

Melville, New York
March 28, 2003

Exhibit 23.2

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement No.'s
333-34929 and 333-34867 of Sentry Technology Corporation on Form S-8 of our
report dated March 22, 2002, relating to the Company's consolidated financial
statements for the years ended December 31, 2001 and 2000, appearing in this
Annual Report on Form 10-K of Sentry Technology Corporation for the year ended
December 31, 2002.

/s/ Deloitte & Touche LLP

Jericho, New York
March 28, 2003

Exhibit 99.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002

I, Peter L. Murdoch, certify pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of Sentry Technology Corporation on Form 10-K for the annual period ended
December 31, 2002 fully complies with the requirements of Section 13(a) and
15(d) of the Securities and Exchange Act of 1934 and that information contained
in such Annual Report on Form 10-K fairly presents in all material respects the
financial condition and results of operation of Sentry Technology Corporation.

By: /s/ Peter L. Murdoch
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Name: Peter L. Murdoch
Title: Chief Executive Officer

Exhibit 99.2

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

I, Peter J. Mundy, certify pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of Sentry Technology Corporation on Form 10-K for the annual period ended
December 31, 2002 fully complies with the requirements of Section 13(a) and
15(d) of the Securities and Exchange Act of 1934 and that information contained
in such Annual Report on Form 10-K fairly presents in all material respects the
financial condition and results of operation of Sentry Technology Corporation.

By: /s/ Peter J. Mundy
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Name: Peter J. Mundy
Title: Chief Financial Officer