SKVY Sentry Technology Corp (CE)

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarter ended June 30, 2008

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from __________ to __________

 Delaware 96-11-3231714
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(State or other jurisdiction of (I.R.S. Employer
 incorporation or organization) Identification No.)


 1881 Lakeland Avenue, Ronkonkoma, NY 11779
---------------------------------------------------- -----
 (Address of principal executive offices) (Zip Code)

Check 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.

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of "large accelerated filer" and "small reporting company" in Rule 12b-2 of the Exchange Act.

 Large accelerated filer Accelerated filer
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 Non-accelerated filer Small reporting company X
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(Do not check if a small reporting company)

As of August 11, 2008, there were 120,743,804 shares of Common Stock outstanding.

 Page No.
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PART I. FINANCIAL INFORMATION
-------------------------------

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 Consolidated Balance Sheets --
 June 30, 2008, and December 31, 2007 3

 Consolidated Statements of Operations and Comprehensive
 Income (Loss) --
 Three Months Ended June 30, 2008, and 2007
 And Six Months Ended June 30, 2008, and 2007 4

 Consolidated Statements of Cash Flows --
 Six Months Ended June 30, 2008, and 2007 5

 Notes to Condensed Consolidated Financial
 Statements - June 30, 2008, and 2007 6 - 14


Item 2. Management's Discussion and Analysis of Plan of Operation 14 - 19


Item 3. Quantitative and Qualitative Disclosures about Market Risk 19

Item 4T. Controls and Procedures 19 - 20


PART II. OTHER INFORMATION
----------------------------

Item 6. Exhibits 20


Signature 20

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Item 1. Financial Statements

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value Amounts)
(Unaudited)

 JUNE 30, December 31,
 2008 2007
 --------- --------------
 ASSETS
-------------------------------------------------------
Current Assets:
 Cash and cash equivalents $ 1,389 $ 256
 Short-term investments 199 202
 Accounts receivable, less allowance for doubtful
 accounts of $149 in 2008 and $209 in 2007, respectively 845 3,014
 Inventory, net 3,124 3,299
 Prepaid expenses and other assets 899 858
 --------- ---------
Total current assets 6,456 7,629

PROPERTY AND EQUIPMENT, net 556 634
OTHER ASSETS 266 269
 --------- ---------
 TOTAL ASSETS $ 7,278 $ 8,532
 ========= =========

 LIABILITIES AND STOCKHOLDERS' DEFICIT
------------------------------------------------------
Current Liabilities:
 Bank indebtedness, demand loan and revolving line of credit $ 4,120 $ 4,551
 Accounts payable 612 1,223
 Accrued liabilities 1,667 1,539
 Obligations under capital leases - current portion 2 2
 Deferred income 265 145
 Convertible debenture 2,000 1,986
 --------- ---------
Total current liabilities 8,666 9,446

OBLIGATIONS UNDER CAPITAL LEASES - less current portion 6 7
DEFFERED TAX LIABILITY 114 117
 --------- ---------
Total liabilities 8,786 9,570

MINORITY INTEREST 1,205 1,200

STOCKHOLDERS' DEFICIT
 Preferred stock, $0.001 par value; authorized 10,000
 (2007 - 10,000) shares; none issued and outstanding
 Common stock, $0.001 par value; authorized 190,000
 (2007 - 190,000) shares; issued and outstanding 120,744
 and 120,744 shares, respectively 121 121
 Additional paid-in capital 49,885 49,420
 Accumulated deficit (53,269) (52,390)
 Accumulated other comprehensive income 550 611
 --------- ---------
Total stockholders' deficit (2,713) (2,238)
 --------- ---------
 TOTAL LIABILITIES AND STOCKHOLDERS'
 DEFICIT $ 7,278 $ 8,532
 ========= =========

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

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In Thousands, Except Per Share Amounts)

 Three Months Ended Six Months Ended
 June 30, June 30,
 ----------------------- ----------------------
 2008 2007 2008 2007
 (Unaudited) (Unaudited)
REVENUES:
 Sales $ 3,402 $ 1,991 $ 5,114 $ 4,320
 Service, installation and other revenues 627 437 957 776
 --------- --------- --------- ---------
 4,029 2,428 6,071 5,096

COST OF SALES AND EXPENSES:
 Cost of sales 1,884 1,106 2,903 2,376
 Customer service expenses 555 485 1,105 940
 Selling, general and administrative expenses 1,095 1,395 2,074 2,592
 Research and development 146 185 293 391
 --------- --------- --------- ---------
 3,680 3,171 6,375 6,299
 --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 349 (743) (304) (1,203)
INTEREST AND FINANCING EXPENSE, net 327 193 564 406
 --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
 AND MINORITY INTEREST 22 (936) (868) (1,609)
INCOME TAX EXPENSE (RECOVERY) 6 (20) 6 7
 --------- --------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST 16 (916) (874) (1,616)
MINORITY INTEREST EXPENSE (INCOME) 8 (18) 5 6
 --------- --------- --------- ---------
NET INCOME (LOSS) 8 (898) (879) (1,622)
 --------- --------- --------- ---------



OTHER COMPREHENSIVE INCOME (LOSS):
 Foreign Currency Translation Adjustments 23 198 (61) 210
 --------- --------- ---------- ---------
COMPREHENSIVE INCOME (LOSS) $ 31 $ (700) $ (940) $ (1,412)
 ========= ========= ========== =========

EARNINGS (LOSS) PER SHARE
 Basic and diluted $ 0.00 $ (0.01) $ (0.01) $ (0.01)
 ========= ========= ========= =========

WEIGHTED AVERAGE NUMBER OF
 COMMON SHARES OUTSTANDING
 Basic and diluted 120,744 120,744 120,744 120,744
 ========= ========= ========= =========


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

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

 Six Months Ended
 June 30,
 ------------------
 2008 2007
 ---- ----
 (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss $ (879) $(1,622)
 Adjustments to reconcile net loss
 to net cash provided by (used in) operating activities:
 Depreciation 59 63
 Amortization of other assets 40 64
 Non-cash consideration
 Stock-based compensation 8 14
 Warrant amortization included in interest 273 152
 Amortization of convertible debenture included in interest 14 21
 Minority interest in net income of consolidated subsidiary 5 6
 Changes in operating assets and liabilities:
 Accounts receivable 2,116 1,115
 Inventory 163 (330)
 Prepaid expenses and other assets 138 (164)
 Accounts payable (608) 408
 Accrued liabilities 135 (99)
 Deferred income 121 58
 ------- -------
 Net cash provided by (used in) operating activities 1,585 (314)
 ------- -------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Changes in short-term investments (2) 190
 Purchase of property and equipment --- (25)
 Other assets (38) 103
 ------- -------
 Net cash (used in) provided by investing activities (40) 268
 ------- -------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Net borrowing on the demand loan and revolving line of credit (350) (212)
 Repayment of obligations under capital leases (1) (2)
 ------- -------
 Net cash (used in) provided by financing activities (351) (214)
 ------- -------

EFFECT OF EXCHANGE RATE CHANGES ON
 CASH AND CASH EQUIVALENTS (61) 166
 ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,133 (94)
CASH AND CASH EQUIVALENTS, beginning of period 256 360
 ------- -------
CASH AND CASH EQUIVALENTS, end of period $1,389 $ 266
 ======= =======

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 Cash paid during the year for:
 Interest $ 335 $ 254
 ======= =======
 Income taxes $ --- $ 10
 ======= =======

Non-cash financing activities:
Issuance of warrants relating to bank guarantees $ 457 $ ---
 ======= =======

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

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2008, and 2007

The interim financial information as of June 30, 2008, and for the three- and six-month periods ended June 30, 2008, and 2007 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to provide for fair presentation. The interim financial information should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007, previously filed with the SEC.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of financial position as of June 30, 2008, and results of operations and cash flows for the three- and six-month periods ended June 30, 2008, and 2007, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Certain prior period amounts have been reclassified to conform to current period presentation.

The Company has incurred operating losses and decreased financial position as a result of not meeting its business plan. The Company had losses of approximately $0.9 million for the six- month period ended June 30, 2008 (June 30, 2007 - $1.6 million), and as of June 30, 2008, the Company had an accumulated deficit of approximately $53.3 million (December 31, 2007 - $52.4 million). The Company's continuation as a going concern is uncertain. The Company entered into a forbearance agreement on May 29, 2008, with its primary lenders who have agreed to forbear from the exercise of their rights and remedies under the security in respect of the indebtedness until October 31, 2008 or earlier in the event of the occurrence of a default in the agreement. The Company's convertible debenture holders and Tradition Capital Bank have agreed to extend maturity to December 31, 2008. Management's plan is to pursue raising additional funds through future equity or debt financing to satisfy its commitments to its primary lenders and meet its obligations to the convertible debenture holders until it achieves profitable operations. Although the Company plans to pursue additional financing, there can be no assurance that the Company will be able to secure financing when needed or obtain such on terms satisfactory to the Company, if at all. The Company's continuation as a going concern depends upon its ability to raise funds and achieve and sustain profitable operations.

The accompanying unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2008, and 2007

amounts and classification of liabilities that may result from the inability of the Company to continue as a going concern.

In April 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") Statement of Financial Accounting Standards ("SFAS") No. 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP SFAS 142-3"). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), "Business Combinations," and other U.S. generally accepted accounting principles ("GAAP"). FSP SFAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. Early adoption is prohibited. The Company is currently reviewing the effect, if any; the proposed guidance will have on its consolidated financial statements.

In May, 2008, FASB issued FSP Accounting Principles Board ("APB") 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants." Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is not permitted. The Company is currently reviewing the effect, if any; the proposed guidance will have on its consolidated financial statements.

In May 2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles ("GAAP") in the United States (the GAAP hierarchy). SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." The Company is currently reviewing the effect, if any; the proposed guidance will have on its consolidated financial statements.

In June 2008, FASB issued FSP EITF Issue 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in paragraphs 60 and 61 of SFAS No. 128, "Earnings per Share." FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2008, and 2007

December 15, 2008, and interim periods within those years. The Company is currently reviewing the effect, if any; the proposed guidance will have on its consolidated financial statements.

NOTE 4 -- Inventory
-------------------

 Inventory consisted of the following: JUNE 30, December 31,
 -------- ------------
 2008 2007
 -------- ------------
 (UNAUDITED) (audited)
 (In thousands)

 Raw materials $ 1,170 $ 1,288
 Work-in-process 213 193
 Finished goods 1,741 1,818
 ----------- -----------
 Total, net $ 3,124 $ 3,299
 ----------- -----------

Reserves for excess and obsolete inventory totaled $1,346,000 and $1,350,000 as of June 30, 2008, and December 31, 2007, respectively, and have been included as a component of the above amounts.

 JUNE 30, December 31,
 -------- ------------
 2008 2007
 -------- ------------
 (UNAUDITED) (audited)
 (In thousands)

Royal Bank of Canada ("RBC") - Bank indebtedness $ 6 $ 13
RBC - Demand loan 3,064 3,488
Tradition Capital Bank - Revolving line of credit 1,050 1,050
 ---------- ----------
 $ 4,120 $ 4,551
 ========== ==========

The maximum borrowing under the demand loan facility was Canadian $3.6 million (U.S. $3.5 million). RBC increased the borrowing base formula by Canadian $1 million (U.S. $982,000) in exchange for additional security provided by two of the Company's directors. Borrowings under the facility are subject to certain limitations based on a percentage of eligible accounts receivable and inventory as defined in the agreement. Interest is payable at a rate of RBC's prime rate (4.75% at June 30, 2008), plus 2.75% per annum. Borrowings under this facility are secured by substantially all of the Company's assets. As of June 30, 2008, the Company exceeded its facilities under the lending formula by approximately $0.6 million (subject to the above limitations) under the demand loan. RBC agreed to forbear from the exercise of its rights and remedies under the security in respect of the indebtedness until October 31, 2008 or earlier in the event of the occurrence of default in accordance with the forbearance agreement which was finalized on May 29, 2008. In accordance with the forbearance agreement the maximum borrowings were reduced to Canadian $3,175,000 (U.S. $3,117,000) and the interest rate was increased from RBC's prime rate plus 2.75% per annum to RBC's prime rate plus 3.25% per annum.

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2008, and 2007

In consideration for the guarantees provided by Mr. Murdoch and Mr. Furst to RBC, the Company paid a fee of $43,000, shared between them, paid in twelve equal monthly installments. As additional consideration, they received fully vested, two year warrants to purchase approximately 2.9 million shares of the Company's common stock, at an exercise price of $0.10 per share. The fair value of these warrants of $120,000 was determined in accordance with SFAS No. 123R and beginning in June 2006 was taken into income over the period of the guarantee, which was one year. These guarantees expired in June 2007 and were subsequently renewed in July 2007 until April 30, 2008. In consideration of these guarantee renewals, Mr. Murdoch and Mr. Furst received a fee of $40,000, shared between them, paid in ten equal monthly installments. As additional consideration, they received fully vested, two year warrants to purchase approximately 7.4 million common shares of the Company at an exercise price of $0.065 per share. The fair value of these warrants of $164,000 was determined in accordance with SFAS No. 123R and beginning in July 2007 was taken into income over the period of the guarantee, which was ten months. These guarantees expired in April 2008 and were subsequently renewed in May 2008 until December 31, 2008. In consideration of these guarantee renewals, Mr. Murdoch and Mr. Furst received a fee of $33,000, shared between them, paid in eight equal monthly installments. As additional consideration, they received fully vested, two year warrants to purchase approximately 5 million common shares of the Company at an exercise price of $0.10 per share. The fair value of these warrants of $150,000 was determined in accordance with SFAS No. 123R and beginning in May 2008 is being taken into income over the period of the guarantee, which is eight months. Interest and financing expense recorded was $54,000 for the three- month period ended June 30, 2008, $103,000 for the six- months ended June 30, 2008. During the three- and six-month periods ended June 30, 2007, $20,000 and $50,000, respectively, has been recorded in interest and financing expense.

In December 2006, the Company entered into a secured revolving credit agreement with Tradition Capital Bank. From December 15, 2006, through the expiration of the facility on June 15, 2007, the Company drew up to a maximum of $550,000 under the facility. Borrowings under this facility were secured by substantially all of the Company's assets in a second position to RBC. In addition, the loan was fully secured by personal guarantees of Mr. Murdoch and Mr. Furst. In consideration of these guarantees, Mr. Murdoch and Mr. Furst received a fee of $14,000, shared between them, paid in six equal monthly installments beginning in December 2006. As additional consideration, they received fully vested, two year warrants to purchase approximately 5.2 million shares of the Company's common stock, at an exercise price of $0.053 per share. The fair value of these warrants of $91,000 was determined in accordance with SFAS No. 123R and beginning in December 2006 was taken into income over the period of the guarantee, which was six months. The credit facility and related guarantees expired in June 2007 and were subsequently renewed in July 2007 until April 30, 2008. In consideration of the guarantee renewals, Mr. Murdoch and Mr. Furst received a fee of $23,000, shared between them, paid in ten equal monthly installments. As additional consideration, they received fully vested, two year warrants to purchase approximately 4.2 million common shares of the Company at an exercise price of $0.065 per share. The fair value of these warrants of $94,000 was determined in accordance with SFAS No. 123R and beginning in July 2007 was taken into income over the period of the guarantee, which was ten months.

On September 25, 2007, Mr. Murdoch and Mr. Furst agreed to provide Tradition Capital Bank additional personal guarantees totaling $500,000, which increased the maximum the Company can draw to $1,050,000, until April 30, 2008, under the same terms and conditions as listed above. In consideration of the guarantees, Mr. Murdoch and Mr. Furst received a fee of $15,000, shared between them, paid in

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2008, and 2007

seven equal monthly installments. As additional consideration, they received fully vested, two year warrants to purchase approximately 2.5 million common shares of the Company at an exercise price of $0.10 per share. The fair value of these warrants of $89,000 was determined in accordance with SFAS No. 123R and beginning in October 2007 was taken into income over the period of the guarantee, which was seven months. On April 30, 2008 the above loan facility expired and was renewed until December 31, 2008. Interest is payable at the reference rate (Wall Street Journal prime, with an interest rate floor of 5.5% currently 5.0%), plus 1.0% per annum. At June 30, 2008, borrowings were at the maximum amount available. In consideration of these guarantee renewals, Mr. Murdoch and Mr. Furst will receive a fee of $35,000, shared between them, paid in eight equal monthly installments. As additional consideration, they received fully vested, two year warrants to purchase approximately 5.3 million common shares of the Company at an exercise price of $0.10 per share. The fair value of these warrants of $157,000 was determined in accordance with SFAS No. 123R and beginning in May 2008 is being taken into income over the period of the guarantee, which is eight months. Interest and financing expense recorded was $61,000 for the three-month period ended June 30, 2008, $128,000 for the six- months ended June 30, 2008. During the three- and six-month periods ended June 30, 2007, $37,000 and $87,000, respectively, has been recorded in interest and financing expense.

NOTE 6 -- Accrued Liabilities
-----------------------------
 JUNE 30, December 31,
 -------- ------------
 2008 2007
 -------- ------------
 (UNAUDITED) (audited)
 ----------- ----------
 (In thousands)

Accrued salaries, employee benefits and payroll taxes $ 227 $ 280
Customer deposit payables 744 305
Other accrued liabilities 696 954
 -------- --------
 $ 1,667 $ 1,539
 ======== ========

On April 30, 2004, Sentry entered into a $2,000,000 secured convertible debenture with Brookfield Technology Fund ("Brookfield"), an alternative investment fund established by Brookfield Asset Management (formerly known as Brascan Technology Fund and Brascan Asset Management, respectively), to invest in early stage, technology-based companies with high growth potential.

Key terms of the transaction are as follows:

- Four-year term.
- Interest rate of 8% per annum.
- Redeemable at Sentry's option after 18 months.
- Conversion price equal to the market price, at time of conversion, less a discount of 30% with a maximum conversion price of $0.12 per share.
- Conversion is at the option of Brookfield when market share price is equal to or greater than $0.17 per share or with the approval of Sentry's Board of Directors when the market share price is less than $0.17 per share.

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2008, and 2007

- Sentry will provide most favored pricing to all Brookfield affiliates and expects to be a supplier of security and identification products to the Brookfield affiliates.

- Brookfield was issued warrants for 5,000,000 common shares of Sentry, priced at $0.15 per share, exercisable anytime up to April 30, 2008.

- Brookfield is entitled to one seat on Sentry's Board of Directors or will participate as an observer.

The convertible debenture is secured by a general security interest over all the assets and properties of Sentry. The amount is subordinate to the existing credit facilities.

On April 11, 2008, Brookfield extended its maturity of the debenture to December 31, 2008. The 5 million warrants that were originally issued expired. In consideration of this renewal, Brookfield received fully vested, two year warrants to purchase 5 million common shares of the Company at an exercise price of $0.10 per share. The fair value of these warrants of $150,000 was determined in accordance with SFAS No. 123R and beginning in May 2008 is being taken into income over the period of the guarantee, which is eight months.

Transactions between related parties are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

Certain of Sentry's key shareholders and directors personally guaranteed bank debt to the Company. Please refer to Note 5 for details.

In August 2007, Mr. Murdoch agreed to provide a personal guarantee for a Letter of Credit of $49,350 for a period of one year in favor of Palm Beach Public Library that the Company was unable to obtain on its own in order to complete a sale of the Company's self service library systems. In consideration of this guarantee Mr. Murdoch will receive a fee of $2,000 paid in twelve equal monthly installments. As additional consideration, he received fully vested, two year warrants to purchase approximately 0.2 million common shares of the Company at an exercise price of $0.10 per share. The fair value of these warrants of $10,000 was determined in accordance with SFAS No. 123R "Share-Based Payment," and beginning in August 2007 is being taken into income over the period of the guarantee, which is twelve months. Interest and financing expense recorded was $3,000 for the three-month period and $5,000 for the six-month period ended June 30, 2008.

In December 2007, Mr. Murdoch, Sentry's CEO and director, and Mr. Furst, a Sentry director, agreed to lend the Company $141,000 ($81,000 and $60,000, respectively) to secure a bid that the Company was unable to obtain on its own to sell products to an airport facility. In consideration of the loans, Mr. Murdoch and Mr. Furst received interest for the period of the loan at the Bank of America's prime rate (7.25%) plus 1% per annum. During the six-month period ended June 30, 2008, $1,000 has been recorded in interest and finance expense related to the loans. The loans were repaid in January 2008.

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2008, and 2007

The Company's 1997 Stock Incentive Plan of Sentry (the "1997 Plan"), which is shareholder approved, permits the granting of common share options and shares to its employees for up to 6,369,365 shares of common stock as stock-based compensation. This plan expired as of January 14, 2007, and as such, there were no remaining shares available for grant under this plan at June 30, 2008. The plan was renewed on May 18, 2007 (the "2007 Plan"), is shareholder approved and permits the granting of common share options and shares to its employees for up to 5,000,000 shares of common stock as stock-based compensation. 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 non-qualified 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.

There was no cash received from exercise of options during the three- and six-month periods ended June 30, 2008 and the three- and six-month periods ended June 30, 2007.

The assumptions used for the specified reporting periods and resulting estimates of weighted average fair value per share of options granted during those periods were as follows:

 Three Months Ended Six Months Ended
 June 30, June 30,
 2008 2007 2008 2007
 ---- ---- ---- ----

Risk-free interest rate --- 4.82% --- 4.82%
Expected dividend yield --- 0% --- 0%
Expected lives --- 2-5 years --- 2-5 years
Expected volatility --- 80% --- 80%

The following table represents the Company's stock options granted, forfeited, or expired and exercised during the six-months ended June 30, 2008:

 Weighted
 Number of Weighted Average Aggregate
 Shares Average Remaining Intrinsic
 Subject to Exercise Contractual Value
 Issuance Price Term ($000)
 -------- ----- ---- ------

Outstanding as of January 1, 2008 2,057,000 $ 0.10
Granted --- ---
Exercised --- ---
Forfeited (129,000) 0.16
Expired (3,000) 2.37
 ----------- -------
OUTSTANDING AS OF JUNE 30, 2008 1,925,000 $ 0.09 7.0 YEARS $ 4
 =========== ====== ========= ===

EXERCISABLE AS OF JUNE 30, 2008 1,201,000 $ 0.09 6.7 YEARS ---
 =========== ====== ========= ===

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2008, and 2007

The aggregate intrinsic value of options exercisable has been shown as $0 because the exercise price of the exercisable option shares exceeded the period end market price of the Company's common stock.

The compensation cost recognized in income for stock-based compensation was $4,000 and $8,000 for the three- and six-month periods ended June 30, 2008, and $7,000 and $14,000 for the three- and six- month periods ended June 30, 2007, respectively.

As of June 30, 2008, there was $39,000 of total unrecognized compensation cost, net of estimated forfeitures, related to all unvested stock options, which is expected to be recognized over a weighted average period of approximately 2.5 years.

There were no stock options issued during the six-month period ended June 30, 2008. There were 511,500 options issued during the six-month period ended June 30, 2007, with a weighted average estimated fair value of $0.06.

At June 30, 2008, options for 4,508,500 common shares were available for future grants under the 2007 Stock Option Plan. On January 14, 2007, the 1997 Plan expired. There were no common shares available for future grant under this Plan.

As of June 30, 2008, Sentry has outstanding warrants for 35,093,123 (June 30, 2007 - 13,363,680) common shares issued in connection with various financing arrangements. The warrants have exercise prices ranging from $0.05 to $0.17 (June 30, 2007 - $0.05 to $0.17) and expire from December 15, 2008, through May 1, 2010.

Effective January 1, 2008, the Company adopted SFAS 157, except as it applies to the nonfinancial assets and nonfinancial liabilities subject to FSP SFAS 157-2. SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for
 identical assets or liabilities in active markets.

Level 2 - Include other inputs that are directly or indirectly
 observable in the marketplace.

Level 3 - Unobservable inputs which are supported by little or no
 market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
June 30, 2008, and 2007

Cash and cash equivalents, short-term investments (Level 1), accounts receivable, bank indebtedness, accounts payable and accrued liabilities (Level
2) are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments.

Information contained or incorporated by reference in this periodic report on Form 10-Q and in other SEC filings by Sentry contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should" or "anticipates" or the negative thereof, other variations thereon or comparable terminology, or by discussions of strategy. These forward-looking statements involve certain significant risks and uncertainties, and actual results may differ materially from the forward-looking statements. For further details and discussion of these risks and uncertainties see Sentry Technology Corporation's SEC filings including, but not limited to, its annual report on Form 10-KSB. No assurance can be given that future results covered by the forward-looking statements will be achieved, and other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. We do not undertake to publicly update or revise any of our forward-looking statements even if experience or future changes show that the indicated results or events will not be realized.

Consolidated revenues were 66% higher in the quarter ended June 30, 2008 as compared to the quarter ended June 30, 2007. For the six- month period ended June 30, 2008 consolidated revenues were 19% higher than in the same period of last year. Our backlog of orders, which we expect to deliver within the next twelve months, was $3.6 million at June 30, 2008, an increase of 9% as compared to $3.3 million at June 30, 2007, and a 29% increase as compared to $2.8 million at December 31, 2007. Total revenues for the periods presented are broken out as follows:

 Q-2 Q-2 % 6 Mos. 6 Mos. %
 2008 2007 Change 2008 2007 Change
 ---- ---- ------ ------ ------ ------
 (in thousands) (in thousands)

Electronic Article Surveillance (EAS) $ 1,184 $ 1,247 (5) $ 2,163 $ 2,900 (25)
Closed Circuit Television (CCTV) 52 53 (2) 138 149 (7)
SentryVision 2,166 691 213 2,813 1,271 121
 ------- ------- ---- ------- ------- -----
Total sales 3,402 1,991 71 5,114 4,320 18
Service, maintenance and installation 627 437 43 957 776 23
 ------- ------- ---- ------- ------- -----
Total revenues $ 4,029 $ 2,428 66 $ 6,071 $ 5,096 19
 ======= ======= ==== ======= ======= =====

Sales in the second quarter of 2008 were 71% higher than the same period in 2007. For the three- and six- month periods ended June 30, 2008 both domestic and international sales were lower for EAS sales mainly due to weak sales volume at our 51% owned labeling plant. In the three- month period ended June 30, 2008 we had higher domestic QuickCheck self-service library sales offset by lower QuickCheck sales in the

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
June 30, 2008, and 2007

six- month period ended June 30, 2008 compared to 2007. CCTV produced slightly lower sales in both the three- month and six- month periods while SentryVision international sales were up in both the three- month and six- month periods due to a $900,000 sale to a dealer serving the Mexico City Metro. Domestic SentryVision sales are up in both the three- and six- month periods due to higher sales to two major customers. Installation revenues were higher in the three- and six- month periods of 2008 as compared to 2007 due to higher related sales revenue. Maintenance revenue was higher offset slightly by lower service revenue in both the three- and six- month periods.

Cost of sales were 55% and 57% of total sales in the three- and six- month periods ended June 30, 2008 as compared to 56% and 55% in the three- and six- month periods ended June 30, 2007. The three- month decrease in the cost of sales percentage is mainly due to a higher volume of sales. The six- month increase in the cost of sales percentage is mainly due to lower sales at our 51% owned labeling plant.

The 14% increase in customer service expenses in the second quarter and the 18% increase in the first six- months of 2008 compared to the second quarter and first six- months of 2007 is primarily due to an increase in subcontractor labor, salary expenses and lift rentals due to higher revenues. The Company is continuing to use outside service contractors to supplement our field service employees in order to better manage total customer service costs during fluctuations in activity levels between periods.

Selling, general and administrative expenses were 22% and 20% lower in the three- and six- month periods ended June 30, 2008, respectively, when compared to the same periods of the previous year. This decrease is principally the result of foreign exchange loss of $65,000 in the three- month period and a gain of $76,000 in the six- month period ended June 30, 2008 compared to a loss of $292,000 in the three- month period and a loss of $337,000 in the six- month period ended June 30, 2007 as well as lower sales salaries and travel and warranty expenses, offset slightly by higher professional fees. Foreign exchange gains resulted from the strengthening of the U.S. dollar valuation of the Company's Canadian dollar bank loan as well as receivables denominated in U.S. dollars from our Canadian subsidiary.

The decrease in research and development costs of 21% in the second quarter of 2008 when compared to the second quarter of 2007 is primarily a result of lower salary and travel expenses and the 25% decrease in the six- month period ended June 30, 2008 as compared to the same period of 2007 is primarily due to a decrease in salary and consulting fees. The Company continues to develop both hardware and software products for its core library and traveling camera system markets.

Total interest and financing costs increased in the three- and six- month periods ended June 30, 2008 primarily as a result of financing costs related to the non-cash amortization of warrants issued of $155,000 and $273,000 in the three- and six- month periods ended June 30, 2008 as compared to $58,000 in the three- month and $134,000 in the six- month periods ended June 30, 2007, as a result of the loan guarantees provided by the Company's directors as well as increased interest expenses on a higher average outstanding debt.

The income tax expense (income) in all periods presented principally results from the taxable income of one of our Canadian subsidiaries, which cannot be offset by Sentry's net operating loss carryforwards.

As a result of the foregoing, Sentry had a gain of $8,000 and a loss of $879,000 in the quarter and six- months ended June 30, 2008 as compared to losses of $898,000 and $1,622,000 in the quarter and six- months ended June 30, 2007.

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
June 30, 2008, and 2007

Liquidity and Capital Resources as of June 30, 2008

At June 30, 2008, we had cash and short-term investments of $1,588,000, working capital of ($2,210,000) and total assets of $7,278,000. While we had a loss of $0.9 million in the first six months of 2008, we generated net cash from operating activities of $1.6 million. This was primarily a result of collecting accounts receivable balances as well as collecting cash upfront from most foreign customers and some domestic customers.

Cash used by investing activities was $40,000 during the first six months of 2008 mainly due to changes in other assets.

Cash used by financing activities was $351,000 during the first six months of 2008 primarily due to reduced borrowings under our RBC credit facilities. Borrowing availability under the credit facilities has been based upon the combined levels of receivables and inventory, which was lower in the first six months of 2008. The extra availability under the credit facility above the maximum allowable limit resulted from the $1.0 million loan guarantees provided by our directors as well as RBC allowing the Company to exceed the maximum allowable borrowing by an additional $0.6 million as of June 30, 2008. The Company entered into a forbearance agreement with RBC in May 2008, extending the RBC bank credit to October 31, 2008.

The maximum borrowing under the demand loan facility was Canadian $3.6 million (U.S. $3.5 million). RBC increased the borrowing base formula by Canadian $1 million (U.S. $982,000) in exchange for additional security provided by two of the Company's directors. Borrowings under the facility are subject to certain limitations based on a percentage of eligible accounts receivable and inventory as defined in the agreement. Interest is payable at a rate of RBC's prime rate (4.75% at June 30, 2008), plus 2.75% per annum. Borrowings under this facility are secured by substantially all of the Company's assets. As of June 30, 2008, the Company exceeded its facilities under the lending formula by approximately $0.6 million (subject to the above limitations) under the demand loan. RBC agreed to forbear from the exercise of its rights and remedies under the security in respect of the indebtedness until October 31, 2008 or earlier in the event of the occurrence of default in accordance with the forbearance agreement which was finalized on May 29, 2008. In accordance with the forbearance agreement the maximum borrowings were reduced to Canadian $3,175,000 (U.S. $3,117,000) and the interest rate was increased from RBC's prime rate plus 2.75% per annum to RBC's prime rate plus 3.25% per annum.

In consideration for the guarantees provided by Mr. Murdoch and Mr. Furst to RBC, the Company paid a fee of $43,000, shared between them, paid in twelve equal monthly installments. As additional consideration, they received fully vested, two year warrants to purchase approximately 2.9 million shares of the Company's common stock, at an exercise price of $0.10 per share. The fair value of these warrants of $120,000 was determined in accordance with SFAS No. 123R and beginning in June 2006 was taken into income over the period of the guarantee, which was one year. These guarantees expired in June 2007 and were subsequently renewed in July 2007 until April 30, 2008. In consideration of these guarantee renewals, Mr. Murdoch and Mr. Furst received a fee of $40,000, shared between them, paid in ten equal monthly installments. As additional consideration, they received fully vested, two year warrants to purchase approximately 7.4 million common shares of the Company at an exercise price of $0.065 per share. The fair value of these warrants of $164,000 was determined in accordance with SFAS No. 123R and beginning in July 2007 was taken into income over the period of the guarantee, which was ten months. These guarantees expired in April 2008 and were subsequently renewed in May 2008 until December 31, 2008. In consideration of these guarantee renewals, Mr. Murdoch and Mr. Furst received

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
June 30, 2008, and 2007

a fee of $33,000, shared between them, paid in eight equal monthly installments. As additional consideration, they received fully vested, two year warrants to purchase approximately 5 million common shares of the Company at an exercise price of $0.10 per share. The fair value of these warrants of $150,000 was determined in accordance with SFAS No. 123R and beginning in May 2008 is being taken into income over the period of the guarantee, which is eight months. Interest and financing expense recorded was $54,000 for the three- month period ended June 30, 2008, $103,000 for the six- months ended June 30, 2008. During the three- and six-month periods ended June 30, 2007, $20,000 and $50,000, respectively, has been recorded in interest and financing expense.

In December 2006, the Company entered into a secured revolving credit agreement with Tradition Capital Bank. From December 15, 2006, through the expiration of the facility on June 15, 2007, the Company drew up to a maximum of $550,000 under the facility. Borrowings under this facility were secured by substantially all of the Company's assets in a second position to RBC. In addition, the loan was fully secured by personal guarantees of Mr. Murdoch and Mr. Furst. In consideration of these guarantees, Mr. Murdoch and Mr. Furst received a fee of $14,000, shared between them, paid in six equal monthly installments beginning in December 2006. As additional consideration, they received fully vested, two year warrants to purchase approximately 5.2 million shares of the Company's common stock, at an exercise price of $0.053 per share. The fair value of these warrants of $91,000 was determined in accordance with SFAS No. 123R and beginning in December 2006 was taken into income over the period of the guarantee, which was six months. The credit facility and related guarantees expired in June 2007 and were subsequently renewed in July 2007 until April 30, 2008. In consideration of the guarantee renewals, Mr. Murdoch and Mr. Furst received a fee of $23,000, shared between them, paid in ten equal monthly installments. As additional consideration, they received fully vested, two year warrants to purchase approximately 4.2 million common shares of the Company at an exercise price of $0.065 per share. The fair value of these warrants of $94,000 was determined in accordance with SFAS No. 123R and beginning in July 2007 was taken into income over the period of the guarantee, which was ten months.

On September 25, 2007, Mr. Murdoch and Mr. Furst agreed to provide Tradition Capital Bank additional personal guarantees totaling $500,000, which increased the maximum the Company can draw to $1,050,000, until April 30, 2008, under the same terms and conditions as listed above. In consideration of the guarantees, Mr. Murdoch and Mr. Furst received a fee of $15,000, shared between them, paid in seven equal monthly installments. As additional consideration, they received fully vested, two year warrants to purchase approximately 2.5 million common shares of the Company at an exercise price of $0.10 per share. The fair value of these warrants of $89,000 was determined in accordance with SFAS No. 123R and beginning in October 2007 was taken into income over the period of the guarantee, which was seven months. On April 30, 2008 the above loan facility expired and was renewed until December 31, 2008. Interest is payable at the reference rate (Wall Street Journal prime, with an interest rate floor of 5.5% currently 5.0%), plus 1.0% per annum. At June 30, 2008, borrowings were at the maximum amount available. In consideration of these guarantee renewals, Mr. Murdoch and Mr. Furst will receive a fee of $35,000, shared between them, paid in eight equal monthly installments. As additional consideration, they received fully vested, two year warrants to purchase approximately 5.3 million common shares of the Company at an exercise price of $0.10 per share. The fair value of these warrants of $157,000 was determined in accordance with SFAS No. 123R and beginning in May 2008 is being taken into income over the period of the guarantee, which is eight months. Interest and financing expense recorded was $61,000 for the three-month period ended June 30, 2008, $128,000 for the six-months ended June 30, 2008. During the three- and six-month periods ended June 30, 2007, $37,000 and $87,000, respectively, has been recorded in interest and financing expense.

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
June 30, 2008, and 2007

In August 2007, Mr. Murdoch agreed to provide a personal guarantee for a Letter of Credit of $49,350 for a period of one year in favor of Palm Beach Public Library that the Company was unable to obtain on its own in order to complete a sale of the Company's self service library systems. In consideration of this guarantee Mr. Murdoch will receive a fee of $2,000 paid in twelve equal monthly installments. As additional consideration, he received fully vested, two year warrants to purchase approximately 0.2 million common shares of the Company at an exercise price of $0.10 per share. The fair value of these warrants of $10,000 was determined in accordance with SFAS No. 123R "Share-Based Payment," and beginning in August 2007 is being taken into income over the period of the guarantee, which is twelve months. Interest and financing expense recorded was $3,000 for the three-month period and $5,000 for the six-month period ended June 30, 2008.

In December 2007, Mr. Murdoch, Sentry's CEO and director, and Mr. Furst, a Sentry director, agreed to lend the Company $141,000 ($81,000 and $60,000, respectively) to secure a bid that the Company was unable to obtain on its own to sell products to an airport facility. In consideration of the loans, Mr. Murdoch and Mr. Furst received interest for the period of the loan at the Bank of America's prime rate (7.25%) plus 1% per annum. During the six-month period ended June 30, 2008, $1,000 has been recorded in interest and finance expense related to the loans. The loans were repaid in January 2008.

On April 11, 2008, Brookfield extended its maturity of the debenture to December 31, 2008. The 5 million warrants that were originally issued expired. In consideration of this renewal, Brookfield received fully vested, two year warrants to purchase 5 million common shares of the Company at an exercise price of $0.10 per share. The fair value of these warrants of $150,000 was determined in accordance with SFAS No. 123R and beginning in May 2008 is being taken into income over the period of the guarantee, which is eight months.

We will require positive cash flows from operations to meet our working capital needs over the next twelve months. The Company continued to incur operating losses through the first six months of 2008. This has limited the Company's ability to secure additional bank financing. The Company collected cash in advance of delivery from both foreign and domestic customers, which caused our cash balance to increase to $1.4 million. The Company has instituted certain plans to increase its revenue base as well as preserve its cash and continue to reduce operating expenses.

We anticipate revenue growth in new and existing markets. We are striving to continue to improve our gross margins and control our selling expenses and our general and administrative expenses. 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 obtaining adequate financing through our credit facility. 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; (ii) the ability to raise additional capital or obtain additional financing; and (iii) economic conditions. In the event that sufficient positive cash flow from operations is not generated, we will seek additional financing to satisfy current operating cash flow deficiencies.

There can be no assurance, however, that additional financing will be available on terms that are satisfactory to the Company, or that any such financing will be sufficient to provide the full amount of funding necessary.

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
June 30, 2008, and 2007

In August 2007, Mr. Murdoch agreed to provide a personal guarantee for a Letter of Credit of $49,350 for a period of one year in favor of Palm Beach Public Library that the Company was unable to obtain on its own in order to complete a sale of the Company's self service library systems. In consideration of this guarantee Mr. Murdoch will receive a fee of $2,000 paid in twelve equal monthly installments. As additional consideration, he received fully vested, two year warrants to purchase approximately 0.2 million common shares of the Company at an exercise price of $0.10 per share. The fair value of these warrants of $10,000 was determined in accordance with SFAS No. 123R "Share-Based Payment," and beginning in August 2007 is being taken into income over the period of the guarantee, which is twelve months. Interest and financing expense recorded was $3,000 for the three-month period and $5,000 for the six-month period ended June 30, 2008.

In December 2007, Mr. Murdoch, Sentry's CEO and director, and Mr. Furst, a Sentry director, agreed to lend the Company $141,000 ($81,000 and $60,000, respectively) to secure a bid that the Company was unable to obtain on its own to sell products to an airport facility. In consideration of the loans, Mr. Murdoch and Mr. Furst received interest for the period of the loan at the Bank of America's prime rate (7.25%) plus 1% per annum. During the six-month period ended June 30, 2008, $1,000 has been recorded in interest and finance expense related to the loans. The loans were repaid in January 2008.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in interest rates, foreign exchange rates and commodity prices. Changes in these factors could cause fluctuations in the results of our operations and cash flows. In the ordinary course of business, we are primarily exposed to foreign currency and interest rate risks. We do not use derivative financial instruments in connection with these commodity market risks.

Item 4T. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and our Principal Financial Officer evaluated, with the participation of our management, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. As of June 30, 2008, our Chief Executive Officer and our Principal Financial Officer concluded that our disclosure controls and procedures, as defined in Securities Exchange Act Rule 13a-15(e), were effective.

Our disclosure controls and procedures have been formulated to ensure (i) that information that we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 were recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) that the information required to be disclosed by us is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES

PART II - OTHER INFORMATION

June 30, 2008, and 2007

(b) Changes in Internal Controls over Financial Reporting

There was no change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the second quarter of 2008 covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 6 - Exhibits

(a) Exhibits:

10.1 - Forbearance Agreement, dated May 29, 2008, by and among Royal Bank of Canada, Sentry Technology Canada Inc., Sentry Technology Corporation and Custom Security Industries Inc.

31.1 - Certification by the Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).

31.2 - Certification by the Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).

32.1 - Certification by the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***

32.2 - Certification by the Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***

*** In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed "filed" for the purposes of Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

SIGNATURE

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 11, 2008 By: /s/JOAN E. MILLER
 --------------- -----------------------------------------
 Joan E. Miller, Vice President - Finance
 and Treasurer
 (Principal Financial and Accounting Officer)

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