RISK FACTORS

          You should carefully consider the following material risk factors before voting on the proposed Reclassification. Some of the statements under "Prospectus Summary," and "Risk Factors," and elsewhere in this Proxy Statement/Prospectus constitute forward-looking statements. These statements involve known and unknown risks and relate to future events, our future financial performance or our projected business results. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other comparable terminology.

           Forward-looking statements are only predictions. Actual events or results may differ materially from any forward-looking statement as a result of various factors.

Risks Relating to the Transaction

           Risk of Non-consummation of the Investment

          If the Purchase Agreement is terminated because our stockholders fail to approve and adopt the proposals related to the Investment, including the Amended and Restated Certificate of Incorporation, or the election of Dutch A&A nominees for our Board of Directors, or if our Board of Directors terminates the Purchase Agreement in order to accept an offer or proposal by a third party, we may be obligated to pay Dutch A&A all costs and expenses incurred in connection with the Purchase Agreement and the related transactions, including expenses related to the preparation, printing, filing and mailing of this Proxy Statement/Prospectus.

           Expected Benefits of the Investment, the Reclassification and Distribution Agreement May Not Be Achieved

          The expected benefits of the Investment, the Reclassification and the Distribution Agreement may not be achieved. Whether the anticipated benefits of the Reclassification are ultimately achieved will depend on a number of factors, including our ability to: (i) take advantage of our rights under the distribution agreement to market Dutch A&A's products; (ii) increase our sales of proprietary and patented SentryVision® and programmable traveling closed circuit television surveillance ("CCTV") systems; (iii) successfully market Knogo's Electronic Article Surveillance ("EAS") systems and compete with lower-priced "off-the-shelf" systems from larger, better-financed competitors; (iv) develop new products and product extensions; (v) successfully fund ongoing operations and halt depletion of our tangible assets; and (vi) generally capitalize on the cash invested by Dutch A&A.

           Control of Sentry by Dutch A&A

          Upon completion of the Reclassification and Investment, Dutch A&A will beneficially own 37.5% of our outstanding voting securities with the right to acquire additional shares over 2 years, representing ownership of up to 60% of our outstanding voting securities. Because of this ownership and through Dutch A&A's nominees to our Board, Dutch A&A will be able to substantially influence our affairs.

          No Obligation to Provide Additional Capital

           Dutch A&A has no obligation to provide or obtain from others additional capital for us, other than the $3.0 million to be received in the Investment.

          Regulation

           Because Knogo's EAS systems and Video's surveillance 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. As required, we have obtained certification of such products by the FCC. As we develop new products, we will apply to the FCC for certification or licensing when required. We may not be successful in obtaining such certification or licensing. In addition, current rules and regulations of the FCC may change in a manner adverse to us.

          Our business plan calls for the sale and use of our products in domestic markets and, where necessary for contractual obligations, in international markets. Our products may be subject to regulation by governmental authorities in various countries having jurisdiction over electronic and communication use. We intend to apply for certification of our products to comply with the requirements under the regulations of the countries in which we plan to market our products. We may not be successful in obtaining certification. In addition, current rules and regulations in such countries may change in a manner adverse to us.

           Competition - We Operate in a Highly Competitive Market

          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 above. We compete principally on the basis of the nature and quality of our products and services and our ability to adapt these products to meet specific customer needs and price requirements.

          We are aware of several other companies that market, directly or through distributors, conventional closed circuit video systems and/or EAS equipment to retail stores. Sensormatic, Checkpoint Systems, Inc., Philips, Inc., Pelco Manufacturing, Inc., Panasonic, Inc., and Ultrak, Inc. are our principal competitors. Sensormatic now also markets a traveling CCTV system in the U.S. Lowe's Home Centers, our largest SentryVision® customer, has begun to purchase traveling CCTV surveillance systems from Sensormatic. We are aware of other companies outside the U.S. 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 we do.

          We may not be successful in competing with these competitors for new customers or in retaining existing customers. Our results of operations may suffer if we cannot compete with larger and better capitalized companies, or replace within a reasonable time a significant number of customers lost to our competitors with comparable contracts or other revenue sources.

           Limitation of Marketing Conventional CCTV Systems With Our Other 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. In fact, our largest single SentryVision® customer, Lowe's Home Centers, continues to project that the bulk of its orders in 2000 and 2001 will be for conventional CCTV systems.

           Reliance on Major Customers

           Although the composition of our largest customers has changed from year to year, we attribute a significant portion of our revenues to a limited number of major customers. Sales to Sensormatic accounted for 10% of total revenues in 1997. In 1997, 1998 and 1999, Lowe's Home Centers accounted for 18%, 22%, and 19% respectively, of total revenues. In 1997 and 1999, Goody's Family Clothing accounted for 13% and 14% of total revenues, respectively. We do not know whether our continuing efforts to broaden our customer base will be successful. In addition, our financial condition, results of operations and cash flows will suffer from any delay, reduction or cancellation of orders from one or more of our significant customers or the loss of one or more of those customers. One of our largest customers, Lowe's Home Centers, has decreased its purchases of SentryVision® systems from $3.5 million in 1998 to $125,000 in 1999 and $25,000 in the first six months of the current year. While Lowe's has increased its purchase of our conventional CCTV products during this period, our gross margins from CCTV products are lower as a percentage of our gross sales than is the case for SentryVision® systems.

           Risks Associated With Intellectual Property

          Video Intellectual Property

           Video's core United States patent, which expires in 2011, covers 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. We recorded a U.S. patent application in 1998 for improvements made to such technology. Video also has received a corresponding European patent and nine foreign country patents. We also have four patents pending for additional corresponding foreign 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 Video. Patents applied for, however, may not actually be issued, and patents currently held may be contested. In addition, new patents, if issued, may not provide any significant competitive advantage to Video.

          We are not aware of any infringement of patents or intellectual property held by third parties. However, if a court determines that we infringed on the rights of others, we may be required to obtain licenses from such other parties. The persons or organizations holding the desired technology may not grant licenses to us or the terms of such licenses may not be acceptable to us. In addition, we could be required to expend significant resources to develop non-infringing technology.

           Video relies 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 protect Video's proprietary technology through patents, trademark registration, trade secret laws and confidentiality agreements, we do not rely on such protection to establish and maintain Video's position in the marketplace. We believe that improvement of Video'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.

          Knogo Intellectual Property

           Knogo has 22 United States and Canadian patents and three patent applications relating to: (i) the method and apparatus for the detection of movement of articles, persons and accessory equipment employed by Knogo 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 Knogo's EAS systems. Although patent protection is advantageous to Knogo, we do not consider any single patent or patent license owned or held by Knogo to be material to its operations. We believe that Knogo's competitive position ultimately will depend on its experience, know-how and proprietary data, engineering, marketing and service capabilities and business reputation, all of which are outside the scope of patent protection. In addition, such patent protection may be challenged, invalidated or circumvented. Similarly, competitors may independently develop or patent technologies that are substantially equivalent to or superior to Knogo's technologies.

           Seasonality of Business - Our Operating Results May Fluctuate on a Seasonal and Quarterly Basis

          Our current customers are primarily dependent on retail sales which are seasonal and subject to significant fluctuations which are difficult to predict. In our experience, orders and installations are generally the lowest in the first quarter of each year.

           Dependence on Key Personnel - The Loss of Our Key Executives Or Our Failure To Attract Qualified Management Could Limit Our Growth And Negatively Affect Our Operations

          We depend upon the services of certain key executive officers, the loss of whom could have a significant negative impact on our operations. Although we have entered into employment agreements with our most senior executive officers, we may not be able to retain or replace the members of our current management or successfully attract and retain qualified management, engineering and sales personnel in the future.

           Limitations on Director Liability

          Our Amended and Restated Certificate of Incorporation provides, as permitted by the DGCL, and with certain exceptions, that our directors shall not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director. These provisions may discourage our stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders against a director. In addition, our bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by the DGCL.

Liquidity and Capital Resources as of June 30, 2000

          As a result of the continued reduced revenue levels and our financial position, we initiated actions in 1999 which included, among others, (a) reducing the number of employees, (b) attempting to improve our working capital, (c) closing and/or consolidating some of our facilities, (d) consolidating some administrative functions, and (e) evaluating certain business lines to ensure that our resources are deployed in the more profitable operations. Our initial efforts to rationalize our operations commenced in the fourth quarter of 1999. Through 2000, the results of these efforts were not sufficient to prevent significant operating losses. During the first six months of 2000, we primarily funded our operations through borrowings under our revolving credit facility, including an amendment to our borrowing base formula which provides for increased availability by up to $0.5 million through 2000. We are increasingly dependent upon future transactions, including the timely release of backlog orders from customers and subsequent cash collections, in order to generate sufficient cash flows and return to profitability. We have sold all available assets to raise cash to finance our operations. We are, therefore, increasingly dependent on borrowings under our revolving credit facility to finance our cash requirements.

          We have a revolving credit facility with GE Capital Corporation that permits us to borrow up to $8 million, subject to availability, under a borrowing formula based on accounts receivable and inventories. The credit agreement expires on December 31, 2001. The facility is secured by a lien on substantially all of our assets. At June 30, 2000, we had borrowings of approximately $3.7 million, the maximum amount available under the facility.

          We will require liquidity and working capital to finance increases in receivables and inventory associated with sales growth and, to a lesser extent, for capital expenditures. We had no material capital expenditure or purchase commitments as of June 30, 2000.

          In addition, on April 11, 2000, we obtained an indication of interest from a group of investors who were prepared to provide $1.0 million of standby debt financing on a short term basis. It would be expected that such investors would require a substantial equity interest in the Company as a condition to such financing. Any amounts that we borrow under this arrangement would be subordinated to our revolving line of credit from GE Capital Corporation. One of our directors is part of this group of potential investors.

          To strengthen our financial position, we continued to solicit other businesses within the security industry to ascertain the level of interest in a possible joint venture or equity investment. Since October of 1999, several parties had indicated interest in investment or merger with our company. In fact, we retained the investment bank of Legg Mason Wood Walker, Incorporated ("Legg Mason") in May, 1999 to help position us for an additional investment or for possible acquisition. As of October 13, 1999, Legg Mason was unsuccessful in developing any interest in a potential transaction. Once we decided to terminate our search through Legg Mason, only Dutch A&A offered serious intentions to engage in negotiations. After many discussions and the exchange of information, we announced on August 8, 2000 that we had entered into an agreement pursuant to which Dutch A&A will invest $3 million in newly issued shares of our common stock. For this investment, Dutch A&A will receive 37.5% of our common stock then outstanding on a fully-diluted basis, after giving effect to the reclassification of our preferred stock into common stock. In addition, Dutch A&A will have the right to acquire additional shares during the two year period following the closing, up to an aggregate holding of 60% of the common stock then outstanding. The transaction is conditioned upon our shareholders' approval, including approval by our preferred and common stockholders, each voting as a class, of proposals 2 and 3 to be voted upon at the Special Meeting, as well as a number of other conditions. Consummation of this transaction will substantially enhance our liquidity and financial condition. There can be no assurances, however, that we will successfully consummate the transaction.

           Availability of Components

          We currently purchase parts and materials from a limited number of suppliers. In addition, although historically we have not been dependent on any one supplier or group of suppliers of components for our systems, we may become dependent in the future. The inability to obtain certain components on a timely basis would adversely affect our ability to fill orders in a timely manner. Any delay in the fulfillment of orders would have a significant negative impact on our financial condition and results of operations.

           Possible Stock Price Volatility - Our Stock may be Volatile

          The market price for our common stock may be subject to significant fluctuations in response to numerous factors, including:

           Dividends

          We have never paid, nor do we anticipate paying, any cash dividends on our common stock. Our loan agreement prohibits us from paying any cash dividends on our common stock without the lender's consent. In addition, since we have not paid any of the accrued dividends on our preferred stock, the terms of that stock also prevent us from paying cash dividends on the common stock. Finally, future debt, equity instruments or securities may impose additional restrictions on our ability to pay cash dividends.

          We had fixed the annual dividend rate on each share of our preferred stock at five percent (5%) of the $5.00 per share face value of such stock. Beginning with the August 12, 1999 dividend, preferred stockholders were entitled to receive, in preference to dividends on all other classes of our equity securities, and whether or not declared, an annual dividend payable in cash, out of funds legally available for the payment of dividends, of $0.25 for each share of preferred stock. These dividends accrue semi-annually and are due in equal installments on each of the last four dividend payment dates. All dividends paid on preferred stock are paid pro rata to the holders. Nevertheless, since our financial condition prevented us from paying cash dividends under our loan agreement with GE Capital Corporation, we did not pay the cash dividends on the preferred stock in August 1999, February 2000 and August 2000.

          If we fail to pay any dividend, the holders of the outstanding shares of preferred stock have the right, voting separately as a class, to elect two directors to our Board and the maximum authorized number of our Board members shall automatically increase by two. This right continues until we pay all dividends in arrears in full. The right then terminates. If we subsequently default, the right shall revest.

          We may not pay cash dividends on any other stock until we pay all accumulated dividends on the preferred stock. If our Board declares, and we pay any dividend on any other stock, the preferred stockholders shall share equally in the distribution of all dividends declared on such other stock as if they held shares of such stock.

           Current Redemption Provisions of Class A Preferred Stock.

          If the stockholders do not approve the Reclassification proposal at the Special Meeting, the Board of Directors will have to consider what steps it should take with respect to the preferred stock. Under the current terms of the preferred stock, we are required to redeem the stock on February 12, 2001 for cash, common stock (valued at the then fair market value) or one-year promissory notes. Since we will not have at that time the approximately $29 million in cash which would be required to redeem the preferred stock (nor would a cash redemption be allowed under our credit agreement), the Board would have to consider redeeming by using either of the two other means, for common stock or for notes.

          We presently have authorized for issue a total of 40 million shares of common stock, of which approximately 10 million are already outstanding. If the fair value of the common stock on the Mandatory Redemption Date were the same as it was on October __, 2000, the last trading day before we printed this Proxy Statement/Prospectus, it would require approximately 267 million shares of common stock to redeem the preferred stock. Consequently, if the Board were to determine to redeem the preferred stock for common stock, then the Board would have to call another special meeting of stockholders to authorize an increase in the number of authorized common shares to permit this redemption. Thereafter, current common stockholders would own in the aggregate approximately 3.5% of the common stock which would then be outstanding. The Board does not know whether the common stockholders would vote to approve such an amendment. If the Board determined not to redeem the preferred stock for common stock, or if the stockholders would not approve the necessary amendment, then under the current terms of the preferred stock, we are required to redeem the preferred stock for promissory notes.

          If the preferred stock is redeemed for promissory notes on the Mandatory Redemption Date, the notes would be one-year promissory notes and would be issued at the rate of $5 principal amount of notes for each share of preferred stock and for accrued dividends, or about $29 million in the aggregate. Barring a radical positive change in our financial position, the issuance of these notes would render us insolvent and unable to pay our debts as they come due.

SELLING STOCKHOLDERS

          This Proxy/Prospectus may be used in connection with the resale of securities of the Company that may be issued to certain parties upon exercise of warrants, to the extent such resales require registration under the Securities Act. We do not know when or in what amounts, if any, a selling securityholders may offer securities for sale because the selling securityholders may elect to sell less than all, or none, of the securities offered by this prospectus. The following table shows certain information with respect to the selling securityholders, assuming the sale of all shares of common stock issuable upon exercise of the warrants:

              Name of             Common Stock Owned       Amount of Securities          Percentage of
       Selling Securityholder   Prior to the Offering     Owned after Completion    Securities Owned after
                                          (1)               of the Offering (1)        Completion of the
                                                                                          Offering (1)

General Electric Capital
 Corporation (2)                      100,000                      0                           0
NOG (NY) QRS 12-23, Inc. (3)          150,000                      0                           0

(1)  Represents shares of common stock issuable upon exercise of warrants.

(2)  General Electric Capital Corporation is our commercial lender. The warrants were
     issued in the course of the lender relationship.

(3) NOG (NY) QRS 12-23, Inc. is the owner of the building in which we have our
    principal offices. The warrants were issued to NOG as landlord in connection
    with a lease amendment.

          In offering the securities covered hereby, the selling securityholders, or their pledgees, donees, transferees or other successors in interest, and any broker- dealers and any other participating broker-dealers who execute sales for the selling securityholders, may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales, and any profits realized by the selling securityholders and the compensation of such broker-dealers may be deemed to be underwriting discounts and commissions. In order to comply with the securities laws of certain states, if applicable, the securities must be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states the securities may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with. We have advised the selling securityholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of securities in the market and to the activities of the selling securityholders and their affiliates. In addition, we will make copies of this Proxy/Prospectus available to the selling securityholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. At the time a particular offer of securities is made, if required, a prospectus supplement will be distributed that will set forth the number of securities being offered and the terms of the offering, including the name of any underwriter, dealer or agent, the purchase price paid by any underwriter, any discount, commission and other item constituting compensation, any discount, commission or concession allowed or reallowed or paid to any dealer, and the proposed selling price to the public. We will file a post effective amendment to remove from registration any of the securities being registered to the extent that the selling securityholders qualify for sale pursuant to Rule 144 or Rule 145.

THE SPECIAL MEETING

           General

          This Proxy Statement/Prospectus is being furnished to you in connection with the solicitation of proxies by our Board for use at the Special Meeting to be held at the offices of Sentry located at 350 Wireless Boulevard, Hauppauge, New York on November 20, 2000, at 10:00 a.m., local time.

Matters to be Considered at the Special Meeting

          The purposes of the Special Meeting are:

           Proposals 1, 2 and 3 are contingent upon each other. Proposal 4 is contingent on Proposals 1, 2 and 3. If any of the Preferred Stock Dividend Proposal, Reclassification Proposal or the Election Proposal is not passed, then none of the other of those proposals or the Classified Board Rescission Proposal will pass. The failure of the Classified Board Rescission Proposal, however, will have no effect on any of the other proposals.

          If our shareholders approve the Reclassification and the Election Proposal (and if the other conditions in our agreement with Dutch A&A are met), then immediately following the Reclassification, Dutch A&A will acquire new shares of common stock representing 37.5% of the common stock to be then outstanding for $3.0 million, with $2.0 million payable at closing and the balance due six months later.

          Our Board has determined that the Reclassification, the terms of the Investment and the related proposals are fair and in your best interests. Accordingly, our Board unanimously recommends that you vote:

Record Date; Voting; and Revocation of Proxies

          Our Board has fixed the close of business on October 18, 2000 as the Record Date for the determination of those stockholders entitled to notice of and to vote at the Special Meeting. Holders of record of our common stock on the Record Date will be entitled to notice of the meeting and to vote on the proposals. As of the Record Date, 9,750,760 shares of our common stock were outstanding and entitled to vote held by approximately 253 holders of record. Each holder of record of shares of our common stock on the Record Date is entitled to cast one vote per share on the proposals and on any other matter properly submitted for the vote of our stockholders at the meeting. A majority of the holders of the outstanding shares of our common stock entitled to vote at the meeting must be present, either in person or by properly executed proxy, to constitute a quorum at the meeting. We will treat shares subject to abstentions as shares that are present at the meeting for purposes of determining the presence of a quorum. If a broker or other nominee holder indicates on the proxy card that it does not have discretionary authority to vote the shares it holds of record on the proposals, we will treat those shares as shares that are present at the meeting for purposes of determining the presence of a quorum, but we will not consider those shares as voted for purposes of determining the approval by our shareholders of the proposals. Since the approval of the proposals requires the affirmative vote of the holders of a majority or more of the outstanding shares of our common stock entitled to vote at the meeting, abstentions and broker non-votes will have the same effect as a vote against approval of the proposals.

          In addition, holders of record of our preferred stock on the Record Date will be entitled to vote on the Preferred Stock Dividend and Reclassification proposals as required by the Delaware General Corporation Law. As of the record date, 5,333,334 shares of our preferred stock were outstanding and entitled to vote, held by approximately 201 holders of record. The common and preferred stockholders may vote as permitted by applicable laws and/or our certificate of incorporation. In order to approve the proposals:

          All shares of our common stock entitled to be voted and represented at the Special Meeting by properly executed proxies that were received prior to or at the Special Meeting, and not revoked, will be voted at the Special Meeting, and any adjournments or postponements thereof, in accordance with the instructions indicated on such proxies. If no instructions are indicated, (i) such proxies will be voted "FOR" the proposals, and (ii) if the holder of the shares represented by such proxies possesses voting rights with respect to any other matter properly brought before the Special Meeting (including, among other things, a motion to adjourn or postpone the Special Meeting to another time and/or place, for the purpose of soliciting additional proxies or otherwise), such proxies will be voted in the discretion of the proxy holders as to such other matters. No proxy, however, which is voted "AGAINST" the proposals will be voted in favor of any such adjournment or postponement.

          Stock brokers do not have authority to vote your shares on these matters without direction from you. Since an abstention has the same effect as an "AGAINST" vote on these matters, you must instruct your broker to vote to approve the proposals if you desire to see them adopted.

           Proxy holders will have discretionary authority to vote on any other matters properly presented at the Special Meeting for consideration using their best judgment. Such discretionary authority will only be exercised to the extent permissible under applicable law. We have no knowledge of any matters to be presented at the Special Meeting other than these proposals.

          If you are present at the Special Meeting, your proxy will not automatically be revoked. However, you may revoke any proxy given in response to this solicitation at any time before it is exercised by (i) delivering to our Secretary a written notice of revocation bearing a later date than the proxy; (ii) delivering to our Secretary a duly executed proxy bearing a date later; or (iii) attending the Special Meeting and voting in person. Any written notice of revocation or subsequently executed proxy should be sent to our Secretary, Mr. Peter J. Mundy, Sentry Technology Corporation, 350 Wireless Boulevard, Hauppauge, New York 11788, or hand delivered to our Secretary, at or before the taking of the vote at the Special Meeting.

          You should not forward any preferred stock certificates with your proxy cards. If the Reclassification is consummated, promptly after the effective time, we will send a letter of transmittal with instructions on delivery of stock certificates.

          The required vote of our stockholders with respect to the proposals is based upon the total number of outstanding shares of our preferred stock and not upon the number of shares which are actually voted. Accordingly, your failure to submit a proxy card or to vote in person at the annual meeting or the abstention from voting will have the same effect as a vote "against" the proposals.

Solicitation

          We will bear all expenses of this solicitation of proxies from you. This solicitation of proxies is made on behalf of our Board of Directors, and we will bear the associated cost. We have retained Corporate Investor Communications, Inc. (the "Solicitor") to assist in the solicitation of proxies. We will pay approximately $22,000 in fees for the Solicitor's services and will reimburse the Solicitor for reasonable out-of-pocket expenses.

          In addition to solicitation by use of the mails, proxies may be solicited by our directors, officers and employees in person or by telephone, telegram or other means of communication. These persons will receive no additional compensation for solicitation of proxies, but may be reimbursed for reasonable out-of-pocket expenses in connection with such solicitation. In addition, we will make arrangements with brokerage firms and other custodians, nominees and fiduciaries for forwarding proxy materials to their principals and will reimburse such parties for reasonable expenses incurred.

          You may contact the Proxy Solicitor at its address and phone numbers indicated on the back cover of this Proxy Statement/Prospectus for the information about voting on the proposals or for additional copies of this Proxy Statement/Prospectus or proxy cards.

PROPOSALS 1 AND 2: PROPOSED AMENDMENTS TO SENTRY'S CERTIFICATE OF INCORPORATION

          General

          You will be asked at the Special Meeting to consider and approve amendments to our certificate of incorporation in order to effect the transactions contemplated in the Purchase Agreement between us and Dutch A&A. Specifically, you are being asked to consider:

           Article IV of our certificate of incorporation provides for a class of shares designated as Class A Preferred Stock. If approved, the first amendment to our certificate of incorporation would allow us to pay the Preferred Stock Dividend - a dividend payable in additional shares of preferred stock at the rate of 0.075 shares of preferred stock for each share of preferred stock held.

          These amendments require the approval of the holders of a majority of the shares of our common stock, and 2/3 of the shares of our preferred stock, outstanding as of the Record Date.

Background of the Proposals

          Our strategy following our merger with Video Sentry in February 1997 was to use Knogo's engineering staff and excess manufacturing capacity, resulting from a 1994 restructuring, for the reengineering and production of our proprietary and patented SentryVision® programmable traveling closed circuit television surveillance ("CCTV") systems. With the reengineering completed, we believed that sales of SentryVision® , which had fallen in the final year that Video was a separate corporation, would rebound. While our engineering staff was able to substantially resolve the design and manufacturing problems associated with SentryVision® , the sales of the system did not achieve the levels we anticipated. Furthermore, while still profitable, sales of Knogo's Electronic Article Surveillance ("EAS") systems 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, a non-compete provision entered into by Knogo in 1994 prevented us from marketing our EAS products outside of the United States and Canada until the non-compete provision expired at the end of 1999.

           Prior to the expiration of the non-compete provision, our Board determined that because of our continuing operating losses and the depletion of our tangible assets used to fund ongoing operations, we required additional investment to continue to market our existing SentryVision® and EAS products, develop new products and product extensions and remain competitive. We retained the investment bank of Legg Mason Wood Walker, Incorporated ("Legg Mason") in May, 1999 to help position us for an additional investment or for possible sale. As of October 13, 1999, Legg Mason was unsuccessful in developing any interest in a potential transaction. We resolved to terminate our engagement with Legg Mason. The termination was effective November 3, 1999.

          In October 1999, faced with continued losses and sales which failed to meet projected levels, our Board removed our Chief Executive Officer and retained Bridge Associates (formerly known as Restoration Management LLC) to assist in our efforts to reduce operating expenditures, to return us to profitability, and to further our efforts to find an acquisition partner or strategic investor. We appointed Anthony H.N. Schnelling, a principal of Bridge Associates, as our interim Chief Executive Officer.

           Commencing with Mr. Schnelling's engagement, we undertook a rigorous review of our operations to determine changes needed to facilitate the development of a business plan appropriate to our operational problems and financial circumstances.

           Steps taken in connection with or as a result of this review included:

           Concurrently with these steps, we continued to solicit other businesses within the security industry to ascertain the level of interest in a possible joint venture with or equity investment in us.

          In February 2000, we contacted a representative of Dutch A&A and discussed equity investment in us by Dutch A&A. After the two companies entered into a confidentiality agreement on February 14, 2000, we furnished additional information to Dutch A&A concerning our business and assets.

          We exchanged additional information and continued discussions intermittently over the next several months. During this period, we continued to discuss possible joint ventures or equity investments with other companies in the security industry. However, none of these other discussions advanced beyond the preliminary stage.

          In May, 2000, we met with representatives of Dutch A&A to discuss the possible terms for their equity investment in us. At this meeting, representatives of Dutch A&A indicated that as a condition to their proposed investment, they would require a change in our capital structure to provide for only one class of equity, and that such a reclassification would require the approval of classes of stock, with each class voting separately. Further, they would require that a majority of our directors be elected from Dutch A&A's nominees.

           While we continued the discussion with Dutch A&A, our directors considered how, and on what financial terms, to effect a reclassification of our preferred stock. In analyzing this issue, our Board considered the trading ranges of both our common stock and our preferred stock since trading began in 1997, the fact that we had not paid any of the cash dividends which were to have been paid on the preferred stock under its terms. The reclassification requested by Dutch A&A would require the approval of both classes of stock.

           Discussions with Dutch A&A slowed during the months of June and July while Dutch A&A completed an internal restructuring and arranged for financing for both its internal restructuring and for the proposed investment in us.

          Late in July 2000, discussions with Dutch A&A accelerated. These discussions, which focused on drafts of the Purchase Agreement and distribution agreement, continued into August. At a meeting of our Board of Directors on August 2, 2000, after further consideration of the factors described below, our Board authorized our officers to negotiate and execute definitive agreements providing for the Dutch A&A Investment in us. We concluded negotiations and executed the definitive agreements on August 8, 2000. We issued a press release before trading in our securities began on August 9, 2000. On September 18, 2000, our Board approved the Preferred Stock Dividend (subject to stockholder approval) and formally called the Special Meeting to approve the proposals.

          Our Reasons for the Preferred Stock Dividend and the Reclassification; Unanimous Recommendation of Our Board of Directors

          Our Board believes that the terms of the Preferred Stock Dividend and the Reclassification are fair and in your best interests. In the course of reaching its determination, our Board consulted with counsel to discuss its legal duties, the terms of the Purchase Agreement and related issues, and with its financial advisor to discuss the financial aspects and fairness of the transaction.

          In reaching its decision to approve the Purchase Agreement and to recommend that you vote to approve and adopt the proposals related to the Purchase Agreement and the Amended and Restated Certificate of Incorporation, our Board considered a number of factors, including (the order does not reflect relative significance):

          This discussion of the information and factors considered by our Board is not intended to be exhaustive, but constitutes the material factors considered by our Board. In view of the number and disparate nature of the factors considered by our Board in connection with its evaluation of the Reclassification and the Investment, our Board did not find it practicable to quantify or assign any relative weights to the factors considered in reaching its determination. Our Board based its determination on the totality of the information and not on one particular factor. In addition, different Board members may have given different weights to different factors. After deliberating with respect to the Reclassification and the other transactions contemplated by the Purchase Agreement, considering, among other things, the matters discussed above and the opinion of Donald & Co. Securities, Inc. referred to above, our Board unanimously approved and adopted the Purchase Agreement, the Amended and Restated Certificate of Incorporation, and the transactions contemplated thereby as being fair, and in your best interests.

          The Board determined to submit the Classified Board Rescission Proposal because Dutch A&A required that we use our best efforts to seek shareholder approval to rescind our classified board structure.

          FOR THE REASONS SET FORTH ABOVE, OUR BOARD UNANIMOUSLY APPROVED AND ADOPTED THE PURCHASE AGREEMENT AS BEING FAIR AND IN YOUR BEST INTERESTS AND RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL AND ADOPTION OF THE PREFERRED STOCK DIVIDEND, THE RECLASSIFICATION, THE CLASSIFIED BOARD RESCISSION, AND FOR EACH OF THE NOMINEES FOR DIRECTOR.

Opinion of Sentry's Financial Advisor

          On September 18, 2000, Donald & Co. Securities, Inc. delivered a preliminary oral opinion to our Board that, as of the date of such opinion and subject to continuing due diligence analysis and issuance of its written opinion, the purchase price was fair, from a financial point of view, to our common stockholders and to our preferred stockholders.

           The full text of the Donald & Co. opinion, which sets forth the assumptions made, matters considered, and limitations on the review undertaken in connection with the opinion, is attached as Annex B to this Proxy Statement/Prospectus. You are urged to, and should, read the Donald & Co. opinion in its entirety.

          In connection with its opinion, Donald & Co. reviewed, among other things, (i) the Purchase Agreement; (ii) our Annual Reports on Form 10-K; (iii) interim reports on Form 8-K and our Quarterly Reports on Form 10-Q; and (iv) certain internal financial analyses and forecasts prepared by our management. Donald & Co. also held discussions with members of our senior management regarding the strategic rationale for, and potential benefits of, the Preferred Stock Dividend, Reclassification and Investment and our past and current business operations, financial condition, and future prospects. In addition, Donald & Co. reviewed the reported price and trading activity for our common stock and preferred stock, reviewed certain of our financial and stock market information with similar information for certain other companies the securities of which are publicly traded, reviewed the financial terms of certain recent transactions in the industry and performed such other appropriate studies and analyses.

          In its review, Donald & Co. relied upon the accuracy and completeness of all the financial and other information provided, including, without limitation, the representations set forth in the Purchase Agreement, and assumed such accuracy and completeness for purposes of rendering its opinion. In that regard, Donald & Co. relied upon our management as to the reasonableness and ability to achieve our financial forecasts (and the assumptions and bases thereof) provided to Donald & Co. and with our consent, assumed that such forecasts reflect our management's best currently available estimates and judgments. In addition, Donald & Co. did not independently evaluate or appraise our assets and liabilities and we did not furnish Donald & Co. with any such evaluation or appraisal. Donald & Co. provided advisory services and its opinion for our Board's information and assistance in considering the transactions relating to the Purchase Agreement. Such opinion does not constitute a recommendation as to how you should vote on the Reclassification.

          The following summarizes the material financial analyses performed by Donald & Co. in providing its opinion to our Board. All analyses discussed below, unless otherwise indicated, exclude our estimated cost savings from any operating synergies resulting from the Investment.

          The preparation of a fairness opinion is a complex process not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying the Donald & Co. opinion.

          In arriving at its fairness determination, Donald & Co. considered the results of all such analyses. No company or transaction used in the above analyses as a comparison is identical to us or the contemplated transaction. The analyses were prepared so Donald & Co. could provide its opinion to our Board on the fairness to you of the purchase price, from a financial point of view. They do not purport to be appraisals or necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results do not necessarily indicate actual future results, which may be significantly more or less favorable than suggested by such analyses. Because such analyses are inherently uncertain, being based upon numerous factors or events beyond our control, we and Donald & Co., or any other person, assume no responsibility if future results are materially different from those forecast. As described above, our Board considered the Donald & Co. opinion with many other factors in making its determination to approve the Investment. This summary is not a complete description of the analysis performed by Donald & Co. and is qualified by reference to the Donald & Co. opinion attached as Annex B hereto.

           Pursuant to a letter agreement dated August 15, 2000 (the "Donald & Co. Engagement Letter"), we engaged Donald & Co. to act as our financial advisor in connection with the Reclassification and Investment. Under the Donald & Co. Engagement Letter, we agree to pay Donald & Co. upon consummation of the Reclassification and Investment a transaction fee of $22,500. In addition, we agreed to reimburse Donald & Co. for certain out-of-pocket expenses, including attorney's fees, and to indemnify Donald & Co. against certain liabilities, including certain liabilities under the federal securities laws.

Interests of Executive Officers and Directors in the Transaction

           Restoration Management Agreement

           Restoration Management Company, LLC ("Restoration"), now known as Bridge Associates, LLC, of which Anthony H.N. Schnelling, our interim President and Chief Executive Officer, is a member and managing director, is a party to an agreement (the "Consulting Agreement") with us which provides for a success fee to Restoration of 1% of the value we receive from any sale, merger, joint venture or combination with any other party. The Restoration Agreement provides that Mr. Schnelling will act as our interim Chief Executive Officer, and that Restoration will provide us with operational and financial consulting services. The consummation of the Reclassification and the Investment would entitle Bridge Associates, LLC to a success fee payable as follows:

          Our agreement with Dutch A&A allows Dutch A&A to nominate three persons for election to our Board of Directors. Mr. Schnelling, a member of Bridge Associates, is one of Dutch A&A's nominees.

           Directors' and Officers' Indemnification and Insurance

          The Purchase Agreement provides that for a period of the latter of (i) six years after the Effective Time, and (ii) the expiration of any statute of limitations applicable to any claim, action, suit, proceeding or investigation, we will indemnify and hold harmless all our past and present officers and directors to the fullest extent permitted under applicable law and the Amended and Restated Certificate of Incorporation. We also agreed to provide, for an aggregate period of not less than six years after the initial purchase, policies of directors' and officers' liability insurance and fiduciary liability insurance issued by a carrier or carriers assigned a claims-paying ability rating by A.M. Best & Co. of "A (Excellent)" or higher that have at least the same coverage limits and amounts and containing terms and conditions that are no less advantageous for the beneficiaries than the policies we currently maintain.

           Other than as set forth above, none of our directors or executive officers have any direct or indirect material interest in the Reclassification or the Investment, except as shareholders or optionholders.

Federal Securities Law Consequences

          All of our shares issued in connection with the Reclassification will be freely transferable, except that any of our shares received by our "affiliates" (as such term is defined under the Securities Act) prior to the Reclassification may be sold only in transactions registered under the Securities Act, permitted by the resale provisions of Rule 145 promulgated under the Securities Act, or as otherwise permitted under the Securities Act. Our affiliates generally include individuals or entities that control, are controlled by, or are under common control with us and generally include our executive officers and directors as well as our principal stockholders.

          In general, Rule 145 promulgated under the Securities Act provides that, for one year following the initial purchase, an affiliate (together with certain related persons) may sell shares of our common stock acquired in connection with the Investment only through unsolicited "broker transactions" or in transactions directly with a "market maker," as such terms are defined in Rule 144 under the Securities Act. In addition, the number of shares to be sold by an affiliate (together with certain related persons and certain persons acting in concert) within any three-month period may not exceed the greater of 1% of our outstanding shares or the average weekly trading volume of our shares during the preceding four calendar weeks. Rule 145 under the Securities Act will remain available to affiliates if we remain current with our informational filings with the Commission under the Exchange Act. One year after the initial purchase, an affiliate may sell our shares without being subject to such manner of sale or volume limitations so long as we remain current with our Exchange Act informational filings and the affiliate ceases to be our affiliate. Two years after the initial purchase, an affiliate may sell our shares without any restrictions so long as such affiliate has not been our affiliate for at least three months prior to the date of such sale.

           Shares being issued to Dutch A&A in connection with the Investment will be sold without registration pursuant to an exemption under the Securities Act. While the Company has agreed to register such shares for resale upon demand by Dutch A&A, representatives of Dutch A&A have indicated that Dutch A&A does not intend to sell the shares.

United States Federal Income Tax Consequences

          The following discussion summarizes the material United States Federal income tax consequences of the Preferred Stock Dividend and the Reclassification to holders of the Class A Preferred Stock. This summary is based on existing statutes, as well as judicial and administrative interpretations thereof, all of which are subject to change, including changes which may be retroactive. Moreover, substantial uncertainties exist with respect to various United States Federal income tax consequences of the contemplated transactions. We will not request any opinion of counsel or ruling from the Internal Revenue Service ("IRS") with respect to any such uncertainties. Accordingly, no assurance can be given that the IRS will not challenge any of the tax positions described herein or that such a challenge will not be successful.

          The discussion below does not address the foreign, state or local tax consequences of the contemplated transactions, nor does it specifically address the tax consequences to taxpayers subject to special treatment under the United States Federal income tax laws (including dealers in securities and currencies, pass-through entities, life insurance companies, tax-exempt organizations, financial institutions, regulated investment companies, taxpayers subject to the alternative minimum tax, persons that hold Class A Preferred Stock as part of an integrated investment (including a "straddle") consisting of Class A Preferred Stock and one or more other positions, foreign corporations, foreign partnerships, foreign trusts, foreign estates, and other persons who, for United States Federal income tax purposes, are not citizens or residents of the United States, or persons whose functional currency is other than the United States dollar). The discussion below assumes the Class A Preferred Stock is and will be held as a capital asset within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code").

Preferred Stock Dividend

          As described in the Proxy Statement/Prospectus for the Class A Preferred Stock, dated January 21, 1997, while the issue is a factual one, we intend to treat the Class A Preferred Stock as common stock for the purpose of determining the appropriate tax treatment of the Preferred Stock Dividend and of the receipt of cash in lieu of fractional shares. Assuming the Class A Preferred Stock is treated as common stock for this purpose, your receipt of additional shares of Class A Preferred Stock generally will not be treated as a taxable stock dividend and you will be required to allocate your tax basis in the shares of Class A Preferred Stock with respect to which the additional shares are received between those shares and the additional shares based on their respective fair market values on the date of the distribution. However, if we were to declare and pay a dividend to holders of our common stock within 36 months of the Reclassification, or alternatively, if the IRS were to treat the Class A Preferred Stock as preferred stock for tax purposes, under Section 305 of the Code, the fair market value of the Preferred Stock Dividend would be treated as a distribution subject to Section 301 of the Code. In that event, the Preferred Stock Dividend would be taxable as a dividend to the extent of our current or accumulated earnings and profits, and any excess would be treated first as a return of capital and thereafter as capital gain. Note, however, that we do not expect to declare or pay dividends to holders of our common stock in the foreseeable future.

          If you receive cash in lieu of fractional shares of Class A Preferred Stock in connection with the Preferred Stock Dividend, you will be treated as having received such fractional shares and then having sold such fractional shares for cash. You will be required to recognize gain or loss in an amount equal to the difference between the amount of cash received and the tax basis allocated to such fractional shares. Any such gain or loss will be capital gain or loss.

Reclassification

          The exchange of our Class A Preferred Stock for our common stock pursuant to the Reclassification will be treated as a tax-free recapitalization within the meaning of Section 368(a)(1)(E) of the Code. Accordingly, you generally will not be required to recognize any gain or loss on the exchange of your Class A Preferred Stock for common stock. In addition, to the extent the exchange is tax-free, your tax basis in the common stock received will be equal to your tax basis in the Class A Preferred Stock surrendered and your holding period in the common stock received will include the holding period of the Class A Preferred Stock surrendered. However, if we were to declare and pay a dividend to holders of our common stock within 36 months of the Reclassification, pursuant to Section 305 of the Code, it is possible that the exchange would be treated as a distribution taxable in the manner described above in "Preferred Stock Dividend." As stated above, we do not expect to declare or pay dividends to holders of our common stock in the foreseeable future.

NOLs and Section 382

          We estimate that our net operating loss carryovers for regular tax purposes were approximately $18 million as of December 31, 1999. These net operating loss carryovers remain subject to examination and possible adjustment by the IRS. In addition, under Section 382 of the Code, if the exchange of Class A Preferred Stock for common stock in conjunction with either the current or certain future sales of common stock to Dutch A&A results in an "ownership change," our use of our net operating losses and certain other tax attribute carryovers and certain built-in losses and deductions generally will be limited to an amount equal to the fair market value of our capital stock immediately prior to the ownership change multiplied by the "long-term tax exempt rate" for the month the ownership change occurs. It is not clear whether the exchange and current sale of common stock to Dutch A&A will result in an ownership change. In addition, even if we determine that the exchange and current sale of common stock to Dutch A&A does not result in an ownership change, depending on when and how much of our common stock Dutch A&A acquires in the future, we may undergo an ownership change at that time. Accordingly, there is no assurance whether and to what extent our net operating loss carryovers will be available to offset any income we earn in the future.

Backup Withholding

          In general, you may be subject to backup withholding at a rate of 31% with respect to any cash received in lieu of fractional shares unless you are an exempt recipient or comply with certain procedures. Backup withholding is not an additional tax. Any amount so withheld will either be credited against your United States Federal income tax liability or refunded by the IRS.

          The foregoing United States Federal income tax discussion is for general information purposes only. You should consult your own tax advisor regarding the specific tax consequences of the Preferred Stock Dividend and the Reclassification, including, without limitation, the application and effect of foreign, state, local or other tax laws.

THE PURCHASE AGREEMENT

          The following summarizes the material terms of the Purchase Agreement, which is incorporated herein by reference. This summary does not purport to be complete and is qualified in its entirety by reference to the Purchase Agreement. We encourage you to read the Purchase Agreement in its entirety.

The Parties to the Purchase Agreement

Sentry

           Sentry Technology Corporation was formed in connection with the February 1997 merger of Knogo North America Inc., a Delaware corporation, and Video Sentry Corporation, a Minnesota corporation. Pursuant to the merger agreement, we entered into for that transaction, we are now the parent corporation of two wholly-owned Delaware subsidiaries: Knogo North America Inc. and Video Sentry Corporation.

           Dutch A&A Holding, B.V.

           The other party to the agreement is Dutch A&A Holding, B.V., also referred to as "Dutch A&A" or the "Investor." It is a Netherlands company which, through its subsidiaries, is in the business of development, manufacture, sale and/or distribution of various kinds of identification, access control, anti-theft electronic article surveillance systems, closed circuit television surveillance and accessories.

          The following Dutch A&A subsidiaries accounted for 100% of total consolidated revenue in 1999: Atlas Software, Dialoc International, Dialoc ID Technology and Dutch Technology Fund, all located in Harderwijk, The Netherlands; Asint and Asint Sound, companies located in Utrecht, The Netherlands; Dialoc-ID Systems Interlabel, a company located in Helmond, The Netherlands; ID Security Systems Canada and ID Systems USA, companies with management offices in Toronto, Ontario; ID Systems Do Brazil, a company located in Nova Friburgo, Rio de Janeiro, Brazil; and Custom Security Industries, a company located in Thornhill, Ontario.

           Dutch A&A was incorporated in the Netherlands in 1990. Its principal executive offices are located at Galvanistraat 24-3840 AH Harderwijk, The Netherlands, and its telephone number is (631) 341 427 100.

Terms of the Reclassification

          The Purchase Agreement

          Upon consummation of the Investment, Dutch A&A will acquire new shares of our common stock, $0.001 par value, representing 37.5% of the common stock to be then outstanding, for $3.0 million, with $2.0 million payable at closing, and the balance due six months later. At any time prior to the first anniversary of the initial purchase, Dutch A&A may increase the total number of shares of common stock it acquires under the agreement to 51% of the shares of common stock to be then outstanding. If the average market value of our common stock, measured over any ten-day trading period during the year, is 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. Otherwise, the purchase price will be $1.5 million.

          At any time prior to the second anniversary of the initial purchase, Dutch A&A may increase the number of the total number of shares of common stock it acquires under the agreement to 60% of the shares of common stock to be then outstanding. The purchase price for such additional shares shall be determined as follows: If the Average Market Value of our common stock, measured over any ten-day trading period during the two years preceding the second anniversary, is at least $25.0 million, the purchase price shall be determined by multiplying the actual number of shares to be purchased by $.001. If Dutch A&A previously exercised its right to acquire shares representing 51% of the common stock, but the average market value test is not met at the time of the second purchase, then the purchase price shall be $3.5 million; otherwise the purchase price shall be $5 million.

          As a condition to the Purchase Agreement, our shareholders must elect three nominees of Dutch A&A to our Board of Directors. The election will take place at the Special Meeting. If Dutch A&A has not acquired 51% of our common stock by the second anniversary of the Effective Time, one of the three nominees of Dutch A&A will resign and be replaced by a nominee of the continuing directors - those directors not nominated by Dutch A&A - approved by Dutch A&A.

          The Distribution Agreement

          At the closing of the Investment, Dutch A&A and Sentry will enter into a distribution agreement, which contemplates a two-way distribution relationship between us and Dutch A&A, having an initial duration of two years from execution. If, after the initial two-year period Dutch A&A has not taken a 51% or greater equity interest in us, the distribution agreement shall automatically extend for an additional two years. Pursuant to the distribution agreement, we will have the right to purchase from Dutch A&A and to sell closed circuit television video capture software, electromagnetic and radio frequency EAS systems, radio frequency and electromagnetic labels, radio frequency and electromagnetic deactivation systems, radio frequency identification (RFID) systems and proximity access control systems manufactured by Dutch A&A or its affiliates. We may also manufacture or purchase from Dutch A&A EAS hard tags. Pricing for the Dutch A&A tags and systems will be set at the lowest price Dutch A&A charges its affiliates. Dutch A&A has the right to purchase from us and to sell into countries where we have no dealer or distributor, electromagnetic system, tag deactivation/reactivation and closed circuit television surveillance systems manufactured by us.

Exchange of Certificates Representing Sentry Preferred Stock

           Following the filing of the Amended and Restated Certificate of Incorporation, certificates formerly representing Class A Preferred Stock will thereafter without further action on the part of the holder, represent the number of shares of common stock into which preferred stock was reclassified. The shares of our common stock will be deemed issued at the effective date of the Reclassification. We will instruct the Agent to deliver the shares of our common stock issued in connection with the Reclassification to holders of our preferred stock.

          Any fractional shares of preferred stock, otherwise issuable to preferred stockholders as a result of the Preferred Stock Dividend, will be pooled for sale by the Agent, with the net proceeds (after expenses) of sale to be divided among such holders pro rata.

          As soon as practicable (but no more than five business days) after the filing of the Amended and Restated Certificate of Incorporation, the Agent will mail to each holder of our preferred stock: (1) a letter of transmittal specifying that delivery will be effective, and risk of loss and title to your preferred stock certificates will pass, only upon proper delivery of preferred stock certificates to the Agent; and (2) instructions on surrendering our preferred stock certificates in exchange for our common stock certificates. Once a preferred stockholder surrenders a preferred stock certificate for cancellation, together with the letter of transmittal and any other necessary documents and tax forms, preferred stockholders will receive a certificate representing the shares of our common stock issued in the reclassification, together with any proceeds due such holder from the sale of the aggregate fractional shares of preferred stock otherwise issuable as a result of the Preferred Stock Dividend. The Agent will then cancel the preferred stock certificate that was surrendered.

          If you own preferred stock, you should not send in your preferred stock certificates until you receive the letter of transmittal form and instructions from the agent. You should not return your preferred stock certificates with the enclosed proxy.

Sentry Stock Options

           Sentry's 1997 Stock Incentive Plan states that upon a reclassification, once holders exercise their options, they are entitled to the number of shares to which they would have been entitled if they owned the shares underlying the option at the time the reclassification occurred. Therefore, following the effective time of the Reclassification, options to purchase our preferred stock will be converted to options to purchase our common stock at a ratio of 5 to 1, adjusted for the Preferred Stock Dividend.

Representations and Warranties

          In the Purchase Agreement, we and Dutch A&A make the following customary representations and warranties:

          In addition, the Purchase Agreement contains representations and warranties by us and Dutch A&A regarding our organization, capital structure, authority to enter into the Purchase Agreement and certifying that the Purchase Agreement is binding.

Conduct of Business Pending the Reclassification

           Actions by Sentry

           Under the Purchase Agreement, we agreed that until the initial purchase by Dutch A&A, we will (1) operate our business in the usual and ordinary course consistent with past practices and in accordance with applicable laws; (2) preserve our business organization; and (3) use our commercially reasonable efforts to retain the services of our respective principal officers and key employees.

           Except as stated in the Purchase Agreement or elsewhere in writing, we will not:

No Solicitation

           Under the Purchase Agreement, we agree not to (and shall use reasonable efforts to cause our officers, directors and employees and any investment bank, attorney, accountant, or other agent retained by us not to) solicit any proposal or offer to acquire all or any significant part of our business and properties or our capital stock, by merger, purchase of assets, tender offer or otherwise (an "Acquisition Proposal" and, any such transaction, an "Acquisition Transaction") or provide any non-public information concerning our Company to any third party in connection with an Acquisition Proposal. However, if our Board of Directors determines in good faith that the failure to consider such proposal or offer could reasonably be deemed to cause our directors to breach their fiduciary duties under applicable law, we may furnish information or participate in discussions and negotiations and enter into an agreement relating to an Acquisition Proposal with any third party (including parties with whom we have had discussions on any basis on or prior to the date of the Purchase Agreement) who makes us an unsolicited proposal or offer.

          In addition, we may (a) issue press releases or otherwise publicly disclose the terms of any Acquisition Proposal, (b) disclose to our stockholders our position on an Acquisition Proposal, and make related filings with the SEC as required by the Exchange Act tender offer rules, and (c) take any action the Board determines would likely be required under applicable law. If we receive an Acquisition Proposal, we will promptly inform Dutch A&A, unless our Board determines that giving such notice could breach its fiduciary duty under applicable law.

Directors' and Officers' Indemnification and Insurance

          The Purchase Agreement provides that:

          •           We will keep in effect in our Certificate of Incorporation and Bylaws provisions for exculpation of director and officer liability and indemnification of our present and former officers, directors, employees and agents to the fullest extent permitted under the Delaware law;

          •           We will keep in effect, at no expense to the directors and officers, their liability insurance, issued by a carrier or carriers assigned a claims-paying ability rating by A.M. Best & Co. of "A (Excellent)" or higher, providing at least the same coverage as the insurance currently maintained by us with terms and conditions as favorable to the beneficiaries for at least six years from the first payment under the Investment. If any claim is made against our present or former directors, officers or employees that is potentially covered by insurance, we will not do anything that would jeopardize, or limit the insurance coverage available for that claim until its final disposition;

          •           Nonetheless, if any claim, proceeding or investigation is made against our present and former officers, directors, employees and agents, this section shall continue in effect until the final disposition of such claim, proceeding or investigation;

          •           Our present and former officers, directors, employees and agents, and their respective heirs and legal representatives, can seek relief from us for the protections set forth in this paragraph. The indemnification provided for here does not preclude any other rights to which such party is entitled. We will pay all expenses, including attorneys' fees, that may be incurred by our present and former officers, directors, employees and agents in enforcing the indemnity and other obligations for which we are responsible; and

          •           If we, or our successors or assigns, (i) consolidate with or merge into any other Person and shall not be the continuing or surviving entity, or (ii) transfer or convey all or substantially all of our properties and assets to any Person, then, we will ensure that on the later of (X) the sixth anniversary of the first payment under the Investment, and (Y) the expiration of any statute of limitations applicable to any relevant claim, proceeding or investigation, our successors and assigns shall assume our obligations before we engage in such a merger or consolidation.

Employee Matters

          The Purchase Agreement states that we will honor all existing employment, severance, consulting and salary continuation agreements with any of our current or former officers, directors, employees or consultants.

          If we (i) consolidate with or merge into any other party, or (ii) transfer or convey all or substantially all of our properties and assets to any other party, then we will ensure that our successors and assigns assume our employee obligations.

Conditions to the Reclassification

          The Purchase Agreement contains certain conditions that must be fulfilled prior to consummation, as follows:

          A period of time may elapse between the Special Meeting and the initial purchase by Dutch A&A while the parties obtain any required governmental approvals of the Reclassification or the Investment not received on or before the date of the Special Meeting. We believe that we will receive all required governmental approvals. We do not currently anticipate that any conditions to consummate of the Reclassification and Investment other than receipt of required governmental approvals would cause any substantial delay between stockholder approval of the Reclassification and the Investment at the Special Meeting and the initial purchase by Dutch A&A. However, we cannot be sure that a Governmental Entity will not challenge the Reclassification and Investment. See "THE RECLASSIFICATION." It should be noted that either party may terminate the Purchase Agreement if the Investment has not been consummated on or before 180 days from the execution date of the Purchase Agreement. That date is February 4, 2001.

Termination

           Regardless of the approval of our stockholders, the Purchase Agreement may be terminated at any time prior to the consummation of the transaction, whether before or after shareholder approval:

          (i)      by our mutual written consent with Dutch A&A; or

          (ii)      by either us or Dutch A&A, if the initial payment by Dutch A&A has not occurred on or before 180 days from the date of the Purchase Agreement (February 4, 2001). However, if any party's misrepresentation in this Agreement or failure to perform any of its covenants and agreements or to satisfy any obligation under this Agreement has caused the failure of the investment to occur on time, the other party may terminate; or

          (iii)      by either us or Dutch A&A, if (i) any federal or state court or governmental or regulatory body has issued any final judgment or order restraining the transactions contemplated by the Purchase Agreement, or (ii) any statute, rule, regulation or executive order of any federal or state governmental authority after the date of this Agreement which prohibits the consummation of the Investment shall be in effect; or

          (iv)      by either us or Dutch A&A, if, at the Special Meeting the (i) Amended and Restated Certificate of Incorporation is not approved, or (ii) Dutch A&A's nominees for election as our directors are not elected to terms satisfactory to Dutch A&A (up to three years); or

          (v)      by Dutch A&A, if we materially breach any of our representations, warranties or material covenants or agreements, which we do not remedy after thirty (30) days' written notice to us by Dutch A&A, except for the right of Dutch A&A to terminate with respect to the matters described in paragraph (ix) below; or

          (vi)      by us, if Dutch A&A materially breaches any of its representations, warranties or material covenants or agreements, which it does not remedy after thirty (30) days' written notice by us to Dutch A&A; or

          (vii)      by either Dutch A&A or us, if (i) our Board of Directors withdraws or modifies in a manner adverse to Dutch A&A its approval or recommendation of the proposal to approve the Amended and Restated Certificate of Incorporation at the Special Meeting or shall have resolved to do any of the acts deemed in connection with an Acquisition Proposal, or (ii) any party makes an Acquisition Proposal that our Board of Directors determines in good faith, that the failure to accept could reasonably be deemed to cause the members of our Board of Directors to breach their fiduciary duties under applicable law; or

          (viii)      by us, if the fairness opinion required by the Purchase Agreement is not received by our Board of Directors by the date required by the Purchase Agreement; or

          (ix)      by Dutch A&A, if (i) it shall determine that in its sole judgment (A) our monetary liability related to the alleged failure of certain of our products to meet the requirements of Industry Canada regulation exceed $300,000.00, or (B) our ability to adequately develop our Canadian market will be adversely affected; or (ii) Dutch A&A determines in its financial due diligence that our financial condition is not consistent (in a manner adverse to Dutch A&A) with financial information furnished to Dutch A&A. However, Dutch A&A's right to terminate the purchase agreement pursuant to this paragraph lapsed at 5:00 p.m., Eastern Time, on August 30, 2000.

Fees and Expenses

          We and Dutch A&A will pay our own fees in connection with the Investment. However, if the Investment is consummated, we will pay the reasonable fees and expenses of Dutch A&A counsel. If either party willfully misrepresents or breaches the Purchase Agreement, the breaching party will pay all costs and expenses incurred by both parties in connection with the Investment and the preparation of this statement and all SEC filing fees.

           Either party may terminate the Purchase Agreement if our Board withdraws or modifies its approval or recommendation of the proposal to adopt the Amended and Restated Certificate of Incorporation or to elect Dutch A&A's nominees for Director. Further, if within six months of such termination, we consummate a proposal or offer by a third party, then we will pay or reimburse Dutch A&A for all reasonable fees and expenses.

Amendment

          We may amend the Purchase Agreement in writing signed by us and Dutch A&A. After the initial purchase by Dutch A&A, and so long as a continuing director remains on our Board (a director not nominated by Dutch A&A), we may amend only with the written consent of a continuing director.

Assignment

          Dutch A&A is permitted to assign its rights and obligations under the Purchase Agreement to any successor to a majority of its electronic article surveillance/security business or assets.

Recommendation

          Our Board has determined that the Reclassification, the terms of the Investment and Purchase Agreement, and the related proposals, are fair and in your best interests. Accordingly, our Board unanimously recommends that you vote:

          1.    "FOR" the Preferred Stock Dividend; and

          2.      "FOR" the Reclassification.

                                                                  Long-Term        All Other
                                         Annual Compensation      Compensation     Compensation (1)
                                         -------------------      ------------     ----------------

                                                                 Securities
Name and                                                         Underlying
                                                                 Options (#)
Principal Position               Year     Salary      Bonus      -----------
------------------               ----     ------      -----


Anthony H.N. Schnelling          1999    $ 50,000(2)    -        200,000              -
Interim President and CEO

Thomas A. Nicolette,             1999     206,941       -         75,000          $4,800
Senior Executive Officer(3)      1998     198,380       -         50,000           4,800
                                 1997     194,167       -        100,000           4,390

Peter J. Mundy,                  1999     124,165       -         35,000           3,725
Vice President - Finance,        1998     119,028       -         20,000           3,571
Secretary and Treasurer          1997     118,110       -         40,000           3,543

John F. Whiteman                 1999     152,462       -         50,000           4,574
Sr. Vice President Sales and     1998     145,476       -         30,000           4,364
Marketing                        1997     149,120    $30,943      40,000           3,586

Peter Y. Zhou,                   1999     134,512       -         20,000           4,036
Vice President - Technology(4)   1998     128,947       -         12,500           3,868
                                 1997     128,833       -         40,000           3,865

                          Number Of
                         Securities    % Of Total                                 Potential Realizable Value At Assumed
                         Underlying    Granted To                                    Annual Rate Of Stock Price
                           Options    Employees In    Exercise      Expiration    Appreciation For Option Term(2)(3)
Name                       Granted        1999       Price (1)         Date       ------------------------------------
----                       -------        ----       ---------         ----                 5%              10%
                                                                                            --             ---

Anthony H.N. Schnelling    200,000        30.5%        $0.188   See Note (1)             $23,650         $59,934
Thomas A. Nicolette         75,000        11.4%         0.62         1/11/09              29,249         74,121
Peter J. Mundy             35,000         5.3%          0.62         1/11/09              18,649         34,590
John F. Whiteman           50,000         7.6%          0.62         1/11/09              19,499         49,414
Peter Y. Zhou(4)           20,000         3.0%          0.62         1/11/09              7,800          19,766

                                                                Number Of Unexercised    Value Of Unexercised In The
                                                                Options At Year-End (#)  Money Options At Year End ($)
                             Shares
                             Acquired On     Value            Exercisable/               Exercisable/
Name                         Exercise (#)    Realized ($)     Unexercisable              Unexercisable
----                         ------------    ------------     -------------              -------------

Anthony H.N. Schnelling              -              -         E          200,000         E        -
                                                              U                -         U        -

Thomas A. Nicolette                  -              -         E          292,139         E        -
                                                              U          130,000         U        -

Peter J. Mundy                       -              -         E          112,614         E        -
                                                              U           56,000         U        -

John F. Whiteman                     -              -         E           64,716         E        -
                                                              U           74,000         U        -

Peter Y. Zhou(1)                     -              -         E          103,703         E        -
                                                              U           39,500         U        -

INCEPTION TO
6/30/00                 2/13/97    3/31/97    6/30/97     9/30/97   12/31/97    3/31/98  6/30/98     9/30/98

SENTRY TECHNOLOGY        3.500      3.375      4.000       2.625      1.500      1.250     1.063       0.813
CORP

STANDARD & POOR'S
600 SMALL CAP          147.510     137.090    161.550    187.310    181.160    200.840    191.540    151.170

STANDARD & POOR'S
ELECTRICAL EQUIPMENT 2,582.140   2,368.880  3,039.330  3,200.070  3,382.440  3,945.380  4,050.180  3,585.580


                       12/31/98   3/31/99   6/30/99     9/30/99     12/31/99     3/31/00     6/30/00

SENTRY TECHNOLOGY       0.625      0.313      0.500       0.250       0.094       0.250       0.094
CORP

STANDARD & POOR'S     177.360    161.070    185.520     176.200     197.790     208.950     210.700
600 SMALL CAP


STANDARD & POOR'S   4,492.060  4,763.710  5,050.980   5,264.250   6,662.360   6,634.300   6,776.890
ELECTRICAL EQUIPMENT




                       2/13/97    3/31/97  6/30/97   9/30/97   12/31/97   3/31/98   6/30/98   9/30/98

SENTRY TECHNOLOGY      $ 100      $ 96    $ 114      $  75    $ 43        $ 36      $ 30      $ 23
CORP

S&P 600 SMALL CAP      $ 100     $  93    $ 110      $ 127    $123        $136      $130      $102
INDEX

S&P ELEC. EQUIP.       $ 100     $  92    $ 118     $  124   $ 131        $153      $157      $139
INDEX

                      12/31/98   3/31/99   6/30/99   9/30/99   12/31/99    3/31/00   6/30/00

Sentry Technology      $ 18       $  9      $ 14      $ 7       $  3        $  7      $  3
Corporation

S&P 600 Small Cap      $120       $109      $126     $119       $134        $142      $143
Index


S&P Elec. Equip.       $174       $184      $ 96     $204       $258        $257      $262
Index

                                                                   High           Low          Close
                                                                   ----           ---          -----

1997
         First Quarter (commencing February 13, 1997)             $37/8         $21/4          $33/8
         Second Quarter......................................      41/4          21/4              4
         Third Quarter.......................................         4         27/16           25/8
         Fourth Quarter......................................         3         15/16           11/2
1998
         First Quarter.......................................        $2           $1 1/4         $1 1/4
         Second Quarter......................................        1 1/2        7/8          11/16
         Third Quarter.......................................      11/8          9/16          13/16
         Fourth Quarter......................................         1           1/2            5/8
1999
         First Quarter.......................................    $11/16         $5/16          $5/16
         Second Quarter......................................     11/16           1/4            1/2
         Third Quarter.......................................     11/16           1/4            1/4
         Fourth Quarter......................................      5/16          1/16           3/32
2000
         First Quarter.......................................    $11/16         $5/32           $1/4
         Second Quarter                                            $1/2         $1/16          $3/32
         Third Quarter (through September 28, 2000)                $1/4         $1/16          $9/64

                                               Shares of        Percent
Name and Address of Beneficial Owners          common stock     of Class(1)
-------------------------------------          ------------     -----------
Walter & Edwin Schloss
Associates L.P.
350 Park Avenue
New York, NY  10022                               602,883          6.2%

                                        Shares of         Percent        Shares of Class A    Percent
Directors and Executive Officers        common stock      of Class(1)    Preferred Stock      of Class(2)
--------------------------------        ------------      -----------    ---------------      -----------
Anthony H.N. Schnelling                   200,000(3)         2.0%                -              -

Thomas A. Nicolette                       574,720(4)         5.7%           346,852(5)          6.3%

Peter J. Mundy                            191,945(6)         1.9%           104,616(7)          1.9%

John F. Whiteman                          128,941(8)         1.3%            49,269(9)            *

Paul D. Mellin                             10,800(10)         *                 -               -

Robert L. Barbanell                        15,800(11)         *              16,537               *

William A. Perlmuth
c/o Stroock & Stroock & Lavan LLP
180 Maiden Lane                           914,966(12)        9.4%           988,716(13)        18.5%
New York, NY  10038

Robert D. Furst, Jr.
3900 Walden Road
Deephaven, MN  55391                      739,690(14)        7.6%           115,510             2.2%

All Sentry Directors and executive
officers as a group (8 persons)         2,776,862(15)       25.9%         1,621,500(16)        28.7%

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value Amounts)                              December 31,            June 30,
-----------------------------------------------------------   ----------------------------   -----------
                                                                 1998           1999            2000
                                                                                             (Unaudited)
ASSETS
CURRENT ASSETS
  Cash and cash equivalents                                    $     873      $     951     $     1,172
  Accounts receivable, less allowance for
    doubtful accounts of
    $651, $683 and $734, respectively                              9,308          6,838           4,743
  Net investment in sales-type leases - current portion              574            393             156
  Inventories                                                      7,382          5,258           5,798
  Prepaid expenses and other current assets                          371            166             441
  Assets held for sale (Note 16)                                   1,691              -               -
                                                           -------------- --------------  ---------------
         Total current assets                                     20,199         13,606          12,310
NET INVESTMENT IN SALES-TYPE LEASES -
  Noncurrent portion                                                 466            108              66
SECURITY DEVICES ON LEASE - Net                                       65             66              73
PROPERTY, PLANT AND EQUIPMENT - Net                                4,348          3,934           3,640
GOODWILL AND OTHER INTANGIBLES, including patent
  costs, less accumulated amortization of
  $3,292, $4,882 and $5,379, respectively                          8,222          4,227           3,734

OTHER ASSETS                                                         196             66              33
                                                           -------------- --------------  ---------------
                                                           $      33,496  $      22,007   $      19,856
                                                           ============== ==============  ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Revolving line of credit                                 $       2,765  $       3,075   $       3,732
  Accounts payable                                                 1,257          1,088           1,257
  Accrued liabilities                                              3,080          2,769           2,374
  Obligations under capital leases -
   current portion                                                   180            165             144
  Deferred income                                                    249            219             185
                                                           -------------- --------------  ---------------
         Total current liabilities                                 7,531          7,316           7,692
OBLIGATIONS UNDER CAPITAL LEASES -
  Noncurrent portion                                               3,061          2,893           2,817
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY                         362            290             257
                                                           -------------- --------------  ---------------
         Total liabilities                                        10,954         10,499          10,766
COMMITMENTS AND CONTIGENCIES (Notes 1 and 13)
REDEEMABLE CUMULATIVE PREFERRED STOCK                             26,517         27,843          28,508
COMMON SHAREHOLDERS' EQUITY (DEFICIT):
  Common stock, $0.001 par value; authorized
   40,000 shares, issued and outstanding
   9,751 shares                                                       10             10              10
  Additional paid-in capital                                      15,522         14,196          13,531
  Accumulated deficit                                            (19,507)       (30,541)        (32,959)
                                                           -------------- --------------  ---------------
         Total common shareholders' equity (deficit)              (3,975)       (16,335)        (19,418)
                                                           -------------- --------------  ---------------
                                                           $      33,496  $      22,007   $      19,856
                                                           ============== ==============  ===============

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except per Share Amounts)
-------------------------------------------------------------------------------------------------------------------
                                                       Years Ended                              Six Months Ended
                                                       December 31,                                  June 30,
                                               1997        1998              1999               1999        2000
REVENUES:                                                                                          (Unaudited)
Sales                                         $17,965     $22,639           $17,366            $9,774      $7,347
Sales to Sensormatic                            2,570       1,792             2,083             1,680       1,299
Service revenues and other                      4,031       3,725             2,832             1,205       1,395
                                            -----------  ---------          ----------        ---------  ----------
                                               24,566      28,156            22,281            12,659      10,041
                                            -----------  ---------          ----------        ---------  ----------
COST AND EXPENSES:
Cost of sales                                  11,177      13,200            13,103             5,931       4,470
Cost of sales to Sensormatic                    1,705       1,212             1,236               988         804
Customer services expenses                      4,772       6,253             5,457             2,989       2,297
Selling, general and administrative             9,629      10,118             9,169             4,668       3,812
expenses
Research and development                        1,658       1,343             1,289               635         451
Purchased in-process research and
     development                               13,200           -                 -                 -           -
     (Note 1)
Restructuring and impairment charges                -           -             3,026                 -           -
(Note 18)
Gain on sale of assets (Note 16)                    -           -              (503)             (503)          -
                                            -----------  ---------          ----------        ---------  ----------
                                               42,141      32,126            32,777            14,708      11,834
                                            -----------  ---------          ----------        ---------  ----------
OPERATING LOSS                                (17,575)     (3,970)          (10,496)           (2,049)     (1,793)

Interest expense                                  168         513               538               258         324
                                            -----------  ---------          ----------        ---------  ----------
LOSS BEFORE INCOME TAXES AND CUMULATIVE
  EFFECT OF CHANGE IN ACCOUNTING
  PRINCIPLE                                   (17,743)     (4,483)          (11,034)           (2,307)     (2,117)

INCOME TAXES                                      174          21                 -                 -           -
                                            -----------  ---------          ----------        ---------  ----------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
     IN ACCOUNTING PRINCIPLE                  (17,917)     (4,504)          (11,034)           (2,307)     (2,117)

CUMULATIVE EFFECT OF CHANGE IN
     ACCOUNTING PRINCIPLE                           -           -                 -                 -         301
                                            -----------  ---------          ----------        ---------  ----------
NET LOSS                                      (17,917)     (4,504)          (11,034)           (2,307)     (2,418)

PREFERRED STOCK DIVIDENDS                       1,067       1,263             1,326               654         665
                                            -----------  ---------          ----------        ---------  ----------
NET LOSS ATTRIBUTED TO
     COMMON SHAREHOLDERS                    $(18,984)     $(5,767)         $(12,360)          $(2,961)    $(3,083)
                                            ===========  =========         ==========         =========  ==========

LOSS PER COMMON SHARE
    BEFORE CUMULATIVE EFFECT
    OF CHANGE IN ACCOUNTING
    PRINCIPLE:
       Basic                                    $(2.08)     $(0.59)          $(1.27)            $(0.30)    $(0.29)
                                            ===========  =========         ==========         =========  ==========
       Diluted                                  $(2.08)     $(0.59)          $(1.27)            $(0.30)    $(0.29)
                                            ===========  =========         ==========         =========  ==========
NET LOSS PER COMMON SHARE
       Basic                                    $(2.08)     $(0.59)          $(1.27)            $(0.30)    $(0.29)
                                            ===========  =========         ==========         =========  ==========
       Diluted                                  $(2.08)     $(0.59)          $(1.27)            $(0.30)    $(0.29)
                                            ===========  =========         ==========         =========  ==========
WEIGHTED AVERAGE COMMON SHARES
       Basic                                     9,114       9,751            9,751              9,751      9,751
                                            ===========  =========         ==========         =========  ==========
       Diluted                                   9,114       9,751            9,751              9,751      9,751

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
------------------------------------------- ---------------------------- -------------- -------------- -----------
                                                                                             Total
                                                                                Retained     Common
                                                                  Additional    Earnings     Shareholders  Redeemable
                                                 Common Stock     Paid-In      (Accumulated   Equity       Cumulative
                                                                  Capital       Deficit)     (Deficit)     Preferred
                                             Shares    Aount                                                Stock


BALANCE, JANUARY 1, 1997                     4,802      $5        $22,329         $2,914     $25,248           $-

Net loss and comprehensive loss                -         -            -          (17,917)    (17,917)           -

Shares issued to Video Sentry
  shareholders in connection with
  the merger (Note 1)                        4,842       5         19,449            -        19,454            -

Preferred shares issued to former
  Knogo N.A. shareholders in
  connection with the merger (Note 1)          -         -        (24,009)           -       (24,009)        24,009

Shares issued to employee benefit
  plan                                          28       -             83            -            83             -

Repayment of obligations under
   Section 16(b) of the Securities and
    Exchange Act of 1934                        -        -             15            -            15             -

Preferred stock dividends (Note 1)              -        -         (1,067)           -        (1,067)         1,067

Exercise of stock options and warrants          79       -           (15)            -           (15)           178
                                            --------  --------   ----------     ---------    -----------   -----------
BALANCE, DECEMBER 31, 1997                   9,751      10        16,785        (15,003)       1,792         25,254

Net loss and comprehensive loss                -        -             -          (4,504)     (4,504)            -

Preferred stock dividends (Note 1)             -        -         (1,263)           -        (1,263)          1,263
                                            --------  --------   ----------     ---------    -----------   -----------
BALANCE, DECEMBER 31, 1998                   9,751      10        15,522        (19,507)     (3,975)         26,517

Net loss and comprehensive loss                -        -           -           (11,034)    (11,034)            -

Preferred stock dividends (Note 1)             -        -         (1,326)           -        (1,326)          1,326
                                            --------  --------   ----------     ---------    -----------   -----------
BALANCE, DECEMBER 31, 1999                   9,751      10        14,196        (30,541)    (16,335)         27,843

Net loss and comprehensive loss
     (unaudited)                              -          -           -           (2,418)     (2,418)             -

Preferred stock dividends (unaudited)
     (Note 1)                                 -          -         (665)            -          (665)            665
                                            --------  --------   ----------     ---------    -----------   -----------

BALANCE JUNE 30, 2000 (unaudited)            9,751     $10      $13,531        $(32,959)   $(19,418)        $28,508
                                            ========  ========  ===========    ==========  ============    ===========
See notes to consolidated financial statements.

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

                                                                    Years Ended                     Six Months
                                                                    -----------                    ----------
                                                                    December 31,                   Ended June 30,
                                                                    -----------                    -------------
                                                            1997       1998          1999       1999          2000
CASH FLOWS FROM OPERATING ACTIVITIES:                                                               (Unaudited)
Net loss                                               $ (17,917)    (4,504)      (11,034)    (2,307)       $(2,418)
Adjustments to reconcile net loss to net cash
   provided by (used in) operating activities:
Write-off of purchased in-process research and
   development                                            13,200          -             -          -              -
Gain on sale of assets                                         -          -          (503)      (503)             -
Depreciation and amortization of security
   devices and property, plant and equipment               1,166      1,106           744        416            314
Amortization of intangibles and other assets               1,570      1,596         1,594        797            498
Deferred income taxes                                        174          -             -          -              -
Provision for bad debts                                       73          2           192         14             25
Loss on impairment of assets                                   -        145         2,440          -              -
Changes in operating assets and liabilities:
   Accounts receivable                                       537     (2,987)        2,278        944          2,070
   Net investment in sales-type leases                     1,240        421           539        312            279
   Inventories                                              (485)       915         2,124        485           (540)
   Prepaid expenses and other assets                         443        165           263        (62)          (275)
   Accounts payable and accrued liabilities                 (620)      (375)         (480)        39           (226)
   Deferred lease rentals                                    169       (172)          (30)       147            (34)
   Net cash provided by (used in) operating
     activities                                     ------------    --------      --------------------      -------
                                                            (450)    (3,688)       (1,873)       282           (307)

CASH FLOWS FROM INVESTING ACTIVITIES:
Payments made to acquire Video Sentry
   Corporation                                            (2,417)         -             -          -              -
Purchase of property, plant and equipment -                 (288)       (94)         (294)      (106)           (11)
   net
Proceeds from sale of assets                                   -          -         2,182      2,194              -
Security devices on lease                                     (2)         5           (25)         2            (16)
Intangibles                                                  (52)       (22)          (39)       (16)            (5)
Net cash provided by (used in) investing
   activities                                        ------------    --------      ---------- --------      -------
                                                          (2,759)      (111)        1,824      2,074            (32)
                                                     ------------    --------      ---------  --------      --------

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

                                                                    Years Ended                   Six Months
                                                                    -----------                   ----------
                                                                   December 31,                 Ended June 30
                                                                    ----------                  -------------
                                                            1997       1998          1999      1999           2000
CASH FLOWS FROM FINANCING ACTIVITIES:                                                            (Unaudited)
Net borrowings (repayments) under the
   revolving line of credit                                    -      2,765           310     2,131)           657
Repayment of acquired debt                                (2,136)         -             -         -              -
Proceeds from shareholder repayment of
   obligations under Section 16(b) of the
   Securities Exchange Act of 1934                            15          -             -         -              -
Repayment of obligations under capital leases               (428)      (239)         (183)      (96)           (97)
Exercise of stock options and warrants                       163          -             -         -              -
Other                                                         83          -             -         -              -
                                                         ---------- ---------       --------  -------         -------
Net cash provided by (used in) financing                  (2,303)     2,526           127     2,227)           560
   activities                                            ----------  --------       --------  -------         -------

INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS                                            (5,512)    (1,273)           78       129            221

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                                                           7,658      2,146           873       873            951
                                                         ---------- ---------       --------  -------        -------
CASH AND CASH EQUIVALENTS, END OF PERIOD
                                                        $  2,146     $  873        $  951     1,002          1,172
                                                        ==========  =========      =========  ========       ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
   INFORMATION:
Cash paid during the period for:
   Interest                                               $  310     $  509        $  577      $300           $325
                                                        ==========  =========      =========  ========       ========
   Income taxes                                             $  -      $  21          $  -       $ -           $  -
                                                        ==========  =========      =========  ========       ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
   FINANCING ACTIVITIES:
Capital lease obligations incurred for the
   purchase of building, office equipment and
   other assets                                           $  165     $  167          $  -      $  -           $  -
                                                        ==========  =========      =========  ========       ========
Common stock issued to acquire Video Sentry
   Corporation                                           $19,454       $  -          $  -      $  -           $  -
                                                        ==========  =========      =========  ========       ========
See notes to consolidated financial statements.

        (In Thousands,                                         1997
        Except per Share Amounts)

        Revenues                                             $24,619
                                                             =======

        Net loss                                              $5,378
                                                              ======

        Net loss attributed to common shareholders            $6,596
                                                              ======

        Net loss per common share                            $(0.68)
                                                             =======

        Weighted average common shares                         9,684
                                                               =====

                                                              December 31,                    June 30,
                                                                  1998             1999        2000
                                                                      (In Thousands)        (Unaudited)
      Minimum lease payments receivable                         $1,204          $  570           $254
      Allowance for uncollectible minimum lease payments           (60)            (29)           (13)
      Unearned income                                             (120)            (40)           (19)
      Unguaranteed residual value                                   16              -               -
                                                             ---------         ---------        ------  -

      Net investment                                             1,040             501            222
      Less current portion                                         574             393            156
                                                             ---------           -------        -----

      Noncurrent portion                                        $  466           $ 108           $ 66
                                                              ========            ======        =====

                                      Sales-Type       Operating
                  Year Ending          Leases           Leases
                  December 31,              (In Thousands)

                  2000                $  445              $  76
                  2001                    82                 39
                  2002                    43                  6
                  2003                     -                  7
                                     -------            -------
                                      $  570             $  128
                                      ======             ======

                                           December 31,         June 30,
                                       1998         1999         2000
                                             (In Thousands)    (Unaudited)
                  Raw materials       $2,497       $2,333         $2,573
                  Work-in-process      3,058        1,482          1,638
                  Finished goods       1,827        1,443          1,587
                                     -------       ------         ------

                                      $7,382       $5,258         $5,798
                                      ======       ======         ======

                                                  December 31,        June 30,
                                            1998        1999            2000
                                                 (In Thousands)      (Unaudited)
         Security devices on lease         $154         $122            $122
         Less allowance for depreciation     89           56              49
                                         ------        ------          ------
                                          $  65        $  66            $ 73
                                          =====        =======         =====

                                           Estimated            December 31       June 30,
                                           Useful Lives       1998       1999       2000
                                            (Years)           (In Thousands)   (Unaudited)

     Building                                   20           $3,033      $3,033     $3,033
     Machinery and equipment                  3-10            2,613       2,567      2,578
     Furniture, fixtures and office
        equipment                             3-10            3,433       3,675      3,688
     Leasehold improvements                   5-10              250         290        290
                                                                ---         ---        ---
                                                               9,329       9,565      9,589
     Less allowance for depreciation and
       amortization                                            4,981       5,631      5,949
                                                               -----       -----      -----
                                                              $4,348      $3,934     $3,640
                                                              ======      ======      ======

                                                                 December 31,            June 30,
                                                              1998              1999      2000
                                                               (In Thousands)          (Unaudited)
    Accrued salaries, employee benefits and payroll taxes   $  979              $715        $650
    Accrued installation costs                                 549               119           -
    Accrued restructuring costs                               -                  606         484
    Other accrued liabilities                                1,552             1,329       1,240
                                                             -----             -----       -----
                                                            $3,080            $2,769      $2,374
                                                            ======            ======      ======

           Year Ending
           December 31,
           2000                                          $  155
           2001                                             155
           2002                                             155
           2003                                             155
           2004                                             155
           Thereafter                                     1,863
                                                         ------
                                                         $2,638
                                                         ======

                    Year Ending
                    December 31,
                     2000                                  $ 501
                     2001                                    445
                     2002                                    445
                     2003                                    387
                     2004                                    376
                     Thereafter                            4,509
                                                          ------
                                                           6,663
                     Less amount representing interest     3,605
                                                          ------
                     Present value of minimum rentals      3,058
                     Less current portion                    165
                                                          ------
                     Noncurrent portion                   $2,893
                                                          ======

                                                                    Year Ended                     Six Months Ended
                                                                    December 31,                      June 30,
                                                              1997      1998          1999         1999       2000
                                                                 (In Thousands, Except per Share Amounts)
                                                                                                 (Unaudited)
            Net Loss:
                 Loss before cumulative effect of          $(17,917)    $(4,504)    $(11,034)     $(2,307)   $(2,117)
                 accounting change
                 Effect of preferred stock dividends         (1,067)     (1,263)      (1,326)        (654)      (665)
                                                          -----------   ---------   ----------    ---------  --------
                                                            (18,984)     (5,767)     (12,360)      (2,961)    (2,782)

                 Cumulative effect of accounting change        -             -            -            -        (301)
                 Net loss attributed to common             $(18,984)    $(5,767)    $(12,360)     $(2,961)   $(3,083)
                 shareholders
                                                          ===========  ==========   ==========   ==========  ========
                 Weighted Average Common Shares               9,114       9,751        9,751        9,751      9,751
                                                          ===========  ==========   ==========   ==========  ========
            Basic and Diluted Earnings per Common Share:
                 Before cumulative effect of accounting       $(2.08)     $(0.59)      $(1.27)      $(0.30)   $(0.29)
                 change
                 Cumulative effect of accounting change           -          -            -            -       (0.03)
                                                          -----------   ---------   ----------    ---------  --------
                 Basic and Diluted earnings per Common        $(2.08)     $(0.59)      $(1.27)      $(0.30)   $(0.32)
                 Share                                    ===========   =========   ==========    =========   =======

                                                                                   Weighted Average
                                                                     Number         Exercise Price
                                                                   of Shares

                              Balance, January 1, 1997                552,072          $  4.26

                              Granted                                 679,500             3.07
                              Exercised                               (35,767)            3.17
                              Canceled                               (161,988)            5.23

                              Balance, December 31, 1997            1,033,817             3.36

                              Granted                                 463,700             2.15
                              Exercised                                  -                -
                              Canceled                               (328,156)            2.32

                              Balance, December 31, 1998            1,169,361             3.17

                              Granted                                 848,500             0.52
                              Exercised                                  -                -
                              Canceled                               (359,602)            1.34

                              Balance, December 31, 1999            1,658,259             2.21

                              Granted (unaudited)                      12,000             0.31
                              Exercised (unaudited)                         -             -
                              Canceled (unaudited)                   (215,703)            2.35
                              Balance June 30, 2000 (unaudited)     1,454,556          $  2.42

                                                                                   Weighted
                                                            Number           Remaining Remaining           Number
                               Exercise Price             Outstanding         Contractual Life           Exercisable
                               --------------             -----------        -------------------         -----------

                                   $8.42                       1,664                   6.00                 1,664
                                    6.31                     204,626                   6.15               204,626
                                    3.96                       8,318                   0.95                 8,318
                                    3.61                       1,331                   5.47                 1,331
                                    3.01                      47,415                   5.01                47,415
                                    3.00                      45,000                   7.13                18,000
                                    3.00                      15,000                   7.62                 6,000
                                    2.40                     158,043                   4.94               158,043
                                    2.38                     347,500                   7.19               139,000
                                    2.37                     142,500                   8.02                28,500
                                    2.37                      12,000                   8.12                 2,400
                                    2.31                         499                   1.01                   499
                                    2.07                      27,865                   0.84                27,865
                                    2.00                      39,000                   8.02                 7,800
                                    1.70                         998                   2.50                   998
                                    0.62                     394,500                   9.04                     -
                                    0.62                      12,000                   9.13                     -
                                    0.19                     200,000                   9.75               200,000
                                                           ---------                -------               -------
                                                           1,658,259                   7.50               852,459
                                                           =========                =======               =======

                                                                                   Six Months Ended
                                              Year Ended December 31,               June 30,
                                           -----------------------------      --------------------
                                           1997          1998       1999      1999            2000
                                                    (In Thousands)                 (Unaudited)

                        Current:
                           Federal         $  -          $  -       $  -      $  -            $  -
                           State              -             -          -         -               -
                           Puerto Rico        -            21          -         -               -
                                           ----          ----       ----      ----            ----
                                              -            21          -         -               -
                                           ----          ----       ----      ----            ----
                        Deferred:
                           Puerto Rico      174             -          -         -               -
                                           ----          ----       ----      ----            ----
                                            174             -          -         -               -
                                           ----          ----       ----      ----            ----
                                           $174          $ 21       $  -      $  -            $  -
                                           ====          ====       ====      ====            ====

                                                                              1997               1998             1999
                                                                                            (In Thousands)

                        Expected tax expense (benefit) at 34%              $(6,033)           $(1,524)          (3,752)
                        Add (deduct):
                          Nondeductible expenses                             5,024                590            1,422
                          U.S. losses producing no tax benefit                 767                866            2,330
                          Benefits of nontaxable income of
                           Puerto Rico subsidiary/losses producing
                           no tax benefit                                      242                107                -
                        Other                                                  174                (18)               -
                                                                           -------            -------           ------
                                                                           $   174            $    21           $    -
                                                                           =======            =======           =======

                                                                               Deferred Tax Assets
                                                                                  (Liabilities)
                                                                              1998              1999
                        Assets:                                                   (In Thousands)

                        Accounts receivable                                 $  241            $  253
                        Inventories                                            488             1,251
                        Accrued liabilities                                    203               184
                        Property, plant and equipment                           64                77
                        Intercompany transactions                               12                 -
                        Net operating loss carryforwards                     5,139             7,113
                        Tax credit carryforwards                               209               209
                                                                            ------            ------

                                 Gross deferred tax assets                   6,356             9,087
                        Less:  Valuation allowance                           6,337             9,057
                                                                            ------            ------
                                                                                19                30
                                                                            ------            ------

                        Liabilities:

                        Tollgate taxes                                         (19)              (30)
                                                                            ------            ------
                                 Gross deferred tax liabilities                (19)              (30)
                                                                            ------            ------
                        Net deferred tax asset (liability)                  $    -            $    -
                                                                            ======            ======

                                                      Year Ended December 31,               Six Months Ended June 30,
                                             ----------------------------------------       -------------------------
                                                1997           1998            1999            1999           2000
                                                          (In Thousands)                           (Unaudited)

      EAS systems                            $10,249        $ 9,555         $ 8,982         $ 4,978        $ 4,060
      CCTV                                     3,623          6,892           7,565           4,538          3,236
      SentryVision(®)                          4,322          6,151           1,846           1,105            695
      3M library products                      2,341          1,833           1,056             833            655
      Service revenues and other               4,031          3,725           2,832           1,205          1,395
                                             -------        -------         -------         -------        -------
      Total revenues                         $24,566        $28,156         $22,281         $12,659        $10,041
                                             =======        =======         =======         =======        =======

SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)

COLUMN A                               COLUMN B           COLUMN C           COLUMN D      COLUMN E
------------------------------------------------------------------------------------------------------
                                                         Additions
                                                               Charged to
                                       Balance at  Charged to  Other                       Balance
Descriptions                           Beginning   Cost and    Accounts /   Deductions /   of End
                                       of Year     Expenses    Describe (1) Describe (2)   of Year

Year ended December 31, 1997:
  Allowance for doubtful accounts         $719        $73        $8           $48             $752
                                          ====        ===        ==           ===             ====
  Allowance for uncollectible minimum
  lease payments                          $157       $(71)                                     $86
                                          ====       ====                                     ===
  Reserve for excess and obsolete
  inventory                             $1,691       $444                    $889           $1,246
                                        ======       ====                    ====           ======
Year ended December 31, 1998:
  Allowance for doubtful accounts         $752         $2       $11          $114             $651
                                          ====         ==       ===          ====             ====
  Allowance for uncollectible minimum
  lease payments                           $86       $(26)                                     $60
                                           ===       ====                                      ===
  Reserve for excess and obsolete
  inventory                             $1,246       $328                    $256           $1,318
                                        ======       ====                    ====           ======
Year ended December 31, 1999:
  Allowance for doubtful accounts         $651       $192       $26          $186             $683
                                          ====       ====       ===          ====             ====
  Allowance for uncollectible minimum
  lease payments                           $60       $(31)                                     $29
                                           ===       ====                                      ===
  Reserve for excess and obsolete
  inventory                             $1,318     $2,434                    $348           $3,404
                                        ======     ======                    ====           ======

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