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Digital Ally Inc. (DGLY-$1.61) Technology

Steve Shaw (212) 894-3325 (sshaw@sidoti.com) Scientific & Technical Instruments
Initiation of Coverage February 9, 2011
Investment Evaluations Ranking 52-Week Range (NASDAQ) 2.47 – 1.51
Earnings 5 Market Cap (Mil) 26
Balance Sheet 5 Float Shares (Mil) 15.093
Cash Flow 4 Dividend Nil
Corporate Governance 4
PEG Valuation 5 BUY Dividend Yield
Russell 2000
NA
814
Sidoti Rating 23

The five components of the Sidoti Rating System are ranked from
1-5 with 5 as the highest rating and 1 as the lowest. A sum of
individual parameters equal to 16 or higher equates to a BUY
rating; a sum less than 16 equates to a NEUTRAL rating.
In Thousands, except per share data
Financial Overview 2008 2009 2010E 2011E 2012E

Sales $32,625 $26,366 $27,819 $30,491 $34,196

Year-Over-Year Growth 68.2% (19.2%) 5.5% 9.6% 12.2%
Gross Profit 19,644 13,433 13,802 17,957 22,569
Gross Margin 60.2% 50.9% 49.6% 58.9% 66.0%
Operating Income 5,099 (1,791) (2,493) 4,433 8,830
Operating Margin 15.6% NM NM 14.5% 25.8%
Net Income 3,353 (1,116) (1,322) 3,556 5,929
EPS $0.19 ($0.07) ($0.08) $0.22 $0.37
Shares Out 17,509 15,798 16,228 16,200 16,000 Quarterly Review – Earnings Per Share
Cash 1,206 183 4,101 11,205 18,491
2009 2010E 2011E 2012E
Old Old Old

Cash Per Share $0.07 $0.01 $0.25 $0.69 $1.16 Mar. ($0.08) ($0.02)A $0.02 $0.08
Total Debt Nil Nil Nil Nil Nil Jun. (0.01) (0.05)A 0.05 0.08
Shareholders’ Equity 17,164 17,566 18,002 23,316 31,003 Sept. 0.00 (0.03)A 0.07 0.10
Dec. 0.02 0.01 0.08 0.12
Current Ratio 4.6 4.8 3.4 4.4 5.5
Total. ($0.07) ($0.08) $0.22 $0.37
Book Value Per Share 0.98 1.11 1.11 1.44 1.94
Tangible Book Value P/S 0.96 1.09 1.04 1.44 1.94 Notes: Sum of quarterly data may not equal full-year total due to
rounding and/or change in share count.
Debt/Total Capital NM NM NM NM NM
Free Cash Flow (5,760) (751) 3,659 6,843 7,025
Five-Year Estimated Compound Annual Growth Rates
FCF Per Share ($0.33) ($0.05) $0.23 $0.42 $0.44
Revenue 9%
EPS 21%
Free Cash Flow 12%

Capital Structure As Of 9/30/10 Current Position As Of 9/30/10 Liquidity Analysis (TTM) Cash Flow (F2012E)
Short-Term Debt Nil Cash $91 Current Ratio 4.8 Net Income (Loss) $5,929
Long-Term Debt Nil Receivables $6,267 Quick Ratio 2.9 CF From Operations $7,525
Total Debt Nil Inventory $9,445 Receivable Turnover 3.0 Capital Expenditures $500
Net Debt (Cash) ($91) Current Assets $19,081 Inventory Turnover 3.6 Free Cash Flow $7,025
Shareholders Equity $16,918 Accounts Payable $2,825 Payable turnover 6.5 Free Cash Flow PS $0.44
Total Capital $16,918 Current Liabilities $4,842 Valuation Analysis
LT Debt/Capital NM Accrued Liabilities $753 Price/F2011E EPS 7.3x Price/FCF 3.6x
Total Debt/Capital NM Total Assets $21,760 Price/F2012E EPS 4.3x FCF Yield 27.4%
Debt/Equity NM BV/Share $1.05 Price/Book Value 0.8x 2012 P/E To Est. EPS Growth 0.1

Description: Digital Ally, Inc. (www.digitalallyinc.com) engages in the production and sale of digital video imaging, audio recording, and related
storage products for use in law enforcement and security applications in the United States and internationally. The company is based in Overland
Park, KS.

Investment Analysis

Digital Ally’s core product is its premium in-car video system that is integrated into a rear view mirror to eliminate on-dash or
windshield obstructions. The company’s product offers advantages over competitive products that include the ability to record both
forward and backward, recording to flash memory cards rather than DVDs, and the ability to mark evidence dropped or thrown away
by a suspect. DGLY also sells the LIDAR speed detection gun, which it claims is lighter and more accurate than competing products,
cannot be jammed or detected, has a feature to avoid obstructions, and alerts a police officer to drivers’ attempts at jamming. The
high accuracy and reliability of the company’s products result in more frequent, accurate and expensive traffic violations for law
enforcement agencies, reduce officer court appearance time, limit lawsuits and liability, and increase successful prosecutions.
Digital Ally is heavily dependent (30%-40% of sales) on federal, state, and municipal funding for law enforcement agencies. The
company’s growth opportunity comes from the 64% (450,000 vehicles) of the targeted law enforcement and security markets that do
not employ in-car video systems. We see a secondary growth opportunities in law enforcement outside of the U.S. and in commercial
applications such as taxi and limousine fleets who have expressed a need for in-car video systems.

The company recently announced several cost reduction and reorganization initiatives that include cutting employee headcount,
reducing cash compensation for certain officers, and shifting some production to contract manufacturers. Management expects its
initiatives to save $4 million in F2011 and lower the break-even point for its DVM in-car video systems to $6 million of sales per
quarter.

We forecast revenue growth of 5.5% in 2010 to $27.8 million, 9.6% in 2011 to $30.5 million, and 12.2% in 2012 to 34.2 million. Our
growth projections include early contributions from international sales and from new products. As a result of the reorganization and
cost cuts, we expect DGLY to generate operating income in 2011 for the first time since 2008; we forecast operating margins of
14.5% and 25.8% for 2011 and 2012, respectively. We estimate a loss of $0.08 per share in 2010 but expect EPS of $0.22 in 2011
and $0.37 in 2012. Our model calls for free cash flow of $3.7 million ($0.23 per share) in 2010, $6.8 million ($0.42) in 2011, and $7.0
($0.44) in 2012.

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IMPORTANT DISCLOSURES
The Sidoti & Company, LLC Micro-Cap Equity Research rating system consists of BUY and NEUTRAL. Our micro-cap rating is a based on a proprietary matrix that
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forward 12-month EPS and a 5-year estimated EPS CAGR, and e) the number of governance issues identified by our analysts. BUY suggests a score of 16 or
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