ICx (ICXT) 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the three and six month periods ended June 30, 2008

OR

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

For the transition period from              to             

Commission file number: 333-145135

ICx Technologies, Inc.

(Exact name of registrant as specified in its charter)

Delaware	#77-0619113
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

2100 Crystal Drive, Suite 650 Arlington, VA	22202
(Address of principal executive offices)	(Zip Code)

(703) 678-2111

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).:

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of July 31, 2008, the registrant had 34,075,832 shares of Common Stock outstanding.

ICx TECHNOLOGIES, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008

INDEX

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007 (audited)	3
Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June  30, 2008 and 2007 (unaudited)	4
Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2008 (unaudited)	5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007 (unaudited)	6
Notes to Consolidated Financial Statements (unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	30
Item 4. Controls and Procedures	30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	31
Item 1A. Risk Factors	31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3. Defaults Upon Senior Securities	31
Item 4. Submission of Matters to a Vote of Security Holders	31
Item 5. Other Information	31
Item 6. Exhibits	31
Signatures	32
Index to Exhibits	33

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

ICx TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	(Unaudited) June 30, 2008
				December 31, 2007
Assets
Current assets:
Cash and cash equivalents (includes restricted cash of $8.3 million at June 30, 2008)	$	40,909,488		$	64,635,940
Trade accounts receivable, net		30,320,580			30,723,604
Inventories		26,021,984			18,305,164
Deferred income taxes		24,373			189,788
Prepaid expenses and other current assets		8,953,464			12,630,928
Total current assets		106,229,889			126,485,424
Property, plant and equipment, net		10,925,296			9,525,741
Intangible assets, net		24,997,574			27,704,589
Goodwill		69,187,977			66,088,664
Other assets		2,186,962			2,025,068
Total assets	$	213,527,698		$	231,829,486
Liabilities and Stockholders’ Equity
Current liabilities:
Lines of credit	$	—		$	124,776
Current portion of long-term debt		60,833			117,082
Accounts payable		10,417,434			10,883,266
Accrued payroll expenses		5,864,340			6,572,238
Accrued expenses and other current liabilities		8,628,244			9,834,893
Deferred revenue		4,288,206			3,497,683
Total current liabilities		29,259,057			31,029,938
Long-term debt		202,287			245,645
Deferred income taxes		1,612,741			1,647,267
Other liabilities		354,465			502,288
Total liabilities		31,428,550			33,425,138
Commitments and Contingencies
Series A Convertible Redeemable Preferred Stock, par value $.001 per share - authorized 15,000,000; issued and outstanding 0 shares; liquidation preference $0		—			—
Stockholders’ Equity:
Common stock, par value $.001 per share, authorized 250,000,000 shares in 2008 and 2007; issued and outstanding 34,263,249 and 33,680,892 shares in 2008 and 2007, respectively		34,263			33,681
Additional paid-in capital		378,979,102			374,126,190
Treasury stock, at cost; 201,106 and 79,623 shares in 2008 and 2007, respectively		(1,906,053	)		(1,121,525	)
Accumulated deficit		(198,632,723	)		(177,537,722	)
Accumulated other comprehensive income		3,624,559			2,903,724
Total stockholders’ equity		182,099,148			198,404,348
Total liabilities and stockholders’ equity	$	213,527,698		$	231,829,486

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

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ICx TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Loss

	(Unaudited)
	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Revenues:
Product revenues	$	23,643,009		$	21,188,490		$	44,007,111		$	37,585,982
Contract research and development revenues		9,822,863			7,980,835			21,798,839			15,757,704
Maintenance, service and other revenues		3,976,104			4,259,686			7,889,102			7,045,885
Total revenues		37,441,976			33,429,011			73,695,052			60,389,571
Cost of revenues:
Cost of product revenues		11,084,481			10,356,040			21,214,597			18,852,308
Cost of contract research and development revenues		6,806,262			5,387,055			14,489,355			10,589,438
Cost of maintenance, service and other revenues		2,414,844			3,047,485			4,971,898			4,718,961
Total cost of revenue		20,305,587			18,790,580			40,675,850			34,160,707
Gross profit		17,136,389			14,638,431			33,019,202			26,228,864
Operating expenses:
General and administrative		8,009,612			10,394,183			17,647,355			19,375,520
Sales and marketing		8,585,664			5,526,090			16,416,680			10,249,432
Research and development		5,877,124			4,664,239			12,560,961			9,286,552
Depreciation and amortization		3,367,098			3,404,508			6,653,882			6,873,428
Total operating expenses		25,839,498			23,989,020			53,278,878			45,784,932
Operating loss		(8,703,109	)		(9,350,589	)		(20,259,676	)		(19,556,068	)
Other income (expense):
Interest income		246,593			134,401			676,142			195,048
Interest expense		(11,406	)		(23,801	)		(29,110	)		(113,646	)
Other, net		(257,380	)		(91,318	)		(379,504	)		(14,986	)
Total other income		(22,193	)		19,282			267,528			66,416
Loss before income taxes		(8,725,302	)		(9,331,307	)		(19,992,148	)		(19,489,652	)
Income tax expense		232,181			157,343			199,968			232,087
Loss from continuing operations	$	(8,957,483	)	$	(9,488,650	)	$	(20,192,116	)	$	(19,721,739	)
(Loss) gain on discontinued operations, net of tax		—			26			—			(1,301,544	)
(Loss) gain on sale of discontinued operations, net of tax		—			2,480,918			(902,885	)		4,562,501
Net loss	$	(8,957,483	)	$	(7,007,706	)	$	(21,095,001	)	$	(16,460,782	)
Other comprehensive income
Foreign currency translation adjustment, net of tax		167,345			633,489			720,835			784,766
Comprehensive loss	$	(8,790,138	)	$	(6,374,217	)	$	(20,374,166	)	$	(15,676,016	)
Net loss	$	(8,957,483	)	$	(7,007,706	)	$	(21,095,001	)	$	(16,460,782	)
Less: Preferred stock dividends including accretion		—			2,403,911			—			4,864,813
Net loss attributable to common stockholders	$	(8,957,483	)	$	(9,411,617	)	$	(21,095,001	)	$	(21,325,595	)
Net loss per common share
Basic and diluted	$	(0.26	)	$	(0.96	)	$	(0.62	)	$	(2.18	)

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

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ICx TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

	(Unaudited)
	Stockholders’ Equity
	Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income		Treasury Stock			Total Stockholders’ Equity
	Shares	Amount
Balances at January 1, 2008	33,680,892	$	33,681	$	374,126,190		$	(177,537,722	)	$	2,903,724	$	(1,121,525	)	$	198,404,348
Comprehensive income (loss):
Net loss	—		—		—			(21,095,001	)		—		—			(21,095,001	)
Foreign currency translation, net of tax	—		—		—			—			720,835		—			720,835
Total comprehensive loss	—		—		—			(21,095,001	)		720,835		—			(20,374,166	)
Issuances of common stock:
Business combinations	189,797		190		887,970			—			—		—			888,160
Stock options, warrants and restricted stock	392,560		392		130,842			—			—		—			131,234
Stock offering costs	—		—		(25,035	)		—			—		—			(25,035	)
Stock based compensation	—		—		3,859,135			—			—		—			3,859,135
Purchases of treasury stock	—		—		—			—			—		(784,528	)		(784,528	)
Balances at June 30, 2008	34,263,249	$	34,263	$	378,979,102		$	(198,632,723	)	$	3,624,559	$	(1,906,053	)	$	182,099,148

The accompanying notes are an integral part of this consolidated financial statement.

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ICx TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	(Unaudited) Six Months Ended June 30,
	2008			2007
Operating activities:
Net loss	$	(21,095,001	)	$	(16,460,782	)
Loss (gain) on sale of discontinued operations		902,885			(4,562,501	)
Loss on discontinued operations, net of tax		—			1,301,544
Loss from continuing operations, net of tax		(20,192,116	)		(19,721,739	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock based compensation		3,135,185			2,779,679
Depreciation and amortization		6,653,882			6,873,428
Deferred income taxes		(87,578	)		—
Changes in operating assets and liabilities:
Trade accounts receivable, net		829,786			(5,027,709	)
Inventories		(7,455,029	)		447,774
Prepaid expenses and other assets		901,789			(939,326	)
Accounts payable		(107,208	)		(1,304,006	)
Accrued expenses and other liabilities		(295,299	)		105,917
Deferred revenue		86,501			(982,304	)
Net cash used in continuing operating activities		(16,530,087	)		(17,768,286	)
Cash used in operation of discontinued operations		—			22,052
Net cash used in operating activities		(16,530,087	)		(17,746,234	)
Investing activities:
Purchases of property, plant and equipment		(2,679,269	)		(2,124,098	)
Business combinations		(5,465,393	)		—
Net cash used in continuing investing activities		(8,144,662	)		(2,124,098	)
Proceeds from the sale of discontinued operations		1,797,115			19,409,441
Net cash (used in) provided by investing activities		(6,347,547	)		17,285,343
Financing activities:
Proceeds from issuance of preferred stock		—			3,500,000
Proceeds from issuance of common stock		131,234			129,726
Borrowings under lines of credit		—			183,623
Repayments under lines of credit		(124,776	)		—
Proceeds from notes payable and long-term debt		—			3,000,000
Repayments of notes payable and long-term debt		(99,607	)		(3,409,587	)
Purchase of treasury shares		(784,528	)		—
Other, net		(25,035	)		(2,442	)
Net cash (used in) provided by financing activities		(902,712	)		3,401,320
Effect of foreign exchange rate on cash		53,894			113,086
Net change in cash and cash equivalents		(23,726,452	)		3,053,515
Cash and cash equivalents at beginning of period		64,635,940			7,236,005
Cash and cash equivalents at end of period	$	40,909,488		$	10,289,520

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

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ICx TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2008 and 2007

1. Description of the Business and Summary of Significant Accounting Policies

(a) General

ICx Technologies, Inc. and Subsidiaries (“ICx” or “Company”) was incorporated in the State of Delaware in 2003 to acquire, develop, and coordinate the operations of security technology companies. ICx develops and integrates advanced sensor technologies for homeland security, force protection and commercial applications. The Company’s proprietary sensors detect and identify chemical, biological, radiological, nuclear, and explosive threats, and deliver superior awareness and actionable intelligence for wide-area surveillance, intrusion detection and facility security. These technologies are used in nuclear power plants, military installations, natural gas storage systems and pipelines, shopping malls, public transportation systems, and port facilities.

The holders of a majority of ICx’ capital stock, DP1, LLC (“DP1”) and Valentis SB, L.P. (“Valentis”), are under the common control of Wexford Capital, LLC (“Wexford”), which is an SEC registered investment advisor.

The Company’s Board of Directors approved a plan in 2006 for the sale of three companies. The sales of two of these companies were completed in the six months ended June 30, 2007. Accordingly the operating results of those two companies are included as discontinued operations in the accompanying consolidated financial statements for the three and six months ended June 30, 2007.

The accounting policies set forth in Note 1 to the consolidated financial statements contained in the Form 10-K filed with the Securities and Exchange Commission on March 31, 2008 have been followed in preparing the accompanying consolidated financial statements. In the Company’s opinion, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the Company’s results of operations and financial position for the interim periods presented have been made in the accompanying consolidated financial statements.

(b) Initial Public Offering

In November 2007, the Company completed its initial public offering (“IPO”) of common stock in which it sold and issued 5 million shares of its common stock at an issue price of $16.00 per share. The Company raised a total of $80 million in gross proceeds from its IPO, or $70.8 million in net proceeds after deducting underwriting discounts and commissions of $5.6 million and other offering costs of $3.6 million. Upon the closing of the IPO, all shares of convertible preferred stock outstanding automatically converted into 18,525,595 shares of common stock.

(c) Reverse Stock Split

On October 23, 2007, the Company’s Board of Directors approved a one-for-two reverse stock split of the Company’s outstanding common stock that became effective immediately prior to the effectiveness of the registration statement for the Company’s initial public offering. All common shares and per share amounts in the accompanying consolidated financial statements and notes to the consolidated financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split. The effects of the reverse split of the Company’s common stock described have also been reflected retroactively in the presentation of all preferred shares and per share amounts in the accompanying consolidated financial statements and notes to the consolidated financial statements based on the preferred conversion ratio of one-to-one (post one-for-two reverse stock split).

(d) Allowance for Trade Accounts and Notes Receivable

At June 30, 2008 and December 31, 2007, trade accounts receivable, net was comprised of the following:

	June 30, 2008			December 31, 2007
U.S. government	$	11,601,536		$	9,543,917
Commercial and other		19,094,929			21,855,032
	$	30,696,465		$	31,398,949
Allowance for doubtful accounts		(375,885	)		(675,345	)
Trade accounts receivable, net	$	30,320,580		$	30,723,604

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Except for the U.S. government, no one customer accounted for 10% or greater of the net trade accounts receivable balance at June 30, 2008 or December 31, 2007.

(e) Inventories

At June 30, 2008 and December 31, 2007, inventories were comprised of the following:

	June 30, 2008			December 31, 2007
Raw materials	$	14,149,998		$	10,296,785
Work in progress		4,713,661			2,521,860
Finished goods		7,693,728			6,101,824
	$	26,557,387		$	18,920,469
Reserve for obsolescence		(535,403	)		(615,305	)
	$	26,021,984		$	18,305,164

(f) Goodwill and Other Intangible Assets

The changes in goodwill by segment as of June 30, 2008 are as follows:

	Detection		Surveillance		Solutions			Total
Balance as of December 31, 2007	$	45,584,782	$	13,306,228	$	7,197,654		$	66,088,664
Goodwill of acquired businesses (Note 3)		3,123,405		—		—			3,123,405
Additional purchase price for 2007 acquisition		—		—		22,400			22,400
Impact of foreign exchange		—		—		(66,492	)		(66,492	)
Other		20,000		—		—			20,000
Balance as of June 30, 2008	$	48,728,187	$	13,306,228	$	7,153,562		$	69,187,977

Goodwill is not amortized, but instead is tested for impairment at least annually. Pursuant to the Company’s policies for assessing impairment of goodwill and long-lived assets, no goodwill was written off in the first six months of 2008 or 2007.

(g) Revenue Recognition

The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin No. 104 as amended, when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection from the customer is reasonably assured. Product revenue is generally recognized upon shipment, unless customer acceptance is required, in which case product revenue is recognized when documentation of customer acceptance is received.

The Company earns contract research and development revenue by performing research and development primarily under contracts entered into with the U.S. government or as subcontractors to other commercial entities that contract with the U.S. government. Most of the research and development contracts are either based on costs incurred plus a fixed fee or are based on a fixed price. The Company recognizes revenue from research and development contracts using the percentage of completion method in accordance with Statement of Position 81-1 as prescribed by the American Institute of Certified Public Accounts Audit and Accounting Guide,Audits of Federal Government Contractors. To the extent that customer billings or payments are in excess of revenues, the excess is recorded as deferred revenue and contract costs in excess of expected earnings under the contract are deferred. At June 30, 2008 and December 31, 2007, the Company had included in deferred revenue $2,258,747 and $1,825,355 of excess billings or customer payments, respectively, related to percentage of completion timing differences. Deferred contract costs at June 30, 2008 and December 31, 2007 were not material. In certain circumstances, revenue is recognized under the percentage of completion method prior to costs being incurred under cost plus fixed fee contracts or prior to billings as defined in fixed price contracts. Such amounts are recorded as unbilled revenue and are expected to be collected within one year of recognition, and if contract costs incurred are below the earnings that are expected to be realized upon contract completion are accrued until the costs are incurred. At June 30, 2008 and December 31, 2007, the Company had unbilled revenue of $5,017,559 and $5,706,570, respectively, included in other current assets in the accompanying financial statements, substantially all of which was due from the U.S. government and expected to be collected within one year. Accrued contract costs at June 30, 2008 and December 31, 2007, were not material. The Company had no material claims outstanding under its research and development contracts at June 30, 2008.

The Company recognizes revenue from services at the time the services are performed. Deferred revenue includes $1,633,249 and $1,235,080 at June 30, 2008 and December 31, 2007, respectively, of prepayments on service contracts which are deferred until such time as the services are performed. Warranty income under separate agreements is recognized ratably over the life of the warranty.

        The Company recognizes software revenue under the provisions of the Accounting Standards Executive Committee’s Statement of Position 97-2 (“SOP 97-2”), Software Revenue Recognition (as amended by SOP 98-9). Revenue from software license fees is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection from the customer is reasonably assured. Revenue from post contract customer maintenance and support is deferred and recognized ratably over the life of the post contract customer maintenance and support agreement. Deferred revenue includes $396,210 and $437,248 at June 30, 2008 and December 31, 2007, respectively, of revenue deferred under multiple-element software arrangements for post contract customer support.

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(h) Accounting for Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with SFAS No. 123(R),Share-Based Payment(“SFAS 123(R)”). SFAS 123(R) requires equity-classified, share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant and to be expensed over the applicable vesting period. Under the modified prospective transition method, share-based awards granted or modified on or after January 1, 2006, are recognized in compensation expense over the applicable vesting period. Also, any previously granted awards that were not fully vested as of January 1, 2006, are recognized as compensation expense over the remaining vesting period.

During the three months ended June 30, 2008 and 2007, the Company recorded non-cash stock-based compensation expense of $1,464,696 and $1,940,359, respectively. During the six months ended June 30, 2008 and 2007, the Company recorded non-cash stock-based compensation expense of $3,135,185 and $2,779,679, respectively. As of June 30, 2008, and December 31, 2007, the Company’s total unrecognized compensation cost related to stock-based awards was $7.6 million and $8.5 million, respectively.

(i) Loss Per Share

The Company calculates loss per share in accordance with SFAS No. 128,Earnings Per Share(“SFAS 128”). Under SFAS 128, basic loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during each reporting period. Diluted loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during each period adjusted for the effect of dilutive potential common shares calculated using the treasury stock method. However, the computation of diluted loss per share shall not assume the conversion or exercise of options that would have an anti-dilutive effect (a decrease in loss per share) on loss per share.

For the quarter ended June 30, 2008, the Company had 33,989,893 weighted average shares outstanding, and all of the Company’s potential common shares were anti-dilutive as the Company was in a net loss position. Those potential common shares consisted of 600,460 weighted average shares of stock. For the quarter ended June 30, 2007, the Company had 9,787,033 weighted average shares outstanding.

For the six months ended June 30, 2008, the Company had 33,852,651 weighted average shares outstanding, and all of the Company’s potential common shares were anti-dilutive as the Company was in a net loss position. Those potential common shares consisted of 593,587 weighted average shares of stock. For the six months ended June 30, 2007, the Company had 9,773,736 weighted average shares outstanding.

(j) Reclassifications

Certain 2007 balances in the accompanying consolidated financial statements have been reclassified to conform to the 2008 presentation.

(k) Fair Value Measurements

Effective January 1, 2008, the Company adopted the provisions of SFAS 157,Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2,“Effective Date of FASB Statement No. 157”, which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Therefore, the Company adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. Adoption of SFAS 157 for financial assets and financial liabilities did not have a material impact on the Company’s consolidated financial position or results of operations. The Company is currently evaluating the impact that adopting SFAS 157 for nonfinancial assets and nonfinancial liabilities will have, if any, on its consolidated financial statements.

Under SFAS 157, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. SFAS 157 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

• Level 1 – Quoted prices in active markets for identical assets or liabilities.

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• Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Level 1 financial assets measured at fair value on a recurring basis consist of shares of common stock held as trading securities of $809,288 and $1,157,410 at June 30, 2008 and December 31, 2007, respectively (Note 9), which are included in other current assets on the consolidated balance sheet. These shares are traded on a national stock exchange and are valued at the closing price of the shares on the reporting date. The Company has no Level 2 or Level 3 financial assets or liabilities measured at fair value on a recurring basis.

(l) Recent Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. The Company has reviewed the recently issued pronouncements and concluded that the following new accounting standards are applicable to the Company.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 (“SFAS 159). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value at specified election dates. Upon adoption, an entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Most of the provisions apply only to entities that elect the fair value option. However, the amendment to SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” applies to all entities with available for sale and trading securities. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Adoption of SFAS 159 on January 1, 2008 did not have a material impact on the Company’s consolidated financial position or results of operations as the Company did not elect the fair value option under SFAS 159.

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 5,Consolidated Financial Statements. SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity in the Company’s consolidated balance sheet. SFAS 160 is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2008. Early adoption is prohibited. The Company does not anticipate that SFAS 160 will have a significant impact on the consolidated financial statements as the Company does not currently have any material noncontrolling interests.

In December 2007, the FASB issued SFAS 141(R),Business Combinations. SFAS No. 141(R) establishes standards for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and for determining what information to disclose in connection with a business combination. Among other things, SFAS No. 141(R) requires securities issued be valued as of the acquisition date, transaction costs incurred in connection with an acquisition be expensed, except acquiree costs that meet the criteria of SFAS No. 146, contingent consideration be recorded at fair value as of the date of acquisition with subsequent changes reflected in income, and in-process research and development be capitalized as an intangible asset. The provisions of SFAS 141(R) are applicable to business combinations consummated on or after December 15, 2008. Early application is prohibited. The provisions of SFAS141(R) may impact the Company’s accounting for future business combinations, as the Company often includes provisions for the issuance of contingent consideration based on future earnings in its acquisitions.

In April 2008, the FASB issued FASB Staff Position No. FAS 142-3,Determination of the Useful Life of Intangible Assets, (“FSP FAS 142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. FSP FAS 142-3 will improve the consistency between the useful life of a recognized intangible asset under SFAS 142,Goodwill and Other Intangible Assets, and the period of expected cash flows used to measure the fair value of the asset under SFAS 141,Business Combinations, and other U.S. GAAP. FSP FAS 142-3 is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2008. Early adoption is prohibited. The Company is currently evaluating the impact that adopting FSP FAS 142-3 will have, if any, on its consolidated financial position and results of operations.

In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles(“SFAS 162”). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for

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nongovernmental entities. SFAS 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company is currently evaluating the impact that adopting SFAS 162 will have, if any, on its consolidated financial position and results of operations, but does not believe adoption will have a significant impact on the consolidated financial statements.

In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1addresses whether unvested share-based payment awards with rights to receive dividends or dividend equivalents should be considered as participating securities for the purposes of applying the two-class method of calculating earnings per share (“EPS”) under SFAS 128. The FASB staff concluded that unvested share-based payments awards that contain nonforfeitable rights to receive dividends or dividend equivalents (whether paid or unpaid) are participating securities, and thus, should be included in the two-class method of computing EPS. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years and requires that all prior period EPS data presented be adjusted retrospectively. Early application is not permitted. The Company is currently evaluating the potential impact FSP EITF 03-6-1 will have, if any, on its consolidated financial statements.

2. Related Party Transactions

Securities Issued to Insiders

DP1 directly holds more than 5% of the Company’s capital stock. Joseph Jacobs, a member of the Company’s Board of Directors, is a member of certain affiliates that own or control DP1, DP2 and Debello Investors, LLC. Mark Mills, the Chairman of the Board of Directors, and Hans Kobler, Chief Executive Officer and a member of the Board of Directors, each has an indirect ownership interest in DP1 and DP2 through an affiliate but otherwise each disclaims beneficial ownership of DP1 or DP2.

Administrative Services Agreement with Wexford

The Company entered into an Administrative Services Agreement with Wexford under which the Company may request certain legal, accounting, back office, and other services. The Company is obligated to reimburse Wexford for all of its direct and indirect costs allocated to the performance of such services. The Company incurred general and administrative expenses of $26,245 and $73,057 in the three months ended June 30, 2008 and 2007, respectively, and $66,836 and $146,978 in the six months ended June 30, 2008 and 2007, respectively, pursuant to the agreement. Either party may terminate specific services or cancel the agreement upon written notice to the other party.

Leases

Juergen Stein, CEO and President of Target GmbH, a subsidiary of the Company, leases facilities to the Company under a lease agreement dated January 1, 2005. Rent expense of $27,000 and $22,500 was incurred in the three months ended June 30, 2008 and 2007, respectively. Rent expense of $54,000 and $45,000 was incurred in the six months ended June 30, 2008 and 2007, respectively. The lease term ends on December 31, 2020, and can be renewed for one year terms thereafter.

Strange Family Holdings, LLP, leases facilities to the Company under a lease agreement dated June 15, 2005. Rent expense of $18,977 and $19,225 was incurred in the three months ended June 30, 2008 and 2007, respectively. Rent expense of $39,153 and $38,450 was incurred in the six months ended June 30, 2008 and 2007, respectively. The lease term ends on August 22, 2008, and can then be renewed for seven one-year terms thereafter. Certain family members of the Strange family hold senior management positions in one of the Company’s subsidiaries.

Debt Obligations

On March 8, 2007, the Company borrowed $3.0 million from DP1 through a convertible promissory note due April 9, 2007. The note bore interest in the form of a $60,000 origination fee deducted from the proceeds. The note was convertible into Series A shares at $10.00 per share and was repaid on April 9, 2007.

3. Business Combination and Related Intangibles

On May 31, 2008, the Company acquired the assets of S3I, LLC (“S3I”) for $3.5 million in cash and $2.3 million in assumed liabilities in a business combination accounted for as a purchase. S3I is a developer of biological sensors. Management believes S3I’s sensors can be integrated into and used with the Company’s other biological-detection products, thereby complementing the Company’s existing products. Acquired intangibles primarily resulted from S3I’s core technology while goodwill resulted from the excess of the purchase price over S3I’s net assets at the date of acquisition. S3I is included in the Detection business segment.

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The following table summarizes the estimated fair values of the net assets acquired as of the date of acquisition:

2008 Acquisition	Tangible Net Assets			Acquired Intangible Assets		Acquired In-Process Research & Development		Goodwill		Total
S3I	$	(1,573,405	)	$	1,950,000	$	—	$	3,123,405	$	3,500,000

Intangible net assets acquired in the business combination are comprised of $1,250,000 of core technology and $700,000 of firm and non-firm contracts. The weighted average life of the core technology is eight years. The weighted average life of the firm and non-firm contracts is less than two years.

The purchase agreement with S3I contains contingent consideration provisions based on earnings and future revenues in an amount not to exceed $24.7 million. In accordance with SFAS 141,Business Combinations, any contingent consideration paid under the agreement would be recorded as an additional cost of the acquisition and therefore would increase goodwill associated with the acquisition.

4. Commitments and Contingencies

The Company is routinely involved in various legal matters arising from the normal course of business. Management believes that losses, if any, arising from such actions will not have a material adverse effect on the financial position or results of operations of the Company.

5. Income Taxes

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48). As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits. The cumulative effect of adopting FIN 48 resulted in no adjustment to retained earnings. As of June 30, 2008 and December 31, 2007, the Company had unrecognized tax benefits of $1.4 million. If recognized in future periods, $1.4 million would reduce the Company’s effective income tax rate. No interest or penalties have been accrued. The Company does not expect the unrecognized tax benefits to significantly change within the next 12 months. The Company has elected to report interest and penalties as a component of income tax expense.

6. Lines of Credit

Certain of the Company’s subsidiaries have operating lines of credit with banks in which borrowing is generally collateralized by and based on a percentage of certain eligible accounts receivable, inventory, and/or property and equipment. Interest is based on prime or, in some cases, percentage points above prime.

At December 31, 2007, lines of credit consisted of a $124,776 outstanding balance on a line of credit with a maximum borrowing amount of $2.5 million, an effective interest rate of 8.60% and a maturity date of April 26, 2008. This line of credit was paid during the six months ended June 30, 2008. In April 2008, the Company renewed this line of credit with similar terms, including a variable interest rate based on prime (minimum of 5.5%) and a maturity date of April 26, 2009. The interest rate at June 30, 2008 was 5.75%.

7. Treasury Stock

As part of the Company’s stock-based compensation plans, the Company offers employees the opportunity to make required tax payments with cash or through a net share settlement. For employees choosing net share settlement, the Company makes required tax payments on behalf of employees as their stock awards vest and then withholds a number of vested shares having a value on the date of vesting equal to the tax obligation. The shares withheld were recorded as treasury shares. During the six months ended June 30, 2008, the Company repurchased 121,483 shares in settlement of employees’ tax obligations for a total of $784,528 or an average of $6.46 per share.

8. Stock-Based Compensation

The following table summarizes activity for nonvested restricted stock (“RS”) and restricted stock units (“RSUs”) granted under the 2007 Equity Incentive Plan for the six months ended June 30, 2008:

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	Restricted Stock Units		Weighted Average Fair Value
Nonvested RS and RSUs outstanding at January 1, 2008	591,459		$	12.04
RS and RSUs granted	513,194			6.63
RS and RSUs vested	(314,157	)		8.49
RS and RSUs forfeited	(43,027	)		8.68
Nonvested RS and RSUs outstanding at June 30, 2008	747,469		$	10.02

The Company recorded stock-based compensation expense of $1.1 million and $0.9 million during the three months ended June 30, 2008 and 2007, respectively, and $2.2 million and $0.9 million during the six months ended June 30, 2008 and 2007, respectively, in connection with restricted stock grants. Grants of restricted stock and restricted stock units are valued using the closing market price of the Company’s common stock on the date of grant. Prior to November 7, 2007, the Company accounted for the fair value of the restricted stock using estimates of the fair value of an underlying share of common stock at the time of the grants as there was no market for the Company’s common stock prior to November 7, 2007. The Company’s common stock valuations used the probability weighted expected return method for 2007.

The aggregate intrinsic value of outstanding restricted stock at June 30, 2008 was $5.5 million. Also at June 30, 2008, total compensation cost related to nonvested restricted stock awards that had not yet been recognized totaled $6.1 million. The weighted average period over which this amount will be recognized is estimated to be 1.3 years.

Stock option activity for options issued under the 2007 Equity Incentive Plan was as follows as of June 30, 2008, and for the six months then ended:

	Shares Subject to Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Options outstanding at January 1, 2008	3,098,641		$	9.22
Options granted	98,250			9.17
Options exercised	(121,191	)		1.08
Options terminated, cancelled or expired	(102,848	)		11.03
Options outstanding at June 30, 2008	2,972,852		$	9.52	6.63	$	(9,723,546	)
Options exercisable at June 30, 2008	2,570,562		$	9.34	6.76	$	(9,235,497	)

The Company did not grant any options in 2007. For options granted in 2008, the fair value of options was estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:

For the six months ended June 30,	2008
Grant date fair value	$	3.13
Risk-free interest rate		3.72	%
Dividend yield		—	%
Expected life (years)		5.0 - 6.25
Expected volatility		41.5% - 42.7	%

No dividend yield assumption was included because the Company does not plan to pay dividends.

A summary of the board-discretionary stock option activity as of June 30, 2008, and changes during the six months then ended is presented below:

	Shares Subject to Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Options outstanding at January 1, 2008	173,525		$	0.25
Options granted	0			—
Options exercised	(5,125	)		0.16
Options terminated, cancelled or expired	0			—
Options outstanding at June 30, 2008	168,400		$	0.26	7.03	$	1,186,184
Options exercisable at June 30, 2008	168,400		$	0.26	7.03	$	1,186,184

Stock-based compensation expense pertaining to stock options totaled $0.4 million and $1.1 million for the three months ended June 30, 2008 and 2007, respectively, and $0.9 million and $1.9 million for the six months ended June 30, 2008 and 2007, respectively. Cash received from the exercise of stock options totaled $97,000 and $38,000 for the three months ended June 30, 2008 and 2007, respectively, and $131,000 and $130,000 for the six months ended June 30, 2008 and 2007, respectively.

The aggregate intrinsic value of outstanding options at June 30, 2008 was $8.5 million. Also at June 30, 2008, total compensation cost related to nonvested awards that had not yet been recognized totaled $1.5 million. The weighted average period over which this amount will be recognized is estimated to be 0.9 years.

9. Discontinued Operations

In August 2006, in connection with the sale of Little Optics (a subdivision of Nomadics) the Company received warrants to purchase 125,000 shares of the purchaser’s Series G Preferred Stock at $5.40 per share. At June 30, 2008 and December 31, 2007, the investment was carried in the consolidated balance sheet at $809,288 and $1,157,410, respectively, and was included in other current assets.

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On December 14, 2006, the Company’s Board of Directors adopted a plan to sell the assets and businesses of Nuvonyx, Inc. and Nuvonyx Europe, manufacturers of laser diode components, arrays and industrial laser systems, and Harbinger Technologies, a provider of homeland defense and security consulting and technology. The Company decided to sell these units primarily because the business models did not align with the strategic plans of the Company. The disposal dates of the units were February 2, 2007, March 15, 2007, and April 24, 2007, for Nuvonyx Europe, Harbinger Technologies, and Nuvonyx, Inc., respectively. The units’ sales and pretax losses, reported in discontinued operations, for the three and six months ended June 30, 2007, are shown below.

	Three months ended June 30, 2007			Six months ended June 30, 2007
Sales
Nuvonyx, Inc.	$	143,289		$	2,475,378
Nuvonyx Europe		—			—
Harbinger Technologies		—			686,228
	$	143,289		$	3,161,606
Net income (loss) before income taxes
Nuvonyx, Inc.	$	(11,086	)	$	(399,517	)
Nuvonyx Europe		—			—
Harbinger Technologies		11,112			(902,027	)
	$	26		$	(1,301,544	)
Net loss per share	$	—		$	(0.07	)

The Company realized a gain on discontinued operations of $26 and a gain on sale of discontinued operations of $2,480,918 in the three months ended June 30, 2007 and a loss on discontinued operations of $1,301,544 and a gain on sale of discontinued operations of $4,562,501 related to the sale of two of these three units in the six months ended June 30, 2007.

In the three months and six months ended June 30, 2008, the Company realized a loss on discontinued operations of $0 and $902,885, respectively, related to the settlement of escrow accounts and contingent purchase consideration.

10. Segment Information

Segment information has been prepared in accordance with SFAS No. 131,Disclosure about Segments of an Enterprise and Related Information. The Company has three reportable segments: detection, surveillance, and solutions. The detection segment provides chemical, biological, radiological, nuclear, and radiation detection activities. The surveillance segment provides perimeter security and monitoring. The solutions segment designs, creates, and deploys security operating systems and video networking systems. Due to a change in internal reporting structure and the economics of the business of one subsidiary during the six months ended June 30, 2008, the Company determined one subsidiary should be removed from the Surveillance segment and included in the Detection segment. Additionally, due to changes in the Company’s internal structure, additional general and administrative and sales and marketing expenses have been allocated to the Company’s reportable segments. Segment information disclosed below for the three months and six months ended June 30, 2007, has been reclassified to conform to the 2008 presentation.

The following is a summary of information for the Company’s reportable segments:

	For the three months ended June 30, 2008
	Detection			Surveillance			Solutions			Segments Combined
Revenues from external customers	$	23,783,594		$	8,441,984		$	5,216,398		$	37,441,976
Segment operating losses		(1,441,079	)		(2,061,719	)		(2,410,386	)		(5,913,184	)
Depreciation and amortization		1,907,946			756,570			542,135			3,206,651
	For the three months ended June 30, 2007
	Detection			Surveillance			Solutions			Segments Combined
Revenues from external customers	$	19,586,968		$	9,442,381		$	4,399,662		$	33,429,011
Segment operating losses		(806,275	)		(2,260,720	)		(1,802,822	)		(4,869,817	)
Depreciation and amortization		1,989,729			877,964			479,633			3,347,326

	For the six months ended June 30, 2008
	Detection			Surveillance			Solutions			Segments Combined
Revenues from external customers	$	43,429,385		$	19,245,623		$	11,020,044		$	73,695,052
Segment operating losses		(5,226,046	)		(4,855,186	)		(4,231,021	)		(14,312,253	)
Depreciation and amortization		3,768,787			1,504,262			1,075,581			6,348,630
Segment property, plant and equipment additions		1,126,204			539,786			168,828			1,834,818
	For the six months ended June 30, 2007
	Detection			Surveillance			Solutions			Segments Combined
Revenues from external customers	$	34,759,149		$	17,016,704		$	8,613,718		$	60,389,571
Segment operating losses		(4,708,328	)		(3,934,048	)		(3,430,215	)		(12,072,591	)
Depreciation and amortization		3,982,704			1,738,309			1,052,939			6,773,952
Segment property, plant and equipment additions		1,425,362			126,115			13,328			1,564,805
As of June 30, 2008
Segment total assets	$	109,417,435		$	43,143,848		$	19,775,588		$	172,336,871
As of December 31, 2007
Segment total assets	$	102,072,985		$	42,180,215		$	20,579,546		$	164,832,746

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Following is a reconciliation of the Company’s operating losses from reportable segments to the total Company loss before income taxes:

	For the three months ended June 30,
	2008			2007
Operating losses from reportable segments	$	(5,913,184	)	$	(4,869,817	)
Unallocated general and administrative expenses		(2,629,478	)		(4,423,590	)
Unallocated depreciation and amortization expense		(160,447	)		(57,182	)
Interest income		246,593			134,401
Interest expense		(11,406	)		(23,801	)
Other non-operating gains (losses), net		(257,380	)		(91,318	)
Loss before income taxes	$	(8,725,302	)	$	(9,331,307	)

	For the six months ended June 30,
	2008			2007
Operating losses from reportable segments	$	(14,312,253	)	$	(12,072,591	)
Unallocated general and administrative expenses		(5,642,171	)		(7,384,001	)
Unallocated depreciation and amortization expense		(305,252	)		(99,476	)
Interest income		676,142			195,048
Interest expense		(29,110	)		(113,646	)
Other non-operating gains (losses), net		(379,504	)		(14,986	)
Loss before income taxes	$	(19,992,148	)	$	(19,489,652	)

Following is a reconciliation of the property, plant and equipment additions from the Company’s reportable segments to the total property, plant and equipment additions of the Company:

	For the six months ended June 30,
	2008		2007
Total property, plant and equipment additions from reportable segments	$	1,834,818	$	1,564,805
Unallocated property, plant and equipment additions		844,451		559,293
Total property, plant and equipment additions	$	2,679,269	$	2,124,098

Following is a reconciliation of the total assets from the Company’s reportable segments to the total assets of the Company:

	June 30, 2008		December 31, 2007
Total assets from reportable segments	$	172,336,871	$	164,832,746
Cash and cash equivalents		34,849,717		57,536,088
Prepaid expenses and other assets		6,316,737		9,270,864
Deferred income taxes		24,373		189,788
Total assets	$	213,527,698	$	231,829,486

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risk and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include, but are not limited to those identified below, and those discussed in the section entitled “Risk Factors” included elsewhere in this report.

Forward-looking Statements

In this Quarterly Report on Form 10-Q, ICx Technologies, Inc. and its consolidated subsidiaries are referred to as “ICx”, “we,” “us,” or “our.” This report on Form 10-Q (“Form 10-Q”) includes forward looking statements. All statements other than statements of historical facts contained in this Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations, are forward-looking statements. We attempt, whenever possible, to identify these forward-looking statements by words such as “may,” “will,” “could,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” and similar expressions. We have based these forward looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long term business operations and objectives, and financial needs. These forward looking statements are subject to a number of risks, uncertainties and assumptions. In light of these risks, uncertainties and assumptions, the forward looking events and circumstances discussed in this Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Form 10-Q to conform these statements to actual results or to changes in our expectations.

You should read this Form 10-Q and the documents that we reference in this Form 10-Q and have filed with the SEC with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

Overview

We are a leader in the development and integration of advanced sensor technologies for homeland security, force protection and commercial applications. Our proprietary sensors detect and identify chemical, biological, radiological, nuclear and explosive threats, and deliver superior awareness and actionable intelligence for wide-area surveillance, intrusion detection and facility security. By leveraging our technical expertise, ICx pioneers the integration of these advanced sensors into effective security and commercial solutions. We were incorporated in 2003, and our business was primarily formed through a series of complementary acquisitions in 2005. We sold the non-strategic operations of three of our companies in 2007 and one company in 2006. On May 30, 2008, we acquired S3I LLC (S3I) for approximately $5.8 million consisting of $3.5 million in cash and $2.3 million in assumed liabilities. On October 1, 2007, we acquired PureTech Systems, Inc. (PureTech) for $3.25 million in cash. Both business combinations were accounted for as purchases. The results of operations of S3I and PureTech are presented in our consolidated financial statements as of the acquisition dates.

We operate our business in three reportable segments: Detection, Surveillance and Solutions. Our Detection segment develops products and conducts research and development in the areas of chemical, biological, radiation, nuclear and explosives detection. Our Surveillance segment provides products and services for perimeter security and wide area surveillance. Our Solutions segment integrates our technologies and products to provide single source solutions that address a broad range of customer specific security and surveillance needs.

Our direct customers include federal agencies such as the U.S. Department of Homeland Security, U.S. Customs & Border Protection (Border Patrol) and the Transportation Security Administration, as well as various state and local governments and agencies, including the New York Police Department, the Orange County Transportation Authority and the Port of Long Beach. We also provide products, components and sub-systems to leading integrators in the security and defense industries who either resell our products or integrate them into comprehensive security installations for their end customers. The value-added-resellers and system integrators that we sell products to include The Boeing Company, Honeywell International, Inc., Northrop Grumman Corp., Raytheon Company, SAIC, Inc. and Thermo Fisher Scientific, Inc.

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We also sell to military customers such as the U.S. Department of Defense, the U.S. Air Force, the U.S. Marines and the U.S. Army. We have also begun to expand our addressable markets by selling to private sector customers such as Federal Express Corporation, The Walt Disney Company and two international airports serving the city of Houston, Texas and surrounding communities. Due to the breadth and diverse nature of our product and technology portfolio and our ability to deliver solutions for a comprehensive range of critical security applications, the future success of our business is not dependent upon a single product, technology, customer or government program.

Our objective is to grow our business organically and through the acquisition of complementary companies. To achieve this objective, we plan to:

• continue to develop and acquire next generation technologies to strengthen our technological leadership position;

• continue converting our innovative technologies in our research and development pipeline into new products and platforms to pursue new market opportunities;

• continue to provide integrated, single-source solutions that prevent a broad range of critical security threats;

• continue to build and strengthen our direct sales force and expand our indirect channels to extend our geographic reach and market penetration;

• leverage our existing intellectual property and infrastructure to expand our addressable markets and further accelerate our growth; and

• grow our business relationships and product offerings by acquiring select companies and assets that enhance our technology leadership, broaden our product offerings or expand our customer relationships.

Key Business Metrics

We monitor a number of key metrics to help forecast growth, establish budgets, measure the effectiveness of our sales and marketing efforts, accelerate product development and measure operational effectiveness.

Product Revenue. We were incorporated in 2003, and our business was formed through a series of complementary acquisitions in 2005. Many of these businesses were in the early stages of transitioning advanced technologies into products, integrating solutions and developing marketing and sales strategies. Beginning in 2005, we began to develop a more comprehensive sales and marketing structure to support our business segments. A key measure of our success is product revenue growth. Because our financial statements present the results of operations of acquired businesses from the date of acquisition, during periods in which we have significant acquisitions, we monitor revenue growth by comparing current periods against pro forma results of operations as if we had acquired the businesses as of the beginning of the prior comparable periods.

Product Gross Profit. Our goal is to grow product gross profit to increase the profitability of our business. Because of the emerging stage of many of our products, gross profit has been inconsistent and unpredictable. Key factors affecting our gross profit are volume pricing, warranty costs, product mix, economies of scale and the ability to absorb fixed costs. Our ability to effectively monitor and manage these factors is important in attaining business profitability.

Research and Development. Our primary source of research and development funds is through direct contracts with the U.S. government and subcontracts with other commercial entities that contract with the U.S. government. We refer to this externally funded research and development as contract research and development. We also invest in research and development activities using our own internal funds in an effort to accelerate new and enhanced product offerings and to expand our technological leadership. We refer to this internally funded research and development as internal research and development. One of our key objectives is to expand our market share by continuing to convert advanced technologies into products and single source integrated solutions. Accordingly, we intend to continue our research and development activities through both contract research and development and internal research and development programs to advance our technologies, release new products and provide integrated solutions.

Description of Certain Factors Affecting our Revenue, Gross Profit and Operating Expenses

Product Revenue and Gross Profit.In our Detection segment, we primarily derive product revenue through the sale of ourFido explosive detectors,IdentiFINDER andInterceptor radiation detectors,AirSentinel bioaerosol sensors and ourGriffin gas chromatography/mass spectrometry line of products. In our Surveillance segment, we primarily derive product revenue from the sale of ourCerberus andSkyWatch towers, our thermal imaging cameras, includingDefendIR andOrion, and our STS line of radar products. In our Solutions segment, we primarily derive product revenue from the sale of ourCameleon advanced camera control systems,Cameleon ITS transportation management software,StarWatch security command and control software andCallisto, a non-security related product for process management of diverse supervisory control and data acquisition (SCADA) applications.

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Our gross profit on product sales is primarily impacted by the relative mix of higher and lower margin products, the efficiency and scale of our manufacturing operations, the relative mix of direct sales to end customers and sales through original equipment manufacturers and other resellers, and the relative mix of products that are manufactured by us and those that are manufactured by third parties. We typically earn a higher gross profit on products that we sell directly to end customers and on products that we manufacture ourselves. Because of the emerging stage of many of our products and our plans for new product introductions, we anticipate that our gross profit may continue to be impacted in the future by fixed overhead costs related to the expansion of our manufacturing capacity. As a result of these factors, our product gross profit has been inconsistent and may continue to be inconsistent for the foreseeable future.

Contract Research and Development Revenue and Gross Profit. We earn contract research and development revenue by performing research and development primarily under contracts that we enter into directly with the U.S. government or as subcontractors to other commercial entities that contract with the U.S. government. Most of our research and development contracts are either based on our cost plus a fixed fee, which is subject to a dollar cap, or are fixed price. We account for earnings under long-term contracts using the percentage-of-completion method of accounting. See “Critical Accounting Policies and Estimates—Revenue Recognition—Contract Research and Development and Services.”

Gross profit on contract research and development revenue is primarily impacted by the mix of contract type and the estimates inherent in recognizing revenue using the percentage-of-completion method of accounting. Our fee, or profit, under cost plus fixed fee contracts is based on a percentage of contract spending and is subject to a cap. On a fixed price contract, we are generally only required to incur the costs necessary to complete the contract. The degree of accuracy in determining the costs to complete our deliverables may impact gross profit under both contract types.

Maintenance, Service and Other Revenue and Gross Profit. We derive maintenance, service and other revenue, in all of our segments, from training, installation and warranty contracts. Additionally, in our Solutions segment we derive revenue from project management and technology integration services. Most of our project management and integration service contracts are for a fixed price and revenue is recognized under the percentage of completion method. Revenue from training and installation contracts is recognized upon completion of services. Revenue under product maintenance and extended warranty contracts is generally recognized over the requisite service period. See “Critical Accounting Policies and Estimates—Revenue Recognition—Maintenance, Service and Other.”

Gross profit under fixed price project management and integration service contracts is primarily impacted by the degree of accuracy in estimating the costs to complete our deliverables under those contracts. Because our product training, installation, maintenance and warranty contracts are generally based on standard services, we have historically recognized higher margins on those services than on our project management and integration services.

General and Administrative Expenses. General and administrative expenses represent the costs and expenses of managing and supporting our operations. We believe that our general and administrative expenses will increase due to additional legal and accounting fees we expect to incur as a public company and additional expenses related to compliance with the Sarbanes-Oxley Act of 2002 and other regulations. Such increase also will result from accounting support services, filing annual and quarterly reports with the Securities and Exchange Commission (SEC), investor relations, directors’ fees, directors’ and officers’ insurance and registrar and transfer agent fees. As a result, we believe that our general and administrative expenses for 2008 will significantly increase and that these increased expenses may affect the comparability of our financial statements with periods leading up to the completion of our initial public offering in November 2007. Beginning in 2009, and in the longer term, we expect our general and administrative expenses to decrease as a percentage of revenue.

Sales and Marketing Expenses. We increased sales and marketing expense in the six months ended June 30, 2008, compared to the six months ended June 30, 2007, through an investment in our sales and marketing platform throughout 2007 that extended into the first half of 2008 in order to support bids and proposals for major programs and to develop a more comprehensive commercial sales channel.

Research and Development. In addition to external funding we receive and record as revenue from the U.S. government and other commercial entities for contract research and development activities, we also invest in research and development activities using our own internal funds in an effort to provide additional means for accelerating the development of new and enhanced product offerings and to expand our technological leadership. The costs of our internally funded research and development are included in our operating expenses. In 2007 and the first six months of 2008, we increased our spending on internally funded research and development activities and the integration of products and technologies among our reportable segments. One of our key objectives is to expand our market share by continuing to convert advanced technologies into products and single source integrated solutions. Accordingly, we anticipate our research and development expense will increase in future periods.

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Results of Operations - Comparison of the Three Months Ended June 30, 2008 and 2007

The following table presents selected summarized consolidated financial information for the three months ended June 30, 2008 and 2007.

	Three Months Ended June 30,
	2008			2007
	(dollars in thousands)
	(unaudited)
Product revenues	$	23,643		$	21,188
Gross profit %		53.1	%		51.1	%
Contract research and development revenues	$	9,823		$	7,981
Gross profit %		30.7	%		32.5	%
Maintenance, service and other revenues	$	3,976		$	4,260
Gross profit %		39.3	%		28.5	%
Total revenues	$	37,442		$	33,429
Gross profit %		45.8	%		43.8	%
Operating loss excluding depreciation and amortization	$	(5,336	)	$	(5,946	)
Depreciation and amortization		3,367			3,405
Operating loss	$	(8,703	)	$	(9,351	)
Loss from continuing operations	$	(8,957	)	$	(9,489	)
Gain on sale of discontinued operations, net		—			2,481
Net loss	$	(8,957	)	$	(7,008	)

Product Revenues and Gross Profit. Product revenue increased $2.5 million, or 12%, to $23.6 million in the second quarter of 2008 from $21.2 million in the second quarter of 2007. An increase in sales of approximately $3.0 million from new and enhanced products in our Detection segment and an increase of $0.8 million in product sales in our Solutions segment were offset by a decrease of approximately $1.3 million in sales from our Surveillance segment. Gross profit as a percentage of product revenue was 53.1% and 51.1% in the second quarters of 2008 and 2007, respectively. The increased gross profit is primarily attributable to increased sales of detection products on which we earn higher gross profit.

Contract Research and Development Revenues and Gross Profit. Contract research and development revenue increased $1.8 million, or 23%, to $9.8 million in the second quarter of 2008 from $8.0 million in the second quarter of 2007. Approximately 66% of this increase is attributable to work performed under contracts in our Detection segment while 26% of the increase is attributable to delivery of prototype platforms under research and development contracts by one of our Surveillance operating units. Gross profit as a percentage of contract research and development revenue was 30.7% and 32.5% in the second quarters of 2008 and 2007, respectively.

Maintenance, Service and Other Revenues and Gross Profit.Maintenance, service and other revenue decreased $0.3 million, or 7%, to $4.0 million in the second quarter of 2008 from $4.3 million in the second quarter of 2007. Gross profit as a percentage of maintenance, service and other revenue was 39.3% and 28.5% in the second quarters of 2008 and 2007, respectively. Gross profit increased in the second quarter of 2008 because a greater proportion of our revenue in 2008 was derived from higher margin contract engineering and design services compared to 2007 in which a greater proportion was derived from lower margin project management, integration and installation services.

Operating Loss. Operating loss decreased $0.6 million, or 7%, to $8.7 million in the second quarter of 2008 from $9.4 million in the second quarter of 2007. An increase in gross profit of $2.5 million over the comparable quarter was offset by $1.9 million in increased operating expenses related primarily to an increase in spending on internal research and development projects and sales and marketing activities. The increase in operating expenses in 2008 primarily related to additional spending on internal research and development projects directed at the development and expansion of chemical, biological, radiation and explosive detection products and technologies. Sales and marketing expense increased $3.1 million as we made a deliberate investment in our sales and marketing platform throughout 2007 that extended through the second quarter of 2008 in order to support bids and proposals for major programs and to develop a more comprehensive commercial sales channel. Operating loss excluding depreciation and amortization is a non-GAAP financial measure that is derived by reducing our operating loss by depreciation and amortization. Amortization primarily represents costs associated with our business acquisitions that do not correspond to an outlay of current and future cash flow. Accordingly, we believe operating loss excluding depreciation and amortization is a more meaningful measure of our recurring operations and an indicator of our working capital requirements. Operating loss excluding depreciation and amortization decreased $0.6 million, or 10%, to $5.3 million in the second quarter of 2008 from $5.9 million in the second quarter of 2007.

Loss from Continuing Operations. Our loss from continuing operations decreased $0.5 million, or 6%, to $9.0 million in the second quarter of 2008 from $9.5 million in the second quarter of 2007. Our $2.5 million increase in gross profit in the second quarter of 2008 was offset by increased spending on internal research and development programs and sales and marketing activities.

Discontinued Operations. In December 2006, we adopted a plan for the sale of three companies. Those businesses did not align with our overall strategic plans. We completed two of the sales in the first quarter of 2007 and the third sale during the second quarter of 2007. In the second quarter of 2007, we realized a gain on the sale of discontinued operations of $2.5 million.

Net Loss. Net loss increased $2.0 million, or 28%, to $9.0 million in the second quarter of 2008 from $7.0 million in the second quarter of 2007. The increased loss was primarily due to the gain on the sale of discontinued operations of $2.5

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million in the second quarter of 2007. Also, our $2.5 million increase in gross profit in the second quarter of 2008 was more than offset by increased spending on internal research and development programs and sales and marketing activities. We increased spending in these areas in an effort to introduce new products and to integrate our products and technologies into broader solutions.

Reportable Segments

We operate our business in three reportable segments: Detection, Surveillance and Solutions. Our Detection segment develops products and conducts research and development in the areas of chemical, biological, radiation, nuclear and explosives detection. Our Surveillance segment provides products and services for perimeter security and wide area surveillance. Our Solutions segment integrates our technologies and products to provide single source solutions that address a broad range of customer specific security and surveillance needs.

Detection Segment - Comparison of the Three Months Ended June 30, 2008 and 2007

	Three Months Ended June 30,
	2008			2007
	(dollars in thousands)
	(unaudited)
Revenue and gross profit %
Product revenue	$	14,927		$	11,896
Contract research and development revenue		8,544			7,438
Maintenance, service and other revenue		313			252
Total revenue	$	23,784		$	19,586
Gross profit %		48.4	%		46.8	%
Operating income excluding depreciation and amortization	$	467		$	1,184
Depreciation and amortization		1,908			1,990
Operating loss	$	(1,441	)	$	(806	)

Product Revenue. Product revenue increased $3.0 million, or 25%, to $14.9 million in the second quarter of 2008 from $11.9 million in the second quarter of 2007. The increase primarily resulted from increased sales of our explosive detection and gas chromatography/mass spectrometry products.

Contract Research and Development Revenue. Contract research and development revenue increased $1.1 million, or 15%, to $8.5 million in the second quarter of 2008 from $7.4 million in the second quarter of 2007. The increase is primarily due to increased government spending on defense and security related programs.

Gross Profit.Gross profit as a percentage of revenue increased from 46.8% in the second quarter of 2007 to 48.4% in the second quarter of 2008 primarily due to the increase in product revenue. In connection with the increased product revenue, gross profit improved due to a change in the mix of sales directly to end customers as compared to sales to original equipment manufacturers in the second quarter of 2007. We typically earn higher gross profit on sales directly to end customers than on sales to original equipment manufacturers, and approximately 24% of our second quarter 2008 revenue was generated by sales through original equipment manufacturers compared to 44% in the second quarter of 2007. In addition, we experienced higher gross profit in the second quarter of 2008 compared to the second quarter of 2007 through improved absorption of our overhead costs on a per unit basis due to increased manufacturing volume.

Operating Loss. Operating loss increased $0.6 million, or 79%, to $1.4 million in the second quarter of 2008 from $0.8 million in the second quarter of 2007. Operating income excluding depreciation and amortization decreased $0.7 million, or 61%, to $0.5 million in 2008 from $1.2 million in 2007. An increase in gross profit of $2.4 million over the comparable quarter was offset by $3.0 million in increased operating expenses related primarily to an increase in spending on internal research and development projects and sales and marketing activities. The increase in operating expenses in 2008 related to additional spending on internal research and development projects directed at the development and expansion of chemical, biological, radiation and explosive detection products and technologies. Sales and marketing expense increased due to an investment in our sales and marketing platform throughout 2007 that extended into the second quarter of 2008 in order to support bids and proposals for major programs and to develop our commercial sales channel.

Surveillance Segment - Comparison of the Three Months Ended June 30, 2008 and 2007

	Three Months Ended June 30,
	2008			2007
	(dollars in thousands)
	(unaudited)
Revenue and gross profit %
Product revenue	$	6,701		$	8,093
Contract research and development revenue		1,249			542
Maintenance, service and other revenue		491			809
Total revenue	$	8,441		$	9,444
Gross profit %		42.9	%		43.6	%
Operating loss excluding depreciation and amortization	$	(1,305	)	$	(1,383	)
Depreciation and amortization		757			878
Operating loss	$	(2,062	)	$	(2,261	)

Product Revenue. Product revenue decreased $1.4 million, or 17%, to $6.7 million in the second quarter of 2008 from $8.1 million in the second quarter of 2007. The decrease is primarily due to a large international shipment of our radar products in the second quarter of 2007 that was not duplicated in 2008 offset by increased sales of our thermal imaging equipment in the second quarter of 2008.

Contract Research and Development Revenue. Contract research and development revenue increased $0.7 million, or 130%, to $1.2 million in the second quarter of 2008 from $0.5 million in the second quarter of 2007 primarily due to delivery of prototype platforms under research and development contracts and work performed under new contracts in our radars group.

Maintenance, Service and Other Revenue. Maintenance, service and other revenue decreased $0.3 million, or 39%, to $0.5 million in the second quarter of 2008 from $0.8 million in the second quarter of 2007 primarily due to a service order in the second quarter of 2007 in our radars group that was non-recurring.

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Gross Profit. Gross profit as a percentage of revenue was 42.9% and 43.6% in the second quarters of 2008 and 2007, respectively. Our gross profit was impacted by a reduction in manufacturing volume which had a negative impact on the absorption of our fixed overhead costs on a per unit basis as well as a shift from product sales to the delivery of prototypes under lower margin contract research and development contracts.

Operating Loss. Operating loss decreased $0.2 million, or 9%, to $2.1 million in the second quarter of 2008 from $2.3 million in the second quarter of 2007. Operating loss excluding depreciation and amortization decreased $0.1 million, or 6%, to $1.3 million in 2008 from $1.4 million in 2007. The decreased operating loss is due to a $0.7 million decrease in operating expenses which offset a reduction in gross margin of $0.5 million. We decreased general and administrative expense $0.5 million in the second quarter of 2008 compared to the second quarter of 2007 due to decreased personnel expenses.

Solutions Segment - Comparison of the Three Months Ended June 30, 2008 and 2007

	Three Months Ended June 30,
	2008			2007
	(dollars in thousands)
	(unaudited)
Revenue and gross profit %
Product revenue	$	2,015		$	1,199
Maintenance, service and other revenue		3,202			3,200
Total revenue	$	5,217		$	4,399
Gross profit %		38.3	%		30.9	%
Operating loss excluding depreciation and amortization	$	(1,869	)	$	(1,323	)
Depreciation and amortization		542			480
Operating loss	$	(2,411	)	$	(1,803	)

Product Revenue. Product revenue increased $0.8 million, or 68%, to $2.0 million in the second quarter of 2008 from $1.2 million in the second quarter of 2007 primarily due to supplemental funding under the Integrated Commercial Intrusion Detection System (“ICIDS”) military program in the second quarter of 2008.

Maintenance, Service and Other Revenue. Maintenance, service and other revenue in the second quarter of 2008 remained flat at $3.2 million compared to the first quarter of 2007.

Gross Profit.Gross profit as a percentage of revenue was 38.3% and 30.9% in the second quarters of 2008 and 2007, respectively. Gross profit increased because margins derived from higher margin contract engineering and design services exceeded margins derived from lower margin project management, integration and installation services as compared to 2007.

Operating Loss. Operating loss increased $0.6 million, or 34%, to $2.4 million in the second quarter of 2008 from $1.8 million in the second quarter of 2007. Operating loss excluding depreciation and amortization increased $0.6 million, or 41%, to $1.9 million in the second quarter of 2008 from $1.3 million in the second quarter of 2007. The increased operating loss is due to a $0.8 million increase in sales and marketing expense and an increase in general and administrative expense of $0.5 million that offset increases in revenue and gross profit. We increased sales and marketing expense in the second quarter of 2008 compared to the second quarter of 2007 due to an investment in our sales and marketing platform throughout 2007 that extended into the second quarter 2008 in order to support bids and proposals for major programs and to develop our commercial sales channel. In addition, 48%, or $0.6 million, of the increase in operating expense is attributed to a company we acquired in October 2007.

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Reconciliation of Reportable Segment Operating Losses to the Consolidated Loss from Continuing Operations

The following tables provides a reconciliation of operating losses from reportable segments to our consolidated net loss from continuing operations for the three months ended June 30, 2008 and 2007:

	Three Months Ended June 30,
	2008			2007
	(dollars in thousands)
	(unaudited)
Reconciliation of segment operating losses to consolidated loss from continuing operations
Segment operating losses	$	(5,914	)	$	(4,870	)
Unallocated general and administrative expenses		(2,630	)		(4,424	)
Unallocated depreciation and amortization expenses		(160	)		(57	)
Interest expense		(11	)		(24	)
Interest income		247			134
Other nonoperating gains (losses), net		(257	)		(91	)
Income tax (expense) benefit		(232	)		(157	)
Consolidated loss from continuing operations	$	(8,957	)	$	(9,489	)

Our unallocated general administrative expenses primarily include personnel costs for executive and senior management, corporate accounting and finance, facilities’ costs, professional fees for audit, tax, legal and other professional services, board of director and advisory board fees, travel, supplies and communication related expenses.

Results of Operations - Comparison of First Six Months of 2008 and 2007

The following table presents selected summarized consolidated financial information for the six months ended June 30, 2008 and 2007.

	Six Months Ended June 30,
	2008			2007
	(dollars in thousands)
	(unaudited)
Product revenues	$	44,007		$	37,585
Gross profit %		51.8	%		49.8	%
Contract research and development revenues	$	21,799		$	15,758
Gross profit %		33.5	%		32.8	%
Maintenance, service and other revenues	$	7,889		$	7,046
Gross profit %		37.0	%		33.0	%
Total revenues	$	73,695		$	60,389
Gross profit %		44.8	%		43.4	%
Operating loss excluding depreciation and amortization	$	(13,606	)	$	(12,684	)
Depreciation and amortization		6,654			6,873
Operating loss	$	(20,260	)	$	(19,556	)
Loss from continuing operations	$	(20,192	)	$	(19,722	)
Loss on discontinued operations, net		—			(1,302	)
Gain (loss) on sale of discontinued operations, net		(903	)		4,563
Net loss	$	(21,095	)	$	(16,461	)

Product Revenues and Gross Profit. Product revenue increased $6.4 million, or 17%, to $44.0 million in the six months ended June 30, 2008 from $37.6 million in the six months ended June 30, 2007. Of this increase, $6.8 million resulted from increased sales of new and enhanced products in our Detection segment and $1.7 million due to supplemental funding under the ICIDS military program. These increases were offset by a decrease of $2.1 million in our Surveillance segment primarily due to decreased sales of our radar equipment. Gross profit as a percentage of product revenue was 51.8% and 49.8% in the first six months of 2008 and 2007, respectively. The increased gross profit is primarily attributable to increased sales of detection products on which we earn higher gross profit.

Contract Research and Development Revenues and Gross Profit. Contract research and development revenue increased $6.0 million, or 38%, to $21.8 million in the six months ended June 30, 2008 from $15.8 million in the six months ended June 30, 2007. Approximately 71% of this increase is attributable to delivery of prototype platforms under research and development contracts by one of our Surveillance operating units. The remainder of the increase is due to increased government spending on defense and security related programs in our Detection segment. Gross profit as a percentage of contract research and development revenue was 33.5% and 32.8% in the first six months of 2008 and 2007, respectively.

Maintenance, Service and Other Revenues and Gross Profit.Maintenance, service and other revenue increased $0.9 million, or 12%, to $7.9 million in the six months ended June 30, 2008 from $7.0 million in the six months ended June 30, 2007. Maintenance, service and other revenue in our Solutions segment accounted for approximately 78%, or $0.7 million, of the increase, of which $1.5 million related primarily to new project management and integration contracts in connection with intelligent transportation systems and contract engineering and design services which was offset by a decrease of $0.9 million in revenue related to the ICIDS military program. Gross profit as a percentage of maintenance, service and other revenue was 37.0% and 33.0% in the first six months of 2008 and 2007, respectively. Gross profit increased in the six months ended June 30, 2008, because margins derived from higher margin contract engineering and design services exceeded margins derived from lower margin project management, integration and installation services.

Operating Loss. Operating loss increased $0.7 million, or 4%, to $20.3 million in the six months ended June 30, 2008 from $19.6 million in the six months ended June 30, 2007. An increase in gross profit of $6.8 million over the comparable quarter was offset by $7.5 million in increased operating expenses related primarily to an increase in spending on internal research and development projects and sales and marketing activities. The increase in operating expenses in 2008 primarily related to additional spending on internal research and development projects directed at the development and expansion of chemical, biological, radiation and explosive detection products and technologies. Sales and marketing expense increased $6.2 million as we made a deliberate investment in our sales and marketing platform throughout 2007 that extended into the first half of 2008 in order to support bids and proposals for major programs and to develop a more comprehensive commercial sales channel. Operating loss excluding depreciation and amortization is a non-GAAP financial measure that is

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derived by reducing our operating loss by depreciation and amortization. Amortization primarily represents costs associated with our business acquisitions that do not correspond to an outlay of current and future cash flow. Accordingly, we believe operating loss excluding depreciation and amortization is a more meaningful measure of our recurring operations and an indicator of our working capital requirements. Operating loss excluding depreciation and amortization increased $0.9 million, or 7%, to $13.6 million in the six months ended June 30, 2008, from $12.7 million in the six months ended June 30, 2007.

Loss from Continuing Operations. Our loss from continuing operations increased $0.5 million, or 2%, to $20.2 million in the six months ended June 30, 2008 from $19.7 million in the six months ended June 30, 2007. The $6.8 million increase in gross profit in the six months ended June 30, 2008 was offset by increased spending on internal research and development programs and sales and marketing activities.

Discontinued Operations. In December 2006, we adopted a plan for the sale of three companies that did not align with our overall strategic plans. We completed two of the sales in the six months ended June 30, 2007 and the third sale during the second quarter of 2007. In the six months ended June 30, 2007, our loss from discontinued operations was $1.3 million compared to zero in 2008. In the six months ended June 30, 2008, we realized a loss on discontinued operations of $0.9 million related to the settlement of escrow accounts and contingent purchase consideration. In the six months ended June 30, 2007, we realized a gain on the sale of discontinued operations of $4.6 million.

Net Loss. Net loss increased $4.6 million, or 28%, to $21.1 million in the six months ended June 30, 2008 from $16.5 million in the six months ended June 30, 2007. The increased loss was primarily due to a $0.9 million loss on the sale of discontinued operations during the six months ended June 30, 2008, compared to a gain on the sale of discontinued operations of $4.6 million in the six months ended June 30, 2007. Also, the $6.8 million increase in gross profit in the six months ended June 30, 2008 was offset by increased spending on internal research and development programs and sales and marketing activities. We increased spending in these areas in an effort to introduce new products and to integrate our products and technologies into broader solutions.

Detection Segment - Comparison of the Six Months Ended June 30, 2008 and 2007

	Six Months Ended June 30,
	2008			2007
	(dollars in thousands)
	(unaudited)
Revenue and gross profit %
Product revenue	$	26,561		$	19,750
Contract research and development revenue		16,073			14,718
Maintenance, service and other revenue		796			290
Total revenue	$	43,430		$	34,758
Gross profit %		48.7	%		43.1	%
Operating loss excluding depreciation and amortization	$	(1,457	)	$	(725	)
Depreciation and amortization		3,769			3,983
Operating loss	$	(5,226	)	$	(4,708	)

Product Revenue. Product revenue increased $6.8 million, or 34%, to $26.6 million in the six months ended June 30, 2008, from $19.8 million in the six months ended June 30, 2007. The increase primarily resulted from increased sales of our explosive and radiation detection and gas chromatography/mass spectrometry products.

Contract Research and Development Revenue. Contract research and development revenue increased $1.4 million, or 9%, to $16.1 million in the six months ended June 30, 2008, from $14.7 million in the six months ended June 30, 2007. The increase is primarily related to increased government spending on defense and security related programs.

Gross Profit.Gross profit as a percentage of revenue increased from 43.1% in the six months ended June 30, 2007, to 48.7% in the six months ended June 30, 2008. Gross profit improved due to a change in the mix of sales directly to end customers as compared to sales to original equipment manufacturers in the six months ended June 30, 2007. We typically earn higher gross profit on sales directly to end customers than on sales to original equipment manufacturers, and approximately 14% of our six month 2008 revenue was generated by sales through original equipment manufacturers compared to 21% in the six months ended June 30, 2007. In addition, we experienced higher gross profit in the six months ended June 30, 2008 compared to the six months ended June 30, 2007 due to improved absorption of our overhead costs on a per unit basis related to increased manufacturing volume.

        Operating Loss. Operating loss increased $0.5 million, or 11%, to $5.2 million in the six months ended June 30, 2008, from $4.7 million in the six months ended June 30, 2007. Operating loss excluding depreciation and amortization was $1.5 million for the six months ended June 30, 2008, compared to $0.7 million for the six months ended June 30, 2007. An increase in gross profit of $6.2 million over the comparable quarter was offset by $6.7 million in increased operating expenses related primarily to an increase in spending on internal research and development projects and sales and marketing activities. The increase in operating expenses in 2008 related to additional spending on internal research and development projects directed at the development and expansion of chemical, biological, radiation and explosive detection products and technologies. Sales and marketing expense increased due to an investment in our sales and marketing platform throughout 2007 that extended into the first half of 2008 in order to support bids and proposals for major programs and to develop our commercial sales channel.

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Surveillance Segment - Comparison of the Six Months Ended June 30, 2008 and 2007

	Six Months Ended June 30,
	2008			2007
	(dollars in thousands)
	(unaudited)
Revenue and gross profit %
Product revenue	$	12,698		$	14,804
Contract research and development revenue		5,691			1,038
Maintenance, service and other revenue		856			1,175
Total revenue	$	19,245		$	17,017
Gross profit %		39.2	%		46.6	%
Operating loss excluding depreciation and amortization	$	(3,350	)	$	(2,196	)
Depreciation and amortization		1,505			1,738
Operating loss	$	(4,855	)	$	(3,934	)

Product Revenue. Product revenue decreased $2.1 million, or 14%, to $12.7 million in the six months ended June 30, 2008 from $14.8 million in the six months ended June 30, 2007. The decrease is due to a shift from product sales to the delivery of prototypes under lower margin contract research and development contracts as well as a large international shipment of our radar equipment in the first half of 2007 that was not duplicated in the first half of 2008. These decreases were offset by increased sales of our thermal imaging equipment.

Contract Research and Development Revenue. Contract research and development revenue increased $4.7 million, or 448%, to $5.7 million in the six months ended June 30, 2008, from $1.0 million in the six months ended June 30, 2007 primarily due to delivery of prototype platforms under research and development contracts.

Gross Profit. Gross profit as a percentage of revenue was 39.2% and 46.6% in the first six months of 2008 and 2007, respectively. Our gross profit was impacted by a reduction in manufacturing volume which had a negative impact on the absorption of our fixed overhead costs on a per unit basis as well as a shift from product sales to the delivery of prototypes under lower margin contract research and development contracts.

Operating Loss. Operating loss increased $0.9 million, or 23%, to $4.8 million in the six months ended June 30, 2008, from $3.9 million in the six months ended June 30, 2007. Operating loss excluding depreciation and amortization increased $1.2 million, or 53%, to $3.4 million in 2008 from $2.2 million in 2007. The increased operating loss is due to a $1.3 million increase in sales and marketing expense. We increased sales and marketing expense in the six months ended June 30, 2008 compared to the six months ended June 30, 2007 due to an investment in our sales and marketing platform throughout 2007 that extended into the first half of 2008 to support bids and proposals for major programs and to continue to develop our commercial sales channel. The increase in sales and marketing expense was offset by a $0.5 million decrease in general and administrative expenses in the first six months of 2008 compared to the first six months of 2007. General and administrative expenses decreased due to decreased personnel costs.

Solutions Segment - Comparison of the Six Months Ended June 30, 2008 and 2007

	Six Months Ended June 30,
	2008			2007
	(dollars in thousands)
	(unaudited)
Revenue and gross profit %
Product revenue	$	4,748		$	3,031
Maintenance, service and other revenue		6,272			5,583
Total revenue	$	11,020		$	8,614
Gross profit %		39.1	%		38.5	%
Operating loss excluding depreciation and amortization	$	(3,157	)	$	(2,377	)
Depreciation and amortization		1,075			1,053
Operating loss	$	(4,232	)	$	(3,430	)

Product Revenue. Product revenue increased $1.7 million, or 57%, to $4.7 million in the six months ended June 30, 2008 from $3.0 million in the six months ended June 30, 2007 primarily due to supplemental funding under the ICIDS military program in the six months ended June 30, 2008. Also, 26%, or $0.4 million, of the increased product revenue was contributed by a company we acquired in October 2007.

        Maintenance, Service and Other Revenue. Maintenance, service and other revenue increased $0.7 million, or 12%, to $6.3 million in the six months ended June 30, 2008 from $5.6 million in the six months ended June 30, 2007. An increase in revenues of $1.1 million attributable to new contracts for the project management and integration of technologies for intelligent transportation systems and an increase of $0.5 million for contract engineering and design services were offset by a decrease of $0.9 million in revenue related to the ICIDS military program.

Gross Profit.Gross profit as a percentage of revenue was 39.1% and 38.5% in the first six months of 2008 and 2007, respectively. Gross profit increased because margins derived from higher margin contract engineering and design services exceeded margins derived from lower margin project management, integration and installation services in the first six months of 2008 compared to the first six months of 2007.

        Operating Loss. Operating loss increased $0.8 million, or 23%, to $4.2 million in the six months ended June 30, 2008 from $3.4 million in the six months ended June 30, 2007. Operating loss excluding depreciation and amortization increased $0.8 million, or 33%, to $3.2 million in the six months ended June 30, 2008 from $2.4 million in the six months ended June 30, 2007. The increased operating loss is due to a $2.0 million increase in general and administrative expense and sales and marketing expense and a decrease in internal research and development expense of $0.2 million that offset increases in revenue and gross profit. We increased sales and marketing expense in the six months ended June 30, 2008 compared to the six months ended June 30, 2007 due to an investment in our sales and marketing platform throughout 2007 that extended into the first half of 2008 to support bids and proposals for major programs and to develop our commercial sales channel. In addition, 70%, or $1.2 million, of the increase in operating expense is attributed to a company we acquired in October 2007.

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Reconciliation of Reportable Segment Operating Losses to the Consolidated Loss from Continuing Operations

The following table provides a reconciliation of operating losses from reportable segments to our consolidated net loss from continuing operations for the six months ended June 30, 2008 and 2007:

	Six Months Ended June 30,
	2008			2007
	(dollars in thousands)
	(unaudited)
Reconciliation of segment operating losses to consolidated loss from continuing operations
Segment operating losses	$	(14,313	)	$	(12,072	)
Unallocated general and administrative expenses		(5,641	)		(7,385	)
Unallocated depreciation and amortization expenses		(305	)		(99	)
Interest expense		(29	)		(114	)
Interest income		676			195
Other nonoperating gains (losses), net		(380	)		(15	)
Income tax expense (benefit)		(200	)		(232	)
Consolidated loss from continuing operations	$	(20,192	)	$	(19,722	)

Our unallocated general administrative expenses primarily include personnel costs for executive and senior management, corporate accounting and finance, facilities’ costs, professional fees for audit, tax, legal and other professional services, board of director and advisory board fees, travel, supplies and communication related expenses.

Liquidity and Capital Resources

As of June 30, 2008, our principal sources of liquidity were cash and cash equivalents of $40.9 million and accounts receivable of $30.3 million. Historically, we have experienced net cash outflows from operating activities and cash inflows from investing or financing activities. We expect our cash flows from operating activities to improve as we continue to reduce our net losses through a variety of means, including but not limited to reducing general and administrative expenses by streamlining our operations, prioritizing internal research and development spending and increasing revenue through organic growth. At June 30, 2008, we had firm backlog of approximately $75 million and unfunded backlog of approximately $195 million. We believe our backlog and recent bookings combined with operating expense reductions will be sufficient to sustain our liquidity and cash flows in 2009 and for the foreseeable future.

Our primary sources of cash historically have been proceeds from the issuance of convertible preferred stock, customer payments for our products and services, lines of credit and short term loans and proceeds from the sale of businesses. In November 2007, we completed an initial public offering and raised net proceeds of $72.7 million after deducting underwriting discounts and commissions of $5.6 million and offering expenses of $1.7 million. We were incorporated in 2003 and have primarily grown our business organically and through a series of complementary acquisitions in 2005. Many of our businesses have early stage products and/or emerging products and engage in research and development activities that are funded both through external government contracts and internal resources.

During 2007 and in the first half of 2008, we increased our investment in sales, marketing and other related business development infrastructure to support our early stage products and emerging technologies. Additionally, we increased our investment in internally funded research and development activities and the integration of products and technologies among our operating units. We also increased our general and administrative expenses in 2007 and in the first half of 2008 through the use of consultants and other professionals to complete certain accounting and legal functions. Consequently, our cumulative net losses, which amounted to approximately $198.6 million at June 30, 2008, were expected based on the nature of our business, the early stage of our products and technologies and our ongoing research and development activities.

In the future we may enter into acquisition agreements for complementary businesses that would require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

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The following table shows our cash and cash equivalents and working capital as of June 30, 2008 and December 31, 2007:

	As of June 30, 2008		As of December 31, 2007
	(dollars in thousands)
	(unaudited)
Cash and cash equivalents	$	40,909	$	64,636
Working capital		76,971		95,455

The following table shows our cash flows from operating, investing and financing activities for the six months ended June 30, 2008 and 2007.

	Six Months Ended June 30,
	2008			2007
	(dollars in thousands)
	(unaudited)
Summary of cash flow:
Cash flows used in operating activities	$	(16,530	)	$	(17,746	)
Cash flows provided by (used in) investing activities		(6,348	)		17,285
Cash flows provided by (used in) financing activities		(903	)		3,401
Effect of foreign exchange rate on cash		54			113
Consolidated net change in cash and cash equivalents	$	(23,727	)	$	3,053

Cash Flows from Operating Activities. Our cash flows from operating activities are significantly influenced by spending required to support the growth of our business in areas such as research and development, sales and marketing, facilities’ expansion and certain general and administrative costs. Our operating cash flows are also influenced by our working capital needs to support growth and fluctuations in inventory, accounts receivable, accounts payable and other current assets and liabilities. The concentration of business with the U.S. government also impacts operating cash flow, particularly for fixed price contracts in which revenue recognition under the percentage of completion method may not coincide with billing. Cash flows used in operating activities decreased $1.2 million, or 6.9%, to $16.5 million for the six months ended June 30, 2008 from $17.7 million in the six months ended June 30, 2007 primarily due to working capital timing differences.

Cash Flows from Investing Activities. Cash flows from investing activities primarily relate to business acquisitions and dispositions and capital expenditures. In the six months ended June 30, 2008, cash flows used in investing activities included $2.7 million of capital expenditures, $4.7 million paid to acquire S3I and settle liabilities assumed in the acquisition of S3I, and $0.8 million of holdback funds related to a 2006 acquisition offset by $1.8 million of cash proceeds released from escrow related to the sale of a company in 2007. In the six months ended June 30, 2007, cash flows from investing activities included $2.1 million in capital expenditures offset by $19.4 million of cash proceeds from the sale of two companies. Capital expenditures for the first quarters of 2008 and 2007 primarily relate to the expansion of facilities and the acquisition of computer equipment and manufacturing and lab equipment. Capital expenditures also included costs associated with the implementation of an enterprise software system throughout the company.

Cash Flows from Financing Activities. Net debt issuances (repayments) were $(0.2) million in the first six months of 2008 and 2007. In the six months ended June 30, 2007, cash flows from financing activities included $3.5 million of net proceeds from the issuance of Series A Preferred Stock, which was used for working capital purposes, and debt proceeds of $3.0 million related to a bridge loan from Wexford that was used for working capital purposes. The $3.0 million bridge loan from Wexford was repaid during the second quarter of 2007.

Contractual Obligations

On April 7, 2008, one of our subsidiaries entered into an operating lease agreement for new facilities. The Company’s subsidiary will begin using the facilities after construction is completed, which we currently anticipate will occur in November 2008. Monthly rent under the agreement approximates $41,000 until December 31, 2012, at which time monthly rent may be increased based on changes in the consumer price index. Subsequent to the initial lease term of fifteen years, the lease may be renewed for a five year period.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires us to make assumptions and prepare estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and revenues and expenses. We base our estimates on historical experience and various other assumptions that we believe are reasonable; however, actual results may differ. See note 1 to our consolidated financial statements contained elsewhere in this report for a discussion of our significant accounting policies.

Revenue Recognition—Products. The majority of our revenue is derived from the sale of our products. We recognize revenue from product sales at the time the product is shipped, title and risk have passed to the customer and collection from the customer is reasonably assured.

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Revenue Recognition—Contract Research and Development and Services. We follow the guidelines of American Institute of Certified Public Accountants (AICPA) Statement of Position 81-1,Accounting for Performance of Construction-Type and Certain Production-Type Contracts, for our contract research and development and contract service revenue. We account for sales and earnings under long-term contracts using the percentage-of-completion method of accounting. Under the percentage-of-completion method, we recognize revenue as the work progresses—either as the products are produced and delivered or as services are rendered, as applicable. We estimate profit as the difference between total estimated revenue and total estimated cost of a contract and recognize that profit over the remaining life of the contract based on either input (e.g., costs incurred) or output (e.g., units delivered) measures, as appropriate. If a revised estimate of contract profitability reveals an anticipated loss on the contract, we recognize the loss in the period it is identified.

The percentage-of-completion method of accounting involves the use of various estimating techniques to project costs at completion, and in some cases includes estimates of recoveries asserted against the customer for changes in specifications. Contract estimates involve various assumptions and projections relative to the outcome of future events over a period of several months or years, including future labor productivity and availability, the nature and complexity of the work to be performed, the cost and availability of materials, the impact of delayed performance, the availability and timing of funding from the customer and the timing of product deliveries. These estimates are based on our best judgment. A significant change in one or more of these estimates could affect the profitability of one or more of our contracts. We principally use hours of work and contract milestones to measure the progress of contract completeness. Certain contracts provide for billings and/or payments that may not coincide with revenue recognition. To the extent that customer billings or payments are in excess of revenues, we record the excess as deferred revenue. To the extent that we recognize revenue under the percentage-of-completion method prior to billings as defined in the contracts, we record such amounts as unbilled revenue, and we expect them to be collected within one year of recognition. Substantially all of the unbilled revenue is due from various agencies of the U.S. government.

We review our contract estimates monthly to assess revisions in contract values and estimated costs at completion and reflect changes in estimates in the current and future periods under the reallocation method.

Revenue Recognition—Maintenance, Service and Other. Maintenance, service and other revenue is primarily derived from project management and technology integration services, product training and installation and software maintenance and extended warranty contracts. We recognize revenue from project management and integration services using the percentage-of-completion method described above. We recognize revenue from product training and installation services when the services are provided. We generally recognize revenue for software maintenance and extended warranty contracts on a straight-line basis over the life of the contract. We recognize software revenue under the provisions of the Accounting Standards Executive Committee’s Statement of Position 97-2 (SOP 97-2),Software Revenue Recognition (as amended by SOP 98-9) . Under the terms of SOPs 97-2 and 98-9, companies are required to defer all revenue from multiple-element software arrangements if sufficient vendor specific objective evidence does not exist for the allocation of revenue to the various elements of the arrangement. As a result, we recognize any revenue on multi-year software license agreements ratably over the life of the arrangement.

Goodwill and Identifiable Intangible Assets. In accordance with SFAS No. 141,Business Combinations (SFAS 141), we allocate the cost of business acquisitions to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition (commonly referred to as the purchase price allocation). As part of the purchase price allocations for our business acquisitions, identifiable intangible assets are recognized as assets apart from goodwill if they arise from contractual or other legal rights, or if they are capable of being separated or divided from the acquired business and sold, transferred, licensed, rented or exchanged. However, in accordance with SFAS 141, we do not recognize any intangible assets apart from goodwill for the assembled workforces of our business acquisitions.

A significant component of the businesses we have acquired historically is the presence of advanced security products and technologies that the business has developed. The most significant identifiable intangible asset that we have separately recognized in accordance with SFAS 141 is core technologies. Our intellectual property and proprietary rights for these core technologies are typically protected through a combination of patents, copyrights, trademarks, service marks, trade secrets, confidentiality provisions and licensing arrangements. The fair value for core technologies is determined, as of the date of acquisition, using the “Relief from Royalty Method,” an approach commonly used in valuing intangible assets. The basic tenet of the “Relief from Royalty Method” is that without ownership of the subject intangible asset, the user of that intangible asset would have to make a stream of payments to the owner of the asset in return for the rights to use that asset. By acquiring the intangible asset, the user avoids these payments. The valuation of the core technologies takes into consideration the percentage of forecasted revenues directly attributable to the underlying core/developed technologies. The royalty rate was selected based on consideration of several factors including external research, industry practices and margin considerations. Also factoring into the valuations of core technologies are the estimated technological useful lives of the products that use the technologies and the present value of future cash flows. The discount rates used to determine the present value of future cash flows is based on consideration of the weighted average cost of capital and internal rates of return as well as the risk and return characteristics of the core technologies.

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Customer contractual relationships also constitute a significant portion of identifiable intangible assets recognized in accordance with SFAS 141. All of our contractual relationships are established through written customer contracts (revenue arrangements). The fair value for customer contractual relationships is determined, as of the date of acquisition, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows (including cash flows from working capital) arising from the follow-on sales on contract (revenue arrangement) renewals expected from customer contractual relationships over their estimated lives, including the probability of expected future contract renewals and sales, less a contributory asset charge, all of which is discounted to present value.

The value assigned to goodwill equals the amount of the purchase price of the business acquired in excess of the sum of the amounts assigned to identifiable acquired assets, both tangible and intangible, less liabilities assumed. At June 30, 2008, we had goodwill of $69.2 million and identifiable intangible assets, net of accumulated amortization, of $25.0 million.

Intangible assets are amortized over their respective estimated useful lives ranging from one to ten years. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to our future cash flows rather than the period of time that it would take us to internally develop an intangible asset that would provide similar benefits. The estimate of the useful lives of our intangible asset is based on an analysis of all pertinent factors, in particular:

• the expected use of the asset by the entity;

• the expected useful life of another asset or group of assets to which the useful life of the intangible asset may relate;

• any legal, regulatory or contractual provisions that may limit the useful life;

• any legal, regulatory, or contractual provisions that enable renewal or extension of the asset’s legal or contractual life without substantial cost (provided there is evidence to support renewal or extension and renewal or extension can be accomplished without material modifications of the existing terms and conditions);

• the effects of obsolescence, demand, competition and other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels); and

• the level of regular maintenance expenditures (but not enhancements) required to obtain the expected future cash flows from the asset (for example, a material level of required maintenance in relation to the carrying amount of the asset may suggest a limited useful life).

If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset, the useful life of the asset is considered to be indefinite. The term indefinite does not mean infinite. An intangible asset with a finite useful life is amortized over that useful life; an intangible asset with an indefinite useful life is not amortized. We have no intangible assets with indefinite useful lives. Under U.S. generally accepted accounting principles (GAAP), goodwill is not amortized.

We review goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and also review goodwill annually in accordance with SFAS No. 142,Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 requires that goodwill be tested, at a minimum, annually for each reporting unit using a two-step process. A reporting unit is an operating segment, as defined in paragraph 10 of SFAS No. 131,Disclosures About Segments of an Enterprise and Related Information, or a component of an operating segment. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and is reviewed. Two or more components of an operating segment may be aggregated and deemed a single reporting unit for goodwill impairment testing purposes if the components have similar economic characteristics. The first step is to identify any potential impairment by comparing the carrying value of the reporting unit to its fair value. If a potential impairment is identified, the second step is to measure the impairment loss by comparing the implied fair value of goodwill with the carrying value of goodwill of the reporting unit. The fair value of a reporting unit is estimated using a discounted cash flow valuation approach and is dependent on estimates for future sales, operating income, depreciation and amortization, income tax payments, working capital changes and capital expenditures as well as expected growth rates for cash flows and long-term interest rates, all of which are affected by economic conditions related to the industries in which we operate as well as conditions in the U.S. capital markets.

The most significant assumptions used in a discounted cash flow valuation regarding the estimated fair values of our reporting units in connection with goodwill valuation assessments are:

• detailed long-range (approximating 10 years) cash flow projections for each of our reporting units;

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• a risk adjusted discount rate including the estimated risk-free rate of return; and

• the expected long-term growth rate of our business, which approximates the expected long-term growth rate for the U.S. economy and the industries in which we operate.

The risk adjusted discount rate represents the estimated weighted average cost of capital. The weighted average cost of capital focuses on rates of return for equity and debt, and a corresponding capital structure.

A decline in the estimated fair value of a reporting unit could result in a goodwill impairment and a related non-cash impairment charge against earnings, if estimated fair value for the reporting unit is less than the carrying value of the net assets of the reporting unit, including its goodwill. There was no goodwill impairment charge for the three or six months ended June 30, 2008 and 2007.

Stock-based Compensation. We account for stock-based compensation in accordance with SFAS No. 123(R),Share-Based Payment(“SFAS 123(R)”). SFAS 123(R) requires equity-classified, share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant and to be expensed over the applicable vesting period. Under the modified prospective transition method, share-based awards granted or modified on or after January 1, 2006, are recognized in compensation expense over the applicable vesting period. Also, any previously granted awards that were not fully vested as of January 1, 2006, are recognized as compensation expense over the remaining vesting period. We recognize this expense on a straight-line basis over the options’ expected terms.

During the six months ended June 30, 2008, we granted 98,250 stock options. We did not grant any options in the six months ended June 30, 2007. During the six months ended June 30, 2008, we granted 513,194 shares of restricted stock pursuant to the 2007 Equity Incentive Plan. Grants of restricted stock and restricted stock units are valued using the closing market price of our common stock on the date of grant. Prior to November 7, 2007, we accounted for the fair value of the restricted stock using estimates of the fair value of an underlying share of common stock at the time of the grants as there was no market for our common stock prior to November 7, 2007. Our common stock valuations used the probability weighted expected return method for 2007.

We estimate the grant date fair value of stock option awards under the provisions of SFAS 123(R) using the Black-Scholes option valuation model, which requires, among other inputs, an estimate of the fair value of the underlying common stock on the date of grant and the expected term of the options. Separate values were determined for options having exercise prices ranging from $7.00 to $16.00. We applied the resulting fair values for one share of common stock as of each of the valuation dates to our Black-Scholes option valuation model to arrive at the fair value of the related options granted during the valuation period.

For the quarters ended June 30, 2008 and 2007, we recognized stock-based compensation expense of $1.5 million and $1.9 million, respectively. For the six months ended June 30, 2008 and 2007, we recognized stock-based compensation expense of $3.1 million and $2.8 million, respectively. In future periods, stock-based compensation expense may increase as we issue additional equity-based awards to continue to attract and retain key employees. Additionally, SFAS 123(R) requires that we recognize compensation expense only for the portion of stock options that are expected to vest.

As of June 30, 2008, our total unrecognized compensation expense related to stock-based awards granted to employees and non-employee directors was approximately $7.5 million.

Income Taxes. We use an asset and liability approach for accounting for income taxes. Deferred income taxes are recognized for the tax consequences of temporary differences and carryforwards by applying enacted tax rates applicable to future years to differences between the financial statement amounts and the tax bases of existing assets and liabilities. We establish a valuation allowance if it is probable that some portion of the deferred tax asset will not be realized. Our determination of whether a valuation allowance is appropriate requires the exercise of judgment. At June 30, 2008, we had net operating loss carryforwards available for U.S. federal and state income taxes of $91.9 million which begin to expire in 2017. The net operating loss carryforwards that we acquired in connection with our business acquisitions may also be limited by provision of the Internal Revenue Code regarding changes in ownership. We have provided a valuation allowance against net U.S. deferred tax assets and operating loss carryforwards in certain non-U.S. jurisdictions. We have recorded a valuation allowance because of the emerging nature of our business and our history of losses. We will continue to evaluate income generated in future periods in determining the reasonableness of our position. If we determine that future income is sufficient or insufficient to cause the realization of the net operating loss carryforwards within the required time, the valuation allowance will be adjusted as necessary.

Liabilities for Pending and Threatened Litigation. We are subject to litigation, investigations, proceedings, claims or assessments and various contingent liabilities incidental to our business or assumed in connection with certain business acquisitions. In accordance with SFAS No. 5,Accounting for Contingencies, we accrue a charge for a loss contingency when

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we believe it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. If the loss is within a range of specified amounts, the most likely amount is accrued, and if no amount within the range represents a better estimate we accrue the minimum amount in the range. Generally, we record the loss contingency at the amount we expect to pay to resolve the contingency and the amount is generally not discounted to the present value. Amounts recoverable under insurance contracts are recorded as assets when recovery is deemed probable. Contingencies that might result in a gain are not recognized until realized. Changes to the amount of the estimated loss, or resolution of one or more contingencies could have a material impact on our results of operations, financial position and cash flows.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements refer to Note 1 of the Notes to the Consolidated Financial Statements in Item 1 – Financial Statements.

Off-Balance Sheet Arrangements

As of June 30, 2008 and 2007, we did not have any off-balance sheet arrangements.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk. Our international businesses generate revenue and incur expenses that are denominated in foreign currencies. These transactions could be materially affected by currency fluctuations. Our exposures are to fluctuations in exchange rates for the U.S. dollar versus the Euro and the Canadian dollar.

Changes in currency exchange rates could adversely affect our consolidated results of operations or financial position. We also maintain cash balances denominated in foreign currencies. At June 30, 2008, we had $1.5 million of cash in foreign accounts. We have not hedged our exposure to changes in foreign currency exchange rates and, as a result, could incur unanticipated translation gains and losses.

Interest Rate Risk. We had cash and cash equivalents of $40.9 million at June 30, 2008. We do not enter into investments for trading or speculative purposes. We do not believe that we have any material exposure to changes in the fair value of these investments as a result of changes in interest rates. Declines in interest rates, however, will reduce future income.

At June 30, 2008, we had an open line of credit which bears interest at a variable rate adjusted based on the prime rate, under which we may borrow a maximum of $2.5 million. At June 30, 2008, no amounts were outstanding under this line of credit. Based on the amount outstanding and the maximum amount available for borrowing, we do not believe that changes in interest rates create material exposure to our business. Increases in interest rates, however, will increase future interest expense.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of June 30, 2008, we completed our evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management as appropriate to allow for timely decisions regarding required disclosure.

Under the applicable rules of the Securities and Exchange Commission, we will be required to include a management report on our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ended December 31, 2008. Pursuant to temporary rules of the Securities and Exchange Commission, management’s report will not be subject to attestation by our registered public accounting firm in our Annual Report on Form 10-K for the year ended December 31, 2008.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the second fiscal quarter of 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in various routine legal proceedings. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, we believe that the outcome of these proceedings, even if determined adversely, would not have a material adverse effect on our business, financial condition and results of operations.

Item 1A. Risk Factors

There have been no material changes in our risk factors from what was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

During the period January 1, 2008 to June 30, 2008, we purchased the following shares:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1-31	—			—	—	—
February 1-29	—			—	—	—
March 1-31	4,164	(1)	$	12.47	N/A	N/A
April 1-30	68,517	(1)	$	5.74	N/A	N/A
May 1-31	19,007	(1)	$	6.49	N/A	N/A
June 1-30	29,795	(1)	$	7.26	N/A	N/A

(1) As part of our restricted stock plan, we offer employees the opportunity to make required tax payments with cash or through a net share settlement. For employees choosing net share settlement, we make required tax payments on behalf of employees as their stock awards vest and then withhold a number of vested shares having a value on the date of vesting equal to the tax obligation. The shares withheld were recorded as treasury shares.

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

On June 12, 2008, we held our annual meeting of stockholders in Arlington, Virginia. Stockholders of record at the close of business on May 8, 2008, were entitled to notice of and to vote in person or by proxy at the annual meeting. As of the record date there were 33,950,917 shares of common stock outstanding and entitled to vote. At the annual meeting, our stockholders voted on the election of eight directors to hold office until the next annual meeting of stockholders and the appointment of Grant Thornton LLP as our independent auditors. At the annual meeting, each of the eight directors nominated by management was elected, and the proposal for the appointment of Grant Thornton LLP as our independent auditors was approved. Details of the votes cast at the meeting are set forth below, including the number of votes for, the number of votes against and withheld, and the number of abstentions, as applicable:

1. To elect the following directors to serve until the next annual meeting of stockholders and until their successors are duly elected and qualified:

	For	Withheld
E. Spencer Abraham	23,456,313	71,407
Colin J. Cumming	23,321,619	206,101
Joseph M. Jacobs	23,286,178	241,542
Hans C. Kobler	23,449,219	78,501
Robert A. Maginn, Jr.	23,456,848	70,872
Mark P. Mills	23,291,046	236,674
Mark L. Plaumann	23,461,716	66,004
Rodney E. Slater	23,461,716	66,004

2. The stockholders ratified the appointment of Grant Thornton LLP as our independent accountants for the fiscal year ending December 31, 2008.

For	Against or Abstained
23,447,258	80,462

Item 5. Other Information

None

Item 6. Exhibits

31.1 Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

31.2 Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

32.1 Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

** Filed herewith

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: August 14, 2008

ICX TECHNOLOGIES, INC.
By:	/S/ HANS C. KOBLER
	Hans C. Kobler
	Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/S/ HANS C. KOBLER Hans C. Kobler	Chief Executive Officer and Director (Principal Executive Officer)	August 14, 2008
/S/ DEBORAH D. MOSIER Deborah D. Mosier	Chief Financial Officer (Principal Financial and Accounting Officer)	August 14, 2008
* Mark P. Mills	Chairman of the Board	August 14, 2008
* E. Spencer Abraham	Director	August 14, 2008
* Colin J. Cumming	Director	August 14, 2008
* Joseph M. Jacobs	Director	August 14, 2008
* Robert A. Maginn, Jr.	Director	August 14, 2008
* Mark L. Plaumann	Director	August 14, 2008
* Rodney E. Slater	Director	August 14, 2008

* By:	/S/ DANIEL T. MONGAN
	Daniel T. Mongan
	Attorney-In-Fact

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INDEX TO EXHIBITS

Exhibit Number	Exhibit Title
31.1	Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

33