Numerex (NMRX) 10-Q 2007 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2007
or
o	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: 0-22920

Numerex Corp.

(Exact Name of Registrant as Specified in Its Charter)

Pennsylvania	11-2948749
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

1600 Parkwood Circle, Suite 500

Atlanta, GA 30339-2119

(Address of Principal Executive Offices) (Zip Code)

(770) 693-5950

(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 þ     No o

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

Large accelerated filer o          Accelerated filer o          Non-accelerated filer þ

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

As of May 10, 2007 an aggregate of 14,538,424 shares of the registrant's Class A Common Stock, no par value (being the registrant's only class of common stock outstanding), were outstanding.

NUMEREX CORP. AND SUBSIDIARIES

INDEX

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets March 31, 2007 (unaudited) and December 31, 2006	4
Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2007 and
March 31, 2006	5
Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2007 and
March 31, 2006	6
Condensed Consolidated Statement of Shareholders' Equity (unaudited)	7
Notes to Condensed Consolidated Financial Statements - unaudited	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosures about Market Risk	23
Item 4. Controls and Procedures	23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	24
Item 1A. Risk Factors	24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3. Defaults Upon Senior Securities	24
Item 4. Submission of Matters to a Vote of Security Holders	24
Item 5. Other Information	24
Item 6. Exhibits	24
Signature Page	25
Certifications	26
Exhibits

2

Forward-looking Statements

This document contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "intend," "estimate," "assume," "strategy," "plan," "outlook," "outcome," "continue," "remain," "trend," and variations of such words and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may," or similar expressions. Numerex cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. These forward-looking statements speak only as of the date of this press release, and Numerex assumes no duty to update forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements and future results could differ materially from historical performance.

The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: the failure to realize improvements on our digital multimedia and networking business; variations in quarterly operating results, delays in the development, introduction, integration and marketing of new wireless products and services; customer acceptance of products and services; economic conditions; changes in financial and capital markets; the inability to attain revenue and earnings growth in our wireless data business; changes in interest rates; inflation; the introduction, withdrawal, success and timing of business initiatives and strategies; competitive conditions; the inability to realize revenue enhancements; and extent and timing of technological changes. Numerex SEC reports identify additional factors that can affect forward-looking statements.

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PART I. FINANCIAL INFORMATION

Item 1.Financial Statements.

NUMEREX CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share information)
	March 31,			December 31,
	2007			2006
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	10,642		$	20,384
Short-term investments		8,054			-
Accounts receivable, less allowance for doubtful accounts of $753 at March 31, 2007 and $933 at December 31, 2006:		13,012			11,844
Inventory		4,311			2,755
Prepaid expenses and other current assets		2,348			1,677
Deferred tax asset - current		831			1,113
TOTAL CURRENT ASSETS		39,198			37,773
Property and Equipment, Net		1,229			1,287
Goodwill, Net		15,967			15,967
Other Intangibles, Net		6,605			6,734
Software, Net		2,041			1,815
Other Assets		694			747
Deferred tax asset - LT		2,070			2,070
TOTAL ASSETS	$	67,803		$	66,393
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	8,437		$	7,651
Other current liabilities		1,837			2,270
Note payable, current		1,853			1,139
Deferred revenues		1,001			715
Obligations under capital leases, current portion		81			96
TOTAL CURRENT LIABILITIES		13,208			11,871
LONG TERM LIABILITIES
Obligations under capital leases and other long term liabilities		329			339
Note Payable		12,121			12,763
TOTAL LONG TERM LIABILITIES		12,450			13,102
SHAREHOLDERS’ EQUITY
Preferred stock - no par value; authorized 3,000,000; none issued		-			-
Class A common stock - no par value; authorized 30,000,000; issued 14,536,924 shares at March 31, 2007 and 14,445,234 shares at December 31, 2006		43,506			43,133
Additional paid-in-capital		2,660			2,486
Treasury stock, at cost, 1,184,900 shares on March 31, 2007 and December 31, 2006		(5,053	)		(5,053	)
Class B common stock - no par value; authorized 5,000,000; none issued		-			-
Accumulated other comprehensive income		2			2
Accumulated earnings		1,029			852
TOTAL SHAREHOLDERS' EQUITY		42,144			41,420
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	67,803		$	66,393

See accompanying notes to condensed consolidated financial statements - unaudited

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Numerex Corp.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
	Three Months Ended
	March 31,
	2007		2006
Net sales:
Product	$	9,274	$	7,599
Service		4,911		4,244
Total net sales		14,185		11,843
Cost of product sales (excluding depreciation)		7,609		6,174
Cost of services (excluding depreciation)		1,203		1,432
Depreciation		21		44
Gross Profit		5,352		4,193
Selling, general, and administrative expenses		3,613		2,793
Research and development expenses		288		296
Bad debt expense		86		-
Depreciation and amortization		469		448
Operating earnings		896		656
Interest expense		146		150
Other expense		9
Earnings before income taxes		741		506
Provision for income taxes		314		30
Net earnings	$	427	$	476
Basic earnings per common share	$	0.03	$	0.04
Diluted earnings per common share	$	0.03	$	0.04
Number of shares used in per share calculation
Basic		13,006		12,243
Diluted		13,608		12,868

See accompanying notes to condensed consolidated financial statements - unaudited

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NUMEREX CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
	For the three month period
	ended March 31,
	2007			2006
Cash flows from operating activities:
Net earnings	$	427		$	476
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation		163			141
Amortization		328			344
Allowance for doubtful accounts		86			-
Non-cash interest expense		73			137
Stock options compensation expense		173			100
Stock issued in lieu of directors fees		-			10
Deferred income taxes		282			-
Changes in assets and liabilities which provided
(used) cash:
Accounts and notes receivable		(1,108	)		(1,283	)
Inventory		(1,556	)		(81	)
Prepaid expenses & interest receivable		(351	)		(261	)
Other assets		(300	)		400
Accounts payable		785			468
Other accrued liabilities		(526	)		76
Deferred revenue		286			109
Income taxes		(269	)		21
Net cash provided/(used) by operating activities:		(1,507	)		657
Cash flows from investing activities:
Purchase of property and equipment		(92	)		(198	)
Purchase of intangible and other assets		(437	)		(109	)
Purchase of short-term investments		(8,054	)		-
Purchase of Airdesk, Inc		-			(1,379	)
Net cash used in investing activities		(8,583	)		(1,686	)
Cash flows from financing activities:
Proceeds from exercise of common stock options		374			217
Principal payments on capital lease obligations		(26	)		(15	)
Principal payments on notes payable and debt		-			(136	)
Net cash provided by financing activities:		348			66
Effect of exchange differences on cash		-			(16	)
Net decrease in cash and cash equivalents		(9,742	)		(979	)
Cash and cash equivalents at beginning of year		20,384			2,821
Cash and cash equivalents at end of year	$	10,642		$	1,842
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest		103			35
Income taxes		17			9
Disclosure of non-cash activities:
Common stock issued for the purchase of Airdesk		-			1,503
Non-cash interest		72			137
Debt converted to common stock		-			1,317

See accompanying notes to condensed consolidated financial statements - unaudited

6

NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
(Unaudited)
										Accumulated
					Additional					Other
	Common		Stock		Paid-In		Treasury			Comprehensive		Retained
	Shares		Amount		Capital		Stock			Earnings		Earnings			Total
Balance, December 31, 2006		14,145	$	43,133	$	2,487	$	(5,053	)	$	2	$	852		$	41,421
FIN 48 Adoption		-		-		-		-			-		(250	)		(250	)
FAS 123 Compensation		-		-		173		-			-		-			173
Issuance of shares in connection with
exercise of stock options		92		373		-		-			-		-			373
Net Earnings		-		-		-		-			-		427			427
Balance, March 31, 2007		14,237	$	43,506	$	2,660	$	(5,053	)	$	2	$	1,029		$	42,144

See accompanying notes to condensed consolidated financial statements - unaudited

7

NUMEREX, CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(UNAUDITED)

NOTE A - BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2007 may not be indicative of the results that may be expected for the year ending December 31, 2007. For further information, reference is also made to Numerex Corp.’s (the “Company’s”) Annual Report on Form 10-K for the year ended December 31, 2006 and the consolidated financial statements contained therein.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:

1.Nature of Business

Numerex Corp. is a wireless network service provider and a leading enabler of fixed and mobile machine-to-machine (M2M) solutions and technology. A single-source for its M2M customers, Numerex delivers real-time wireless data communications for purposes of monitoring, tracking, measuring, and intelligent management of remote assets with solutions tailored to meet the needs of each application, customer, and industry. A few of the vertical markets indirectly served by the Company include alarm security, vehicle location and asset tracking, point of sale, vending, and utility management. Numerex offers its products and services primarily throughout the United States, Canada, and Mexico. The company is headquartered in Atlanta, Georgia.

2.Principles of Consolidation

The consolidated financial statements include the results of operations and financial position of Numerex and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

3.Cash and Cash Equivalents

Cash equivalents of $10.6 million at March 31, 2007 and $20.4 million at December 31, 2006, consist of overnight repurchase agreements, money market deposit accounts, amounts on deposit in a foreign bank and restricted cash held as a letter of credit. Cash of $41,000 at March 31, 2007 and $48,000 at December 31, 2006 was held in our foreign bank account.

4.Short-Term Investments

Short-term investments that have an original maturity between three months and one year and a remaining maturity of less than one year are classified as either held-to-maturity or available-for-sale. Held-to-maturity securities are stated at amortized cost as it is our intent to hold these securities until maturity. Available-for-sale securities are recorded at fair value and are classified as current assets due to our intent and practice to hold these readily marketable investments for less than one year.

The investment securities held by the Company at March 31, 2007 are debt instruments and classified as held-to-maturity. The fair value of the securities is $8,054,000. The contractual maturity of the debt securities is $8,054,000. The security will mature on August 13, 2007.

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5.Intangible Assets

Intangible assetsconsist of developed software, patents and acquired intellectual property, and goodwill. These assets, except for goodwill, are amortized over their expected useful lives. Developed software is amortized using the straight-line method over 3 to 5 years. Patents and acquired intellectual property are amortized using the straight-line method over 7 to 16 years. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142), Goodwill and Other Intangibles. Under SFAS No. 142, goodwill is no longer amortized. Rather, SFAS No. 142 requires that intangible assets deemed to have an indefinite useful life be reviewed for impairment upon adoption of SFAS No. 142 and at least annually thereafter.

Intangible assets with determinable useful lives are amortized on a straight-line basis over their estimated useful lives. We capitalize software development costs when project technological feasibility is established and conclude capitalization when the product is ready for release. Software development costs incurred prior to the establishments of technological feasibility are expensed as incurred. The following table provides a summary of the components of our intangible assets.

	March 31,			December 31,
(In thousands)	2007			2006
Wireless Data Communications
Goodwill	$	15,377		$	15,377
Accumulated Amortization		(1,405	)		(1,405	)
Digital Multimedia and Networking
Goodwill		5,409			5,409
Accumulated Amortization		(3,414	)		(3,414	)
Goodwill, net	$	15,967		$	15,967
Purchased and developed software		4,787			4,458
Patents, trade and service marks		12,415			12,358
Intangible and other assets		1,038			988
Total intangible assets		18,240			17,804
Accumulated amortization		(9,594	)		(9,254	)
Intangible assets, net	$	8,646		$	8,550

6.Income Taxes

In June 2006 the FASB issued Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise's financial statements in accordance with SFAS 109. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. The Company adopted FIN 48 effective January 1, 2007, and the provisions of FIN 48 will be applied to all income tax positions commencing from that date. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within operations as income tax expense. The cumulative effect of applying the provisions of FIN 48 has been reported as an adjustment to the opening balance of retained earnings as of January 1, 2007.

The Company utilizes the liability method of accounting for income taxes as set forth in SFAS 109. The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. SFAS 109 further states that forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence such as cumulative losses in recent years. As a result of the Company's recent cumulative losses in the U.S. and certain foreign jurisdictions, the Company has concluded that a partial valuation allowance should remain recorded.

9

As a result of applying the provisions of FIN 48, the Company recorded a liability for unrecognized tax benefits of $250,000 inclusive of interest and penalties of $20,250 and $11,700 respectively. The $250,000 unrecognized benefit also caused a corresponding decrease to retained earnings, as of January 1, 2007. Recognizing these unrecognized tax benefits would have an impact on our effective tax rate. The company anticipates recording unrecognized tax benefits of $105,000 inclusive of interest and penalties for the year ended December 31, 2007. This amount is related to state and local income tax filing positions expected to be taken during the year.  This increase in liability will result in an increase in income tax expense for the current year. Of this expense, $11,300 has been recognized for the current three months ending March 31, 2007 in accordance with the provisions of SFAS 109.

We recorded a tax provision of $314,000 for the three months ended March 31, 2007 as compared to $30,000 for the three months ended March 31, 2006, representing effective tax rates of 42.4% and 5.93%, respectively. The difference between the Company's effective tax rate and the 34% federal statutory rate in the current year resulted primarily from state tax accruals and stock option expenses. The overall increase in the effective tax rate from the three months ended in 2006 compared to the same period in 2007 can be attributed to the company's partial release of the valuation allowance which offset much of the company's net operating loss (NOL) deferred tax assets. The company will recognize deferred tax expense in 2007 primarily related to the utilization of these NOLs. The company did not recognize deferred tax expense in 2006 before the release of the valuation allowance.

The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitation. The 2003 through 2006 tax years generally remain subject to examination by federal and most state tax authorities. However, certain returns from years in which net operating losses have arisen are still open for examination by the tax authorities.

7.Inventory

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

The components of inventory, net of reserves are as follows:

	March 31,			December 31,
(In thousands)	2007			2006
Raw materials	$	1,248		$	871
Work-in-progress		23			30
Finished goods		3,416			2,207
Less reserve for obsolescence		(376	)		(353	)
Inventory, net	$	4,311		$	2,755

8.Notes Payable

On December 29, 2006, we completed a private placement to Laurus Master Fund, Ltd. (“Laurus”) of (i) a convertible term note in the principal amount of $10,000,000 (“Note C”), and (ii) a warrant to purchase up to 158,562 shares of our common stock. Interest accrues on this note at a rate of 9.50% annually. This note has a four year term and is secured by substantially all of our assets. Note C principal reductions will begin in July 2007 and will continue for the next 42 months with final payment due in December 2010. Interest and principal under convertible Note C may be paid in either cash or, subject to certain conditions, in shares of our common stock. We may only use common stock to make payments on convertible Note C if the price per share of the common stock for the required number of trading days immediately prior to conversion is greater than $11.41. The holder of the convertible note may convert the entire principal amount of the convertible note, and any accrued interest thereon, into our common stock at a fixed conversion price equal to $10.37 per share.

On May 30, 2006, we completed a private placement to Laurus Master Fund, Ltd. (“Laurus”) of (i) a convertible term note in the principal amount of $5,000,000 (“Note A”) (ii) a non-convertible term note in the principal amount of $5,000,000 (“Note B”), and (iii) a warrant to purchase up to 241,379 shares of our common stock. Interest accrues on each of the notes at a rate of 9.75% annually. Both notes have four year terms and are secured by substantially all of our assets.

We may only use common stock to make payments on convertible Note A if the price per share of the common stock for the required number of trading days immediately prior to conversion is greater than $8.70. The holder of the convertible note may convert the entire principal amount of the convertible note, and any accrued interest thereon, into our common stock at a fixed conversion price equal to $7.91 per share.

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On August 31, 2006, Laurus converted $158,200 of Note A, which included $41,979 of accrued interest into 20,000 shares of common stock. On September 14, 2006 we voluntarily converted $1,249,994 of Note A into 158,027 shares of common stock. On October 9, 2006 we voluntarily converted $1,249,994 of Note A into 158,027 shares of common stock. On November 14, 2006 we voluntarily converted $1,249,994 of Note A into 158,027 shares of common stock. On December 19, 2006 we voluntarily converted the remaining outstanding balance of $1,133,796 of Note A into 143,337 shares of common stock.

Interest under Note B must be paid in cash. The principal balance on Note B is due and payable in cash on May 30, 2010.

As of March 31, 2007 we had $5,000,000 outstanding under Note B and $10,000,000 outstanding under Note C.

The warrant with Note C is exercisable by the holder until December 29, 2013. Subject to adjustments described in the warrant, the holder will be entitled to receive, upon exercise of the warrant in whole or in part, shares of common stock at an exercise price of $10.13. We are required to register the common stock underlying the Warrant for resale by Laurus.

The warrant with Note A and Note B is exercisable by the holder until May 30, 2013. Subject to adjustments described in the warrant, the holder will be entitled to receive, upon exercise of the warrant in whole or in part, shares of common stock at an exercise price of $7.73. We have registered the common stock underlying the Warrant for resale by Laurus. Note A also contains a beneficial conversion feature with a contingent conversion option. The value of the Beneficial Conversion Feature, $38,000, was measured as of the commitment date.

We also completed two prior private placements with Laurus. On January 13, 2004, we completed our first private placement to Laurus of (i) a Convertible Term Note in the aggregate principal amount of $4,500,000 (the “First Company Note”), and (ii) a warrant to purchase up to 300,000 shares of the Company’s common stock (the “First Warrant”). The First Warrant is exercisable by Laurus until January 13, 2011, and has three separate tranches.

The first tranche is exercisable for up to 150,000 shares of common stock at a price of $4.75 per share. The second tranche is exercisable for up to 100,000 shares of common stock at a price of $5.17 per share. The third tranche is exercisable for up to 50,000 shares of common stock at a price of $5.99 per share. We also agreed to register the common stock underlying the First Warrant for resale by Laurus, and have such registration declared effective, by August 13, 2004. Such registration statement was declared effective on November 22, 2004. As a result, under the terms of the First Warrant, we issued warrants covering additional 66,000 shares pursuant to the registration rights agreement. On July 6, 2005 we voluntarily converted $2,280,000 of the outstanding debt associated with the First Company Note into 500,000 shares of common stock. On August 1, 2005 we converted the $953,040 remaining outstanding portion of the debt associated with the First Company Note into 209,000 shares of common stock.

On January 28, 2005, the Company completed a second private placement to Laurus of (i) a Convertible Term Note in the original principal amount of $1,500,000 (the “Second Company Note”), and (ii) a warrant to purchase up to 100,000 shares of our common stock (the “Second Warrant”). The Second Company Note provided that Laurus may convert all or any portion of the outstanding principal amount of the Second Company Note into shares of common stock, subject to certain limitations. The Second Warrant is exercisable by Laurus until January 28, 2012, and has two separate pricing tranches. The first pricing tranche is exercisable for up to 50,000 shares of common stock at a price of $5.51 per share. The second pricing tranche is exercisable for up to 50,000 shares of common stock at a price of $5.72 per share. We have registered the common stock underlying the Second Company Warrant for resale by Laurus. The Second Company Note also contained a beneficial conversion feature with a contingent conversion option. The value of the beneficial conversion feature was measured as of the commitment date. The value at the commitment date was $154,000. On February 6, 2006, Laurus converted $1,263,780 of our outstanding debt, including $8,944 of accrued interest into 238,000 shares of common stock. The result of this transaction was to eliminate our Second Company Note with Laurus, excluding the warrants issued with the Second Company Note. These warrants along with the warrants issued with the First Company Note, which total 400,000, remain outstanding.

Laurus is an "accredited investor" as defined in Rule 501(d) of Regulation D under the Securities Act of 1933, as amended (the "Securities Act"). The Company issued the securities to Laurus in reliance on the exemption from registration provided by Section 4(2) under the Securities Act.

9.Shareholders’ Equity

Shareholders’ Equity increased by $724,000 for the three-month period ending March 31, 2007. The increase in Shareholders’ Equity was attributable to the increase of $427,000 in the retained earnings due to the current earnings and to the issuance of common stock due to the exercise of employee stock options. This was partially offset by $250,000 adjustment to retained earnings for the adoption of FIN 48.

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10. Stock-Based Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including equity awards.

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006. The Company’s Condensed Consolidated Financial Statements as of and for the three months ended March 31, 2007 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Company’s Condensed Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R) for the three months ended March 31, 2007 was $173,000 and for the three months ended March 31, 2006 was $99,000, which consisted of stock-based compensation expense related to employee equity awards. Total unrecognized compensation related to unvested stock-based awards granted to employees and members of our board of directors at March 31, 2007, net of estimated forfeitures, is $1.9 million and is expected to be recognized over a weighted-average period of 3.9 years.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in the Company’s Condensed Consolidated Statement of Operations for the three March 31, 2007 included compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). With the adoption of SFAS 123(R), the Company will continue to use the method of attributing the value of stock-based compensation costs to expense on the straight-line method. As stock-based compensation expense recognized in the Condensed Consolidated Statement of Operations for the first quarter of fiscal 2007 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.

The fair value of share-based payment awards is estimated at the grant date using the Black-Scholes option valuation model. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to; the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.

We have outstanding stock options granted pursuant to four stock option plans. The 1994 Long-Term Incentive Plan (the “1994 Plan”), which was adopted in 1994, the Non-Employee Director Stock Option Plan (the “Director Plan”) which was adopted in 1996, the Long-Term Incentive Plan (the “1999 Plan”), which was adopted in 1999 and the 2006 Long Term Incentive Plan (the “2006 Plan”) which was adopted in 2006. The 1994 Plan and the Director Plan were terminated and replaced by the 1999 Plan which was effective for options granted from October 25, 1999. The 1999 Plan was terminated and replaced by the 2006 Plan. Options outstanding under the 1994 Plan, the Director Plan and the 1999 Plan remain in effect, but no new options may be granted under those plans. Options issued under the 2006 Plan and the 1999 Plan typically vest ratably over a four-year period. All options issued under the 1994 Plan are fully vested.

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 The aggregate number of shares which may be issued under the 2006 plan is 750,000 shares of Class A Common Stock (“Shares”) plus (i) any available Shares under the 1999 Plan as of its termination date and (ii) Shares subject to options granted under the 1999 Plan that expire or terminate without having been fully exercised. A summary of the company's stock option activity and related information for the three months ended March 31, 2007 follows:

		Weighted	Weighted	Aggregate
		Average	Average Remaining	Intrinsic
	Shares	Ex. Price	Contractual Life (Yrs)	Value
Outstanding, at 12/31/06	1,784,865	$5.55
Options granted	38,250	$9.34
Options exercised	(91,690)	$4.88
Options cancelled	(4,000)	$4.57
Options expired	-	$0.00
Outstanding, end of period	1,727,425	$5.67	6.48	$ 7,782,080
Exercisable, end of period	1,047,925	$4.95	4.99	$ 5,483,125

The following table summarizes information related to fixed stock options outstanding at March 31, 2007:

	Options outstanding			Options exercisable
Range of exercise prices	Number outstanding at March 31, 2007	Weighted average remaining contractual life (years)	Weighted average exercise price	Number exercisable at March 31, 2007	Weighted average exercise price
$1.00 -   4.00	523,415	5.74	$3.03	420,790	$2.86
4.01 -   8.00	735,010	6.47	$5.26	458,635	$5.39
8.01 -   12.94	469,000	7.33	$9.26	168,500	$9.00
	1,727,425	6.48	$5.67	1,047,925	$4.95

The fair value of options at date of grant was estimated using the Black-Scholes option pricing model. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected stock price volatility was calculated based on the historical volatility of our common stock over the expected life of the option. The average expected life was based on the contractual term of the option and expected employee exercise behavior. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. Forfeitures are estimated based on voluntary termination behavior, as well as an analysis of actual option forfeitures.

The key assumptions used in the valuation model during the three months ended March 31, 2007 and 2006 are provided below:

	Three Months Ended
	March 31,
	2007	2006
Valuation Assumptions:
Volatility	57.09%	67.42%
Expected term	6.3 years	6.3 years
Risk free interest rate	4.46%	4.31%
Dividend yield	0.00%	0.00%

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11.Earnings Per Share

Basic net earnings per common share available to common shareholders are based on the weighted-average number of common shares outstanding. For periods in which we have net earnings, diluted net earnings per common share available to common shareholders are based on the weighted-average number of common shares outstanding and dilutive potential common shares, such as dilutive stock options.

The numerator in calculating both basic and diluted earnings per common share for each period is the same as net earnings. The denominator is based on the number of common shares as shown in the following table:

	Three Months Ended
	March 31,
(In thousands, except per share data)	2007		2006
Common Shares:
Weighted average common shares outstanding		13,006		12,145
Dilutive effect of common stock equivalents		602		616
Total		13,608		12,761
Net earnings:	$	427	$	476
Net earnings per common share:
Basic	$	0.03	$	0.04
Diluted	$	0.03	$	0.04

For the three months ended March 31, 2007 and 2006, we excluded antidilutive options of 201,000 and 212,000 respectively, shares of common stock and common stock equivalents from the computation of diluted earnings per share. We excluded these share amounts because the exercise prices of those shares were greater than the average market price of the common stock during the applicable period. With the acquisition of Airdesk, the Company could issue an additional 300,000 shares of the Company’s common stock over a three-year period. These shares are currently held in Escrow and are not included in the basic and diluted share calculation.

12.Revenue Recognition

Our revenue is generated from three sources:

·the supply of product, under non recurring agreements,

·the provision of services, under non recurring agreements and,

·the provision of data transportation services, under recurring or multi-year contractually based agreements.

Revenue is recognized when persuasive evidence of an agreement exists, the product or service has been delivered, fees and prices are fixed and determinable, collectibility is probable and when all other significant obligations have been fulfilled.

We recognize revenue from product sales at the time of shipment and passage of title. We offer customers the right to return products that do not function properly within a limited time after delivery. We continuously monitor and track such product returns and record a provision for the estimated amount of such future returns, based on historical experience and any notification received of pending returns. While such returns have historically been within expectations and the provisions established, we cannot guarantee that we will continue to experience the same return rates that we have experienced in the past. Any significant increase in product failure rates and the resulting credit returns could have a material adverse impact on operating results for the period or periods in which such returns materialize.

We recognize revenue from the provision of services at the time of the completion, delivery or performance of the service. In the case of revenue derived from maintenance services we recognize revenue ratably over the contract term. In certain instances we may under an appropriate agreement advance charge for the service to be provided. In these instances we recognize the advance charge as deferred revenue (classified as a liability) and release the revenue ratably over future periods in accordance with the contract term as the service is completed, delivered or performed.

Our arrangements do not generally include acceptance clauses. However, arrangements involving multiple element service agreements include certain milestones and levels of certification, acceptance occurs upon our certification of our completion of each of the various elements.

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We recognize revenue from the provision of data transportation services when we perform the services or process transactions in accordance with contractual performance standards. Revenue is earned monthly on the basis of the contracted monthly fee and an excess message fee charge, should it apply, that is volume based. In certain instances we may under an appropriate agreement advance charge for the data transport service to be provided. In these instances we recognize the advance charge (even if nonrefundable) as deferred revenue (classified as a liability) and release the revenue over future periods in accordance with the contract term as the data transport service is delivered or performed.

13.Recent Accounting Pronouncements

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 No. 159”). SFAS No. 159 allows companies to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 will become effective for the Company beginning in fiscal 2009. The Company is currently evaluating what effects the adoption of SFAS No. 159 will have on the Company’s future results of operations and financial condition.

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United Sates of America, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

14.Savings and Investment Plan

We sponsor a 401k savings and investment plan that covers all of the employees of Numerex Corp. and its subsidiaries that elect to participate. Employees are eligible for participation on the enrollment date following six months of service. We contributed an amount equal to 50% of the portion of the each participant’s elective deferral contribution that does not exceed 6% of such participant’s total compensation for each payroll period in which an elective deferral is made. Our contribution is made in cash on a monthly basis. The matching contributions made by us vest over a three-year period at a rate of 33% per year. Approximately $35,200 and $33,300 were expensed for the quarters ended March 31, 2007 and 2006, respectively.

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NOTE C - INVESTMENTS

AirDeskAcquisition

On January 5, 2006 we completed the acquisition of the assets of AIRDESK, Inc. through its wholly owned subsidiary, Airdesk LLC (“Airdesk”). The results of Airdesk’s operations have been included in the consolidated financial statements from January 1, 2006. The assets relate to Airdesk’s machine-to-machine (M2M) solutions and services business in the United States and Canada. The acquisition aligns Airdesk’s digital M2M products and portfolio of industry leading radio modules with our M2M network and services platform.

The assets acquired consist of furniture, fixtures, equipment (consisting of hardware and software), inventory, distribution rights agreements, accounts receivable, trademarks and other intellectual property, including Airdesk’s billing system and “Airsource” database library.

Total consideration for the asset purchase was approximately $4,222,000 payable in the form of shares of our common stock and the assumption of certain existing indebtedness of AIRDESK, Inc. In addition, if certain revenue and other performance targets are achieved, we could release an additional 300,000 shares of our common stock over a three-year period.

We assumed approximately $2,453,000 of debt, of which $1,199,000 was paid in cash at closing of the transaction as a reduction of part of the debt, and the balance of $1,254,000 was paid on August 17, 2006. We also issued shares of common stock valued at approximately $196,000 to AIRDESK at closing and deposited the remaining shares of common stock, valued at closing at approximately $1,307,000, with an Escrow Agent. AIRDESK retains voting and dividend rights to these shares while held in escrow. The Escrow Agent will release the shares of common stock to AIRDESK over a two-year period in accordance with the terms of the Escrow Agreement. In addition, we incurred approximately $266,000 of direct acquisition expenses that are in addition to the purchase price.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

(in thousands)	At January 5, 2006
Current assets	$	2,410
Property, plant and equipment		444
Other non-current assets		12
Intangible assets		934
Goodwill		3,214
Total assets acquired		7,014
Current liabilities		(3,346	)
Long-term debt		(700	)
Total liabilities assumed		(4,046	)
Net assets acquired	$	2,968

The $934,000 of acquired intangible assets was comprised of $668,000 assigned to trademarks, $189,000 assigned to customer relationships and $77,000 assigned to a non-compete agreement. The estimated useful life of the customer relationships is 4 years and the estimated useful life of the non-compete agreement is 2 years. The trademarks are not subject to amortization.

The $3,214,000 of goodwill was assigned to the wireless data communications segment. The goodwill and intangible assets will not be deductible for income tax purposes, thus resulting in a $635,000 lowering of the consolidated valuation allowance on deferred tax assets.

NOTE D - LIQUIDITY

We believe that our existing cash and cash equivalents together with cash generated from operations will be sufficient to meet our operating requirements through at least December 31, 2007. This belief could be affected by future operating earnings that a lower than expectations, a material adverse change in our operating business or a default under the Company Notes.

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NOTE E - SEGMENT INFORMATION

Segment Information

The Company operates in three distinct segments: Wireless Data Communications; Digital Multimedia, Networking and Wireline Security; and Unallocated Corporate. The Wireless Data Communications segment is made up of all our wireless machine-to-machine communications products and services. The Digital Multimedia, Networking and Wireline Security includes our networking products and services, video conferencing products, and our wire-line security detection products. There are expenses, such as depreciation and amortization at the corporate level that are not allocated to the other reportable segments.

Summarized below are the Company’s revenues and net income (loss) by reportable segment.

Certain Corporate expenses are allocated to the segments based on segment revenues.

	Three Months Ended
	March 31,
(In thousands)	2007			2006
Revenues:
Wireless Data Communications	$	12,869		$	10,403
Digital Multimedia, Networking and Wireline Security		1,316			1,440
	$	14,185		$	11,843
Operating earnings (loss) before taxes
Wireless Data Communications	$	798		$	634
Digital Multimedia, Networking and Wireline Security		176			(5	)
Unallocated Corporate		(233	)		(123	)
	$	741		$	506
Depreciation and Amortization
Wireless Data Communications	$	328		$	339
Digital Multimedia, Networking and Wireline Security		54			98
Unallocated Corporate		108			55
	$	490		$	492
March 31,					Dec. 31
Identifiable Assets		2007			2006
Wireless Data Communications	$	39,384		$	37,380
Digital Multimedia, Networking and Wireline Security		3,989			3,941
Unallocated Corporate		24,430			25,072
	$	67,803		$	66,393

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Numerex Corp. is a wireless network service provider and a leading enabler of fixed and mobile machine-to-machine (M2M) solutions and technology. A single-source for its M2M customers, Numerex delivers real-time wireless data communications for purposes of monitoring, tracking, measuring, and intelligent management of remote assets with solutions tailored to meet the needs of each application, customer, and industry. Several markets indirectly served by the Company include alarm security, vehicle location and asset tracking, point of sale, vending, and utility management. Numerex offers its products and services primarily throughout the United States, Canada, and Mexico. The company is headquartered in Atlanta, Georgia.

Revenues for the first quarter of 2007 increased 20% compared to the first quarter of 2006. We continued to see growth in our wireless data products and services. Wireless data revenues increased over 24%, primarily as a result of increased product sales, compared to the first quarter last year. The increase in the current year revenues compared to the prior year is primarily attributable to growth in wireless M2M products and services. The company’s growth in revenues in the first quarter was lower than expected because of reduced sales for the Company’s mobile tracking solution. The decision was made in the first quarter to temporarily stop shipments of this product pending the resolution of activation and billing issues, which surfaced during the quarter. These issues have now been resolved and shipments of the product have resumed and are expected to accelerate over the course of the year.

Critical Accounting Policies and Estimates

The following discussion and analysis is based upon our condensed consolidated financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States of America. The preparation of our condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of revenue, expenses, assets, and liabilities during the periods reported. Estimates are used when accounting for certain items such as unbilled revenue, allowance for doubtful accounts, depreciation or amortization periods, income taxes and valuation of intangible assets. We base our estimates on historical experience, where applicable and other assumptions that we believe are reasonable under the circumstances. We believe that certain significant accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

For additional information regarding the Company’s critical accounting policies see Note B to the Condensed Consolidated Financial Statements included in Part 1, Item 1 above. Also, reference is made to the Company’s Annual Report on Form 10-K as amended for the year ended December 31, 2006 and the condensed consolidated financial statements contained therein.

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General

The following tables set forth, for the periods indicated, the amounts and percentages of net sales represented by selected items in the Company’s Condensed Consolidated Statements of Operations.

SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
	For the Three Months Ended
	March 31,
	2007		2006		% Change
Net sales:
Wireless Data Communications
Product	$	8,913	$	7,293		22.2	%
Service		3,956		3,109		27.2	%
Sub-Total		12,869		10,402		23.7	%
Digital Multimedia, Networking and Wireline Security
Product		361		306		18.0	%
Service		955		1,135		-15.9	%
Sub-Total		1,316		1,441		-8.7	%
Total net sales
Product		9,274		7,599		22.0	%
Service		4,911		4,244		15.7	%
Total net sales		14,185		11,843		19.8	%
Cost of product sales (excluding depreciation)		7,609		6,174		23.2	%
Cost of services (excluding depreciation)		1,203		1,432		-16.0	%
Depreciation		21		44		-52.3	%
Gross Profit		5,352		4,193		27.6	%
Selling, general, and administrative expenses		3,613		2,793		29.4	%
Research and development expenses		288		296		-2.7	%
Bad debt expense		86		-		na
Depreciation and amortization		469		448		4.7	%
Operating earnings		896		656		-36.6	%
Interest expense		146		150		2.7	%
Other expense		9		-		na
Earnings before income taxes		741		506		-46.4	%
Income taxes		314		30		na
Net earnings	$	427	$	476		10.3	%
Basic income per common share	$	0.03	$	0.04
Diluted income per common share	$	0.03	$	0.04
Basic weighted average shares outstanding		13,006		12,243
Diluted weighted average shares outstanding		13,608		12,868

See notes to consolidated financial statements

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SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS
Percent of Total Sales
	Three Month Period Ended
	March 31,
	2007			2006
Wireless Data Communications
Product		62.8	%		61.6	%
Service		27.9	%		26.3	%
Sub-Total		90.7	%		87.8	%
Digital Multimedia, Networking and Wireline Security
Product		2.5	%		2.6	%
Service		6.7	%		9.6	%
Sub-Total		9.3	%		12.2	%
Total net sales
Product		65.4	%		64.2	%
Service		34.6	%		35.8	%
Total net sales		100.0	%		100.0	%
Cost of product sales (excluding depreciation)		53.6	%		52.1	%
Cost of services (excluding depreciation)		8.5	%		12.1	%
Depreciation		0.1	%		0.4	%
Gross Profit		37.7	%		35.4	%
Selling, general, and administrative expenses		25.5	%		23.6	%
Research and development expenses		2.0	%		2.5	%
Bad debt expense		0.6	%		0.0	%
Depreciation and amortization		3.3	%		3.8	%
Operating earnings		6.3	%		5.5	%
Interest expense		-1.0	%		-1.3	%
Other expense		-0.1	%		0.0	%
Net earnings before income taxes		5.2	%		4.3	%
Income taxes		2.2	%		0.3	%
Net earnings		3.0	%		4.0	%

See notes to consolidated financial statements

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Results of Operations

First quarter fiscal year 2007 compared to first quarter fiscal year 2006

Net Sales

Net sales increased 20% to $14.2 million for the three-month period ended March 31, 2007 as compared to $11.8 million for the three-month period ended March 31, 2006. The increase in total net sales for the first quarter was attributable to a 22.0% increase in total product sales and a 15.7% increase in sales of services. The increase of the product and service sales for the quarter ended March 31, 2007, compared to the same period in 2006, was in Wireless Data Communications, which was partially offset by a decrease in Digital Multimedia, Networking and Wireline Security services.

Net sales from Wireless Data Communications increased 23.7% to $12.9 million for the three-month period ended March 31, 2007 as compared to $10.4 million for the three-month period ended March 31, 2006. The increase in net sales for the period was the result of an increase in product sales (up 22.2% from the same period last year) and an increase in service sales (up 27.2% versus the same period last year). The increase in Wireless Data Communications product sales of $1.6 million for the first quarter of 2007 versus the same period in 2006 was the result of increased sales of our wireless security products as well as our wireless module products.

During the three-month period ended March 31, 2007, Wireless Data Communications service revenues increased 27.2% to $3.9 million as compared to $3.1 million for the three-month period ended March 31, 2006. This increase was primarily due to increases in the number of connections to our wireless networks. Revenues from connections to our networks increased $640,000 for the three-month period ended March 31, 2007 compared to the same period in 2006. Connection increases were generated by sales of our security products as well as those generated by value added resellers who utilize the Numerex networks to provide customer services. We continue to focus on increasing connections to our networks due to the recurring nature of the service revenues.

Net sales from Digital Multimedia, Networking and Wireline Security decreased 8.7% to $1.3 million for the three-month period ended March 31, 2007 compared to $1.4 million for the three-month period ended March 31, 2006. The decrease in first quarter revenues compared to the first quarter of 2006 was due to a 15.9% decrease in service revenues to $1.0 million primarily due to a decreased demand for installation and integration services.

Cost of Sales

Cost of product sales increased 23.2% to $7.6 million for the three-month period ended March 31, 2007 as compared to $6.2 million for the three-month period ended March 31, 2006. The increase in cost of sales was primarily due to higher product sales volume of our wireless security devices.

Cost of services decreased 16% to $1.2 million for the three-month period ended March 31, 2007 as compared to $1.4 million for the three-month period ended March 31, 2006. The decrease in cost of services for the three month period ended March 31, 2007 versus the same period in 2006 was primarily the result of reduced personnel and service materials in the Digital Multimedia, Networking and Wireline services segment.

Cost of salesdepreciation and amortization expense decreased 52.3% to $21,000 for the three-month period ended March 31, 2007 as compared to $44,000 for the three-month period ended March 31, 2006. This decrease was primarily due to certain assets becoming fully depreciated.

Gross Profit

Gross profit, as a percentage of net sales, was 37.7% for the three-month period ended March 31, 2007 compared to 35.4% for the three-month period ended March 31, 2006. The total gross profit as a percentage of sales increased for the quarter ended March 31, 2007 compared to the same period in 2006 because of the decrease in cost of services. Since gross profit as a percentage of sales is generally higher on service revenue than for product sales, the decrease in service costs resulted in a higher gross profit percentage.

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Operating Expenses

Selling, general, administrative and other expenses increased 29.4% to $3.6 million for the three-month period ended March 31, 2007 as compared to $2.8 million for the three-month period ended March 31, 2006. This increase is principally due to higher headcount in sales, marketing and support functions, as well as an increase in promotional and other sales and marketing expenses.

Research and development expenses decreased 2.7% to $288,000 for the three-month period ended March 31, 2007 as compared to $296,000 for the three-month period ended March 31, 2006. This decrease is primarily due to an increase in software capitalization to $255,000 compared to $99,000 in the prior year three month period. This was partially offset by increased contractor costs to $215,000 for the three month period ended March 31, 2007 compared to $99,000 for the same prior year period. These increased contractor costs are related to the development of the new digital products and services. In the prior year period not all of the projects had reached technical feasibility and therefore were expensed as incurred. Some of these projects have now proved technically feasible and have moved into full development.

Bad debt expense increased to $86,000 for the quarter ended March 31, 2007 from $0 in the same quarter in 2006. Bad debt increased over the prior year period as a result a realease of the bad debt allowance in the prior year period as a result of the implementation of more stringent credit policies and collections processes as well as an improvement in the general economic conditions.

Operating expense depreciation and amortization expense increased 4.7% to $469,000 for the three-month period ended March 31, 2007 as compared to $448,000 for the three-month period ended March 31, 2006. This increase is attributable to amortization beginning on completed research and development projects as well as the purchase of depreciable computer and office equipment.

Interest expense increased slightly for the three-month period ended March 31, 2007 to $155,000 as compared to $150,000 for the three-month period ended March 31, 2006. This increase was primarily the result of an increase in the foreign currency exchange loss related to our Canadian and Latin American customers.

We recorded a tax provision of $314,000 for the three months ended March 31, 2007 as compared to $30,000 for the three months ended March 31, 2006. The increase over the prior year is due to Federal AMT as well as increased State income taxes.

Basic and diluted earning per common share was $0.03 for three-month period ended March 31, 2007 as compared to basic and fully diluted earnings per share of $0.04 for the three-month period ended March 31, 2006.

The basic weighted average shares outstanding was 13,006,000 and diluted weighted average shares outstanding was 13,608,000 for the three-month period ended March 31, 2007 as compared to basic weighted average shares outstanding of 12,145,000 and diluted weighted average shares outstanding of 12,764,000 for the three-month period ended March 31, 2006. This increase was due to the issuance of 885,000 common shares to Laurus in connection with the conversion of our debt, as discussed earlier, the issuance of 348,000 common shares related to the acquisition of the assets of AIRDESK, Inc., as well as the issuance of 166,000 common shares related to the exercise of employee stock options. These issuances were partially offset by the retirement of 1.2 million treasury shares in August 2006.

Liquidity and Capital Resources

We had working capital of $26.2 million as of March 31, 2007 compared to a working capital of $25.9 million at December 31, 2006. We had cash balances of $10.6 million and $20.3 million, respectively, as of March 31, 2007 and December 31, 2006. The decrease in cash balances is primarily related to the transfer of cash to a short-term investment account.

We used cash from operating activities totaling $1.5 million for the three-month period ended March 31, 2007 compared to providing cash of $657,000 for the three-month period ended March 31, 2006. The increase in cash used by operating activities for the three months ended March 31, 2007 versus the comparable period of 2006 was primarily due to an increase in inventory and an increase in accounts receivable. The temporary suspension of sales of our mobile tracking product during the first quarter of 2007 hampered the collection of receivables and slowed the turnover of inventory. These were partially offset by an increase in accounts payable, and an increase in deferred revenue.

We used cash in investing activities totaling $8.6 million for the three-month period ended March 31, 2007 compared to $1.7 million for the three-month period ended March 31, 2006. The increase in cash used in investing activities was primarily due to the purchase of short-term investments and the purchase of intangible assets.

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We generated cash from financing activities totaling $348,000 for the three-month period ended March 31, 2007 compared to $66,000 for the three-month period ended March 31, 2006. For the period ended March 31, 2007 and March 31, 2006, cash generated from financing activities was primarily related to the proceeds from the exercise of stock options, which was partially offset by payments on the notes and lease payable.

Our business has traditionally not been capital intensive; accordingly, capital expenditures have not been material. To date, we have funded all capital expenditures from working capital, capital leases and other long-term obligations.

We believe that our existing cash and cash equivalents together with cash generated from operations will be sufficient to meet our operating requirements through at least December 31, 2007. This belief could be affected by future operating losses in excess of expectations, a material adverse change in our operating business or a default under the Company Notes.

Item 3.Quantitative and Qualitative Disclosures about Market Risks.

Our exposure to market risk relates primarily to our cash balances and the effect that changes in interest rates have on the interest earned on that portfolio.

As of March 31, 2007 we did not hold any derivative financial instruments for speculative or trading purposes. The primary objective of our investment activities is the preservation of principal while maximizing investment income and minimizing risk. As of March 31, 2007, we had $18.7 million in cash, cash equivalents and short-term investments that mature in six months or less. Due to the short duration of these financial instruments, we do not expect that a change in interest rates would result in any material loss to our investment portfolio.

At March 31, 2007, we have obligations under a note payable and under capital leases, both of which have fixed interest rates. We believe that the effect, if any, of reasonably possible near-term changes in interest rates or foreign currency exchange rates on our financial position, results of operations and cash flows will not be material.

Item 4.Controls and Procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2007.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation of our disclosure controls and procedures as of March 31, 2007, our chief executive officer and chief financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2007, no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.Legal Proceedings.

We are involved in litigation in the ordinary course of our business, both as a defendant and as a plaintiff. While we cannot predict the outcome of any pending or future litigation, examination or investigation, we do not believe that any pending matter will have a material adverse effect on our cash flows, financial condition or results of operations.

Item 1A. Risk Factors.

For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussion set forth in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and the information under “Forward-Looking Statements” included in this report. At March 31, 2007, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2006.

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

None - not applicable.

Item 3.Defaults Upon Senior Securities.

None - not applicable.

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

None - not applicable.

Item 5.Other Information.

None - not applicable.

Item 6.Exhibits

Exhibit 31.1Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14.

Exhibit 31.2Certification of Chief Financial Officer, Executive Vice President, and Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14.

Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Through its website at www.nmrx.com, the Company makes available, free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission.

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SIGNATURES

Pursuant to the requirements 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.

NUMEREX CORP.

(Registrant)

Date: May 14, 2007/s/Stratton J. Nicolaides

Stratton J. Nicolaides

Chairman and Chief Executive Officer

Date: May 14, 2007/s/Alan B. Catherall

 Alan B. Catherall

 Chief Financial Officer,

 Executive Vice President, and

 Principal Financial and Accounting Officer