Numerex (NMRX) 10-Q 2008 Q3 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 September 30, 2008
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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o

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 November 5, 2008 an aggregate of 14,161,614 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 Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2008 and September 30, 2007.	3
Condensed Consolidated Balance Sheets (Unaudited) September 30, 2008 and December 31, 2007	4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2008 and September 30, 2007.	5
Condensed Statement of Shareholders' Equity (Unaudited) for the Nine Months Ended September 30, 2008	6
Notes to Condensed Consolidated Financial Statements - Unaudited	7
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.  Quantitative and Qualitative Disclosures about Market Risk	21
Item 4.  Controls and Procedures	22
PART II - OTHER INFORMATION
Item 1.  Legal Proceedings	22
Item 1A.  Risk Factors	22
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.  Defaults Upon Senior Securities	22
Item 4.  Submission of Matters to a Vote of Security Holders	23
Item 5.  Other Information	23
Item 6.  Exhibits	23
Signature Page	24
Certifications	26
Exhibits

PART I.  FINANCIAL INFORMATION

Item 1.   Financial Statements.

Numerex Corp.
Condensed Consolidated Statement of Operations
(In thousands, except per share data)
(Unaudited)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Net sales:
Hardware	$	11,632		$	10,185		$	35,745		$	29,573
Service		7,345			5,799			21,112			15,767
Total net sales		18,977			15,984			56,857			45,340
Cost of hardware sales		9,663			9,096			30,838			25,874
Cost of services		2,634			1,536			6,755			4,020
Gross Profit		6,680			5,352			19,264			15,446
Selling, general, and administrative expenses		4,697			4,078			14,672			11,557
Research and development expenses		473			382			1,488			1,004
Bad Debt Expense		209			164			420			413
Depreciation and amortization		773			697			2,289			1,717
Operating earnings		528			31			395			755
Interest expense		(331	)		(448	)		(1,141	)		(949	)
Other income (expense)		5			(1	)		2			(20	)
Earnings (loss) before income tax		202			(418	)		(744	)		(214	)
Provision (benefit) for income tax		125			(201	)		(421	)		(101	)
Net earnings (loss)	$	77		$	(217	)	$	(323	)	$	(113	)
Basic earnings (loss) per common share	$	0.01		$	(0.02	)	$	(0.02	)	$	(0.01	)
Diluted earnings (loss) per common share	$	0.01		$	(0.02	)	$	(0.02	)	$	(0.01	)
Number of shares used in per share calculation
Basic		13,742			13,187			13,735			13,117
Diluted		13,986			13,187			13,735			13,117

See accompanying notes to condensed consolidated financial statements – unaudited

3 

NUMEREX CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
	September 30,			December 31,
	2008			2007
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	8,550		$	7,425
Accounts receivable, less allowance for doubtful accounts of $1,300 at September 30, 2008 and $1,009 at December 31, 2007:		12,512			16,396
Inventory, net		8,645			10,059
Prepaid expenses and other current assets		1,709			1,885
Deferred tax asset		820			770
TOTAL CURRENT ASSETS		32,236			36,535
Property and equipment, net		1,730			2,003
Goodwill, net		26,116			22,603
Other intangibles, net		6,370			6,940
Software, net		3,346			3,486
Other assets - long-term		334			526
Deferred tax asset - long-term		2,397			2,005
TOTAL ASSETS	$	72,529		$	74,098
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	7,626		$	10,299
Other current liabilities		2,075			2,311
Note payable		2,568			2,568
Deferred revenues		2,290			1,328
Obligations under capital leases		35			44
TOTAL CURRENT LIABILITIES		14,594			16,550
LONG TERM LIABILITIES
Obligations under capital leases and other long-term liabilities		425			486
Note payable - net of current portion		8,271			10,197
TOTAL LONG TERM LIABILITIES		8,696			10,683
COMMITMENTS AND CONTIGENCIES		-			-
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 14,928,101
shares at September 30, 2008 and 14,706,101 shares at December 31, 2007		49,290			47,455
Class B common stock – no par value; authorized 5,000,000; none issued		-			-
Additional paid-in-capital		4,285			3,427
Treasury stock, at cost, 1,185,809 shares on September 30, 2008 and
December 31, 2007		(5,053	)		(5,053	)
Accumulated other comprehensive loss		(1	)		(6	)
Retained earnings		718			1,042
TOTAL SHAREHOLDERS' EQUITY		49,239			46,865
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	72,529		$	74,098

See accompanying notes to condensed consolidated financial statements – unaudited

4 

NUMEREX CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
	For the nine month period
	ended September 30,
	2008			2007
Operating activities:-
Net loss	$	(323	)	$	(113	)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation		593			492
Amortization		1,696			1,225
Allowance for doubtful accounts		420			413
Inventory reserves		(5	)		38
Non-cash interest expense		364			213
Share based compensation expense		858			656
Stock issued in lieu of directors fees		49			-
Deferred income taxes		(442	)		(29	)
Changes in assets and liabilities which provided (used) cash:
Accounts and notes receivable		3,497			(3,946	)
Inventory		1,420			(4,497	)
Prepaid expenses & interest receivable		143			322
Other assets		45			71
Accounts payable		(2,673	)		521
Other current liabilities		(47	)		55
Deferred revenue		963			2,255
Income taxes		(199	)		(272	)
Net cash provided by (used in) operating activities		6,359			(2,596	)
Investing activities:
Purchase of property and equipment		(320	)		(456	)
Purchase of intangible and other assets		(987	)		(1,113	)
Purchase of short-term investment		-			(8,050	)
Sale of short-term investment		-			8,003
Purchase of assets of Orbit One Communications, Inc		(1,807	)		(5,884	)
Net cash used in investing activities		(3,114	)		(7,500	)
Financing activities:
Proceeds from exercise of common stock options		80			545
Principal payments on capital lease obligations		(62	)		(68	)
Principal payments on notes payable and debt		(2,143	)		(714	)
Net cash used in financing activities		(2,125	)		(237	)
Effect of exchange rate differences on cash		5			(7	)
Net increase (decrease) in cash and cash equivalents		1,125			(10,340	)
Cash and cash equivalents at beginning of year		7,425			20,384
Cash and cash equivalents at end of year	$	8,550		$	10,044
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest		900			693
Income taxes		180			17
Disclosure of non-cash activities:
Non-cash interest		364			213
Non-cash deferred income taxes		442			282
Disclosure of non-cash investing activities:
Common stock issued for the purchase of assets of Airdesk, Inc.		1,706			1,018

See accompanying notes to condensed consolidated financial statements – unaudited

5 

NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
										Accumulated
					Additional					Other
	Common		Stock		Paid-In		Treasury			Comprehensive			Retained
	Shares		Amount		Capital		Stock			Loss			Earnings			Total
Balance, December 31, 2007		14,706	$	47,455	$	3,427	$	(5,053	)	$	(6	)	$	1,042		$	46,865
Issuance of shares under Directors
Stock Plan		7		49		-		-			-			-			49
Issuance of shares in connection with
employee stock option plan		15		80		-		-			-			-			80
Issuance of shares in connection with purchase of Airdesk, Inc.		200		1,706		-		-			-			-			1,706
Share-based payments		-		-		858		-			-			-			858
Translation adjustment		-		-		-		-			5			-			5
Net loss		-		-		-		-			-			(323	)		(323	)
Balance, September 30, 2008		14,928	$	49,290	$	4,285	$	(5,053	)	$	(1	)	$	718		$	49,239

6 

NUMEREX CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(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 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 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 nine months ended September 30, 2008 may not be indicative of the results that may be expected for the year ending December 31, 2008.  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, 2007 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. offers a broad choice of secure machine-to-machine (M2M) network services and solutions. Numerex offers three service platforms - Networx, Techworx, and Flexworx - that companies choose to power their M2M solutions.  The Company offers its M2M products and services through a variety of brands including Uplink and Orbit One. Numerex 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.              Inventory

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

The components of inventory, net of reserves consists of the following:

	September 30,			December 31,
(In thousands)	2008			2007
Raw materials	$	1,738		$	4,086
Work-in-progress		15			51
Finished goods		7,227			6,262
Less reserve for obsolescence		(335	)		(340	)
Inventory, net	$	8,645		$	10,059

 7

4.              Notes Payable and Warrants

On May 30, 2006, the Company completed a private placement to Laurus Master Fund, Ltd. (“Laurus”) with a non-convertible term note in the principal amount of $5 million (“Note B”), and a warrant to purchase up to 241,379 shares of our common stock.  Interest accrues on Note B at a rate of 9.75% annually.  The note has a four year term and is secured by substantially all of our assets.  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.

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

In consideration of the above private placements and other private placements for term notes, the Company issued to Laurus warrants to purchase our common stock, the terms of which are summarized as follows:

		Common
Number		Stock
of		Exercise		Expiration
Securities		Price		Date
	150,000	$	4.75	January 13, 2011
	100,000	$	5.17	January 13, 2011
	116,000	$	5.99	January 13, 2011
	50,000	$	5.51	January 28, 2012
	50,000	$	5.72	January 28, 2012
	241,379	$	7.73	May 30, 2013
	158,562	$	10.13	December 29, 2013

5.   Stock-Based Compensation

Stock-based compensation expense recognized under Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”)  for the three months ended September 30, 2008 and 2007 was $280,000 and $246,000, respectively.  Stock-based compensation expense for the nine months ended September 30, 2008 and 2007 was $858,000 and $656,000, respectively.  Total unrecognized compensation related to unvested stock-based awards granted to employees and members of our board of directors at September 30, 2008, net of estimated forfeitures, is $2.2 million and is expected to be recognized over a weighted-average period of 1.1 years.

 8

A summary of the Company's stock option activity and related information for the nine months ended September 30, 2008 follows:

				Weighted		Weighted	Aggregate
				Average		Average Remaining	Intrinsic
	Options			Exercise Price		Contractual Life (Years)	Value
Outstanding, at December 31, 2007		1,926,222		$	6.06
Options granted		119,500			6.62
Options exercised		(15,350	)		4.91
Options cancelled		(50,250	)		7.86
Options expired		-			-
Outstanding, September 30, 2008		1,980,122		$	6.05	5.72	$ 541,382
Exercisable, September 30, 2008		1,338,935		$	5.44	5.44	$ 538,722

The weighted-average fair value of options granted during the nine months ended September 30, 2008 and September 30, 2007 was $4.01 and $5.18, respectively.  The total intrinsic value for options exercised during the nine months ended September 30, 2008 and 2007 was $44,543 and $757,982, respectively.

The following table summarizes information related to stock options outstanding at September 30, 2008:

	Options outstanding				Options exercisable
Range of Exercise Prices	Number Outstanding at  September 30, 2008	Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price	Number Exercisable at September 30, 2008	Weighted Average Exercise Price
$1.00 –   $  4.00	507,065	4.18	$                  3.00		469,065	$                2.92
$ 4.01 –  $  8.00	956,307	6.34	$                  5.86		565,307	$                5.39
$ 8.01 –  $ 12.94	516,750	6.09	$                  9.40		304,563	$                9.39
	1,980,122	5.72	$      ��           6.05		1,338,935	$                5.44

The fair value of options at date of grant was estimated using the Black-Scholes option pricing model.  The key assumptions used in the valuation model during the nine months ended September 30, 2008 are provided below:

	Nine Months Ended
	September 30,
	2008			2007
Valuation Assumptions:
Volatility		65.26	%		56.30	%
Expected term	6.25 years			6.25 years
Risk free interest rate		3.25	%		4.37	%
Dividend yield		0.00	%		0.00	%

9 

6.               Income Tax 

The Company accounts for income taxes in accordance with SFAS 109, "Accounting for Income Taxes" which requires the use of the liability method of accounting for deferred income taxes. Effective January 1, 2007, the Company implemented FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)" ("FIN 48"). FIN 48 was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

As of September 30, 2008 the Company had $385,000 of unrecognized tax benefits inclusive of interest and penalties of $86,000, all of which would impact the Company's effective tax rate if recognized. The Company anticipates recording unrecognized tax benefits related to state and local income taxes of approximately $85,000 inclusive of interest and penalties of approximately $25,000 and $12,250 respectivelyfor the year ended December 31, 2008. This increase in liability would impact the company's effective tax rate if recognized. The Company did not incur a material change to unrecognized tax benefits for the nine months ending September 30, 2008.

The Company recorded a tax benefit of $421,000 for the nine months ended September 30, 2008 as compared to a tax benefit of $101,000 for the nine months ended September 30, 2007 representing effective tax rates of   56.6% and 47.2 %, respectively. The difference between the Company's effective tax rate and the 34% federal statutory rate in the current and prior year resulted primarily from state tax accruals and Incentive Stock Option expenses. The Company will recognize deferred tax expense in 2008 primarily related to the utilization of NOLs.

The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitation. The 2005 through 2007 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.               Earnings/(Loss) Per Share

Basic net earnings (loss) per common share 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 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 (loss). The denominator is based on the number of common shares as shown in the following table:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(In thousands, except per share data)	2008		2007			2008			2007
Common Shares:
Weighted average common shares outstanding		13,742		13,187			13,735			13,117
Dilutive effect of common stock equivalents		244		-			-			-
Total		13,986		13,187			13,735			13,117
Net earnings (loss)	$	77	$	(217	)	$	(323	)	$	(113	)
Net earnings (loss) per common share:
Basic	$	0.01	$	(0.02	)	$	(0.02	)	$	(0.01	)
Diluted	$	0.01	$	(0.02	)	$	(0.02	)	$	(0.01	)

Because of the antidulitive effect of the net loss, potential common shares resulting from options, convertible debt and warrants were excluded from the calculation of diluted earnings per share for the nine months ended September 30, 2008 and for the three and nine months ended September 30, 2007.  For the nine months ended September 30, 2008, options to purchase 474,000 shares of common stock and common stock equivalents, would have been taken into account in calculating diluted earnings per share were it not for the antidilutive effect of the net loss.  For the three months ended September 30, 2007, options to purchase 1,810,000 and for the nine months ended September 30, 2007 options to purchase 1,740,000 shares of common stock and common stock equivalents, would have been taken into account in calculating diluted earnings per share were it not for the antidilutive effect of the net loss.

10 

With the acquisition of Orbit One Communications, the Company could issue an additional 1,571,729 shares of the Company’s common stock.  These shares are currently held in Escrow and are not included in the basic and diluted share calculation.

    8.               Recent Accounting Pronouncements

In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.”  This FSP provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.  The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years.  All prior period earnings per share data presented shall be adjusted retrospectively.  Early application of this FSP is prohibited.  The Company is currently evaluating the potential impact of adopting FSP EITF 03-6-1.

In May 2008, the FASB issued FASB Staff Position (“FSP”) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“the FSP”).  The FSP requires that the proceeds from the issuance of certain convertible debt instruments be allocated between a liability component (issued at a discount) and an equity component.  The resulting debt discount must be amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense.  The FSP is effective for fiscal years beginning after December 15, 2008, will not permit early application, and will require retrospective application to all periods presented.  The Company is currently evaluating the impact of the FSP on our consolidated financial statements.

In April 2008, the FASB issued Statement No. 142-3, Determination of the Useful Life of Intangible Assets (“FAS 142-3”). FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB No. 142, Goodwill and Other Intangible Assets. The intent is to improve the consistency between the useful life of a recognized intangible asset under FAS 142 and the period of expected cash flows used to measure the fair value of the asset under FASB No. 141(R), Business Combinations—revised (“FAS 141(R)”), and other GAAP. FAS 142-3 will be effective for intangible assets acquired beginning January 1, 2009. Accordingly, the impact on the Company would be limited to the extent of any future acquisitions.

Staff Accounting Bulletin 110 (SAB 110) issued by the U.S. Securities and Exchange Commission (SEC) was effective for us beginning in the first quarter of 2008. SAB 110 amends the SEC’s views discussed in Staff Accounting Bulletin 107 (SAB 107) regarding the use of the simplified method in developing estimates of the expected lives of share options in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123(R)). The amendment, in part, allowed the continued use, subject to specific criteria, of the simplified method in estimating expected lives of share options granted after December 31, 2007.  The Company has continued to use the simplified method to estimate the expected term of its stock options.

In December 2007, the FASB issued Statement No. 141(R), "Business Combinations," (“SFAS 141(R)”), which will change the accounting for and reporting of business combination transactions. The most significant changes in the accounting for business combinations under SFAS 141(R) include: (1) valuation of any acquirer shares issued as purchase consideration will be measured at fair value as of the acquisition date; (2) contingent purchase consideration, if any, will generally be measured and recorded at the acquisition date, at fair value, with any subsequent change in fair value reflected in earnings rather than through an adjustment to the purchase price allocation; (3) acquired in-process research and development costs, which have historically been expensed immediately upon acquisition, will now be capitalized at their acquisition date fair values, measured for impairment over the remaining development period and, upon completion of a successful development project, amortized to expense over the asset's estimated useful life; (4) acquisition related costs will be expensed as incurred rather than capitalized as part of the purchase price allocation; and (5) acquisition related restructuring cost accruals will be reflected within the acquisition accounting only if certain specific criteria are met as of the acquisition date; the prior accounting convention, which permitted an acquirer to record restructuring accruals within the purchase price allocation as long as certain, broad criteria had been met, generally around formulating, finalizing and communicating certain exit activities, will no longer be permitted. SFAS 141(R) will be effective for all business combinations consummated beginning January 1, 2009. Earlier adoption is not permitted.  The impact of adopting SFAS 141R will be dependent on the business combinations that the Company may pursue after its effective date.

11 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. For financial assets and liabilities, this statement is effective for fiscal periods beginning after November 15, 2007 and does not require any new fair value measurements. In February 2008, the FASB Staff Position No. 157-2 was issued which delayed the effective date of FASB Statement No. 157 to fiscal years ending after November 15, 2008 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

The Company adopted SFAS 157, “Fair Value Measurements,” and FSP 157-2, “Effective Date of FASB Statement No. 157,” in the first quarter of 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about items measured at fair value. SFAS 157 does not require any new fair value measurements. It applies to accounting pronouncements that already require or permit fair value measures. As a result, the Company will not be required to recognize any new assets or liabilities at fair value. FSP 157-2 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.  The Company is currently assessing the potential effect on its consolidated financial statements of the adoption of SFAS 157 for its non-financial assets and liabilities, which the Company will adopt on January 1, 2009.

SFAS 157 establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows:

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

2. Level 2 – Inputs other than level 1 that are either directly or indirectly observable

3. Level 3 – Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use

The adoption of SFAS No. 157 did not have a material effect on the consolidated financial statements.

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.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, including interim periods within that fiscal year. The Company did not elect the fair value option for any of its existing financial instruments as of September 30, 2008 and the Company has not determined whether or not it will elect this option for financial instruments it may acquire in the future.

NOTE C – LIQUIDITY

The Company believes that existing cash and cash equivalents together with cash generated from operations will be sufficient to meet operating requirements over the next twelve months.  This belief could be affected by future operating earnings that are lower than expectations; a material adverse change in the Company’s operating business or a default under the Company’s notes.

12 

NOTE D – ACQUISITIONS

Orbit One Communications, Inc. Acquisition

On July 31, 2007 the Company completed the acquisition of the assets of Orbit One Communications, Inc. through its wholly owned subsidiary, Orbit One Communications LLC (“Orbit One”).  In accordance with the Asset Purchase Agreement (the Agreement), in January 2008 we paid Orbit One $1.8 million in cash after a certain customer agreement was extended as well as other conditions were met, which resulted in an increase in goodwill.  In addition, if certain revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) performance objectives and milestones are achieved, subsequent payments could include additional cash payments of $2.5 million as well as shares of Numerex Corp’s common stock.  If all earn-out objectives are achieved stock payments could be up to 1,100,000 shares of the Company’s Class A common stock.   If the performance targets are exceeded, Orbit One may receive up to an additional 471,729 shares of the Company’s Class A common stock and an additional cash payment of $2.5 million. The earn-out milestones are measured over three periods: (i) from the closing date of the transaction through December 31, 2007; (ii) calendar year 2008; and (iii) calendar year 2009. The Company and Orbit One entered into an escrow agreement whereby 10% of the cash payments not subject to performance-related milestones were placed in escrow for one year from the closing date in order to settle any indemnification claims under the Agreement and subject to the limitations described therein.  Any additional payments of either cash or equity will be reflected as incremental goodwill.  At December 31, 2007, Orbit One satisfied certain contractual milestones which would, under the terms of the acquisition Agreement, result in the release of additional shares.  These shares, however, remain in escrow and the January 2008 payment of $1.8 million noted above is being disputed as part of the legal action described more fully in the “Subsequent Events” paragraph of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Airdesk, Inc. Acquisition

On January 5, 2006 the Company completed the acquisition of the assets of Airdesk, Inc. through its wholly owned subsidiary, Airdesk LLC (“Airdesk”).  On January 1, 2008, the asset purchase agreement was amended to remove performance targets on 200,000 un-issued shares with 60,000 shares to be issued on April 1, 2008, 60,000 shares to be issued on April 1, 2009 and the balance of 80,000 shares to be issued on April 1, 2010.   Since these shares were only time contingent, we recognized the value of these shares on the date of the amendment of January 1, 2008.  This resulted in a $1.7 million increase in goodwill and a corresponding increase in common stock.  The average selling price of our common stock on the date of the amendment was $8.53 per share.

NOTE E- SUBSEQUENT EVENTS

Ublip Acquisition

On October 9, 2008 the Company completed the acquisition of Ublip, Inc. (“Ublip”).  The results of Ublip’s operations will be included in the consolidated financial statements from October 9, 2008.   Ublip is a M2M software and services company based in Dallas, Texas operating in the United States.

The assets acquired consist of computer equipment, software, inventory, accounts receivable, and other intellectual property, including Ublip’s ‘Foundation’ software.

Ublip was merged into a wholly-owned subsidiary of Numerex and will be fully integrated into the Company’s operations.  The aggregate purchase price of approximately $1.7 million, consists of  405,000 shares of restricted Numerex Class A Common Stock, valued at $1.4 million, using the average selling price on the date of the acquisition of $3.56 per share, and approximately $280,000 in cash.

The company is in the process of engaging an external appraisal firm to allocate the purchase price based on the assets fair values.  The Company expects the primary intangible assets to be software, customer relationships and goodwill.

Goodwill will be assigned to the wireless M2M data communications segment and the goodwill will not be deductible for income tax purposes.

13 

NOTE F – SEGMENT INFORMATION

Segment Information

SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments in financial statements.  The Company has two reportable operating segments.  These segments are Wireless M2M Data Communications and Digital Multimedia, Networking and Wireline Security.  The Wireless M2M Data Communications segment is made up of all our wireless machine-to-machine communications hardware and service.  The Digital Multimedia, Networking and Wireline Security segment includes our networking hardware and service, video conferencing hardware, and our wireline security detection hardware.

The Company’s chief operating decision maker is the President and Chief Executive Officer (CEO). While the CEO is apprised of a variety of financial metrics and information, the Company’s business is principally managed on a segment basis, with the CEO evaluating performance based upon segment operating earnings or loss that includes an allocation of common expenses, but excludes certain unallocated expenses. The CEO does not view segment results below operating earnings (loss) before unallocated costs, and therefore unallocated expenses, interest income and other, net, and the provision for income taxes are not broken out by segment. Items below segment operating profit/(loss) are reviewed on a consolidated basis.

Summarized below are the Company’s unaudited revenues and operating earnings (loss) by reportable segment:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands)	2008			2007			2008			2007
Net sales:
Wireless M2M Data Communications	$	16,721		$	14,837		$	51,929		$	41,544
Digital Multimedia, Networking and Wireline Security		2,256			1,147			4,928			3,796
	$	18,977		$	15,984		$	56,857		$	45,340
Gross profit:
Wireless M2M Data Communications	$	5,354		$	4,704		$	16,358		$	13,331
Digital Multimedia, Networking and Wireline Security		1,326			648			2,906			2,115
	$	6,680		$	5,352		$	19,264		$	15,446
Operating earnings (loss) before tax:
Wireless M2M Data Communications	$	(61	)	$	40		$	(693	)	$	680
Digital Multimedia, Networking and Wireline Security		857			121			1,492			450
Unallocated Corporate		(268	)		(130	)		(404	)		(375	)
	$	528		$	31		$	395		$	755
Depreciation and amortization:
Wireless M2M Data Communications	$	621		$	520		$	1,861		$	1,204
Digital Multimedia, Networking and Wireline Security		8			47			38			147
Unallocated Corporate		144			130			390			366
	$	773		$	697		$	2,289		$	1,717

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

Summarized below are the Company’s unaudited identifiable assets at September 30, 2008 and audited identifiable assets at December 31, 2007:

(In thousands)	September 30,		December 31
Identifiable assets:	2008		2007
Wireless M2M Data Communications	$	55,591	$	57,271
Digital Multimedia, Networking and Wireline Security		3,339		3,972
Unallocated Corporate		13,599		12,855
	$	72,529	$	74,098

14 

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

Forward-looking Statements

This report on Form 10-Q contains forward- looking statements with respect to Numerex future financial or business performance conditions or strategies and other financial and business matters, including expectations regarding growth trends and activities in the wireless data business. 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: our inability to reposition our platform to capture greater recurring service revenues, difficulties associated with integrating Ublip’s and Orbit One’s business, the risks that a substantial portion of Orbit One's revenues are derived from government contracts that may be terminated by the government at any time, variations in quarterly operating results, delays in the development, introduction, integration and marketing of new wireless services; customer acceptance of 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.

Overview

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company.  This MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited financial statements and the accompanying notes to the financial statements in this Quarterl Report on Form 10-Q for the period ended September 30, 2008.

Net sales increased 19% to $19.0 million for the three-month period ended September 30, 2008 as compared to $16.0 million for the three-month period ended September 30, 2007. Net sales increased 25.0% to $57.0 million for the nine-month period ended September 30, 2008 as compared to $45.0 million for the nine-month period ended September 30, 2007. We continued to see growth in our Wireless M2M Data Communications business units due to demand for our network services.

We recognized net income for the third quarter ended September 30, 2008 of $77,000, or $0.01 per basic and diluted share, compared to a net loss of $217,000, or ($0.02) per basic and diluted share for third quarter ended September 30, 2007.  We recognized a net loss for the nine months ended September 30, 2008 of $323,000, or ($0.02) per basic and diluted share, compared to a net loss of $113,000 or ($0.01) per basic and diluted share for the nine months ended September 30, 2007.

While our overall business continues to grow, general economic uncertainty as well as the near-completion of the wireless technology transition from analog to digital which stimulated hardware sales during most of 2007 as well as the first quarter of 2008, may reduce our future growth rate to lower than historical trends.  We do expect revenue growth during the remainder of the year due to key customers that are in business sectors such as real estate, security, utilities, emergency services, vehicle tracking and asset monitoring.  We have also tightened our credit policies in response to the economic climate, in particular to our hardware-only market, which may impact revenues for the balance of the year.  Our efforts to tighten our credit policies include reviewing all hardware orders prior to fulfillment in order to ensure the customer is in good standing.

15 

We recognized operating income of $528,000 for the three months ended September 30, 2008 compared to operating earnings of $31,000 for the three months ended September 30, 2007.  We had operating income of $395,000 for the nine months ended September 30, 2008 as compared to operating earnings of $755,000 for the nine months ended September 30, 2007.  The decrease in operating earnings is primarily impacted by an increase in materials cost of sales, and selling, general and administrative (SG&A) expenses for our satellite M2M unit, which we did not have in the three and nine months ended September 30, 2007.

Critical Accounting Policies and Estimates

The MD&A 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 deferred 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.  There can be no assurance that actual results will not differ from those estimates and such differences could be significant.

For additional information regarding our critical accounting policies see Note B to the Condensed Consolidated Financial Statements included in Part 1, Item 1 above.   Also, reference is made to our Annual Report on Form 10-K as amended for the year ended December 31, 2007 and the condensed consolidated financial statements contained therein.

Results of Operations

Three and Nine Months Ended September 30, 2008 Compared to Three and Nine Months Ended September 30, 2007:

Net Sales

Net sales for our reportable segments for the three and nine months ended September 30, 2008 and 2007 are summarized in the following table:

	Three Months Ended									Nine Months Ended
	September 30,									September 30,
					Amount		Percent							Amount			Percent
(In thousands)	2008		2007		Change		Change			2008		2007		Change			Change
Net sales:
Wireless M2M Data Communications
Hardware	$	10,235	$	9,874	$	361		3.7	%	$	33,098	$	28,448	$	4,650			16.3	%
Service		6,486		4,963		1,523		30.7	%		18,831		13,096		5,735			43.8	%
Subtotal		16,721		14,837		1,884		12.7	%		51,929		41,544		10,385			25.0	%
Digital Multimedia, Networking and Wireline Security
Hardware		1,397		311		1,086		349.2	%		2,647		1,125		1,522			135.3	%
Service		859		836		23		2.8	%		2,281		2,671		(390	)		-14.6	%
Subtotal		2,256		1,147		1,109		96.7	%		4,928		3,796		1,132			29.8	%
Total net sales	$	18,977	$	15,984	$	2,993		18.7	%	$	56,857	$	45,340	$	11,517			25.4	%

Net sales for our Wireless M2M Data Communications segment increased 12.7% to $16.7 million for the three-month period ended September 30, 2008 as compared to $14.8 million for the three-month period ended September 30, 2007.  Net sales for the nine months ended September 30, 2008 increased 25.0% to $51.9 million as compared to $41.5 million for the nine months ended September 30, 2007.  The increase in total net sales for the three and nine month periods for the Wireless M2M Data Communications segment was due to an increase in both hardware sales and service revenue.

16 

For the three-month period ended September 30, 2008, hardware net sales in Wireless M2M Data Communications increased 3.7% to $10.2 million from $9.9 million in the prior year period.  For the nine-month period, hardware net sales in Wireless M2M Data Communications increased 16.3% to $33.1 million as compared to $28.4 million in the prior year period.The increase in Wireless M2M Data Communications hardware sales for the three month period ended September 30, 2008 versus the same three month period in 2007 is primarily due to the increased sales of wireless modules which was partially offset by a decline in sales of our wireless security devices due to the decreased demand for wireless security hardware now that carriers have ceased to provide analog network service.  The increase in Wireless M2M Data Communications hardware sales for the nine months ended September 30, 2008 versus the same nine month period in 2007 was primarily the result of demand due, in the first quarter of 2008, for digital wireless security devices used for wireless communications between alarm installations and central monitoring stations related to the shut down of the analog network service.  The increase in hardware sales for the nine months ended September 30, 2008 was also due to increased demand for our digital wireless module hardware.

During the three-month period ended September 30, 2008, Wireless M2M Data Communications service net sales increased 31% to $6.5 million as compared to $5.0 million for the three month period ended September 30, 2007.  For the nine months ended September 30, 2008, Wireless M2M Data Communications service net sales increased 44% to $18.8 million as compared to $13.1 million for the same prior year period.  Connection increases were generated by sales of our security hardware as well as by end users and value added resellers who utilize our network to provide customer solutions.  We continue to focus on increasing connections to our network due to the recurring nature of the service revenues.  Our wireless connections for the period ended September 30, 2008 increased to over 700,000, an 82% increase in connections over the period ended September 30, 2007.  The increase in connections was achieved in the midst of the FCC ruling which allowed carriers to cease providing analog service and only provide digital service as of February 18, 2008.  Our growth was also attributable to increased connections from wireless modules used in the door entry control solution used by real estate agents and brokers.

Net sales from Digital Multimedia, Networking and Wireline Security increased 97% to $2.2 million for the three-month period ended September 30, 2008 compared to $1.1 million for the three-month period ended September 30, 2007.  For the nine-month period ended September 30, 2008 net sales from Digital Multimedia, Networking and Wireline Security increased 30% to $4.9 million compared to $3.8 million for the same prior year period.  Net sales for the three and nine month period ended September 30, 2008 was due to an increase in hardware sales.

For the three-month period ended September 30, 2008, hardware sales from Digital Multimedia, Networking and Wireline Security increased 348% to $1.4 million as compared to $312,000 for the three months ended September 30, 2007.  For the nine months ended September 30, 2007 hardware sales increased 135% to $2.6 million compared to $1.1 million for the same prior year period.  The increase in hardware sales for the three and nine month period ended September 30, 2008 is due to increase sales of our interactive videoconferencing hardware (PowerPlay), which is sold directly and indirectly to distance-learning customers. Capital spending by targeted distance learning customers is largely funded by government entities and, as a result, is difficult to predict and can fluctuate significantly from period to period.

For the three months ended September 30, 2008, Digital Multimedia, Networking and Wireline Security service revenues increased 2.9% to $859,000 compared to $835,000 for the three months ended September 30, 2007.  For the nine months ended September 30, 2008, service net sales decreased 15% to $2.3 million as compared to $2.7 million for the same prior year period.  Our installation and integration services are primarily, either directly or indirectly, provided to large wireline and wireless telecommunication companies.  The decrease for the comparable three and nine month periods is due to a decrease in demand for these services.

17 

Cost of Sales

Cost of sales for our reportable segments for the three and nine months ended September 30, 2008 and 2007 are summarized in the following table:

	Three Months Ended										Nine Months Ended
	September 30,										September 30,
					Amount			Percent							Amount			Percent
(In thousands)	2008		2007		Change			Change			2008		2007		Change			Change
Cost of Sales:
Wireless M2M Data Communications
Cost of hardware sales	$	9,040	$	8,949	$	91			1.0	%	$	29,717	$	25,185	$	4,532			18.0	%
Cost of service sales		2,327		1,185		1,142			96.4	%		5,854		3,028		2,826			93.3	%
Subtotal		11,367		10,134		1,233			12.2	%		35,571		28,213		7,358			26.1	%
Digital Multimedia, Networking and Wireline Security
Cost of hardware sales		623		148		475			320.9	%		1,121		689		432			62.7	%
Cost of service sales		307		350		(43	)		-12.3	%		901		992		(91	)		-9.2	%
Subtotal		930		498		432			86.7	%		2,022		1,681		341			20.3	%
Total cost of sales	$	12,297	$	10,632	$	1,665			15.7	%	$	37,593	$	29,894	$	7,699			25.8	%

Cost of hardware sales for our Wireless Data Communications segment increased 1.0% to $9.0 million for the three months September 30, 2008 as compared to $8.9 million for the three months ended September 30, 2007.  For the nine months ended September 30, 2008 cost of hardware sales increased 18% to $29.7 million compared to $25.2 million for the same prior year period.  The increase in cost of hardware sales for the our Wireless M2M Data Communications segment for the three months ended September 30, 2008 is primarily the result of increased hardware sales.  The increase in cost of hardware sales for our Wireless Data Communications segment for the nine months ended September 30, 2008 was primarily the result of higher hardware net sales volumes as well as our decision to focus on our new strategy to secure network connections and long term recurring revenues at the expense of short term hardware margins.

During the three-month period ended September 30, 2008, Wireless M2M Data Communications service net costs increased 96% to $2.3 million as compared to $1.2 million for the three month period ended September 30, 2007.  For the nine months ended September 30, 2008, Wireless M2M Data Communications service net costs increased 93% to $5.9 million as compared to $3.0 million for the same prior year period.  These increases were primarily due to an increase in the number of connections to our wireless M2M network during the three and nine-month periods ending September 30, 2008.  Net sales from connections to our network increased $1.5 million for the three-month period ended September 30, 2008 and $5.7 million for the nine-month period ended September 30, 2008 compared to the same periods in 2007.  Connection increases were generated by sales of our security hardware as well as by end users and value added resellers who utilize our network to provide customer solutions.  We continue to focus on increasing connections to our network due to the recurring nature of the service net sales.

Cost of hardware sales for our Digital Multimedia, Networking and Wireline Security segment increased 320% to $623,000 for the three months September 30, 2008 as compared to $148,000 for the three months ended September 30, 2007.  For the nine months ended September 30, 2008 cost of hardware sales increased 63% to $1.1 million compared to $689,000 for the same prior year period.  The increase in cost of hardware sales for our Digital Multimedia, Networking and Wireline Security segment for the three months ended September 30, 2008 was primarily the result of higher hardware sales volume in our interactive videoconferencing hardware (PowerPlay).  The decrease in cost of hardware sales for our Digital Multimedia, Networking and Wireline Security segment for the nine months ended September 30, 2008 was primarily the result of lower hardware sales related to our wireline security product which generates lower margins than our interactive videoconferencing hardware.

Cost of service sales for our Digital Multimedia, Networking and Wireline Security segment decreased 12% to $307,000 for the three months ended September 30, 2008 as compared to $350,000 for the three months ended September 30, 2007.  For the nine months ended September 30, 2008 cost of service sales decreased 9% to $901,000 as compared to $992,000 for the same prior year period.  The decrease in cost of service sales for the Digital Multimedia, Networking and Wireline Security segment for the three and nine months ended September 30, 2008 is in direct correlation to the decrease in services net sales for this segment.

18 

Gross Profit

	Three Months Ended											Nine Months Ended
	September 30,											September 30,
							Amount		Percent									Amount		Percent
(In thousands)	2008			2007			Change		Change			2008			2007			Change		Change
Total net sales	$	18,977		$	15,984		$	2,993		18.7	%	$	56,857		$	45,340		$	11,517		25.4	%
Total cost of sales		12,297			10,632			1,665		15.7	%		37,593			29,894			7,699		25.8	%
Gross profit	$	6,680		$	5,352		$	1,328		24.8	%	$	19,264		$	15,446		$	3,818		24.7	%
Gross profit percent		35.2	%		33.5	%							33.9	%		34.1	%

Gross profit, as a percentage of net sales, was 35.2% for the three-month period ended September 30, 2008 compared to 33.5% for the three-month period ended September 30, 2007.  For the nine months ended September 30, 2008, gross profit as a percentage of net sales was 33.9% compared to 34.1% for the same prior year period.  Profit for the three months ended September 30, 2008 is due to two factors. The first is a change in the overall revenue mix. In the three month period ended September 30, 2007, service revenues were 36.3% of total revenues compared to 38.7% in the three month period ended September 30, 2008. This drives an overall margin improvement since service revenues have a significantly higher gross margin than those achieved through the sale of hardware. In addition, hardware margins improved in the three month period ended September 30, 2008 because of significantly lower unit sales of low-margin hardware related to the analog-to-digital transition and an increase in digital multimedia and satellite unit sales.  Total gross profit as a percentage of sales decreased for the nine months ended September 30, 2008 compared to the same period in 2007.  This decrease was caused by our adoption of a revised pricing model in the wireless security unit to secure network connections and long term recurring revenues at the expense of short term hardware margins, as well as a write-off of analog inventory.  The decline in gross profit is also due to increased hardware sales which earn a lower gross margin and are a greater portion of total revenues for the current comparable period.

Operating, Interest and Other Expenses

Operating, interest and other expenses for the Company for the three and nine months ended September 30, 2008 and 2007 are summarized in the following table:

	Three Months Ended												Nine Months Ended
	September 30,												September 30,
							Amount			Percent									Amount			Percent
(In thousands)	2008			2007			Change			Change			2008			2007			Change			Change
Selling, general, and administrative expenses	$	4,697		$	4,078		$	619			15.2	%	$	14,672		$	11,557		$	3,115			27	%
Research and development expenses		473			382			91			23.8	%		1,488			1,004			484			48	%
Bad debt expense		209			164			45			27.4	%		420			413			7			2	%
Depreciation and amortization		773			697			76			10.9	%		2,289			1,717			572			33	%
Operating earnings (loss)		528			31			497		nm				395			755			(360	)		-48	%
Interest expense		331			448			(117	)		-26.1	%		1,141			949			192			20	%
Other expense		(5	)		1			(6	)		-600.0	%		(2	)		20			(22	)		-110	%
Earnings (loss) before income tax		202			(418	)		620			-148.3	%		(744	)		(214	)		(530	)	nm
Income tax benefit (provision)		(125	)		201			(326	)		-162.2	%		421			101			320		nm
Net earnings (loss)	$	77		$	(217	)	$	294			-310.5	%	$	(323	)	$	(113	)	$	(210	)	nm

Selling, general, administrative and other expenses increased 15% to $4.7 million for the three months ended September 30, 2008 as compared to $4.1 million for the three months ended September 30, 2007.  For the nine months ended September 30, 2008 selling, general, administrative and other expenses increased 27% to $14.7 million compared to $11.6 million for the same prior year period.  The increase for the three and nine months ended September 30, 2008 is primarily the result of higher expenses associated with our satellite M2M unit, which we acquired on July 31, 2007.  Six of the seven new hires during the nine month period ended September 30, 2008 were sales or marketing employees and part of the increase reflects the payment of higher salary and commission payments to those employees. In addition, we finished a complete re-branding and promotional exercise in the first quarter of 2008 resulting in additional marketing expenses during the nine month period ending September 30, 2008.  Additionally, stock-based compensation, operational, facilities and related expenses were higher due to our growth.  Professional fees related to litigation are also greater in the three and nine months ended September 30, 2008.

19 

Research and development expenses increased 24% to $473,000 for the three-month period ended September 30, 2008 as compared to $382,000 for the three-month period ended September 30, 2007.  For the nine months ended September 30, 2008 research and development expenses increased 48% to $1.5 million compared to $1.0 million for the same prior year period.  The increase for the three and nine months ended September 30, 2008 is primarily due to expenses associated with our satellite M2M unit that we did not have in the same three and nine months period ended September 30, 2007.  Additional expenses were incurred in connection with new projects that have not reached technical feasibility; therefore, work on these projects was expensed as incurred.

Bad debt expense increased to $209,000 for the quarter ended September 30, 2008 from $164,000 in the same quarter in 2007.  For the nine months ended September 30, 2008 bad debt increased to $420,000 as compared to $413,000 for the same prior year period.  We analyze accounts receivable and consider our historical bad debt experience, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.  Bad debt expense increased over the prior year period as a result of our analysis.

Depreciation and amortization expense increased 11% to $773,000 for the three-month period ended September 30, 2008 as compared to $697,000 for the three-month period ended September 30, 2007.  For the nine months ended September 30, 2008 depreciation and amortization expense increased 33% to $2.3 million as compared to $1.7 million for the nine months ended September 30, 2007.  The increase for the three and nine months ended September 30, 2008 is primarily due to amortization expense associated with our satellite M2M unit that we did not have in the same three and nine months period ended September 30, 2007.  Additionally, 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, net, decreased for the three-month period ended September 30, 2008 to $331,000 as compared to $448,000 for the three-month period ended September 30, 2007.  For the nine months ended September 30, 2008 interest expense increased to $1.1 million as compared to $949,000 for the same prior year period.  The decrease in interest expense for the three months ended September 30, 2008 is due to lower interest due on our Notes payable due to the decrease in the total outstanding Notes payable balance as a result of principal payments.  The increase for the nine month period ended September 30, 2008 is due to lower interest income received due to a decrease in total cash balances from the prior nine months ended September 30, 2007.

We recorded a tax benefit of $421,000 for the nine months ended September 30, 2008 as compared to an income tax benefit of $101,000 for the nine months ended September 30, 2007.

20 

Liquidity and Capital Resources

We had working capital of $17.7 million as of September 30, 2008 compared to a working capital of $20.0 million at December 31, 2007.  We had cash balances of $8.6 million and $7.4 million as of September 30, 2008 and December 31, 2007, respectively.

The following table shows information about our cash flows and liquidity positions during the nine months ended September 30, 2008 and 2007. You should read this table and the discussion that follows in conjunction with our consolidated statements of cash flows contained in “Item 1. Financial Statements” in Part I of this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

	For the nine month period
	ended September 30,
	2008			2007
Net cash provided by (used in) operating activities	$	6,359		$	(2,596	)
Net cash used in investing activities		(3,114	)		(7,500	)
Net cash used in financing activities		(2,125	)		(237	)
Effect of exchange rate differences on cash		5			(7	)
Net change in cash and cash equivalents	$	1,125		$	(10,340	)

We provided cash from operating activities totaling $6.4 million for the nine-month period ended September 30, 2008 compared to using cash of $2.6 million for the nine-month period ended September 30, 2007.  The increase in cash provided by operating activities for the nine months ended September 30, 2008 versus the comparable period of 2007 was primarily due to a decrease in accounts receivable and inventory, and an increase in depreciation and amortization expense.  These were partially offset by a decrease in accounts payable.

We used cash in investing activities totaling $3.1 million for the nine-month period ended September 30, 2008 compared to $7.5 million for the nine-month period ended September 30, 2007.   The decrease in cash used in investing activities was primarily due to cash used in the prior nine-month period for the purchase of  the assets of Orbit One Communications, Inc.

We used cash in financing activities totaling $2.1 million for the nine-month period ended September 30, 2008 compared to $237,000 for the nine-month period ended September 30, 2007.  The increase in cash used for financing activities is due to payments on our notes payable, which began in July 2007.

We believe that our existing cash and cash equivalents together with cash generated from operations will be sufficient, without the need for additional financing, to meet our operating requirements over the next twelve months.  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’s notes payable.

Off-Balance Sheet Arrangements

As of September 30, 2008, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

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 September 30, 2008 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 minimizing investment. As of September 30, 2008, we had $8.6 million in cash and cash equivalents. 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 September 30, 2008, 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.

21 

Item 4.                        Controls and Procedures.

Evaluation of Disclosure 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 September 30, 2008.  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 September 30, 2008, 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 period ended September 30, 2008, 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.

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, 2007 and the information under “Forward-Looking Statements” included in this report.  At September 30, 2008, 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, 2007 except as set forth below:

Our operating results may be adversely affected by unfavorable economic conditions.

         Economic conditions worldwide have contributed to slowdowns in the technology industry generally, as well as to the specific segments and markets in which we operate, such as the real estate and home security markets.  The current uncertain macroeconomic climate, including but not limited to the effects of weakness in the credit markets, the continued erosion of home prices and demand in the housing market, and declining consumer confidence driven by economic recession fears, could lead to reduced demand from our customers and increased price competition for our products, increased risk of excess and obsolete inventories and higher overhead costs as a percentage of revenue.  This consequently could have a material adverse effect on our business, financial condition and results of operations.

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

None – not applicable.

Item 3. Defaults Upon Senior Securities.

None - not applicable.

22 

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

Exhibit 31.2 Certification 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 32.2 Certification 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.

23 

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)
November 10, 2008	/s/ ­­­­Stratton J. Nicolaides
	Stratton J. Nicolaides
	Chief Executive Officer and Chairman
November 10, 2008	/s/ ­­­­Alan B. Catherall
	Alan B. Catherall
	Chief Financial Officer
	Executive Vice President and
	Principle Financial and Accounting Officer

24 

Exhibit Index

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

Exhibit 31.2 Certification 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 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

25