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.

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.

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.

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.

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.

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.

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 . . .