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

Forward-looking Statements

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

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

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

Overview

We are a leader in the development and integration of advanced sensor technologies for homeland security, force protection and commercial applications. Our proprietary sensors detect and identify chemical, biological, radiological, nuclear and explosive threats, and deliver superior awareness and actionable intelligence for wide-area surveillance, intrusion detection and facility security. By leveraging our technical expertise, ICx pioneers the integration of these advanced sensors into effective security and commercial solutions. We were incorporated in 2003, and our business was primarily formed through a series of complementary acquisitions in 2005 with additional acquisitions in 2006, 2007 and 2008. We sold the non-strategic operations of three of our companies in 2007 and one company in 2006.

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

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

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

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

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

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

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

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

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

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

Key Business Metrics

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

Product Revenue and Product Gross Profit. We were incorporated in 2003, and our business was formed through a series of complementary acquisitions from 2005 through 2008. Many of these businesses were in the early stages of transitioning advanced technologies into products, integrating solutions and developing marketing and sales strategies. A key measure of our success is product revenue growth. Our goal is to grow product gross profit to increase the profitability of our business. Because of the emerging stage of many of our products, gross profit has been inconsistent and unpredictable. Key factors affecting our gross profit are volume pricing, warranty costs, product mix, economies of scale and the ability to absorb fixed costs. Our ability to effectively monitor and manage these factors is important in attaining business profitability.

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

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

Product Revenue and Gross Profit. In our Detection segment, we primarily derive product revenue through the sale of our Fido explosive detectors, IdentiFINDER and Interceptor radiation detectors, AirSentinel bioaerosol sensors and our Griffin gas chromatography/mass spectrometry line of products. In our Surveillance segment, we primarily derive product revenue from the sale of our Cerberus and SkyWatch towers, our thermal imaging cameras, including DefendIR and Orion, and our STS line of radar products. In our Solutions segment, we primarily derive product revenue from the sale of our Cameleon advanced camera control systems, Cameleon ITS transportation management software, StarWatch security command and control software and Callisto, a non-security related product for process management of diverse supervisory control and data acquisition (SCADA) applications.

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

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

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

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

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

General and Administrative Expenses. General and administrative expenses represent the costs and expenses of managing and supporting our operations. Certain general and administrative expenses have increased due to additional legal and accounting fees we have incurred as a public company and additional expenses related to compliance with the Sarbanes-Oxley Act of 2002 and other regulations. We have also increased costs for accounting support services, filing annual and quarterly reports with the Securities and Exchange Commission (SEC), investor relations, directors' fees, directors' and officers' insurance and registrar and transfer agent fees. Since the inception of our company we have focused on integrating our business units and streamlining operations. The impact of those efforts has more than offset the higher costs associated with being a public company which has resulted in lower general and administrative expenses for the first nine months of 2008 compared to the same period in 2007. Beginning in 2009, and in the longer term, we expect our general and administrative expenses will begin to stabilize and will continue to decrease as a percentage of revenue.

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

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

Results of Operations - Comparison of the Three months ended September 30, 2008 and 2007

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

                                                            Three Months Ended September 30,
                                                               2008                  2007
                                                                 (dollars in thousands)
                                                                       (unaudited)
Product revenues                                          $        25,500       $        22,121
Gross profit %                                                       52.7 %                53.9 %
Contract research and development revenues                $         8,853       $         8,725
Gross profit %                                                       33.3 %                27.7 %
Maintenance, service and other revenues                   $        10,607       $         3,384
Gross profit %                                                       34.0 %                37.7 %

Total revenues                                            $        44,960       $        34,230

Gross profit %                                                       44.5 %                45.6 %

Operating loss excluding depreciation and amortization    $          (619 )     $        (5,249 )
Depreciation and amortization                                       3,607                 3,367

Operating loss                                            $        (4,226 )     $        (8,616 )

Loss from continuing operations                           $        (3,817 )     $        (7,421 )
Gain (loss) on sale of discontinued operations, net                    -                    580

Net loss                                                  $        (3,817 )     $        (6,841 )

Product Revenues and Gross Profit. Product revenue increased $3.4 million, or 15%, to $25.5 million in the third quarter of 2008 from $22.1 million in the third quarter of 2007. An increase in sales of approximately $3.9 million from new and enhanced products in our Detection segment was offset by a decrease of $0.4 million in product sales in our Surveillance segment. Product sales from Solutions in the third quarter of 2008 were flat compared to the same quarter in 2007. Gross profit as a percentage of product revenue was 52.7% and 53.9% in the third quarters of 2008 and 2007, respectively. The decrease in gross profit is primarily attributable to differences in the mix of products sold in the comparable third quarter periods.

Contract Research and Development Revenues and Gross Profit. Contract research and development revenue increased $0.2 million, or 2%, to $8.9 million in the third quarter of 2008 from $8.7 million in the third quarter of 2007. Gross profit as a percentage of contract research and development revenue was 33.3% and 27.7% in the third quarters of 2008 and 2007, respectively. The increase in gross profit is due to the mix of contract types and the estimates inherent in recognizing revenue and costs under the percentage of completion method of accounting.

Maintenance, Service and Other Revenues and Gross Profit. Maintenance, service and other revenue increased $7.2 million, or 212%, to $10.6 million in the third quarter of 2008 from $3.4 million in the third quarter of 2007. Increased revenue of approximately $4.7 million from our Surveillance segment for the delivery of custom platforms under a new service contract and approximately $1.9 million of additional revenue from new contracts in our Solutions segment for the delivery of intelligent transportation systems contributed to the increases in revenue for the comparable quarters. Gross profit as a percentage of maintenance, service and other revenue was 34.0% and 37.7% in the third quarters of 2008 and 2007, respectively. Gross profit decreased in the third quarter of 2008 due to the mix of contract types and the estimates inherent in recognizing revenue and costs under the percentage of completion method of accounting.

Operating Loss. Operating loss decreased $4.4 million, or 51%, to $4.2 million in the third quarter of 2008 from $8.6 million in the third quarter of 2007. An increase in gross profit of $4.4 million over the comparable quarter was the primary reason for reduced losses as operating expenses remained flat compared to the third quarter of 2007. Operating loss excluding depreciation and amortization is a non-GAAP financial measure that is derived by reducing our operating loss by depreciation and amortization. Amortization primarily represents costs associated with our business acquisitions that do not correspond to an outlay of current and future cash flow. Accordingly, we believe operating loss excluding depreciation and amortization is a more meaningful measure of our recurring operations and an indicator of our working capital requirements. Operating loss excluding depreciation and amortization decreased $4.6 million, or 88%, to $0.6 million in the third quarter of 2008 from $5.2 million in the third quarter of 2007.

Loss from Continuing Operations. Our loss from continuing operations decreased $3.6 million, or 49%, to $3.8 million in the third quarter of 2008 from $7.4 million in the third quarter of 2007. Our $4.4 million increase in gross profit in the third quarter of 2008 was the primary reason for reduced losses.

Discontinued Operations. In December 2006, we adopted a plan for the sale of three companies that did not align with our overall strategic plans. We completed two of the sales in the first quarter of 2007 and the third sale during the second quarter of 2007. In the third quarter of 2007, we realized an additional gain on the sale of discontinued operations of $0.6 million related to those sales.

Net Loss. Net loss decreased $3.0 million, or 44%, to $3.8 million in the third quarter of 2008 from $6.8 million in the third quarter of 2007. The decreased loss was primarily due to a $4.4 million increase in gross profit. The increase in gross profit was partially offset by a reduced tax benefit and a gain from discontinued operations in the third quarter of 2007.

Reportable Segments

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

Detection Segment - Comparison of the Three months ended September 30, 2008 and 2007

                                                              Three Months Ended September 30,
                                                                 2008                  2007
                                                                   (dollars in thousands)
                                                                         (unaudited)
Revenue and gross profit %
Product revenue                                             $        16,717       $        12,850
Contract research and development revenue                             8,070                 7,915
Maintenance, service and other revenue                                  633                     8

Total revenue                                               $        25,420       $        20,773

Gross profit %                                                         51.5 %                46.8 %

Operating income excluding depreciation and amortization    $         2,643       $           236
Depreciation and amortization                                         2,114                 2,013

Operating income (loss)                                     $           529       $        (1,777 )

Product Revenue. Product revenue increased $3.9 million, or 30%, to $16.7 million in the third quarter of 2008 from $12.8 million in the third quarter of 2007. The increase primarily resulted from increased sales of our radiation detectors, bio aerosol sensors and our gas chromatography/mass spectrometry products.

Contract Research and Development Revenue. Contract research and development revenue increased $0.2 million, or 3%, to $8.1 million in the third quarter of 2008 from $7.9 million in the third quarter of 2007.

Gross Profit. Gross profit as a percentage of revenue increased from 46.8% in the third quarter of 2007 to 51.5% in the third quarter of 2008 primarily due to the increase in product revenue and higher margins on contract research and development revenue. The mix of contract types and the estimates inherent in recognizing revenue and costs using the percentage of completion method of accounting contributed to higher gross margins for the third quarter of 2008.

Operating Income (Loss). Operating income increased $2.3 million, or 128%, to $0.5 million in the third quarter of 2008 from a $1.8 million loss in the third quarter of 2007. Operating income excluding depreciation and amortization increased $2.4 million, or 1200%, to $2.6 million in 2008 from $0.2 million in 2007. An increase in gross profit of $3.4 million over the comparable quarter was offset by $1.1 million in increased operating expenses. The increase in operating expenses in 2008 related to additional spending on internal research and development projects directed at the development and expansion of chemical, biological, radiation and explosive detection products and technologies. Sales and marketing expense increased due to an investment in our sales and marketing platform in order to support bids and proposals for major programs and to expand our distribution channels.

Surveillance Segment - Comparison of the Three months ended September 30, 2008 and 2007

                                                              Three Months Ended September 30,
                                                                2008                   2007
                                                                   (dollars in thousands)
                                                                        (unaudited)
Revenue and gross profit %
Product revenue                                            $         6,523        $         6,993
Contract research and development revenue                              612                    810
Maintenance, service and other revenue                               5,536                    816

Total revenue                                              $        12,671        $         8,619

Gross profit %                                                        34.5 %                 45.6 %

Operating loss excluding depreciation and amortization     $          (233 )      $        (1,798 )
Depreciation and amortization                                          769                    886

Operating loss                                             $        (1,002 )      $        (2,684 )

Product Revenue. Product revenue decreased $0.5 million, or 7%, to $6.5 million in the third quarter of 2008 from $7.0 million in the third quarter of 2007 primarily due to lower revenue from radar and thermal imaging sales.

Contract Research and Development Revenue. Contract research and development revenue decreased $0.2 million, or 25%, to $0.6 million in the third quarter of . . .