Forward-looking Statements

This document may contain 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. 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 continue to expand our subscription-based sales mode; our ability to efficiently utilize cloud computing to expand our services; the risks that a substantial portion of revenues derived from government contracts may be terminated by the government at any time; variations in quarterly operating results; delays in the development, introduction, integration and marketing of new services; customer acceptance of services; economic conditions resulting in decreased demand for our products and services, including a prolonged deterioration of the housing market; the risk that our strategic alliances and partnerships will not yield substantial revenues; changes in financial and capital markets, the inability to raise growth capital on favorable terms, if at all; the inability to attain revenue and earnings growth; changes in interest rates; inflation; the introduction, withdrawal, success and timing of business initiatives and strategies; competitive conditions; the inability to realize revenue enhancements; disruption in key supplier relationships and/or related services; unexpected costs associated with our continued investments and expansion in international markets; and extent and timing of technological changes. Numerex SEC reports identify additional factors that can affect forward-looking statement.

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 unaudited financial statements in this Quarterly Report on Form 10-Q for the period ended June 30, 2012.

Results of operations

While our overall business has grown and we believe that our pipeline of future sales opportunities is strong, particularly demand from our channel partners for our network and application platforms, general economic uncertainty remains and may reduce our future growth. Although we are focused on generating recurring revenues from services and support, hardware-only sales were $5.7 million for the three-month period ended June 30, 2012 compared to $4.9 million in 2011. Hardware only sales were $10.1 million for the six-month period ended June 3, 2012 compared to $9.7 million in 2011. We have continued to closely monitor our credit policies in response to the economic climate, in particular to our hardware-only sales.

Net revenues increased 13.8% to $16.4 million for the three-month period ended June 30, 2012, compared to $14.4 million in 2011. Net revenues increased 9.8% to $30.9 million for the six-month period ended June 30, 2012, compared to $28.1 million in 2011. The increase in net sales is primarily attributable to the growth in M2M subscriptions.

Operating earnings increased 114.6% to $0.8 million for the three-month period ended June 30, 2012, compared to $0.4 million in 2011. Operating earnings increased 86.7% to $1.2 million for the six-month period ended June 30, 2012, compared to $0.6 million in 2011.

Net earnings increased 105.3% to $0.7 million for the three-month period ended June 30, 2012, compared to net earnings of $0.3 million in 2011. Net earnings increased 78.6% to $1.0 million for the six-month period ended June 30, 2012, compared to net earnings of $0.6 million in 2011.

Critical Accounting Policies

There have been no material changes in our critical accounting policies, estimates and judgments during the three months ended June 30, 2012 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011.

Results of Operations

Three Months Ended June 30, 2012 and 2011

Net Revenues, Gross Profit and Cost of Sales


Net revenues, gross profit and cost of sales are summarized in the following
table:

                                                   Three Months Ended
                                                 06/30/12      06/30/11       % Change
 Net revenues:
 Recurring revenue and support                  $   10,664     $   9,461           12.7 %
 Embedded devices & hardware                         5,692         4,912           15.9 %
 Total net revenues:                                16,356        14,373           13.8 %
 Cost of revenues, exclusive of depreciation:
 Cost of recurring revenue and support               4,470         3,930           13.7 %
 Cost of embedded devices & hardware                 4,641         4,143           12.0 %
 Gross Profit                                   $    7,245     $   6,300           15.0 %
                                                      44.3 %        43.8 %

Net Revenues

Recurring revenue and support increased 12.7% to $10.7 million for the three-month period ended June 30, 2012, compared to $9.5 million in 2011. This increase was primarily due to an increase of 116,000 subscriptions for the three months ended June 30, 2012 compared to a 42,000 increase in subscriptions for the three months ended June 30, 2011.

Embedded devices and hardware increased 15.9% to $5.7 million for the three-month period ended June 30, 2012, compared to $4.9 million in 2011. The increase is primarily due to increased sales of our wireless module and security products.

Gross Profit

Gross profit, as a percentage of net sales, increased to 44.3% for the three-month period ended June 30, 2012, compared to 43.8% in 2011. The increase was primarily due to the increase in recurring revenue of $1.2 million. This increase causes an overall margin improvement since recurring revenues have a higher gross margin than those achieved through the sale of embedded devices.

Cost of Revenues

Recurring revenue and support cost of revenues increased 13.7% to $4.5 million for the three-month period ended June 30, 2012, as compared to $3.9 million in 2011. The increase is the result of the increase in subscriptions, licensing and support sales.

Embedded devices and hardware cost of revenues increased 12.0% to $4.6 million for the three-month period ended June 30, 2012, as compared to $4.1 million in 2011. The increase is the result of the increase in sales of embedded devices and hardware.

Operating Expenses

Operating expenses are summarized in the following table:

                                                  Three Months Ended
               (In thousands)                  06/30/12        06/30/11       % Change
 Operating expenses
 General, administrative and legal expenses   $    2,491      $    2,272            9.6 %
 Sales and marketing expenses                      2,396           2,326            3.0 %
 Engineering and development expenses                803             574           39.9 %
 Depreciation and amortization                       778             766            1.6 %
 Operating earnings                           $      777      $      362          114.6 %

General, administrative and legal expenses increased 9.6% to $2.5 million for the three-month period ended June 30, 2012, compared to $2.3 million in 2011. The increase is primarily due to an increase in employee related expenses of $138,000, and an increase in share-based compensation of $81,000,

Sales and marketing expenses increased 3.0% to $2.4 million for the three-month period ended June 30, 2012, compared to $2.3 million in 2011. The increase is primarily due an increase in promotional fees of $42,000, and an increase in personnel related fees of $28,000.

Research and development expenses increased 39.9% to $0.8 million for the three-month period ended June 30, 2012, compared to $0.6 million in 2011. The increase is primarily due to an increase in personnel related fees of $180,000 and an increase in facility related fees of $46,000.

Depreciation and amortization expense remained constant at $0.8 million for the three-month period ended June 30, 2012 and 2011.

Income Taxes

Management continues to review the allowance for deferred taxes on a periodic basis and concluded no change in the reserve was necessary. Management will continue to monitor prospectively in order to determine if an adjustment to the allowance in the future will be necessary if the current earnings trend continues. Should management determine that a release the valuation allowance is appropriate, it could have a positive significant impact on our earnings.

Six Months Ended June 30, 2012 and 2011

Net Revenues, Gross Profit and Cost of Sales

Net revenues, gross profit and cost of sales are summarized in the following
table:

                                                Six Months Ended
                                             06/30/12      06/30/11       % Change
 Net revenues:
 Recurring revenue and support               $  20,807     $  18,472           12.6 %
 Embedded devices & hardware                    10,081         9,670            4.3 %
 Total net revenues:                            30,888        28,142            9.8 %
 Cost of sales, exclusive of depreciation:
 Cost of recurring revenue and support           8,600         7,642           12.5 %
 Cost of embedded devices & hardware             8,259         8,114            1.8 %
 Gross Profit                                $  14,029     $  12,386           13.3 %
                                                  45.4 %        44.0 %

Net Revenues

Recurring revenue and support increased 12.6% to $20.8 million for the six-month period ended June 30, 2012, compared to $18.5 million in 2011. This increase was primarily due to the growth in subscriptions to 1.63 million at June 30, 2012 compared to 1.26 million at June 30, 2011.

Embedded devices and hardware increased 4.3% to $10.1 million for the six-month period ended June 30, 2012, compared to $9.7 million in 2011. The increase is primarily due to increased sales of our wireless module and security products.

Gross Profit

Gross profit, as a percentage of net revenue, increased to 45.4% for the six-month period ended June 30, 2012, compared to 44.0% in 2011. The increase was primarily due to the increase in recurring revenue of $2.0 million. This increase causes an overall margin improvement since recurring revenues have a higher gross margin than those achieved through the sale of embedded devices.

Cost of Revenues

Recurring revenue and support cost of revenues increased 12.5% to $8.6 million for the six-month period ended June 30, 2012, as compared to $7.6 million in 2011. The increase is the result of the increase in M2M subscriptions, licensing and support sales.

Embedded devices and hardware cost of revenues increased 1.8% to $8.3 million for the six-month period ended June 30, 2012, as compared to $8.1 million in 2011. The increase is the result of the increase in sales of embedded devices and hardware.

Operating Expenses

Operating expenses are summarized in the following table:


                                                  Six Months Ended
               (In thousands)                 06/30/12       06/30/11       % Change
 Operating expenses
 General, administrative and legal expenses   $   5,134     $    4,484           14.5 %
 Sales and marketing expenses                     4,468          4,560           -2.0 %
 Engineering and development expenses             1,654          1,169           41.5 %
 Depreciation and amortization                    1,593          1,541            3.4 %
 Operating earnings                           $   1,180     $      632           86.7 %

General, administrative and legal expenses increased 14.5% to $5.1 million for the six-month period ended June 30, 2012, compared to $4.5 million in 2011. The increase is primarily due to an increase in share-based compensation of $310,000, and an increase in employee related expenses of $340,000.

Sales and marketing expenses decreased 2.0% to $4.5 million for the six-month period ended June 30, 2012, compared to $4.6 million in 2011. The decrease is primarily due to reduced employee related expenses of $107,000 offset by an increase in office related supplies of $15,000.

Research and development expenses increased 41.5% to $1.7 million for the six-month period ended June 30, 2012, compared to $1.2 million in 2011. The increase is primarily due to an increase in personnel related expenses of $360,000 and an increase in facility office related expenses of $125,000.

Depreciation and amortization expense increased 3.4% to $1.6 million for the six-month period ended June 30, 2012, compared to $1.5 million in 2011. The increase is primarily due to the purchase of certain tangible and intangible assets.

Income Taxes

Management continues to review the allowance for deferred taxes on a periodic basis and concluded no change in the reserve was necessary. Management will continue to monitor prospectively in order to determine if an adjustment to the allowance in the future will be necessary if the current earnings trend continues. Should management determine that a release the valuation allowance is appropriate, it could have a positive significant impact on our earnings.

Liquidity and Capital Resources

We had working capital of $13.6 million as of June 30, 2012 and $12.4 million as of December 31, 2011. We had cash balances of $9.0 million and $9.8 million, as of June 30, 2012 and December 31, 2011, respectively.

Net cash provided by operating activities for the six-month period ended June 30, 2012 was $0.6 million. The primary non-cash adjustments to net income for the six-month period ended June 30, 2012 were $1.7 million for depreciation and amortization and $0.7 million for share-based compensation expense. The changes in operating assets and liabilities included a $1.6 million increase in accounts and note receivable, a $0.3 million increase in other assets and a $1.5 million decrease in accounts payable, partially offset by a $0.4 million increase in deferred revenues.

Net cash used in investing activities for the six-month period ended June 30, 2012 was $1.7 million due primarily to purchases of property and equipment of $0.4 million and intangible and other assets of $1.3 million.

Net cash provided by financing activities for the six-month period ended June 30, 2012 was $0.3 million due primarily to proceeds from debt of $1.0 million, partially offset by payments on capital leases of $0.2 million and debt of $0.6 million.

To date, we have funded all capital expenditures from working capital, capital leases and other long-term obligations.

At June 30, 2012, we had a balance outstanding on our credit facility of $6.1 million at an interest rate of 4%. We were in compliance with all financial covenants of our credit agreement at June 30, 2012 and there were no letters of credit outstanding. As of the date of the filing of this Quarterly Report on Form 10-Q, no further borrowings had been made under the credit facility.

On April 25, 2011, we filed a universal shelf registration statement on Form S-3 with the SEC. Subject to market conditions, the registration statement allows us, from time to time, to offer and sell up to $30 million of equity securities as described in the registration statement. The registration statement was declared effective by the SEC on May 3, 2011. We have not issued or sold any securities pursuant to the shelf registration statement

We believe that our existing cash and cash equivalents together with expected cash generated from operations will be sufficient to meet our operating requirements for at least the next twelve months. This belief could be affected by future results that differ from expectations or a material adverse change in our operating business, including noncompliance with the financial covenants under our credit facility

Off-Balance Sheet Arrangements

As of June 30, 2012, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.