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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the three and nine month periods ended September 30, 2008

OR



| ̈ | 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: 001-33793





ICx Technologies, Inc.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | #77-0619113                      
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



|                                            |  |           
|------------------------------------------- |  | ----------
|2100 Crystal Drive, Suite 650 Arlington, VA |  | 22202     
|(Address of principal executive offices)    |  | (Zip Code)

(703) 678-2111

(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  x    No   ̈

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 definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one).:

Large accelerated filer   ̈    Accelerated filer   ̈    Non-accelerated filer  x    Smaller reporting company   ̈

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

As of October 31, 2008, the registrant had 34,121,907 shares of Common Stock outstanding.









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ICx TECHNOLOGIES, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

INDEX



|                                                                                                                                          |  |   
|----------------------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                                                             |  |   
|                                                                                                                                          | 
|Item 1. Financial Statements                                                                                                              |  |   
|                                                                                                                                          | 
|Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007
(audited)                                          |  | 3 
|                                                                                                                                          | 
|Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 
30, 2008 and 2007 (unaudited) |  | 4 
|                                                                                                                                          | 
|Consolidated Statement of Stockholders Equity for the Nine Months Ended September 30, 2008 (unaudited)                                   |  | 5 
|                                                                                                                                          | 
|Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007
(unaudited)                                   |  | 6 
|                                                                                                                                          | 
|Notes to Consolidated Financial Statements (unaudited)                                                                                    |  | 7 
|                                                                                                                                          | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations                                             |  | 18
|                                                                                                                                          | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                                        |  | 31
|                                                                                                                                          | 
|Item 4. Controls and Procedures                                                                                                           |  | 31
|                                                                                                                                          | 
|PART II. OTHER INFORMATION                                                                                                                |  |   
|                                                                                                                                          | 
|Item 1. Legal Proceedings                                                                                                                 |  | 32
|                                                                                                                                          | 
|Item 1A. Risk Factors                                                                                                                     |  | 32
|                                                                                                                                          | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                                       |  | 32
|                                                                                                                                          | 
|Item 3. Defaults Upon Senior Securities                                                                                                   |  | 32
|                                                                                                                                          | 
|Item 4. Submission of Matters to a Vote of Security Holders                                                                               |  | 32
|                                                                                                                                          | 
|Item 5. Other Information                                                                                                                 |  | 32
|                                                                                                                                          | 
|Item 6. Exhibits                                                                                                                          |  | 32
|                                                                                                                                          | 
|Signatures                                                                                                                                |  | 33
|                                                                                                                                          | 
|Index to Exhibits                                                                                                                         |  | 34



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

ICx TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets



|                                                                                                                                                                                |  |                              |              |   |                  |   |              |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------------ | - | ---------------- | - | ------------ | -
|                                                                                                                                                                                |  | (Unaudited)September 30,2008 |              |   | December 31,2007 |  
|Assets                                                                                                                                                                          |  |                              |              |   |                  |   |              |  
|Current assets:                                                                                                                                                                 |  |                              |              |   |                  |   |              |  
|Cash and cash equivalents (includes restricted cash of $8.4 million at September 30, 2008)                                                                                      |  | $                            | 45,720,499   |   |                  | $ | 64,635,940   |  
|Trade accounts receivable, net                                                                                                                                                  |  |                              | 25,084,785   |   |                  |   | 30,723,604   |  
|Inventories                                                                                                                                                                     |  |                              | 26,341,419   |   |                  |   | 18,305,164   |  
|Deferred income taxes                                                                                                                                                           |  |                              | 24,373       |   |                  |   | 189,788      |  
|Prepaid expenses and other current assets                                                                                                                                       |  |                              | 13,037,564   |   |                  |   | 12,630,928   |  
|                                                                                                                                                                                |  |                              |              |   |                  |   |              |  
|Total current assets                                                                                                                                                            |  |                              | 110,208,640  |   |                  |   | 126,485,424  |  
|Property, plant and equipment, net                                                                                                                                              |  |                              | 10,944,906   |   |                  |   | 9,525,741    |  
|Intangible assets, net                                                                                                                                                          |  |                              | 21,796,724   |   |                  |   | 27,704,589   |  
|Goodwill                                                                                                                                                                        |  |                              | 69,133,800   |   |                  |   | 66,088,664   |  
|Other assets                                                                                                                                                                    |  |                              | 2,612,775    |   |                  |   | 2,025,068    |  
|                                                                                                                                                                                |  |                              |              |   |                  |   |              |  
|Total assets                                                                                                                                                                    |  | $                            | 214,696,845  |   |                  | $ | 231,829,486  |  
|                                                                                                                                                                                |  |                              |              |   |                  |   |              |  
|Liabilities and Stockholders Equity                                                                                                                                            |  |                              |              |   |                  |   |              |  
|Current liabilities:                                                                                                                                                            |  |                              |              |   |                  |   |              |  
|Lines of credit                                                                                                                                                                 |  | $                            | 915,647      |   |                  | $ | 124,776      |  
|Current portion of long-term debt                                                                                                                                               |  |                              | 60,102       |   |                  |   | 117,082      |  
|Accounts payable                                                                                                                                                                |  |                              | 8,169,133    |   |                  |   | 10,883,266   |  
|Accrued payroll expenses                                                                                                                                                        |  |                              | 6,055,105    |   |                  |   | 6,572,238    |  
|Accrued expenses and other current liabilities                                                                                                                                  |  |                              | 8,483,680    |   |                  |   | 9,834,893    |  
|Deferred revenue                                                                                                                                                                |  |                              | 10,537,216   |   |                  |   | 3,497,683    |  
|                                                                                                                                                                                |  |                              |              |   |                  |   |              |  
|Total current liabilities                                                                                                                                                       |  |                              | 34,220,883   |   |                  |   | 31,029,938   |  
|Long-term debt                                                                                                                                                                  |  |                              | 189,553      |   |                  |   | 245,645      |  
|Deferred income taxes                                                                                                                                                           |  |                              | 1,460,259    |   |                  |   | 1,647,267    |  
|Other liabilities                                                                                                                                                               |  |                              | 361,704      |   |                  |   | 502,288      |  
|                                                                                                                                                                                |  |                              |              |   |                  |   |              |  
|Total liabilities                                                                                                                                                               |  |                              | 36,232,399   |   |                  |   | 33,425,138   |  
|                                                                                                                                                                                |  |                              |              |   |                  |   |              |  
|Commitments and Contingencies                                                                                                                                                   |  |                              |              |   |                  |   |              |  
|Series A Convertible Redeemable Preferred Stock, par value $.001 per share - authorized 15,000,000; issued and outstanding 0 shares;
liquidation preference $0                  |  |                              |             |   |                  |   |             |  
|                                                                                                                                                                                |  |                              |              |   |                  |   |              |  
|Stockholders Equity:                                                                                                                                                           |  |                              |              |   |                  |   |              |  
|Common stock, par value $.001 per share, authorized 250,000,000 shares in 2008 and 2007; issued and outstanding 34,323,488 and 33,680,892
shares in 2008 and 2007, respectively |  |                              | 34,324       |   |                  |   | 33,681       |  
|Additional paid-in capital                                                                                                                                                      |  |                              | 380,363,510  |   |                  |   | 374,126,190  |  
|Treasury stock, at cost; 216,707 and 79,623 shares in 2008 and 2007, respectively                                                                                               |  |                              | (2,026,628   | ) |                  |   | (1,121,525   | )
|Accumulated deficit                                                                                                                                                             |  |                              | (202,449,543 | ) |                  |   | (177,537,722 | )
|Accumulated other comprehensive income                                                                                                                                          |  |                              | 2,542,783    |   |                  |   | 2,903,724    |  
|                                                                                                                                                                                |  |                              |              |   |                  |   |              |  
|Total stockholders equity                                                                                                                                                      |  |                              | 178,464,446  |   |                  |   | 198,404,348  |  
|                                                                                                                                                                                |  |                              |              |   |                  |   |              |  
|Total liabilities and stockholders equity                                                                                                                                      |  | $                            | 214,696,845  |   |                  | $ | 231,829,486  |  
|                                                                                                                                                                                |  |                              |              |   |                  |   |              |  

The accompanying notes are an integral part of these consolidated financial statements.



3



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ICx TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Loss



|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|---------------------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                           |  | (Unaudited)                      |           
|                                                           |  | Three Months Ended September 30, |            |   | Nine Months Ended September 30, |  
|                                                           |  | 2008                             |            |   | 2007                            |   |            | 2008 |  |   | 2007        |  
|Revenues:                                                  |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Product revenues                                           |  | $                                | 25,499,700 |   |                                 | $ | 22,120,966 |      |  | $ | 69,506,811  |   |  | $ | 59,706,948  |  
|Contract research and development revenues                 |  |                                  | 8,853,460  |   |                                 |   | 8,724,761  |      |  |   | 30,652,299  |   |  |   | 24,482,465  |  
|Maintenance, service and other revenues                    |  |                                  | 10,607,422 |   |                                 |   | 3,384,107  |      |  |   | 18,496,524  |   |  |   | 10,429,992  |  
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Total revenues                                             |  |                                  | 44,960,582 |   |                                 |   | 34,229,834 |      |  |   | 118,655,634 |   |  |   | 94,619,405  |  
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Cost of revenues:                                          |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Cost of product revenues                                   |  |                                  | 12,052,194 |   |                                 |   | 10,205,504 |      |  |   | 33,266,791  |   |  |   | 29,057,812  |  
|Cost of contract research and development revenues         |  |                                  | 5,908,765  |   |                                 |   | 6,311,005  |      |  |   | 20,398,120  |   |  |   | 16,900,443  |  
|Cost of maintenance, service and other revenues            |  |                                  | 6,999,611  |   |                                 |   | 2,106,764  |      |  |   | 11,971,509  |   |  |   | 6,825,725   |  
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Total cost of revenue                                      |  |                                  | 24,960,570 |   |                                 |   | 18,623,273 |      |  |   | 65,636,420  |   |  |   | 52,783,980  |  
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Gross profit                                               |  |                                  | 20,000,012 |   |                                 |   | 15,606,561 |      |  |   | 53,019,214  |   |  |   | 41,835,425  |  
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Operating expenses:                                        |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|General and administrative                                 |  |                                  | 7,717,630  |   |                                 |   | 8,697,524  |      |  |   | 25,364,985  |   |  |   | 28,073,044  |  
|Sales and marketing                                        |  |                                  | 7,290,901  |   |                                 |   | 6,753,378  |      |  |   | 23,707,581  |   |  |   | 17,002,810  |  
|Research and development                                   |  |                                  | 5,610,904  |   |                                 |   | 5,404,787  |      |  |   | 18,171,865  |   |  |   | 14,691,339  |  
|Depreciation and amortization                              |  |                                  | 3,606,978  |   |                                 |   | 3,366,628  |      |  |   | 10,260,860  |   |  |   | 10,240,056  |  
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Total operating expenses                                   |  |                                  | 24,226,413 |   |                                 |   | 24,222,317 |      |  |   | 77,505,291  |   |  |   | 70,007,249  |  
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Operating loss                                             |  |                                  | (4,226,401 | ) |                                 |   | (8,615,756 | )    |  |   | (24,486,077 | ) |  |   | (28,171,824 | )
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Other income (expense):                                    |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Interest income                                            |  |                                  | 190,645    |   |                                 |   | 253,733    |      |  |   | 866,787     |   |  |   | 448,781     |  
|Interest expense                                           |  |                                  | (19,751    | ) |                                 |   | (340,971   | )    |  |   | (48,861     | ) |  |   | (454,617    | )
|Other, net                                                 |  |                                  | 113,858    |   |                                 |   | 142,957    |      |  |   | (265,646    | ) |  |   | 127,971     |  
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Total other income                                         |  |                                  | 284,752    |   |                                 |   | 55,719     |      |  |   | 552,280     |   |  |   | 122,135     |  
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Loss before income taxes                                   |  |                                  | (3,941,649 | ) |                                 |   | (8,560,037 | )    |  |   | (23,933,797 | ) |  |   | (28,049,689 | )
|Income tax expense (benefit)                               |  |                                  | (124,829   | ) |                                 |   | (1,139,087 | )    |  |   | 75,139      |   |  |   | (907,000    | )
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Loss from continuing operations                            |  | $                                | (3,816,820 | ) |                                 | $ | (7,420,950 | )    |  | $ | (24,008,936 | ) |  | $ | (27,142,689 | )
|(Loss) gain on discontinued operations, net of tax         |  |                                  |           |   |                                 |   |           |      |  |   |            |   |  |   | (1,301,544  | )
|(Loss) gain on sale of discontinued operations, net of tax |  |                                  |           |   |                                 |   | 580,485    |      |  |   | (902,885    | ) |  |   | 5,142,986   |  
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Net loss                                                   |  | $                                | (3,816,820 | ) |                                 | $ | (6,840,465 | )    |  | $ | (24,911,821 | ) |  | $ | (23,301,247 | )
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Other comprehensive income                                 |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Foreign currency translation adjustment, net of tax        |  |                                  | (1,081,776 | ) |                                 |   | 789,944    |      |  |   | (360,941    | ) |  |   | 1,574,710   |  
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Comprehensive loss                                         |  | $                                | (4,898,596 | ) |                                 | $ | (6,050,521 | )    |  | $ | (25,272,762 | ) |  | $ | (21,726,537 | )
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Net loss                                                   |  | $                                | (3,816,820 | ) |                                 | $ | (6,840,465 | )    |  | $ | (24,911,821 | ) |  | $ | (23,301,247 | )
|Less: Preferred stock dividends including accretion        |  |                                  |           |   |                                 |   | 2,519,249  |      |  |   |            |   |  |   | 7,384,062   |  
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Net loss attributable to common stockholders               |  | $                                | (3,816,820 | ) |                                 | $ | (9,359,714 | )    |  | $ | (24,911,821 | ) |  | $ | (30,685,309 | )
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Net loss per common share                                  |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Basic and diluted                                          |  | $                                | (0.11      | ) |                                 | $ | (0.95      | )    |  | $ | (0.73       | ) |  | $ | (3.13       | )
|                                                           |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  

The accompanying notes are an integral part of these consolidated financial statements.



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ICx TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders Equity



|                                             |  |                      |  |                          |        |  |                    |             |   |                                     |   |              |               |  |   |                          |   |  |   |            |   |  |   |             |  
|-------------------------------------------- |  | -------------------- |  | ------------------------ | ------ |  | ------------------ | ----------- | - | ----------------------------------- | - | ------------ | ------------- |  | - | ------------------------ | - |  | - | ---------- | - |  | - | ----------- | -
|                                             |  | (Unaudited)          | 
|                                             |  | Stockholders Equity | 
|                                             |  | Common Stock         |  | AdditionalPaid-inCapital |        |  | AccumulatedDeficit |             |   | AccumulatedOtherComprehensiveIncome |   |              | TreasuryStock |  |   | TotalStockholdersEquity |  
|                                             |  | Shares               |  | Amount                   |        |  |                    |             |  
|Balances at January 1, 2008                  |  | 33,680,892           |  | $                        | 33,681 |  | $                  | 374,126,190 |   |                                     | $ | (177,537,722 | )             |  | $ | 2,903,724                |   |  | $ | (1,121,525 | ) |  | $ | 198,404,348 |  
|Comprehensive income (loss):                 |  |                      |  |                          |        |  |                    |             |   |                                     |   |              |               |  |   |                          |   |  |   |            |   |  |   |             |  
|Net loss                                     |  |                     |  |                          |       |  |                    |            |   |                                     |   | (24,911,821  | )             |  |   |                         |   |  |   |           |   |  |   | (24,911,821 | )
|Foreign currency translation, net of tax     |  |                     |  |                          |       |  |                    |            |   |                                     |   |             |               |  |   | (360,941                 | ) |  |   |           |   |  |   | (360,941    | )
|                                             |  |                      |  |                          |        |  |                    |             |   |                                     |   |              |               |  |   |                          |   |  |   |            |   |  |   |             |  
|Total comprehensive loss                     |  |                     |  |                          |       |  |                    |            |   |                                     |   | (24,911,821  | )             |  |   | (360,941                 | ) |  |   |           |   |  |   | (25,272,762 | )
|Issuances of common stock:                   |  |                      |  |                          |        |  |                    |             |   |                                     |   |              |               |  |   |                          |   |  |   |            |   |  |   |             |  
|Business combinations                        |  | 189,797              |  |                          | 190    |  |                    | 887,970     |   |                                     |   |             |               |  |   |                         |   |  |   |           |   |  |   | 888,160     |  
|Stock options, warrants and restricted stock |  | 452,799              |  |                          | 453    |  |                    | 166,652     |   |                                     |   |             |               |  |   |                         |   |  |   |           |   |  |   | 167,105     |  
|Stock offering costs                         |  |                     |  |                          |       |  |                    | (27,841     | ) |                                     |   |             |               |  |   |                         |   |  |   |           |   |  |   | (27,841     | )
|Stock based compensation                     |  |                     |  |                          |       |  |                    | 5,210,539   |   |                                     |   |             |               |  |   |                         |   |  |   |           |   |  |   | 5,210,539   |  
|Purchases of treasury stock                  |  |                     |  |                          |       |  |                    |            |   |                                     |   |             |               |  |   |                         |   |  |   | (905,103   | ) |  |   | (905,103    | )
|                                             |  |                      |  |                          |        |  |                    |             |   |                                     |   |              |               |  |   |                          |   |  |   |            |   |  |   |             |  
|Balances at September 30, 2008               |  | 34,323,488           |  | $                        | 34,324 |  | $                  | 380,363,510 |   |                                     | $ | (202,449,543 | )             |  | $ | 2,542,783                |   |  | $ | (2,026,628 | ) |  | $ | 178,464,446 |  
|                                             |  |                      |  |                          |        |  |                    |             |   |                                     |   |              |               |  |   |                          |   |  |   |            |   |  |   |             |  

The accompanying notes are an integral part of this consolidated financial statement.



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ICx TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows



|                                                                            |  |                                            |             |   |      |   |             |  
|--------------------------------------------------------------------------- |  | ------------------------------------------ | ----------- | - | ---- | - | ----------- | -
|                                                                            |  | (Unaudited)Nine Months Ended September 30, |            
|                                                                            |  | 2008                                       |             |   | 2007 |  
|Operating activities:                                                       |  |                                            |             |   |      |   |             |  
|Net loss                                                                    |  | $                                          | (24,911,821 | ) |      | $ | (23,301,247 | )
|Loss (gain) on sale of discontinued operations                              |  |                                            | 902,885     |   |      |   | (5,142,986  | )
|Loss on discontinued operations, net of tax                                 |  |                                            |            |   |      |   | 1,301,544   |  
|                                                                            |  |                                            |             |   |      |   |             |  
|Loss from continuing operations, net of tax                                 |  |                                            | (24,008,936 | ) |      |   | (27,142,689 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                            |             |   |      |   |             |  
|Stock based compensation                                                    |  |                                            | 4,500,704   |   |      |   | 4,109,848   |  
|Depreciation and amortization                                               |  |                                            | 10,260,860  |   |      |   | 10,240,056  |  
|Deferred income taxes                                                       |  |                                            | (88,928     | ) |      |   | (563,002    | )
|Gain on disposal of property and equipment                                  |  |                                            |            |   |      |   | (1,127      | )
|Changes in operating assets and liabilities:                                |  |                                            |             |   |      |   |             |  
|Trade accounts receivable, net                                              |  |                                            | 5,824,720   |   |      |   | (3,443,320  | )
|Inventories                                                                 |  |                                            | (7,958,381  | ) |      |   | (1,737,108  | )
|Prepaid expenses and other assets                                           |  |                                            | (3,579,629  | ) |      |   | (3,248,295  | )
|Accounts payable                                                            |  |                                            | (2,051,867  | ) |      |   | 401,039     |  
|Accrued expenses and other liabilities                                      |  |                                            | 1,072,784   |   |      |   | 602,166     |  
|Deferred revenue                                                            |  |                                            | 6,401,003   |   |      |   | (187,648    | )
|                                                                            |  |                                            |             |   |      |   |             |  
|Net cash used in continuing operating activities                            |  |                                            | (9,627,670  | ) |      |   | (20,970,080 | )
|Cash provided by operation of discontinued operations                       |  |                                            |            |   |      |   | 69,881      |  
|                                                                            |  |                                            |             |   |      |   |             |  
|Net cash used in operating activities                                       |  |                                            | (9,627,670  | ) |      |   | (20,900,199 | )
|                                                                            |  |                                            |             |   |      |   |             |  
|Investing activities:                                                       |  |                                            |             |   |      |   |             |  
|Purchases of property, plant and equipment                                  |  |                                            | (3,538,786  | ) |      |   | (3,754,160  | )
|Business combinations                                                       |  |                                            | (7,443,805  | ) |      |   |            |  
|                                                                            |  |                                            |             |   |      |   |             |  
|Net cash used in continuing investing activities                            |  |                                            | (10,982,591 | ) |      |   | (3,754,160  | )
|Proceeds from the sale of discontinued operations                           |  |                                            | 1,797,115   |   |      |   | 23,571,004  |  
|                                                                            |  |                                            |             |   |      |   |             |  
|Net cash (used in) provided by investing activities                         |  |                                            | (9,185,476  | ) |      |   | 19,816,844  |  
|                                                                            |  |                                            |             |   |      |   |             |  
|Financing activities:                                                       |  |                                            |             |   |      |   |             |  
|Proceeds from issuance of preferred stock                                   |  |                                            |            |   |      |   | 3,500,000   |  
|Proceeds from issuance of common stock                                      |  |                                            | 167,105     |   |      |   | 295,609     |  
|Borrowings under lines of credit                                            |  |                                            | 915,647     |   |      |   | 540,723     |  
|Repayments under lines of credit                                            |  |                                            | (124,776    | ) |      |   | (753,239    | )
|Proceeds from notes payable and long-term debt                              |  |                                            |            |   |      |   | 14,578,899  |  
|Repayments of notes payable and long-term debt                              |  |                                            | (113,072    | ) |      |   | (8,409,916  | )
|Purchase of treasury shares                                                 |  |                                            | (905,103    | ) |      |   |            |  
|Other, net                                                                  |  |                                            | (34,581     | ) |      |   | (2,511      | )
|                                                                            |  |                                            |             |   |      |   |             |  
|Net cash (used in) provided by financing activities                         |  |                                            | (94,780     | ) |      |   | 9,749,565   |  
|                                                                            |  |                                            |             |   |      |   |             |  
|Effect of foreign exchange rate on cash                                     |  |                                            | (7,515      | ) |      |   | 229,803     |  
|                                                                            |  |                                            |             |   |      |   |             |  
|Net change in cash and cash equivalents                                     |  |                                            | (18,915,441 | ) |      |   | 8,896,013   |  
|Cash and cash equivalents at beginning of period                            |  |                                            | 64,635,940  |   |      |   | 7,236,005   |  
|                                                                            |  |                                            |             |   |      |   |             |  
|Cash and cash equivalents at end of period                                  |  | $                                          | 45,720,499  |   |      | $ | 16,132,018  |  
|                                                                            |  |                                            |             |   |      |   |             |  

The accompanying notes are an integral part of these consolidated financial statements.



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ICx TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2008 and 2007



|1. | Description of the Business and Summary of Significant Accounting Policies
|-- | --------------------------------------------------------------------------



|(a) | General
|--- | -------

ICx Technologies, Inc. and
Subsidiaries (ICx or Company) was incorporated in the State of Delaware in 2003 to acquire, develop, and coordinate the operations of security technology companies. ICx develops and integrates advanced sensor technologies for
homeland security, force protection and commercial applications. The Companys 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. These technologies are used in nuclear power plants, military installations, natural gas storage systems and pipelines, shopping malls, public transportation
systems, and port facilities.

The holders of a majority of ICx capital stock, DP1, LLC (DP1) and Valentis SB, L.P.
(Valentis), are under the common control of Wexford Capital, LLC (Wexford), which is an SEC registered investment advisor.

The Companys Board of Directors approved a plan in 2006 for the sale of three companies. The sales of these companies were completed in the nine months ended September 30, 2007. Accordingly the operating results of those
companies are included as discontinued operations in the accompanying consolidated financial statements for the three and nine months ended September 30, 2007.

The accounting policies set forth in Note 1 to the consolidated financial statements contained in the Form 10-K filed with the Securities and Exchange Commission on March 31, 2008 have been followed in preparing
the accompanying consolidated financial statements. In the Companys opinion, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the Companys results of operations and financial position
for the interim periods presented have been made in the accompanying consolidated financial statements.



|(b) | Initial Public Offering
|--- | -----------------------

In November 2007,
the Company completed its initial public offering (IPO) of common stock in which it sold and issued 5 million shares of its common stock at an issue price of $16.00 per share. The Company raised a total of $80 million in gross
proceeds from its IPO, or $70.8 million in net proceeds after deducting underwriting discounts and commissions of $5.6 million and other offering costs of $3.6 million. Upon the closing of the IPO, all shares of convertible preferred stock
outstanding automatically converted into 18,525,595 shares of common stock.



|(c) | Reverse Stock Split
|--- | -------------------

On October 23,
2007, the Companys Board of Directors approved a one-for-two reverse stock split of the Companys outstanding common stock that became effective immediately prior to the effectiveness of the registration statement for the Companys
initial public offering. All common shares and per share amounts in the accompanying consolidated financial statements and notes to the consolidated financial statements have been retroactively adjusted for all periods presented to give effect to
the reverse stock split. The effects of the reverse split of the Companys common stock described have also been reflected retroactively in the presentation of all preferred shares and per share amounts in the accompanying consolidated
financial statements and notes to the consolidated financial statements based on the preferred conversion ratio of one-to-one (post one-for-two reverse stock split).



|(d) | Trade Accounts Receivable
|--- | -------------------------

At
September 30, 2008 and December 31, 2007, trade accounts receivable, net was comprised of the following:



|                                |  |                    |            |   |                   |   |            |  
|------------------------------- |  | ------------------ | ---------- | - | ----------------- | - | ---------- | -
|                                |  | September 30, 2008 |            |   | December 31, 2007 |  
|U.S. government                 |  | $                  | 7,023,965  |   |                   | $ | 9,543,917  |  
|Commercial and other            |  |                    | 18,356,932 |   |                   |   | 21,855,032 |  
|                                |  |                    |            |   |                   |   |            |  
|                                |  | $                  | 25,380,897 |   |                   | $ | 31,398,949 |  
|Allowance for doubtful accounts |  |                    | (296,112   | ) |                   |   | (675,345   | )
|                                |  |                    |            |   |                   |   |            |  
|Trade accounts receivable, net  |  | $                  | 25,084,785 |   |                   | $ | 30,723,604 |  
|                                |  |                    |            |   |                   |   |            |  



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Except for the U.S. government, no one customer accounted for 10% or greater of the net trade accounts
receivable balance at September 30, 2008 or December 31, 2007.



|(e) | Inventories
|--- | -----------

At September 30, 2008 and
December 31, 2007, inventories were comprised of the following:



|                         |  |                    |            |   |                   |   |            |  
|------------------------ |  | ------------------ | ---------- | - | ----------------- | - | ---------- | -
|                         |  | September 30, 2008 |            |   | December 31, 2007 |  
|Raw materials            |  | $                  | 14,785,022 |   |                   | $ | 10,296,785 |  
|Work in progress         |  |                    | 5,060,670  |   |                   |   | 2,521,860  |  
|Finished goods           |  |                    | 7,223,234  |   |                   |   | 6,101,824  |  
|                         |  |                    |            |   |                   |   |            |  
|                         |  | $                  | 27,068,926 |   |                   | $ | 18,920,469 |  
|Reserve for obsolescence |  |                    | (727,507   | ) |                   |   | (615,305   | )
|                         |  |                    |            |   |                   |   |            |  
|                         |  | $                  | 26,341,419 |   |                   | $ | 18,305,164 |  
|                         |  |                    |            |   |                   |   |            |  



|(f) | Goodwill and Other Intangible Assets
|--- | ------------------------------------

The
changes in goodwill by segment as of September 30, 2008 are as follows:



|                                               |  |           |            |              |   |            |  |   |           |   |  |   |            |  
|---------------------------------------------- |  | --------- | ---------- | ------------ | - | ---------- |  | - | --------- | - |  | - | ---------- | -
|                                               |  | Detection |            | Surveillance |   | Solutions  |  |   | Total     |  
|Balance as of December 31, 2007                |  | $         | 46,154,294 |              | $ | 12,736,716 |  | $ | 7,197,654 |   |  | $ | 66,088,664 |  
|Goodwill of acquired businesses (Note 3)       |  |           | 3,123,405  |              |   |           |  |   |          |   |  |   | 3,123,405  |  
|Additional purchase price for 2008 acquisition |  |           | 25,530     |              |   |           |  |   |          |   |  |   | 25,530     |  
|Additional purchase price for 2007 acquisition |  |           |           |              |   |           |  |   | 22,400    |   |  |   | 22,400     |  
|Impact of foreign exchange                     |  |           |           |              |   |           |  |   | (126,199  | ) |  |   | (126,199   | )
|                                               |  |           |            |              |   |            |  |   |           |   |  |   |            |  
|Balance as of September 30, 2008               |  | $         | 49,303,229 |              | $ | 12,736,716 |  | $ | 7,093,855 |   |  | $ | 69,133,800 |  
|                                               |  |           |            |              |   |            |  |   |           |   |  |   |            |  

Goodwill is not amortized, but instead is tested for impairment at least annually. Pursuant to the
Companys policies for assessing impairment of goodwill and long-lived assets, no goodwill was written off in the first nine months of 2008 or 2007.



|(g) | Revenue Recognition
|--- | -------------------

The Company recognizes
revenue from product sales in accordance with Staff Accounting Bulletin No. 104 as amended, when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and
collection from the customer is reasonably assured. Product revenue is generally recognized upon shipment, unless customer acceptance is required, in which case product revenue is recognized when documentation of customer acceptance is received.

The Company earns contract research and development revenue by performing research and development primarily under contracts entered into
with the U.S. government or as subcontractors to other commercial entities that contract with the U.S. government. Most of the research and development contracts are either based on costs incurred plus a fixed fee or are based on a fixed price. The
Company recognizes revenue from research and development contracts using the percentage of completion method in accordance with Statement of Position 81-1 as prescribed by the American Institute of Certified Public Accounts Audit and Accounting
Guide, Audits of Federal Government Contractors. To the extent that customer billings or payments are in excess of revenues, the excess is recorded as deferred revenue and contract costs in excess of expected earnings under the contract are
deferred. At September 30, 2008 and December 31, 2007, the Company had included in deferred revenue $8,929,868 and $1,825,355 of excess billings or customer payments, respectively, related to percentage of completion timing differences.
Deferred contract costs at September 30, 2008 and December 31, 2007 were not material. In certain circumstances, revenue is recognized under the percentage of completion method prior to costs being incurred under cost plus fixed fee
contracts or prior to billings as defined in fixed price contracts. Such amounts are recorded as unbilled revenue and are expected to be collected within one year of recognition, and if contract costs incurred are below the earnings that are
expected to be realized upon contract completion, the costs are accrued until they are incurred. At September 30, 2008 and December 31, 2007, the Company had unbilled revenue of $9,842,267 and $5,706,570, respectively, included in other
current assets in the accompanying financial statements, substantially all of which was due from the U.S. government and expected to be collected within one year. Accrued contract costs at September 30, 2008 and December 31, 2007, were not
material. The Company had no material claims outstanding under its research and development contracts at September 30, 2008.



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The Company recognizes revenue from services at the time the services are performed. Deferred revenue
includes $1,336,266 and $1,235,080 at September 30, 2008 and December 31, 2007, respectively, of prepayments on service contracts which are deferred until such time as the services are performed. Warranty income under separate agreements
is recognized ratably over the life of the warranty.

The Company recognizes software revenue under the provisions of the Accounting
Standards Executive Committees Statement of Position 97-2 (SOP 97-2), Software Revenue Recognition (as amended by SOP 98-9). Revenue from software license fees is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the price is fixed or determinable, and collection from the customer is reasonably assured. Revenue from post contract customer maintenance and support is deferred and recognized ratably over the life of the post contract
customer maintenance and support agreement. Deferred revenue includes $271,082 and $437,248 at September 30, 2008 and December 31, 2007, respectively, of revenue deferred under multiple-element software arrangements for post contract
customer support.



|(h) | Accounting for Stock-Based Compensation
|--- | ---------------------------------------

The
Company accounts for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment(SFAS 123(R)). SFAS 123(R) requires equity-classified, share-based payments to employees, including grants of employee
stock options, to be valued at fair value on the date of grant and to be expensed over the applicable vesting period. Under the modified prospective transition method, share-based awards granted or modified on or after January 1, 2006, are
recognized in compensation expense over the applicable vesting period. Also, any previously granted awards that were not fully vested as of January 1, 2006, are recognized as compensation expense over the remaining vesting period.

During the three months ended September 30, 2008 and 2007, the Company recorded non-cash stock-based compensation expense of $1,365,520 and
$1,330,169, respectively. During the nine months ended September 30, 2008 and 2007, the Company recorded non-cash stock-based compensation expense of $4,500,704 and $4,109,848, respectively. As of September 30, 2008, and December 31,
2007, the Companys total unrecognized compensation cost related to stock-based awards was $6.1 million and $8.5 million, respectively.



|(i) | Loss Per Share
|--- | --------------

The Company calculates loss
per share in accordance with SFAS No. 128, Earnings Per Share(SFAS 128). Under SFAS 128, basic loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of
common shares outstanding during each reporting period. Diluted loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during each period adjusted for
the effect of dilutive potential common shares calculated using the treasury stock method. However, the computation of diluted loss per share shall not assume the conversion or exercise of options that would have an anti-dilutive effect (a decrease
in loss per share) on loss per share.

For the quarter ended September 30, 2008, the Company had 34,293,531 weighted average shares
outstanding, and all of the Companys potential common shares were anti-dilutive as the Company was in a net loss position. Those potential common shares consisted of 721,233 weighted average shares of stock. For the quarter ended
September 30, 2007, the Company had 9,847,605 weighted average shares outstanding and all of the Companys potential common shares were anti-dilutive as the Company was in a net loss position. Those potential common shares consisted of
1,785,122 weighted average shares of stock options and 18,525,595 weighted average shares of convertible preferred stock.

For the nine
months ended September 30, 2008, the Company had 34,000,684 weighted average shares outstanding, and all of the Companys potential common shares were anti-dilutive as the Company was in a net loss position. Those potential common shares
consisted of 601,263 weighted average shares of stock. For the nine months ended September 30, 2007, the Company had 9,798,678 weighted average shares outstanding and all of the Companys potential common shares were anti-dilutive as the
Company was in a net loss position. Those potential common shares consisted of 3,364,634 weighted average shares of stock options, warrants and restricted stock/stock units and 18,514,057 weighted average shares of convertible preferred stock.



|(j) | Reclassifications
|--- | -----------------

Certain 2007 balances in
the accompanying consolidated financial statements have been reclassified to conform to the 2008 presentation.



|(k) | Fair Value Measurements
|--- | -----------------------

Effective
January 1, 2008, the Company adopted the provisions of SFAS 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles,



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and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB
Statement No. 157, which 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.
Therefore, the Company adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. Adoption of SFAS 157 for financial assets and financial liabilities did not have a material impact on the Companys
consolidated financial position or results of operations. The Company is currently evaluating the impact that adopting SFAS 157 for nonfinancial assets and nonfinancial liabilities will have, if any, on its consolidated financial statements.

Under SFAS 157, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of
observable inputs and minimize the use of unobservable inputs. SFAS 157 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair
value:



| |  |  | Level 1  Quoted prices in active markets for identical assets or liabilities.
| | - |  | ------------------------------------------------------------------------------



| |  |  | Level 2  Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices
in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

Level 1 financial assets measured at fair value on a recurring basis consist of shares of common stock held as trading
securities of $1,157,410 at December 31, 2007 (Note 9), which are included in other current assets on the consolidated balance sheet. These shares are traded on a national stock exchange and are valued at the closing price of the shares on the
reporting date. These shares were sold in July 2008. The Company has no Level 2 or Level 3 financial assets or liabilities measured at fair value on a recurring basis.



|(l) | Recent Accounting Pronouncements
|--- | --------------------------------

The
Financial Accounting Standards Board (FASB) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. The Company has reviewed the recently issued pronouncements and
concluded that the following new accounting standards are applicable to the Company.

In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at
fair value at specified election dates. Upon adoption, an entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Most of the provisions apply only to
entities that elect the fair value option. However, the amendment to SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available for sale and trading securities. SFAS 159 is
effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. Adoption of SFAS 159 on January 1, 2008 did not have a material impact on the Companys consolidated financial position or
results of operations as the Company did not elect the fair value option under SFAS 159.

In December 2007, the FASB issued SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160). SFAS 160 amends Accounting Research Bulletin No. 5, Consolidated Financial Statements. SFAS 160 changes the accounting and
reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity in the Companys consolidated balance sheet. SFAS 160 is effective as of the beginning of an entitys first
fiscal year that begins after December 15, 2008. Early adoption is prohibited. The Company does not anticipate that SFAS 160 will have a significant impact on the consolidated financial statements as the Company does not currently have any
material noncontrolling interests.

In December 2007, the FASB issued SFAS 141(R), Business Combinations (SFAS 141(R)).
SFAS 141(R) establishes standards for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141(R) also
provides guidance for recognizing and measuring the goodwill acquired in the business combination and for determining what information to disclose in connection with a business combination. Among other things, SFAS 141(R) requires securities issued
be valued as of the acquisition date, transaction costs incurred in connection with an acquisition be expensed, except acquiree costs that meet the criteria of SFAS 146, contingent consideration be recorded at fair value as of the date of
acquisition with subsequent changes reflected in income, and in-process research and development be capitalized as an intangible asset. The provisions of



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SFAS 141(R) are applicable to business combinations consummated on or after December 15, 2008. Early application is prohibited. The provisions of SFAS
141(R) may impact the Companys accounting for future business combinations, as the Company often includes provisions for the issuance of contingent consideration based on future earnings in its acquisitions.

In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets, (FSP FAS
142-3), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. FSP FAS 142-3 will improve the consistency between the useful life of
a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets, and the period of expected cash flows used to measure the fair value of the asset under SFAS 141, Business Combinations, and other U.S. GAAP. FSP FAS
142-3 is effective as of the beginning of an entitys first fiscal year that begins after December 15, 2008. Early adoption is prohibited. The Company is currently evaluating the impact that adopting FSP FAS 142-3 will have, if any, on its
consolidated financial position and results of operations.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles(SFAS 162). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that
are presented in conformity with U.S. GAAP for nongovernmental entities. SFAS 162 will become effective 60 days following the SECs approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company is currently evaluating the impact that adopting SFAS 162 will have, if any, on its consolidated financial position and results of operations, but does
not believe adoption will have a significant impact on the consolidated financial statements.

In June 2008, the FASB issued FASB Staff
Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether unvested share-based payment awards with
rights to receive dividends or dividend equivalents should be considered as participating securities for the purposes of applying the two-class method of calculating earnings per share (EPS) under SFAS 128. The FASB staff concluded that
unvested share-based payments awards that contain nonforfeitable rights to receive dividends or dividend equivalents (whether paid or unpaid) are participating securities, and thus, should be included in the two-class method of computing EPS. FSP
EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years and requires that all prior period EPS data presented be adjusted retrospectively. Early application is not permitted. The
Company is currently evaluating the potential impact FSP EITF 03-6-1 will have, if any, on its consolidated financial statements.

In
October 2008, the FASB issued Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3 clarifies the application of SFAS 157 in an inactive
market and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP became effective on October 10, 2008 and must be applied to
prior periods for which financial statements have not been issued. Adoption of FSP 157-3 did not have a material impact on the Companys consolidated financial position or results of operations.



|2. | Related Party Transactions
|-- | --------------------------

Securities Issued
to Insiders

DP1 directly holds more than 5% of the Companys capital stock. Joseph Jacobs, a member of the Companys
Board of Directors, is a member of certain affiliates that own or control DP1, DP2 and Debello Investors, LLC. Mark Mills, the Chairman of the Board of Directors, and Hans Kobler, Chief Executive Officer and a member of the Board of Directors, each
has an indirect ownership interest in DP1 and DP2 through an affiliate but otherwise each disclaims beneficial ownership of DP1 or DP2.

Administrative Services Agreement with Wexford

The Company entered into an Administrative Services Agreement with
Wexford under which the Company may request certain legal, accounting, back office, and other services. The Company is obligated to reimburse Wexford for all of its direct and indirect costs allocated to the performance of such services. The Company
incurred general and administrative expenses of $26,363 and $37,493 in the three months ended September 30, 2008 and 2007, respectively, and $93,199 and $184,471 in the nine months ended September 30, 2008 and 2007, respectively, pursuant
to the agreement. Either party may terminate specific services or cancel the agreement upon written notice to the other party.



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Leases

Juergen Stein, CEO and President of Target GmbH, a subsidiary of the Company, leases facilities to the Company under a lease agreement dated January 1, 2005. Rent expense of $27,000 and $25,500 was incurred in
the three months ended September 30, 2008 and 2007, respectively. Rent expense of $81,000 and $70,500 was incurred in the nine months ended September 30, 2008 and 2007, respectively. The lease term ends on December 31, 2020, and can
be renewed for one year terms thereafter.

Strange Family Holdings, LLP, leases facilities to the Company under a lease agreement dated
June 15, 2005. Rent expense of $16,897 and $20,631 was incurred in the three months ended September 30, 2008 and 2007, respectively. Rent expense of $56,050 and $59,081 was incurred in the nine months ended September 30, 2008 and
2007, respectively. Effective September 1, 2008, the lease was renewed for similar terms for a one-year period. The lease may be renewed for six additional one-year terms thereafter. Certain family members of the Strange family hold senior
management positions in one of the Companys subsidiaries.

Debt Obligations

On March 8, 2007, the Company borrowed $3.0 million from DP1 through a convertible promissory note due April 9, 2007. The note bore interest in
the form of a $60,000 origination fee deducted from the proceeds. The note was convertible into Series A shares at $10.00 per share and was repaid on April 9, 2007. On September 28, 2007, the Company entered into a $7.0 million promissory
note payable to DP1 and due December 27, 2007. The note bore interest at 2% every 30 days payable in advance. The note was repaid in full on the due date with the net proceeds from the IPO. Net proceeds from the note totaled $6.9 million.



|3. | Business Combination and Related Intangibles
|-- | --------------------------------------------

On
May 31, 2008, the Company acquired the assets of S3I, LLC (S3I) for $3.5 million in cash and $2.3 million in assumed liabilities in a business combination accounted for as a purchase. S3I is a developer of biological sensors.
Management believes S3Is sensors can be integrated into and used with the Companys other biological-detection products, thereby complementing the Companys existing products. Acquired intangibles primarily resulted from S3Is
core technology while goodwill resulted from the excess of the purchase price over S3Is net assets at the date of acquisition. S3I is included in the Detection business segment.

The following table summarizes the estimated fair values of the net assets acquired as of the date of acquisition:



|                 |  |                    |            |   |                          |   |                                         |  |          |   |       |   |           |  |   |          
|---------------- |  | ------------------ | ---------- | - | ------------------------ | - | --------------------------------------- |  | -------- | - | ----- | - | --------- |  | - | ---------
|2008 Acquisition |  | TangibleNet Assets |            |   | AcquiredIntangibleAssets |   | AcquiredIn-ProcessResearch &Development |  | Goodwill |   | Total
|S3I              |  | $                  | (1,573,405 | ) |                          | $ | 1,950,000                               |  | $        |  |       | $ | 3,123,405 |  | $ | 3,500,000

Intangible net assets acquired in the business combination are comprised of $1,250,000 of core
technology and $700,000 of firm and non-firm contracts. The weighted average life of the core technology is eight years. The weighted average life of the firm and non-firm contracts is less than two years.

The purchase agreement with S3I contains contingent consideration provisions based on earnings and future revenues in an amount not to exceed $24.7
million. In accordance with SFAS 141, Business Combinations, any contingent consideration paid under the agreement would be recorded as an additional cost of the acquisition and therefore would increase goodwill associated with the
acquisition.



|4. | Commitments and Contingencies
|-- | -----------------------------

The Company is
routinely involved in various legal matters arising from the normal course of business. Management believes that losses, if any, arising from such actions will not have a material adverse effect on the financial position or results of operations of
the Company.



|5. | Income Taxes
|-- | ------------

Effective January 1, 2007, the
Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes,an Interpretation of FASB Statement No. 109 (FIN 48). As a result of the implementation of FIN 48, the Company
recognized no material adjustment in the liability for unrecognized income tax benefits. The cumulative effect of adopting FIN 48 resulted in no adjustment to retained earnings. As of September 30, 2008 and



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December 31, 2007, the Company had unrecognized tax benefits of $1.4 million. If recognized in future periods, $1.4 million would reduce the
Companys effective income tax rate. No interest or penalties have been accrued. The Company does not expect the unrecognized tax benefits to significantly change within the next 12 months. The Company has elected to report interest and
penalties as a component of income tax expense.



|6. | Lines of Credit
|-- | ---------------

Certain of the Companys
subsidiaries have operating lines of credit with banks in which borrowing is generally collateralized by and based on a percentage of certain eligible accounts receivable, inventory, and/or property and equipment. Interest is based on prime or, in
some cases, percentage points above prime.

At September 30, 2008 and December 31, 2007, lines of credit consisted of outstanding
balances of $915,647 and $124,776, respectively, on a line of credit with a maximum borrowing amount of $2.5 million, a variable interest rate based on prime (minimum of 5.5%) and a maturity date of April 26, 2009. The interest rate at
September 30, 2008 was 5.75%.



|7. | Treasury Stock
|-- | --------------

As part of the Companys
stock-based compensation plans, the Company offers employees the opportunity to make required tax payments with cash or through a net share settlement. For employees choosing net share settlement, the Company makes required tax payments on behalf of
employees as their stock awards vest and then withholds a number of vested shares having a value on the date of vesting equal to the tax obligation. The shares withheld were recorded as treasury shares. During the nine months ended
September 30, 2008, the Company repurchased 137,084 shares in settlement of employees tax obligations for a total of $905,103 or an average of $6.60 per share.



|8. | Stock-Based Compensation
|-- | ------------------------

The following table
summarizes activity for nonvested restricted stock (RS) and restricted stock units (RSUs) granted under the 2007 Equity Incentive Plan for the nine months ended September 30, 2008:



|                                                        |  |                       |   |  |                           |      
|------------------------------------------------------- |  | --------------------- | - |  | ------------------------- | -----
|                                                        |  | RestrictedStock Units |   |  | WeightedAverageFair Value
|Nonvested RS and RSUs outstanding at January 1, 2008    |  | 591,459               |   |  | $                         | 12.04
|RS and RSUs granted                                     |  | 514,726               |   |  |                           | 6.63 
|RS and RSUs vested                                      |  | (358,776              | ) |  |                           | 9.00 
|RS and RSUs forfeited                                   |  | (56,173               | ) |  |                           | 9.16 
|                                                        |  |                       |   |  |                           |      
|Nonvested RS and RSUs outstanding at September 30, 2008 |  | 691,236               |   |  | $                         | 9.83 
|                                                        |  |                       |   |  |                           |      

The Company recorded stock-based compensation expense of $1.0 million and $0.6 million during the
three months ended September 30, 2008 and 2007, respectively, and $3.2 million and $1.5 million during the nine months ended September 30, 2008 and 2007, respectively, in connection with restricted stock grants. Grants of restricted stock
and restricted stock units are valued using the closing market price of the Companys common stock on the date of grant. Prior to November 7, 2007, the Company accounted for the fair value of the restricted stock using estimates of the
fair value of an underlying share of common stock at the time of the grants as there was no market for the Companys common stock prior to November 7, 2007. The Companys common stock valuations used the probability weighted expected
return method for 2007.

The aggregate intrinsic value of outstanding restricted stock at September 30, 2008 was $5.4 million. Also at
September 30, 2008, total compensation cost related to nonvested restricted stock awards that had not yet been recognized totaled $5.0 million. The weighted average period over which this amount will be recognized is estimated to be 1.2 years.



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Stock option activity for options issued under the 2007 Equity Incentive Plan was as follows as of
September 30, 2008, and for the nine months then ended:



|                                          |  |                         |   |  |                              |       |                                                   |      |                         |   |          
|----------------------------------------- |  | ----------------------- | - |  | ---------------------------- | ----- | ------------------------------------------------- | ---- | ----------------------- | - | ---------
|                                          |  | SharesSubject toOptions |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm(in years) |      | AggregateIntrinsicValue
|Options outstanding at January 1, 2008    |  | 3,098,641               |   |  | $                            | 9.22  |                                                   |      |                         |   |          
|Options granted                           |  | 98,250                  |   |  |                              | 9.17  |                                                   |      |                         |   |          
|Options exercised                         |  | (128,011                | ) |  |                              | 1.16  |                                                   |      |                         |   |          
|Options terminated, cancelled or expired  |  | (176,100                | ) |  |                              | 10.67 |                                                   |      |                         |   |          
|                                          |  |                         |   |  |                              |       |                                                   |      |                         |   |          
|Options outstanding at September 30, 2008 |  | 2,892,780               |   |  | $                            | 9.52  |                                                   | 6.40 |                         | $ | 3,264,263
|                                          |  |                         |   |  |                              |       |                                                   |      |                         |   |          
|Options exercisable at September 30, 2008 |  | 2,579,362               |   |  | $                            | 9.32  |                                                   | 6.77 |                         | $ | 3,139,104
|                                          |  |                         |   |  |                              |       |                                                   |      |                         |   |          

The Company did not grant any options in 2007. For options granted in 2008, the fair value of
options was estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:



|                                        |  |      |              |  
|--------------------------------------- |  | ---- | ------------ | -
|For the nine months ended September 30, |  | 2008 |             
|Grant date fair value                   |  | $    | 3.13         |  
|Risk-free interest rate                 |  |      | 3.72         | %
|Dividend yield                          |  |      |             | %
|Expected life (years)                   |  |      | 5.0 - 6.25   |  
|Expected volatility                     |  |      | 41.5% - 42.7 | %

No dividend yield assumption was included because the Company does not plan to pay dividends.

A summary of the board-discretionary stock option activity as of September 30, 2008, and changes during the nine months then ended is
presented below:



|                                          |  |                         |   |  |                              |      |                                                   |      |                         |   |          
|----------------------------------------- |  | ----------------------- | - |  | ---------------------------- | ---- | ------------------------------------------------- | ---- | ----------------------- | - | ---------
|                                          |  | SharesSubject toOptions |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualTerm(in years) |      | AggregateIntrinsicValue
|Options outstanding at January 1, 2008    |  | 173,525                 |   |  | $                            | 0.25 |                                                   |      |                         |   |          
|Options granted                           |  | 0                       |   |  |                              |     |                                                   |      |                         |   |          
|Options exercised                         |  | (13,925                 | ) |  |                              | 1.32 |                                                   |      |                         |   |          
|Options terminated, cancelled or expired  |  | 0                       |   |  |                              |     |                                                   |      |                         |   |          
|                                          |  |                         |   |  |                              |      |                                                   |      |                         |   |          
|Options outstanding at September 30, 2008 |  | 159,600                 |   |  | $                            | 0.16 |                                                   | 6.78 |                         | $ | 1,204,980
|                                          |  |                         |   |  |                              |      |                                                   |      |                         |   |          
|Options exercisable at September 30, 2008 |  | 159,600                 |   |  | $                            | 0.16 |                                                   | 6.78 |                         | $ | 1,204,980
|                                          |  |                         |   |  |                              |      |                                                   |      |                         |   |          

Stock-based compensation expense pertaining to stock options totaled $0.4 million and $0.7 million
for the three months ended September 30, 2008 and 2007, respectively, and $1.3 million and $2.6 million for the nine months ended September 30, 2008 and 2007, respectively. Cash received from the exercise of stock options totaled $36,000
and $166,000 for the three months ended September 30, 2008 and 2007, respectively, and $167,000 and $296,000 for the nine months ended September 30, 2008 and 2007, respectively.

The aggregate intrinsic value of outstanding options at September 30, 2008 was $4.5 million. Also at September 30, 2008, total compensation
cost related to nonvested awards that had not yet been recognized totaled $1.1 million. The weighted average period over which this amount will be recognized is estimated to be 0.8 years.



|9. | Discontinued Operations
|-- | -----------------------

In August 2006, in
connection with the sale of Little Optics (a subdivision of Nomadics) the Company received warrants to purchase 125,000 shares of the purchasers Series G Preferred Stock at $5.40 per share. At December 31, 2007,



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the investment was carried in the consolidated balance sheet at $1,157,410 and was included in other current assets. This investment was sold in July 2008
and the resulting gain of $175,944 was recorded in other income in the consolidated statement of operations during the three and nine months ended September 30, 2008.

On December 14, 2006, the Companys Board of Directors adopted a plan to sell the assets and businesses of Nuvonyx, Inc. and Nuvonyx Europe,
manufacturers of laser diode components, arrays and industrial laser systems, and Harbinger Technologies, a provider of homeland defense and security consulting and technology. The Company decided to sell these units primarily because the business
models did not align with the strategic plans of the Company. The disposal dates of the units were February 2, 2007, March 15, 2007, and April 24, 2007, for Nuvonyx Europe, Harbinger Technologies, and Nuvonyx, Inc., respectively.
The units sales and pretax losses, reported in discontinued operations, for the nine months ended September 30, 2007, are shown below.



|                                      |  |                                    |            |  
|------------------------------------- |  | ---------------------------------- | ---------- | -
|                                      |  | Nine monthsendedSeptember 30, 2007 |           
|Sales                                 |  |                                    |            |  
|Nuvonyx, Inc.                         |  | $                                  | 2,475,378  |  
|Nuvonyx Europe                        |  |                                    |           |  
|Harbinger Technologies                |  |                                    | 686,228    |  
|                                      |  |                                    |            |  
|                                      |  | $                                  | 3,161,606  |  
|                                      |  |                                    |            |  
|Net income (loss) before income taxes |  |                                    |            |  
|Nuvonyx, Inc.                         |  | $                                  | (399,517   | )
|Nuvonyx Europe                        |  |                                    |           |  
|Harbinger Technologies                |  |                                    | (902,027   | )
|                                      |  |                                    |            |  
|                                      |  | $                                  | (1,301,544 | )
|                                      |  |                                    |            |  
|Net loss per share                    |  | $                                  | (0.13      | )
|                                      |  |                                    |            |  

The Company realized a gain on sale of discontinued operations of $580,485 in the three months
ended September 30, 2007 and a loss on discontinued operations of $1,301,544 and a gain on sale of discontinued operations of $5,142,986 related to the sale of these three units in the nine months ended September 30, 2007.

In the three months and nine months ended September 30, 2008, the Company realized a loss on sale of discontinued operations of $0 and $902,885,
respectively, related to the settlement of escrow accounts and contingent purchase consideration.



|10. | Segment Information
|--- | -------------------

Segment information has been
prepared in accordance with SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. The Company has three reportable segments: detection, surveillance, and solutions. The detection segment provides chemical,
biological, radiological, nuclear, and radiation detection activities. The surveillance segment provides perimeter security and monitoring. The solutions segment designs, creates, and deploys security operating systems and video networking systems.
Due to a change in internal reporting structure and the economics of the business of one subsidiary during the nine months ended September 30, 2008, the Company determined one subsidiary should be removed from the Surveillance segment and
included in the Detection segment. Additionally, due to changes in the Companys internal structure, additional general and administrative and sales and marketing expenses have been allocated to the Companys reportable segments. Segment
information disclosed below for the three months and nine months ended September 30, 2007, has been reclassified to conform to the 2008 presentation.



15



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##### Table of Contents

The following is a summary of information for the Companys reportable segments:



|                                                |  |                                               |             |   |              |   |            |           |  |   |                  |   |  |   |             |  
|----------------------------------------------- |  | --------------------------------------------- | ----------- | - | ------------ | - | ---------- | --------- |  | - | ---------------- | - |  | - | ----------- | -
|                                                |  | For the three months ended September 30, 2008 |            
|                                                |  | Detection                                     |             |   | Surveillance |   |            | Solutions |  |   | SegmentsCombined |  
|Revenues from external customers                |  | $                                             | 25,419,383  |   |              | $ | 12,670,875 |           |  | $ | 6,870,324        |   |  | $ | 44,960,582  |  
|Segment operating income (losses)               |  |                                               | 529,096     |   |              |   | (1,002,537 | )         |  |   | (1,314,517       | ) |  |   | (1,787,958  | )
|Depreciation and amortization                   |  |                                               | 2,114,367   |   |              |   | 769,322    |           |  |   | 540,737          |   |  |   | 3,424,426   |  
|                                                | 
|                                                |  | For the three months ended September 30, 2007 |            
|                                                |  | Detection                                     |             |   | Surveillance |   |            | Solutions |  |   | SegmentsCombined |  
|Revenues from external customers                |  | $                                             | 20,773,192  |   |              | $ | 8,619,443  |           |  | $ | 4,837,199        |   |  | $ | 34,229,834  |  
|Segment operating losses                        |  |                                               | (1,777,346  | ) |              |   | (2,684,061 | )         |  |   | (2,012,979       | ) |  |   | (6,474,386  | )
|Depreciation and amortization                   |  |                                               | 2,012,911   |   |              |   | 886,168    |           |  |   | 437,123          |   |  |   | 3,336,202   |  
|                                                | 
|                                                |  | For the nine months ended September 30, 2008  |            
|                                                |  | Detection                                     |             |   | Surveillance |   |            | Solutions |  |   | SegmentsCombined |  
|Revenues from external customers                |  | $                                             | 68,848,768  |   |              | $ | 31,916,498 |           |  | $ | 17,890,368       |   |  | $ | 118,655,634 |  
|Segment operating losses                        |  |                                               | (4,696,950  | ) |              |   | (5,857,723 | )         |  |   | (5,545,538       | ) |  |   | (16,100,211 | )
|Depreciation and amortization                   |  |                                               | 5,883,154   |   |              |   | 2,273,584  |           |  |   | 1,616,318        |   |  |   | 9,773,056   |  
|Segment property, plant and equipment additions |  |                                               | 1,737,342   |   |              |   | 630,431    |           |  |   | 201,732          |   |  |   | 2,569,505   |  
|                                                | 
|                                                |  | For the nine months ended September 30, 2007  |            
|                                                |  | Detection                                     |             |   | Surveillance |   |            | Solutions |  |   | SegmentsCombined |  
|Revenues from external customers                |  | $                                             | 55,532,341  |   |              | $ | 25,636,147 |           |  | $ | 13,450,917       |   |  | $ | 94,619,405  |  
|Segment operating losses                        |  |                                               | (6,485,674  | ) |              |   | (6,618,109 | )         |  |   | (5,443,194       | ) |  |   | (18,546,977 | )
|Depreciation and amortization                   |  |                                               | 5,995,615   |   |              |   | 2,624,477  |           |  |   | 1,490,062        |   |  |   | 10,110,154  |  
|Segment property, plant and equipment additions |  |                                               | 1,939,082   |   |              |   | 342,397    |           |  |   | 123,544          |   |  |   | 2,405,023   |  
|                                                |  |                                               |             |  
|As of September 30, 2008                        |  |                                               |             |   |              |   |            |           |  |   |                  |  
|Segment total assets                            |  | $                                             | 104,080,475 |   |              | $ | 49,880,252 |           |  | $ | 20,098,935       |   |  | $ | 174,059,662 |  
|                                                |  |                                               |             |  
|As of December 31, 2007                         |  |                                               |             |   |              |   |            |           |  |   |                  |  
|Segment total assets                            |  | $                                             | 102,072,985 |   |              | $ | 42,180,215 |           |  | $ | 20,579,546       |   |  | $ | 164,832,746 |  

Following is a reconciliation of the Companys operating losses from reportable segments to the total Company
loss before income taxes:



|                                                  |  |                                          |            |   |      |   |            |  
|------------------------------------------------- |  | ---------------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                  |  | For the three months ended September 30, |           
|                                                  |  | 2008                                     |            |   | 2007 |  
|Operating losses from reportable segments         |  | $                                        | (1,787,958 | ) |      | $ | (6,474,386 | )
|Unallocated general and administrative expenses   |  |                                          | (2,255,891 | ) |      |   | (2,110,944 | )
|Unallocated depreciation and amortization expense |  |                                          | (182,552   | ) |      |   | (30,426    | )
|Interest income                                   |  |                                          | 190,645    |   |      |   | 253,733    |  
|Interest expense                                  |  |                                          | (19,751    | ) |      |   | (340,971   | )
|Other non-operating gains, net                    |  |                                          | 113,858    |   |      |   | 142,957    |  
|                                                  |  |                                          |            |   |      |   |            |  
|Loss before income taxes                          |  | $                                        | (3,941,649 | ) |      | $ | (8,560,037 | )
|                                                  |  |                                          |            |   |      |   |            |  



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|                                                  |  |                                         |             |   |      |   |             |  
|------------------------------------------------- |  | --------------------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                  |  | For the nine months ended September 30, |            
|                                                  |  | 2008                                    |             |   | 2007 |  
|Operating losses from reportable segments         |  | $                                       | (16,100,211 | ) |      | $ | (18,546,977 | )
|Unallocated general and administrative expenses   |  |                                         | (7,898,062  | ) |      |   | (9,494,945  | )
|Unallocated depreciation and amortization expense |  |                                         | (487,804    | ) |      |   | (129,902    | )
|Interest income                                   |  |                                         | 866,787     |   |      |   | 448,781     |  
|Interest expense                                  |  |                                         | (48,861     | ) |      |   | (454,617    | )
|Other non-operating gains (losses), net           |  |                                         | (265,646    | ) |      |   | 127,971     |  
|                                                  |  |                                         |             |   |      |   |             |  
|Loss before income taxes                          |  | $                                       | (23,933,797 | ) |      | $ | (28,049,689 | )
|                                                  |  |                                         |             |   |      |   |             |  

Following is a reconciliation of the property, plant and equipment additions from the
Companys reportable segments to the total property, plant and equipment additions of the Company:



|                                                                       |  |                                         |           |      |   |          
|---------------------------------------------------------------------- |  | --------------------------------------- | --------- | ---- | - | ---------
|                                                                       |  | For the nine months ended September 30,
|                                                                       |  | 2008                                    |           | 2007
|Total property, plant and equipment additions from reportable segments |  | $                                       | 2,569,505 |      | $ | 2,405,023
|Unallocated property, plant and equipment additions                    |  |                                         | 969,281   |      |   | 1,349,137
|                                                                       |  |                                         |           |      |   |          
|Total property, plant and equipment additions                          |  | $                                       | 3,538,786 |      | $ | 3,754,160
|                                                                       |  |                                         |           |      |   |          

Following is a reconciliation of the total assets from the Companys reportable segments to
the total assets of the Company:



|                                      |  |                    |             |                   |   |            
|------------------------------------- |  | ------------------ | ----------- | ----------------- | - | -----------
|                                      |  | September 30, 2008 |             | December 31, 2007
|Total assets from reportable segments |  | $                  | 174,059,662 |                   | $ | 164,832,746
|Cash and cash equivalents             |  |                    | 36,057,572  |                   |   | 57,536,088 
|Prepaid expenses and other assets     |  |                    | 4,555,238   |                   |   | 9,270,864  
|Deferred income taxes                 |  |                    | 24,373      |                   |   | 189,788    
|                                      |  |                    |             |                   |   |            
|Total assets                          |  | $                  | 214,696,845 |                   | $ | 231,829,486
|                                      |  |                    |             |                   |   |            



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|Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

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.



18



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##### Table of Contents

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, AirSentinelbioaerosol 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.



19



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##### Table of Contents

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.



20



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##### Table of Contents

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.



21



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##### Table of Contents

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 2008 from $0.8 million in the third quarter of 2007 primarily due to
delivery of prototype platforms under a research and development contract that was substantially completed during the third quarter of 2008.

Maintenance, Service and Other Revenue. Maintenance, service and other revenue increased $4.7 million, or 587%, to $5.5 million in the third quarter of 2008 from $0.8 million in the third quarter of 2007 primarily due to a new
service contract for the delivery of customized platforms.

Gross Profit. Gross profit as a percentage of revenue was 34.5% and
45.6% in the third quarters of 2008 and 2007, respectively. Our gross profit decreased because a higher portion of our revenue was derived from lower margin service contracts.

Operating Loss. Operating loss decreased $1.7 million, or 63%, to $1.0 million in the third quarter of 2008 from $2.7 million in the third quarter
of 2007. Operating loss excluding depreciation and amortization decreased $1.6 million, or 89%, to $0.2 million in 2008 from $1.8 million in 2007. Revenue growth and a reduction in operating expenses due to our focus on integrating our business and
streamlining operations were the primary factors that resulted in reduced losses.



22



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##### Table of Contents

Solutions 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                                        |  | $                                | 2,260  |   |      | $ | 2,278  |  
|Contract research and development revenue              |  |                                  | 172    |   |      |   |       |  
|Maintenance, service and other revenue                 |  |                                  | 4,438  |   |      |   | 2,559  |  
|                                                       |  |                                  |        |   |      |   |        |  
|Total revenue                                          |  | $                                | 6,870  |   |      | $ | 4,837  |  
|                                                       |  |                                  |        |   |      |   |        |  
|Gross profit %                                         |  |                                  | 36.9   | % |      |   | 40.6   | %
|                                                       |  |                                  |        |   |      |   |        |  
|Operating loss excluding depreciation and amortization |  | $                                | (774   | ) |      | $ | (1,576 | )
|Depreciation and amortization                          |  |                                  | 541    |   |      |   | 437    |  
|                                                       |  |                                  |        |   |      |   |        |  
|Operating loss                                         |  | $                                | (1,315 | ) |      | $ | (2,013 | )
|                                                       |  |                                  |        |   |      |   |        |  

Product Revenue. Product revenue remained flat in the third quarter of 2008 as compared to
the third quarter of 2007. Product revenue in this segment has historically been dependent on supplemental funding under phase 3 of the Integrated Commercial Intrusion Detection System (ICIDS) military program which is nearing
completion.

Maintenance, Service and Other Revenue. Maintenance, service and other revenue increased $1.8 million, or 69%, to $4.4
million in the third quarter of 2008 from $2.6 million in the third quarter of 2007. New long-term service contracts for intelligent transportation systems are the primary reason for the increase in revenue over the same period last year.

Gross Profit.Gross profit as a percentage of revenue was 36.9% and 40.6% in the third quarters of 2008 and 2007, respectively.
Gross profit as a percentage of revenue decreased because more revenue was derived from long-term project management and integration service contracts which generally have lower gross margins than product sales.

Operating Loss. Operating loss decreased $0.7 million, or 35%, to $1.3 million in the third quarter of 2008 from $2.0 million in the third quarter
of 2007. Operating loss excluding depreciation and amortization decreased $0.8 million, or 50%, to $0.8 million in the third quarter of 2008 from $1.6 million in the third quarter of 2007. The decreased operating loss is primarily due to the 42%
growth in revenue over the same quarter last year.

Reconciliation of Reportable Segment Operating Losses to the Consolidated Loss from
Continuing Operations

The following tables provides a reconciliation of operating losses from reportable segments to our consolidated
net loss from continuing operations for the three months ended September 30, 2008 and 2007:



|                                                                                           |  |                                  |        |   |      |   |        |  
|------------------------------------------------------------------------------------------ |  | -------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                           |  | Three Months Ended September 30, |       
|                                                                                           |  | 2008                             |        |   | 2007 |  
|                                                                                           |  | (dollars in thousands)           |       
|                                                                                           |  | (unaudited)                      |       
|Reconciliation of segment operating losses to consolidated loss from continuing operations |  |                                  |        |   |      |   |        |  
|Segment operating losses                                                                   |  | $                                | (1,788 | ) |      | $ | (6,474 | )
|Unallocated general and administrative expenses                                            |  |                                  | (2,256 | ) |      |   | (2,112 | )
|Unallocated depreciation and amortization expenses                                         |  |                                  | (183   | ) |      |   | (30    | )
|Interest expense                                                                           |  |                                  | (20    | ) |      |   | (341   | )
|Interest income                                                                            |  |                                  | 191    |   |      |   | 254    |  
|Other nonoperating gains (losses), net                                                     |  |                                  | 114    |   |      |   | 143    |  
|Income tax (expense) benefit                                                               |  |                                  | 125    |   |      |   | 1,139  |  
|                                                                                           |  |                                  |        |   |      |   |        |  
|Consolidated loss from continuing operations                                               |  | $                                | (3,817 | ) |      | $ | (7,421 | )
|                                                                                           |  |                                  |        |   |      |   |        |  

Our unallocated general administrative expenses primarily include personnel costs for executive
and senior management, corporate accounting and finance, facilities costs, professional fees for audit, tax, legal and other professional services, board of director and advisory board fees, travel, supplies and communication related expenses.

Results of Operations - Comparison of First Nine Months of 2008 and 2007

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



|                                                       |  |                                 |         |   |      |   |         |  
|------------------------------------------------------ |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                       |  | Nine Months Ended September 30, |        
|                                                       |  | 2008                            |         |   | 2007 |  
|                                                       |  | (dollars in thousands)          |        
|                                                       |  | (unaudited)                     |        
|Product revenues                                       |  | $                               | 69,507  |   |      | $ | 59,707  |  
|Gross profit %                                         |  |                                 | 52.1    | % |      |   | 51.3    | %
|Contract research and development revenues             |  | $                               | 30,652  |   |      | $ | 24,482  |  
|Gross profit %                                         |  |                                 | 33.5    | % |      |   | 31.0    | %
|Maintenance, service and other revenues                |  | $                               | 18,497  |   |      | $ | 10,430  |  
|Gross profit %                                         |  |                                 | 35.3    | % |      |   | 34.6    | %
|                                                       |  |                                 |         |   |      |   |         |  
|Total revenues                                         |  | $                               | 118,656 |   |      | $ | 94,619  |  
|                                                       |  |                                 |         |   |      |   |         |  
|Gross profit %                                         |  |                                 | 44.7    | % |      |   | 44.2    | %
|                                                       |  |                                 |         |   |      |   |         |  
|Operating loss excluding depreciation and amortization |  | $                               | (14,225 | ) |      | $ | (17,932 | )
|Depreciation and amortization                          |  |                                 | 10,261  |   |      |   | 10,240  |  
|                                                       |  |                                 |         |   |      |   |         |  
|Operating loss                                         |  | $                               | (24,486 | ) |      | $ | (28,172 | )
|                                                       |  |                                 |         |   |      |   |         |  
|Loss from continuing operations                        |  | $                               | (24,009 | ) |      | $ | (27,143 | )
|Loss on discontinued operations, net                   |  |                                 |        |   |      |   | (1,302  | )
|Gain (loss) on sale of discontinued operations, net    |  |                                 | (903    | ) |      |   | 5,143   |  
|                                                       |  |                                 |         |   |      |   |         |  
|Net loss                                               |  | $                               | (24,912 | ) |      | $ | (23,302 | )
|                                                       |  |                                 |         |   |      |   |         |  

Product Revenues and Gross Profit. Product revenue increased $9.8 million, or 16%, to $69.5
million in the nine months ended September 30, 2008 from $59.7 million in the nine months ended September 30, 2007. Of this increase, $10.7 million resulted from increased sales of new and enhanced products in our Detection segment and
$1.7 million from increased sales in our Solutions segment primarily from additional supplemental funding under the ICIDS military program. These increases were offset by a decrease of $2.6 million in our Surveillance segment primarily due to
decreased sales of our radar equipment. Gross profit as a percentage of product revenue was 52.1% and 51.3% in the first nine months of 2008 and 2007, respectively.

Contract Research and Development Revenues and Gross Profit. Contract research and development revenue increased $6.2 million, or 25%, to $30.7 million in the nine months ended September 30, 2008 from
$24.5 million in the nine months ended September 30, 2007. Approximately $4.5 of this increase is attributable to delivery of prototype platforms under research and development contracts by one of our Surveillance operating units. The remainder
of the increase is primarily due to increased government spending on defense and security related programs in our Detection segment. Gross profit as a percentage of contract research and development revenue was 33.5% and 31.0% in the first nine
months 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 $8.1 million, or 78%, to $18.5 million
in the nine months ended September 30, 2008 from $10.4 million in the nine months ended September 30, 2007. Maintenance, service and other revenue in our Solutions segment accounted for approximately $2.5 million of the increase, the
majority of which was for new project management and integration services for intelligent



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##### Table of Contents

transportation systems. In our Surveillance segment, maintenance, service and other revenue accounted for approximately $4.5 million of the revenue increase,
the majority of which relates to the delivery of custom platforms. The remaining $1.1 of the increase came from our Detection segment. Gross profit as a percentage of maintenance, service and other revenue was 35.3% and 34.6% in the first nine
months of 2008 and 2007, respectively.

Operating Loss. Operating loss decreased $3.7 million, or 13%, to $24.5 million in the nine
months ended September 30, 2008 from $28.2 million in the nine months ended September 30, 2007. An increase in gross profit of $11.2 million over the comparable nine month period was offset by $7.5 million in increased operating expenses.
The increase in operating expenses in 2008 primarily 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, and a deliberate investment in our sales and marketing platform to expand our distribution channels. 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 $3.7 million, or 21%, to $14.2 million in the nine
months ended September 30, 2008, from $17.9 million in the nine months ended September 30, 2007.

Loss from Continuing
Operations. Our loss from continuing operations decreased $3.1 million, or 11%, to $24.0 million in the nine months ended September 30, 2008 from $27.1 million in the nine months ended September 30, 2007. The $11.2 million increase in
gross profit in the nine months ended September 30, 2008 was offset by increased spending on internal research and development programs and sales and marketing activities.

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 nine months ended September 30, 2007, our loss from discontinued operations was $1.3 million compared to zero in 2008. In
the nine months ended September 30, 2008, we realized a loss on discontinued operations of $0.9 million related to the settlement of escrow accounts and contingent purchase consideration. In the nine months ended September 30, 2007, we
realized a gain on the sale of discontinued operations of $5.1 million.

Net Loss. Net loss increased $1.6 million, or 7%, to $24.9
million in the nine months ended September 30, 2008 from $23.3 million in the nine months ended September 30, 2007. The increased loss was primarily due to a $0.9 million loss on the sale of discontinued operations during the nine months
ended September 30, 2008, compared to a gain on the sale of discontinued operations of $5.1 million in the nine months ended September 30, 2007. In addition, an $11.2 million increase in gross profit in the nine months ended
September 30, 2008 was offset by increased spending on internal research and development programs and sales and marketing activities. We increased spending in these areas in an effort to introduce new products and to integrate our products and
technologies into broader solutions.

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



|                                                                |  |                                 |        |   |      |   |        |  
|--------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                |  | Nine Months Ended September 30, |       
|                                                                |  | 2008                            |        |   | 2007 |  
|                                                                |  | (dollars in thousands)          |       
|                                                                |  | (unaudited)                     |       
|Revenue and gross profit %                                      |  |                                 |        |   |      |   |        |  
|Product revenue                                                 |  | $                               | 43,277 |   |      | $ | 32,600 |  
|Contract research and development revenue                       |  |                                 | 24,144 |   |      |   | 22,634 |  
|Maintenance, service and other revenue                          |  |                                 | 1,428  |   |      |   | 298    |  
|                                                                |  |                                 |        |   |      |   |        |  
|Total revenue                                                   |  | $                               | 68,849 |   |      | $ | 55,532 |  
|                                                                |  |                                 |        |   |      |   |        |  
|Gross profit %                                                  |  |                                 | 49.8   | % |      |   | 44.5   | %
|                                                                |  |                                 |        |   |      |   |        |  
|Operating income (loss) excluding depreciation and amortization |  | $                               | 1,186  |   |      | $ | (490   | )
|Depreciation and amortization                                   |  |                                 | 5,883  |   |      |   | 5,996  |  
|                                                                |  |                                 |        |   |      |   |        |  
|Operating loss                                                  |  | $                               | (4,697 | ) |      | $ | (6,486 | )
|                                                                |  |                                 |        |   |      |   |        |  

Product Revenue. Product revenue increased $10.7 million, or 33%, to $43.3 million in the
nine months ended September 30, 2008 from $32.6 million in the nine months ended September 30, 2007. The increase primarily resulted from increased sales of our explosive and radiation detectors, bio aerosol sensors and gas
chromatography/mass spectrometry products.

Contract Research and Development Revenue. Contract research and development revenue
increased $1.5 million, or 7%, to $24.1 million in the nine months ended September 30, 2008 from $22.6 million in the nine months ended September 30, 2007. The increase is primarily related to increased government spending on defense and
security related programs.



Gross Profit.Gross profit as
a percentage of revenue increased from 44.5% in the nine months ended September 30, 2007 to 49.8% in the nine months ended September 30, 2008 primarily due to the increase in product revenue and higher margins on contract research and
development revenue that resulted from the mix of contract types and the estimates inherent in recognizing revenue and costs using the percentage of completion method of accounting.

Operating Loss. Operating loss decreased $1.8 million, or 28%, to $4.7 million in the nine months ended September 30, 2008 from $6.5 million
in the nine months ended September 30, 2007. Operating income (loss) excluding depreciation and amortization was $1.2 million for the nine months ended September 30, 2008, compared to a loss of $0.5 million for the nine months ended
September 30, 2007, an increase of $1.7 million, or 340%. An increase in gross profit of $9.6 million over



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##### Table of Contents

the comparable quarter was offset by $7.8 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 Nine months ended September 30, 2008 and 2007



|                                                       |  |                                 |        |   |      |   |        |  
|------------------------------------------------------ |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                       |  | Nine Months Ended September 30, |       
|                                                       |  | 2008                            |        |   | 2007 |  
|                                                       |  | (dollars in thousands)          |       
|                                                       |  | (unaudited)                     |       
|Revenue and gross profit %                             |  |                                 |        |   |      |   |        |  
|Product revenue                                        |  | $                               | 19,221 |   |      | $ | 21,797 |  
|Contract research and development revenue              |  |                                 | 6,303  |   |      |   | 1,849  |  
|Maintenance, service and other revenue                 |  |                                 | 6,392  |   |      |   | 1,990  |  
|                                                       |  |                                 |        |   |      |   |        |  
|Total revenue                                          |  | $                               | 31,916 |   |      | $ | 25,636 |  
|                                                       |  |                                 |        |   |      |   |        |  
|Gross profit %                                         |  |                                 | 37.4   | % |      |   | 46.2   | %
|                                                       |  |                                 |        |   |      |   |        |  
|Operating loss excluding depreciation and amortization |  | $                               | (3,584 | ) |      | $ | (3,994 | )
|Depreciation and amortization                          |  |                                 | 2,274  |   |      |   | 2,624  |  
|                                                       |  |                                 |        |   |      |   |        |  
|Operating loss                                         |  | $                               | (5,858 | ) |      | $ | (6,618 | )
|                                                       |  |                                 |        |   |      |   |        |  

Product Revenue. Product revenue decreased $2.6 million, or 12%, to $19.2 million in the
nine months ended September 30, 2008 from $21.8 million in the nine months ended September 30, 2007. The decrease is due to a shift from platform product sales to the delivery of platform prototypes under contract research and development
contracts and custom platforms under service contracts. Additionally, in 2007 we had a significant delivery of radar equipment to one customer in 2007 that was not duplicated in 2008. These decreases were offset by increased sales of our thermal
imaging equipment.

Contract Research and Development Revenue. Contract research and development revenue increased $4.5 million, or
250%, to $6.3 million in the nine months ended September 30, 2008 from $1.8 million in the nine months ended September 30, 2007 primarily due to delivery of prototype platforms under research and development contracts.

Maintenance, Service and Other Revenue. Maintenance, service and other revenue increased $4.4 million, or 220%, to $6.4 million in the first nine
months of 2008 from $2.0 million in the same period in 2007 primarily due to a new service contract for the delivery of customized platforms.

Gross Profit. Gross profit as a percentage of revenue was 37.4% and 46.2% in the first nine months of 2008 and 2007, respectively. Our gross profit was impacted by a shift from product sales to the delivery of platform prototypes and
customized platforms under lower margin contract research and development and service contracts.

Operating Loss. Operating loss
decreased $0.7 million, or 11%, to $5.9 million in the nine months ended September 30, 2008 from $6.6 million in the nine months ended September 30, 2007. Operating loss excluding depreciation and amortization decreased $0.4 million, or
10%, to $3.6 million in the first nine months of 2008 from $4.0 million in the first nine months of 2007. A 25% increase in revenue was the primary reason for reduced operating loss for the first nine months of 2008.

Solutions Segment - Comparison of the Nine months ended September 30, 2008 and 2007



|                                                       |  |                                 |        |   |      |   |        |  
|------------------------------------------------------ |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                       |  | Nine Months Ended September 30, |       
|                                                       |  | 2008                            |        |   | 2007 |  
|                                                       |  | (dollars in thousands)          |       
|                                                       |  | (unaudited)                     |       
|Revenue and gross profit %                             |  |                                 |        |   |      |   |        |  
|Product revenue                                        |  | $                               | 7,008  |   |      | $ | 5,309  |  
|Contract research and development revenue              |  |                                 | 207    |   |      |   |       |  
|Maintenance, service and other revenue                 |  |                                 | 10,675 |   |      |   | 8,142  |  
|                                                       |  |                                 |        |   |      |   |        |  
|Total revenue                                          |  | $                               | 17,890 |   |      | $ | 13,451 |  
|                                                       |  |                                 |        |   |      |   |        |  
|Gross profit %                                         |  |                                 | 38.2   | % |      |   | 39.3   | %
|                                                       |  |                                 |        |   |      |   |        |  
|Operating loss excluding depreciation and amortization |  | $                               | (3,930 | ) |      | $ | (3,953 | )
|Depreciation and amortization                          |  |                                 | 1,616  |   |      |   | 1,490  |  
|                                                       |  |                                 |        |   |      |   |        |  
|Operating loss                                         |  | $                               | (5,546 | ) |      | $ | (5,443 | )
|                                                       |  |                                 |        |   |      |   |        |  

Product Revenue. Product revenue increased $1.7 million, or 32%, to $7.0 million in the
nine months ended September 30, 2008 from $5.3 million in the nine months ended September 30, 2007 primarily due to the contribution of product revenue in the first nine months of 2008 by a company we acquired in October 2007.
Additionally, we received more funding under the phase 3 of the ICIDS program in the first nine months of 2008 than in the first nine months of 2007.

Maintenance, Service and Other Revenue. Maintenance, service and other revenue increased $2.6 million, or 32%, to $10.7 million in the nine months ended September 30, 2008 from $8.1 million in the nine
months ended September 30, 2007. The increase in revenue is primarily related to new contracts for project management and integration of technologies for intelligent transportation systems.

Gross Profit.Gross profit as a percentage of revenue was 38.2% and 39.3% in the first nine months of 2008 and 2007, respectively. Gross profit as
a percentage of revenue decreased in the first nine months of 2008 because more revenue was derived from long-term project management and integration service contracts which generally have lower gross margins than product sales.

Operating Loss. Operating loss and operating loss excluding depreciation and amortization for the first nine months of 2008 was approximately the
same as the first nine months of 2008. An increase in revenue and gross margins for the comparable nine month periods were offset by higher sales and marketing expense due to the expansion of our sales and marketing platform to support bids and
proposals for major programs and to develop our commercial sales channel.



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##### Table of Contents

Reconciliation of Reportable Segment Operating Losses to the Consolidated Loss from Continuing Operations

The following table provides a reconciliation of operating losses from reportable segments to our consolidated net loss from continuing
operations for the nine months ended September 30, 2008 and 2007:



|                                                                                           |  |                                 |         |   |      |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                           |  | Nine Months Ended September 30, |        
|                                                                                           |  | 2008                            |         |   | 2007 |  
|                                                                                           |  | (dollars in thousands)          |        
|                                                                                           |  | (unaudited)                     |        
|Reconciliation of segment operating losses to consolidated loss from continuing operations |  |                                 |         |   |      |   |         |  
|Segment operating losses                                                                   |  | $                               | (16,100 | ) |      | $ | (18,547 | )
|Unallocated general and administrative expenses                                            |  |                                 | (7,898  | ) |      |   | (9,495  | )
|Unallocated depreciation and amortization expenses                                         |  |                                 | (488    | ) |      |   | (130    | )
|Interest expense                                                                           |  |                                 | (49     | ) |      |   | (455    | )
|Interest income                                                                            |  |                                 | 867     |   |      |   | 449     |  
|Other nonoperating gains (losses), net                                                     |  |                                 | (266    | ) |      |   | 128     |  
|Income tax benefit (expense)                                                               |  |                                 | (75     | ) |      |   | 907     |  
|                                                                                           |  |                                 |         |   |      |   |         |  
|Consolidated loss from continuing operations                                               |  | $                               | (24,009 | ) |      | $ | (27,143 | )
|                                                                                           |  |                                 |         |   |      |   |         |  

Our unallocated general administrative expenses primarily include personnel costs for executive
and senior management, corporate accounting and finance, facilities costs, professional fees for audit, tax, legal and other professional services, board of director and advisory board fees, travel, supplies and communication related expenses.

Liquidity and Capital Resources

As of
September 30, 2008, our principal sources of liquidity were cash and cash equivalents of $45.7 million and accounts receivable of $25.1 million. Prior to 2008, we experienced net cash outflows from operating activities and cash inflows from
investing or financing activities. We expect our cash flows from operating activities to improve as we continue to reduce our net losses through a variety of means, including but not limited to reducing general and administrative expenses by
streamlining our operations, prioritizing internal research and development spending and increasing revenue through organic growth. At September 30, 2008, we had firm backlog of approximately $114 million and unfunded backlog of approximately
$450 million. We believe our backlog and recent bookings combined with operating expense reductions will be sufficient to sustain our liquidity and cash flows in 2009 and for the foreseeable future.

Our primary sources of cash historically have been proceeds from the issuance of convertible preferred stock, customer payments for our products and
services, lines of credit and short term loans and proceeds from the sale of businesses. In November 2007, we completed an initial public offering and raised net proceeds of $72.7 million after deducting underwriting discounts and commissions of
$5.6 million and offering expenses of $1.7 million. We were incorporated in 2003 and have primarily grown our business organically and through a series of complementary acquisitions from 2005 through 2008. Many of our businesses have early stage
products and/or emerging products and engage in research and development activities that are funded both through external government contracts and internal resources.

During 2007 and in the first nine months of 2008, we increased our investment in sales, marketing and other related business development infrastructure to support our early stage products and emerging technologies.
Additionally, we increased our investment in internally funded research and development activities and the integration of products and technologies among our operating units. We also increased our general and administrative expenses in 2007 and in
the first nine months of 2008 through the use of consultants and other professionals to complete certain accounting and legal functions. Consequently, our cumulative net losses, which amounted to approximately $202.4 million at September 30,
2008, were expected based on the nature of our business, the early stage of our products and technologies and our ongoing research and development activities.

In the future we may enter into agreements to acquire complementary businesses that would require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at
all.



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The following table shows our cash and cash equivalents and working capital as of September 30, 2008
and December 31, 2007:



|                          |  |                         |        |                        |   |       
|------------------------- |  | ----------------------- | ------ | ---------------------- | - | ------
|                          |  | As of September 30,2008 |        | As of December 31,2007
|                          |  | (dollars in thousands) 
|                          |  | (unaudited)             |        |                       
|Cash and cash equivalents |  | $                       | 45,720 |                        | $ | 64,636
|Working capital           |  |                         | 75,988 |                        |   | 95,455

The following table shows our cash flows from operating, investing and financing activities for the nine months
ended September 30, 2008 and 2007.



|                                                      |  |                                 |         |   |      |   |         |  
|----------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                      |  | Nine Months Ended September 30, |        
|                                                      |  | 2008                            |         |   | 2007 |  
|                                                      |  | (dollars in thousands)          |        
|                                                      |  | (unaudited)                     |        
|Summary of cash flow:                                 |  |                                 |         |   |      |   |         |  
|Cash flows used in operating activities               |  | $                               | (9,628  | ) |      | $ | (20,900 | )
|Cash flows provided by (used in) investing activities |  |                                 | (9,185  | ) |      |   | 19,817  |  
|Cash flows provided by (used in) financing activities |  |                                 | (95     | ) |      |   | 9,750   |  
|Effect of foreign exchange rate on cash               |  |                                 | (8      | ) |      |   | 230     |  
|                                                      |  |                                 |         |   |      |   |         |  
|Consolidated net change in cash and cash equivalents  |  | $                               | (18,916 | ) |      | $ | 8,897   |  
|                                                      |  |                                 |         |   |      |   |         |  

Cash Flows from Operating Activities. Our cash flows from operating activities are
significantly influenced by spending required to support the growth of our business in areas such as research and development, sales and marketing, facilities expansion and certain general and administrative costs. Our operating cash flows are
also influenced by our working capital needs to support growth and fluctuations in inventory, accounts receivable, accounts payable and other current assets and liabilities. The concentration of business with the U.S. government also impacts
operating cash flow, particularly for fixed price contracts in which revenue recognition under the percentage of completion method may not coincide with billing. Cash flows used in operating activities decreased $11.3 million, or 54.1%, to $9.6
million for the nine months ended September 30, 2008 from $20.9 million in the nine months ended September 30, 2007 primarily due to working capital timing differences related to improved collections of trade accounts receivable, advance
payments from customers on percentage of completion contracts and increased inventory purchases to support revenue growth.

Cash Flows
from Investing Activities. Cash flows from investing activities primarily relate to business acquisitions and dispositions and capital expenditures. In the nine months ended September 30, 2008, cash flows used in investing activities
included $3.5 million of capital expenditures, $4.8 million paid to acquire a company and settle liabilities assumed in the acquisition, $1.9 million of contingent consideration paid in connection with acquisitions completed in 2005 and $0.8 million
of funds paid in connection with an acquisition completed in 2006 offset by $1.8 million of cash proceeds released from escrow related to the sale of a company in 2007. In the nine months ended September 30, 2007, cash flows from investing
activities included $3.8 million in capital expenditures offset by $23.6 million of cash proceeds from the sale of three companies. Capital expenditures for the nine months ended September 30, 2008 and 2007 primarily relate to the expansion of
facilities and the acquisition of computer equipment and manufacturing and lab equipment. Capital expenditures also include costs associated with the implementation of an enterprise software system throughout the company.

Cash Flows from Financing Activities. Net debt issuances were $0.7 and $6.0 million in the nine months ended September 30, 2008 and 2007,
respectively. In the nine months ended September 30, 2007, cash flows from financing activities included $3.5 million of proceeds from the issuance of Series A Preferred Stock, which was used for working capital purposes, and $10.0 million
related to bridge loans from Wexford that were used for working capital purposes. A $3.0 million bridge loan from Wexford was repaid during the third quarter of 2007, while the remaining $7.0 million was repaid during the fourth quarter of 2007.

Contractual Obligations

On
April 7, 2008, one of our subsidiaries entered into an operating lease agreement for new facilities. Our subsidiary began using the facilities in October 2008. Monthly rent under the agreement approximates $41,000 until December 31, 2012,
at which time monthly rent may be increased based on changes in the consumer price index. Subsequent to the initial lease term of fifteen years, the lease may be renewed for a five year period.



Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires us to make assumptions and prepare estimates that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and revenues and expenses. We base our estimates on historical experience and various other assumptions that we believe are reasonable; however, actual results may differ. See note 1
to our consolidated financial statements contained elsewhere in this report for a discussion of our significant accounting policies.

Revenue RecognitionProducts. The majority of our revenue is derived from the sale of our products. We recognize revenue from product sales at the time the product is shipped, title and risk have passed to the customer
and collection from the customer is reasonably assured.



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Revenue RecognitionContract Research and Development and Services. We follow the
guidelines of American Institute of Certified Public Accountants (AICPA) Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, for our contract research and development and contract
service revenue. We account for sales and earnings under long-term contracts using the percentage-of-completion method of accounting. Under the percentage-of-completion method, we recognize revenue as the work progresseseither as the products
are produced and delivered or as services are rendered, as applicable. We estimate profit as the difference between total estimated revenue and total estimated cost of a contract and recognize that profit over the remaining life of the contract
based on either input (e.g., costs incurred) or output (e.g., units delivered) measures, as appropriate. If a revised estimate of contract profitability reveals an anticipated loss on the contract, we recognize the loss in the period it is
identified.

The percentage-of-completion method of accounting involves the use of various estimating techniques to project costs at
completion, and in some cases includes estimates of recoveries asserted against the customer for changes in specifications. Contract estimates involve various assumptions and projections relative to the outcome of future events over a period of
several months or years, including future labor productivity and availability, the nature and complexity of the work to be performed, the cost and availability of materials, the impact of delayed performance, the availability and timing of funding
from the customer and the timing of product deliveries. These estimates are based on our best judgment. A significant change in one or more of these estimates could affect the profitability of one or more of our contracts. We principally use hours
of work and contract milestones to measure the progress of contract completeness. Certain contracts provide for billings and/or payments that may not coincide with revenue recognition. To the extent that customer billings or payments are in excess
of revenues, we record the excess as deferred revenue. To the extent that we recognize revenue under the percentage-of-completion method prior to billings as defined in the contracts, we record such amounts as unbilled revenue, and we expect them to
be collected within one year of recognition. Substantially all of the unbilled revenue is due from various agencies of the U.S. government.

We review our contract estimates monthly to assess revisions in contract values and estimated costs at completion and reflect changes in estimates in the current and future periods under the reallocation method.

Revenue RecognitionMaintenance, Service and Other. Maintenance, service and other revenue is primarily derived from project
management and technology integration services, product training and installation and software maintenance and extended warranty contracts. We recognize revenue from project management and integration services using the percentage-of-completion
method described above. We recognize revenue from product training and installation services when the services are provided. We generally recognize revenue for software maintenance and extended warranty contracts on a straight-line basis over the
life of the contract. We recognize software revenue under the provisions of the Accounting Standards Executive Committees Statement of Position 97-2 (SOP 97-2), Software Revenue Recognition (as amended by SOP 98-9). Under the terms of
SOPs 97-2 and 98-9, companies are required to defer all revenue from multiple-element software arrangements if sufficient vendor specific objective evidence does not exist for the allocation of revenue to the various elements of the arrangement. As
a result, we recognize any revenue on multi-year software license agreements ratably over the life of the arrangement.

Goodwill and
Identifiable Intangible Assets. In accordance with SFAS No. 141, Business Combinations (SFAS 141), we allocate the cost of business acquisitions to the assets acquired and liabilities assumed based on their estimated fair values at
the date of acquisition (commonly referred to as the purchase price allocation). As part of the purchase price allocations for our business acquisitions, identifiable intangible assets are recognized as assets apart from goodwill if they arise from
contractual or other legal rights, or if they are capable of being separated or divided from the acquired business and sold, transferred, licensed, rented or exchanged. However, in accordance with SFAS 141, we do not recognize any intangible assets
apart from goodwill for the assembled workforces of our business acquisitions.

A significant component of the businesses we have acquired
historically is the presence of advanced security products and technologies that the business has developed. The most significant identifiable intangible asset that we have separately recognized in accordance with SFAS 141 is core technologies. Our
intellectual property and proprietary rights for these core technologies are typically protected through a combination of patents, copyrights, trademarks, service marks, trade secrets, confidentiality provisions and licensing arrangements. The fair
value for core technologies is determined, as of the date of acquisition, using the Relief from Royalty Method, an approach commonly used in valuing intangible assets. The basic tenet of the Relief from Royalty Method is that
without ownership of the subject intangible asset, the user of that intangible asset would have to make a stream of payments to the owner of the asset in return for the rights to use that asset. By acquiring the intangible asset, the user avoids
these payments. The valuation of the core technologies takes into consideration the percentage of forecasted revenues directly attributable to the underlying core/developed technologies. The royalty rate was selected based on consideration of
several factors including external research, industry practices and margin considerations. Also factoring into the valuations of core technologies are the estimated technological useful lives of the products that use the technologies and the present
value of future cash flows. The discount rates used to determine the present value of future cash flows is based on consideration of the weighted average cost of capital and internal rates of return as well as the risk and return characteristics of
the core technologies.



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Customer contractual relationships also constitute a significant portion of identifiable intangible
assets recognized in accordance with SFAS 141. All of our contractual relationships are established through written customer contracts (revenue arrangements). The fair value for customer contractual relationships is determined, as of the date of
acquisition, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows (including cash flows from working capital) arising from the follow-on sales on contract (revenue arrangement) renewals
expected from customer contractual relationships over their estimated lives, including the probability of expected future contract renewals and sales, less a contributory asset charge, all of which is discounted to present value.

The value assigned to goodwill equals the amount of the purchase price of the business acquired in excess of the sum of the amounts assigned to
identifiable acquired assets, both tangible and intangible, less liabilities assumed. At September 30, 2008, we had goodwill of $69.1 million and identifiable intangible assets, net of accumulated amortization, of $21.8 million.

Intangible assets are amortized over their respective estimated useful lives ranging from one to ten years. The useful life of an intangible asset is the
period over which the asset is expected to contribute directly or indirectly to our future cash flows rather than the period of time that it would take us to internally develop an intangible asset that would provide similar benefits. The estimate of
the useful lives of our intangible asset is based on an analysis of all pertinent factors, in particular:



| |  |  | the expected use of the asset by the entity;
| | - |  | --------------------------------------------



| |  |  | the expected useful life of another asset or group of assets to which the useful life of the intangible asset may relate;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | any legal, regulatory or contractual provisions that may limit the useful life;
| | - |  | -------------------------------------------------------------------------------



| |  |  | any legal, regulatory, or contractual provisions that enable renewal or extension of the assets legal or contractual life without substantial cost (provided
there is evidence to support renewal or extension and renewal or extension can be accomplished without material modifications of the existing terms and conditions);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effects of obsolescence, demand, competition and other economic factors (such as the stability of the industry, known technological advances, legislative action
that results in an uncertain or changing regulatory environment, and expected changes in distribution channels); and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the level of regular maintenance expenditures (but not enhancements) required to obtain the expected future cash flows from the asset (for example, a material level
of required maintenance in relation to the carrying amount of the asset may suggest a limited useful life).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If no legal,
regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset, the useful life of the asset is considered to be indefinite. The term indefinite does not mean infinite. An intangible asset with a finite
useful life is amortized over that useful life; an intangible asset with an indefinite useful life is not amortized. We have no intangible assets with indefinite useful lives. Under U.S. generally accepted accounting principles (GAAP), goodwill is
not amortized.

We review goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable, and also review goodwill annually in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 requires that goodwill be tested, at a minimum, annually
for each reporting unit using a two-step process. A reporting unit is an operating segment, as defined in paragraph 10 of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, or a component of an operating
segment. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and is reviewed. Two or more components of an operating segment may be aggregated and
deemed a single reporting unit for goodwill impairment testing purposes if the components have similar economic characteristics. The first step is to identify any potential impairment by comparing the carrying value of the reporting unit to its fair
value. If a potential impairment is identified, the second step is to measure the impairment loss by comparing the implied fair value of goodwill with the carrying value of goodwill of the reporting unit. The fair value of a reporting unit is
estimated using a discounted cash flow valuation approach and is dependent on estimates for future sales, operating income, depreciation and amortization, income tax payments, working capital changes and capital expenditures as well as expected
growth rates for cash flows and long-term interest rates, all of which are affected by economic conditions related to the industries in which we operate as well as conditions in the U.S. capital markets.



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The most significant assumptions used in a discounted cash flow valuation regarding the estimated fair
values of our reporting units in connection with goodwill valuation assessments are:



| |  |  | detailed long-range (approximating 10 years) cash flow projections for each of our reporting units;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | a risk adjusted discount rate including the estimated risk-free rate of return; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the expected long-term growth rate of our business, which approximates the expected long-term growth rate for the U.S. economy and the industries in which we
operate.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

The risk adjusted discount rate represents the estimated weighted average cost of capital. The weighted average
cost of capital focuses on rates of return for equity and debt, and a corresponding capital structure.

A decline in the estimated fair
value of a reporting unit could result in a goodwill impairment and a related non-cash impairment charge against earnings, if estimated fair value for the reporting unit is less than the carrying value of the net assets of the reporting unit,
including its goodwill. There was no goodwill impairment charge for the three or nine months ended September 30, 2008 and 2007.

Stock-based Compensation. We account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment(SFAS 123(R)). SFAS 123(R) requires equity-classified, share-based payments to
employees, including grants of employee stock options, to be valued at fair value on the date of grant and to be expensed over the applicable vesting period. Under the modified prospective transition method, share-based awards granted or modified on
or after January 1, 2006, are recognized in compensation expense over the applicable vesting period. Also, any previously granted awards that were not fully vested as of January 1, 2006, are recognized as compensation expense over the
remaining vesting period. We recognize this expense on a straight-line basis over the options expected terms.

During the nine months
ended September 30, 2008, we granted 98,250 stock options. We did not grant any options in the nine months ended September 30, 2007. During the nine months ended September 30, 2008, we granted 514,726 shares of restricted stock
pursuant to the 2007 Equity Incentive Plan. Grants of restricted stock and restricted stock units are valued using the closing market price of our common stock on the date of grant. Prior to November 7, 2007, we accounted for the fair value of
the restricted stock using estimates of the fair value of an underlying share of common stock at the time of the grants as there was no market for our common stock prior to November 7, 2007. Our common stock valuations used the probability
weighted expected return method for 2007.

We estimate the grant date fair value of stock option awards under the provisions of SFAS 123(R)
using the Black-Scholes option valuation model, which requires, among other inputs, an estimate of the fair value of the underlying common stock on the date of grant and the expected term of the options. Separate values were determined for options
having exercise prices ranging from $7.00 to $16.00. We applied the resulting fair values for one share of common stock as of each of the valuation dates to our Black-Scholes option valuation model to arrive at the fair value of the related options
granted during the valuation period.

For the quarters ended September 30, 2008 and 2007, we recognized stock-based compensation
expense of $1.4 million and $1.3 million, respectively. For the nine months ended September 30, 2008 and 2007, we recognized stock-based compensation expense of $4.5 million and $4.1 million, respectively. In future periods, stock-based
compensation expense may increase as we issue additional equity-based awards to continue to attract and retain key employees. Additionally, SFAS 123(R) requires that we recognize compensation expense only for the portion of stock options that are
expected to vest.

As of September 30, 2008, our total unrecognized compensation expense related to stock-based awards granted to
employees and non-employee directors was approximately $6.1 million.

Income Taxes. We use an asset and liability approach for
accounting for income taxes. Deferred income taxes are recognized for the tax consequences of temporary differences and carryforwards by applying enacted tax rates applicable to future years to differences between the financial statement amounts and
the tax bases of existing assets and liabilities. We establish a valuation allowance if it is probable that some portion of the deferred tax asset will not be realized. Our determination of whether a valuation allowance is appropriate requires the
exercise of judgment. At September 30, 2008, we had net operating loss carryforwards available for U.S. federal and state income taxes of $91.9 million which begin to expire in 2017. The net operating loss carryforwards that we acquired in
connection with our business acquisitions may also be limited by provision of the Internal Revenue Code regarding changes in ownership. We have provided a valuation allowance against net U.S. deferred tax assets and operating loss carryforwards in
certain non-U.S. jurisdictions. We have recorded a valuation allowance because of the emerging nature of our business and our history of losses. We will continue to evaluate income generated in future periods in determining the reasonableness of our
position. If we determine that future income is sufficient or insufficient to cause the realization of the net operating loss carryforwards within the required time, the valuation allowance will be adjusted as necessary.



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Liabilities for Pending and Threatened Litigation. We are subject to litigation, investigations,
proceedings, claims or assessments and various contingent liabilities incidental to our business or assumed in connection with certain business acquisitions. In accordance with SFAS No. 5, Accounting for Contingencies, we accrue a charge
for a loss contingency when we believe it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. If the loss is within a range of specified amounts, the most likely amount is accrued, and if no
amount within the range represents a better estimate we accrue the minimum amount in the range. Generally, we record the loss contingency at the amount we expect to pay to resolve the contingency and the amount is generally not discounted to the
present value. Amounts recoverable under insurance contracts are recorded as assets when recovery is deemed probable. Contingencies that might result in a gain are not recognized until realized. Changes to the amount of the estimated loss, or
resolution of one or more contingencies could have a material impact on our results of operations, financial position and cash flows.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements refer to Note 1 of the Notes to the
Consolidated Financial Statements in Item 1  Financial Statements.

Off-Balance Sheet Arrangements

As of September 30, 2008 and 2007, we did not have any off-balance sheet arrangements.



|Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Foreign Currency Risk.Our international businesses generate revenue and incur expenses that are denominated in foreign currencies. Historically, our foreign currency translation adjustments have not been material to our financial
position or consolidated results of operations. However, changes in economic conditions impacting foreign currency exchange rates could materially increase our exposure to foreign currency fluctuations and adversely affect our consolidated results
of operations or financial position, specifically with changes in the United States dollar relative to the Canadian dollar and the European Euro. Our Canadian and German subsidiaries are consolidated into our financial results and under U.S. GAAP,
we are required to translate the financial condition and results of operations of these subsidiaries into United States dollars, with any corresponding translation gains or losses being recorded in other comprehensive income in our consolidated
financial statements. For the nine months ended September 30, 2008 and 2007, this translation adjustment was a loss of $0.4 million and a gain of $1.6 million, respectively. We also maintain cash balances denominated in foreign currencies. At
September 30, 2008, we had $0.7 million of cash in foreign accounts. We have not hedged our exposure to changes in foreign currency rates and, as a result, could incur unanticipated translation gains and losses.

Interest Rate Risk. We had cash and cash equivalents of $45.7 million at September 30, 2008. We do not enter into investments for trading or
speculative purposes. We do not believe that we have any material exposure to changes in the fair value of these investments as a result of changes in interest rates. Declines in interest rates, however, will reduce future income.

At September 30, 2008, we had an open line of credit which bears interest at a variable rate adjusted based on the prime rate, under which we may
borrow a maximum of $2.5 million. At September 30, 2008, $0.9 million was outstanding under this line of credit. Based on the amount outstanding and the maximum amount available for borrowing, we do not believe that changes in interest rates
create material exposure to our business. Increases in interest rates, however, will increase future interest expense.



|Item 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

As of September 30, 2008, we completed our evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management as appropriate to allow for timely decisions regarding
required disclosure.

Under the applicable rules of the Securities and Exchange Commission, we will be required to include a management
report on our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ended December 31, 2008. Pursuant to temporary rules of the Securities and Exchange Commission, managements report will not
be subject to attestation by our registered public accounting firm in our Annual Report on Form 10-K for the year ended December 31, 2008.



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Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the third fiscal quarter of 2008 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II
 OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

From time to time, we are
involved in various routine legal proceedings. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, we believe that the outcome of these proceedings, even if determined adversely, would not have
a material adverse effect on our business, financial condition and results of operations.



|Item 1A. | Risk Factors
|-------- | ------------

Except as indicated below, there have
been no material changes in information to the Risk Factors previously described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007.

Recent economic developments may adversely affect our business, financial condition and results of operations

Current uncertainty in global economic conditions poses a risk to the overall economy and could result in changes in the priorities and timing of spending by our government and commercial customers that are difficult
to anticipate. If demand for our products and services decreases due to such changing priorities we may be required to record an impairment on our long-lived assets, which are primarily comprised of intangible assets, which would increase our
expenses. Changes in demand for our products, and changes in our customers product needs, could have a variety of negative effects on our competitive position and our financial results, and, in certain cases, may reduce our revenue, increase
our costs, lower our gross margin percentage, or require us to recognize impairments of our assets.



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

Unregistered Sales of Equity Securities

During the period April 1, 2008 to September 30, 2008, we have issued and sold the
following unregistered securities:



| |  |  | From April 1, 2008 to June 30, 2008, we issued and sold to our employees, directors and consultants an aggregate of 13,380 shares of our common stock pursuant to
option exercises under our 2005 Stock Plan at prices ranging from $0.16 to $3.50 per share.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | From July 1, 2008 to September 30, 2008, we issued and sold to our employees, directors and consultants an aggregate of 6,820 shares of our common stock pursuant to
option exercises under our 2005 Stock Plan at prices ranging from $1.50 to $3.50 per share.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The sales of the above
securities were deemed to be exempt from registration in reliance on Rule 701 promulgated under Section 3(b) thereof, as a transaction pursuant to a compensatory benefit plan and contract relating to compensation as provided under such Rule 701.

Issuer Purchases of Equity Securities

During the period January 1, 2008 to September 30, 2008, we purchased the following shares:



|               |  |                                |     |  |                            |       |                                                                              |     |                                                                             |    
|-------------- |  | ------------------------------ | --- |  | -------------------------- | ----- | ---------------------------------------------------------------------------- | --- | --------------------------------------------------------------------------- | ---
|Period         |  | Total Numberof SharesPurchased |     |  | Average PricePaid perShare |       | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms |     | Maximum Number ofShares that May YetBe Purchased Underthe Plans or Programs
|January 1-31   |  |                               |     |  |                            |      |                                                                              |    |                                                                             |   
|February 1-29  |  |                               |     |  |                            |      |                                                                              |    |                                                                             |   
|March 1-31     |  | 4,164                          | (1) |  | $                          | 12.47 |                                                                              | N/A |                                                                             | N/A
|April 1-30     |  | 68,517                         | (1) |  | $                          | 5.74  |                                                                              | N/A |                                                                             | N/A
|May 1-31       |  | 19,007                         | (1) |  | $                          | 6.49  |                                                                              | N/A |                                                                             | N/A
|June 1-30      |  | 29,795                         | (1) |  | $                          | 7.26  |                                                                              | N/A |                                                                             | N/A
|July 1-31      |  | 7,501                          | (1) |  | $                          | 7.30  |                                                                              | N/A |                                                                             | N/A
|August 1-31    |  | 5,378                          | (1) |  | $                          | 8.22  |                                                                              | N/A |                                                                             | N/A
|September 1-30 |  | 2,722                          | (1) |  | $                          | 7.93  |                                                                              | N/A |                                                                             | N/A



|(1) | As part of our restricted stock plan, we offer employees the opportunity to make required tax payments with cash or through a net share settlement. For employees choosing net share
settlement, we make required tax payments on behalf of employees as their stock awards vest and then withhold a number of vested shares having a value on the date of vesting equal to the tax obligation. The shares withheld were recorded as treasury
shares.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None



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

None



|Item 5. | Other Information
|------- | -----------------

None



|Item 6. | Exhibits
|------- | --------



|     |  |                                                                                                                                                                                                                     
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Second Amended and Restated Certificate of Incorporation, filed as the same numbered exhibit with Registrants Registration Statement on Form S-1, as amended, filed August 6, 2007,
Commission File No. 333-145135*
|     | 
|3.2  |  | Certificate of Amendment filed January 12, 2006, filed as the same numbered exhibit with Registrants Registration Statement on Form S-1, as amended, filed August 6, 2007, Commission
File No. 333-145135*         
|     | 
|3.3  |  | Certificate of Amendment filed September 19, 2006, filed as the same numbered exhibit with Registrants Registration Statement on Form S-1, as amended, filed August 6, 2007, Commission
File No. 333-145135*       
|     | 
|3.4  |  | Certificate of Amendment filed December 19, 2006, filed as the same numbered exhibit with Registrants Registration Statement on Form S-1, as amended, filed August 6, 2007, Commission
File No. 333-145135*        
|     | 
|3.6  |  | Amended and Restated Bylaws of ICx Technologies, Inc., filed as the same numbered exhibit with Registrants Registration Statement on Form S-1, as amended, filed August 6, 2007,
Commission File No. 333-145135*   
|     | 
|31.1 |  | Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**                                                                                                            
|     | 
|31.2 |  | Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**                                                                                                            
|     | 
|32.1 |  | Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**                                                                                



|* | Incorporated by reference
|- | -------------------------

|** | Filed herewith
|-- | --------------



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Dated: November 14, 2008



ICX TECHNOLOGIES, INC.By:

/S/ HANS C. KOBLERHans C. KoblerChief Executive Officer and Chairman of the Board


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                        |  |                                                                                 |  |                  
|--------------------------------------- |  | ------------------------------------------------------------------------------- |  | -----------------
|Signature                               |  | Title                                                                           |  | Date             
|                                        |  |                                                                                
|/S/ HANS C. KOBLER Hans C. Kobler       |  | Chief Executive Officer and Chairman of the Board (Principal Executive Officer) |  | November 14, 2008
|                                        |  |                                                                                
|/S/ DEBORAH D. MOSIER Deborah D. Mosier |  | Chief Financial Officer (Principal
Financial and Accounting Officer)            |  | November 14, 2008
|                                        |  |                                                                                
|* E. Spencer Abraham                    |  | Director                                                                        |  | November 14, 2008
|                                        |  |                                                                                
|* Colin J. Cumming                      |  | Director                                                                        |  | November 14, 2008
|                                        |  |                                                                                
|* Joseph M. Jacobs                      |  | Director                                                                        |  | November 14, 2008
|                                        |  |                                                                                
|* Robert A. Maginn, Jr.                 |  | Director                                                                        |  | November 14, 2008
|                                        |  |                                                                                
|* Mark L. Plaumann                      |  | Director                                                                        |  | November 14, 2008
|                                        |  |                                                                                
|* Rodney E. Slater                      |  | Director                                                                        |  | November 14, 2008



|      |  |                     
|----- |  | --------------------
|* By: |  | /S/ DANIEL T. MONGAN
|      |  | Daniel T. Mongan    
|      |  | Attorney-In-Fact    



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INDEX TO EXHIBITS



|              |  |                                                                                                                                   
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Title                                                                                                                     
|31.1          |  | Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                            
|              | 
|31.2          |  | Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                            
|              | 
|32.1          |  | Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



34