##### Table of Contents





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 quarterly period ended September 30, 2009

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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    Yes   ̈    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 the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one).:



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | 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, 2009, the registrant had 34,496,557 shares of Common Stock outstanding.









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##### Table of Contents

ICx TECHNOLOGIES, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009

INDEX



|                                                                                                                                          |  |   
|----------------------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                                                             |  |   
|                                                                                                                                          | 
|Item 1. Financial Statements                                                                                                              |  |   
|                                                                                                                                          | 
|Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31,
2008                                                    |  | 3 
|                                                                                                                                          | 
|Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 
30, 2009 and 2008 (unaudited) |  | 4 
|                                                                                                                                          | 
|Consolidated Statement of Stockholders Equity for the Nine Months Ended September 30, 2009
(unaudited)                                   |  | 5 
|                                                                                                                                          | 
|Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 (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                                                                        |  | 33
|                                                                                                                                          | 
|Item 4. Controls and Procedures                                                                                                           |  | 34
|                                                                                                                                          | 
|PART II. OTHER INFORMATION                                                                                                                |  |   
|                                                                                                                                          | 
|Item 1. Legal Proceedings                                                                                                                 |  | 34
|                                                                                                                                          | 
|Item 1A. Risk Factors                                                                                                                     |  | 34
|                                                                                                                                          | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                                       |  | 35
|                                                                                                                                          | 
|Item 3. Defaults Upon Senior Securities                                                                                                   |  | 35
|                                                                                                                                          | 
|Item 4. Submission of Matters to a Vote of Security Holders                                                                               |  | 35
|                                                                                                                                          | 
|Item 5. Other Information                                                                                                                 |  | 35
|                                                                                                                                          | 
|Item 6. Exhibits                                                                                                                          |  | 35
|                                                                                                                                          | 
|Signatures                                                                                                                                |  | 36
|                                                                                                                                          | 
|Index to Exhibits                                                                                                                         |  | 37



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION



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

ICx TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets



|                                                                                                                                                                                                                                      |  |                            |              |   |                  |   |              |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------------ | - | ---------------- | - | ------------ | -
|                                                                                                                                                                                                                                      |  | UnauditedSeptember 30,2009 |              |   | December 31,2008 |  
|Assets                                                                                                                                                                                                                                |  |                            |              |   |                  |   |              |  
|Current assets:                                                                                                                                                                                                                       |  |                            |              |   |                  |   |              |  
|Cash and cash equivalents                                                                                                                                                                                                             |  | $                          | 22,669,093   |   |                  | $ | 30,353,728   |  
|Restricted cash                                                                                                                                                                                                                       |  |                            | 8,456,024    |   |                  |   | 8,428,375    |  
|Trade accounts receivable, net                                                                                                                                                                                                        |  |                            | 31,675,315   |   |                  |   | 36,547,022   |  
|Unbilled revenue                                                                                                                                                                                                                      |  |                            | 10,314,272   |   |                  |   | 10,996,971   |  
|Inventories                                                                                                                                                                                                                           |  |                            | 24,006,872   |   |                  |   | 26,174,426   |  
|Deferred income taxes                                                                                                                                                                                                                 |  |                            | 19,935       |   |                  |   | 19,935       |  
|Prepaid expenses and other current assets                                                                                                                                                                                             |  |                            | 5,895,398    |   |                  |   | 2,630,995    |  
|Current assets of discontinued operations                                                                                                                                                                                             |  |                            | 240,505      |   |                  |   | 618,687      |  
|                                                                                                                                                                                                                                      |  |                            |              |   |                  |   |              |  
|                                                                                                                                                                                                                                      |  |                           
|Total current assets                                                                                                                                                                                                                  |  |                            | 103,277,414  |   |                  |   | 115,770,139  |  
|Property, plant and equipment, net                                                                                                                                                                                                    |  |                            | 10,517,643   |   |                  |   | 10,850,293   |  
|Intangible assets, net                                                                                                                                                                                                                |  |                            | 11,729,058   |   |                  |   | 18,018,082   |  
|Goodwill                                                                                                                                                                                                                              |  |                            | 69,951,892   |   |                  |   | 69,557,440   |  
|Other assets                                                                                                                                                                                                                          |  |                            | 3,174,822    |   |                  |   | 2,343,794    |  
|Noncurrent assets of discontinued operations                                                                                                                                                                                          |  |                            | 377,888      |   |                  |   | 2,758,704    |  
|                                                                                                                                                                                                                                      |  |                            |              |   |                  |   |              |  
|                                                                                                                                                                                                                                      |  |                           
|Total assets                                                                                                                                                                                                                          |  | $                          | 199,028,717  |   |                  | $ | 219,298,452  |  
|                                                                                                                                                                                                                                      |  |                            |              |   |                  |   |              |  
|Liabilities and Stockholders Equity                                                                                                                                                                                                  |  |                            |              |   |                  |   |              |  
|Current liabilities:                                                                                                                                                                                                                  |  |                            |              |   |                  |   |              |  
|                                                                                                                                                                                                                                      |  |                           
|Current portion of long-term debt                                                                                                                                                                                                     |  | $                          | 78,162       |   |                  | $ | 58,920       |  
|Accounts payable                                                                                                                                                                                                                      |  |                            | 9,635,889    |   |                  |   | 16,868,514   |  
|Accrued payroll expenses                                                                                                                                                                                                              |  |                            | 5,505,863    |   |                  |   | 5,906,904    |  
|Accrued expenses and other current liabilities                                                                                                                                                                                        |  |                            | 6,246,023    |   |                  |   | 7,131,284    |  
|Deferred revenue                                                                                                                                                                                                                      |  |                            | 4,273,510    |   |                  |   | 8,861,965    |  
|Current liabilities of discontinued operations                                                                                                                                                                                        |  |                            | 118,393      |   |                  |   | 198,036      |  
|                                                                                                                                                                                                                                      |  |                            |              |   |                  |   |              |  
|                                                                                                                                                                                                                                      |  |                           
|Total current liabilities                                                                                                                                                                                                             |  |                            | 25,857,840   |   |                  |   | 39,025,623   |  
|Long-term debt                                                                                                                                                                                                                        |  |                            | 118,900      |   |                  |   | 175,519      |  
|Deferred income taxes                                                                                                                                                                                                                 |  |                            | 953,457      |   |                  |   | 947,600      |  
|Other liabilities                                                                                                                                                                                                                     |  |                            | 414,010      |   |                  |   | 1,342,342    |  
|                                                                                                                                                                                                                                      |  |                            |              |   |                  |   |              |  
|                                                                                                                                                                                                                                      |  |                           
|Total liabilities                                                                                                                                                                                                                     |  |                            | 27,344,207   |   |                  |   | 41,491,084   |  
|                                                                                                                                                                                                                                      |  |                            |              |   |                  |   |              |  
|                                                                                                                                                                                                                                      |  |                           
|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 at September 30, 2009 and December 31, 2008;
issued and outstanding 34,835,176 and 34,422,765 shares at September 30, 2009 and December 31, 2008, respectively |  |                            | 34,835       |   |                  |   | 34,423       |  
|Additional paid-in capital                                                                                                                                                                                                            |  |                            | 384,795,708  |   |                  |   | 381,701,973  |  
|Treasury stock, at cost; 344,656 and 240,665 shares at September 30, 2009 and December 31, 2008,
respectively                                                                                                                         |  |                            | (2,711,634   | ) |                  |   | (2,214,912   | )
|Accumulated deficit                                                                                                                                                                                                                   |  |                            | (213,080,803 | ) |                  |   | (204,478,210 | )
|Accumulated other comprehensive income                                                                                                                                                                                                |  |                            | 2,646,404    |   |                  |   | 2,764,094    |  
|                                                                                                                                                                                                                                      |  |                            |              |   |                  |   |              |  
|Total stockholders equity                                                                                                                                                                                                            |  |                            | 171,684,510  |   |                  |   | 177,807,368  |  
|                                                                                                                                                                                                                                      |  |                            |              |   |                  |   |              |  
|Total liabilities and stockholders equity                                                                                                                                                                                            |  | $                          | 199,028,717  |   |                  | $ | 219,298,452  |  
|                                                                                                                                                                                                                                      |  |                            |              |   |                  |   |              |  

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



3



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##### Table of Contents

ICx TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Loss



|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|----------------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                      |  | (Unaudited)                      |           
|                                                      |  | Three Months Ended September 30, |            |   | Nine Months Ended September 30, |  
|                                                      |  | 2009                             |            |   | 2008                            |   |            | 2009 |  |   | 2008        |  
|Revenues:                                             |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Product revenues                                      |  | $                                | 19,966,612 |   |                                 | $ | 24,982,335 |      |  | $ | 58,410,216  |   |  | $ | 68,545,593  |  
|Contract research and development revenues            |  |                                  | 15,066,087 |   |                                 |   | 8,853,460  |      |  |   | 39,040,300  |   |  |   | 30,652,299  |  
|Service and other revenues                            |  |                                  | 7,787,762  |   |                                 |   | 10,502,055 |      |  |   | 37,750,051  |   |  |   | 18,304,725  |  
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                                      |  |                                  |            |  
|Total revenues                                        |  |                                  | 42,820,461 |   |                                 |   | 44,337,850 |      |  |   | 135,200,567 |   |  |   | 117,502,617 |  
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                                      |  |                                  |            |  
|Cost of revenues:                                     |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Cost of product revenues                              |  |                                  | 9,047,045  |   |                                 |   | 11,755,820 |      |  |   | 27,983,748  |   |  |   | 32,842,384  |  
|Cost of contract research and development revenues    |  |                                  | 10,445,448 |   |                                 |   | 5,908,765  |      |  |   | 28,324,800  |   |  |   | 20,398,120  |  
|Cost of service and other revenues                    |  |                                  | 5,758,217  |   |                                 |   | 6,919,387  |      |  |   | 27,289,008  |   |  |   | 11,770,540  |  
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                                      |  |                                  |            |  
|Total cost of revenue                                 |  |                                  | 25,250,710 |   |                                 |   | 24,583,972 |      |  |   | 83,597,556  |   |  |   | 65,011,044  |  
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                                      |  |                                  |            |  
|Gross profit                                          |  |                                  | 17,569,751 |   |                                 |   | 19,753,878 |      |  |   | 51,603,011  |   |  |   | 52,491,573  |  
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                                      |  |                                  |            |  
|Operating expenses:                                   |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|General and administrative                            |  |                                  | 6,450,432  |   |                                 |   | 7,585,029  |      |  |   | 20,356,755  |   |  |   | 24,937,434  |  
|Sales and marketing                                   |  |                                  | 5,354,395  |   |                                 |   | 7,135,439  |      |  |   | 17,548,744  |   |  |   | 23,083,221  |  
|Research and development                              |  |                                  | 4,202,559  |   |                                 |   | 5,493,560  |      |  |   | 10,823,625  |   |  |   | 17,865,027  |  
|Depreciation and amortization                         |  |                                  | 2,663,840  |   |                                 |   | 3,460,726  |      |  |   | 8,682,719   |   |  |   | 9,821,898   |  
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                                      |  |                                  |            |  
|Total operating expenses                              |  |                                  | 18,671,226 |   |                                 |   | 23,674,754 |      |  |   | 57,411,843  |   |  |   | 75,707,580  |  
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                                      |  |                                  |            |  
|Operating loss                                        |  |                                  | (1,101,475 | ) |                                 |   | (3,920,876 | )    |  |   | (5,808,832  | ) |  |   | (23,216,007 | )
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                                      |  |                                  |            |  
|Other income (expense):                               |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Interest income                                       |  |                                  | 36,196     |   |                                 |   | 190,840    |      |  |   | 127,167     |   |  |   | 867,293     |  
|Interest expense                                      |  |                                  | (23,845    | ) |                                 |   | (19,751    | )    |  |   | (78,358     | ) |  |   | (48,861     | )
|Other, net                                            |  |                                  | (275,865   | ) |                                 |   | 113,858    |      |  |   | 125,049     |   |  |   | (265,646    | )
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                                      |  |                                  |            |  
|Total other income (expense)                          |  |                                  | (263,514   | ) |                                 |   | 284,947    |      |  |   | 173,858     |   |  |   | 552,786     |  
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                                      |  |                                  |            |  
|Loss before income taxes                              |  |                                  | (1,364,989 | ) |                                 |   | (3,635,929 | )    |  |   | (5,634,974  | ) |  |   | (22,663,221 | )
|Income tax expense (benefit)                          |  |                                  | (36,039    | ) |                                 |   | (124,829   | )    |  |   | 199,385     |   |  |   | 75,139      |  
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                                      |  |                                  |            |  
|Loss from continuing operations                       |  | $                                | (1,328,950 | ) |                                 | $ | (3,511,100 | )    |  | $ | (5,834,359  | ) |  | $ | (22,738,360 | )
|Loss on discontinued operations, net of tax           |  |                                  | (2,527,777 | ) |                                 |   | (305,720   | )    |  |   | (2,768,234  | ) |  |   | (1,270,576  | )
|Loss on sale of discontinued operations, net of tax   |  |                                  |           |   |                                 |   |           |      |  |   |            |   |  |   | (902,885    | )
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                                      |  |                                  |            |  
|Net loss                                              |  | $                                | (3,856,727 | ) |                                 | $ | (3,816,820 | )    |  | $ | (8,602,593  | ) |  | $ | (24,911,821 | )
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                                      |  |                                  |            |  
|Other comprehensive income (loss)                     |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Foreign currency translation adjustment, net of tax   |  |                                  | 797,176    |   |                                 |   | (1,081,776 | )    |  |   | (117,690    | ) |  |   | (360,941    | )
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                                      |  |                                  |            |  
|Comprehensive loss                                    |  | $                                | (3,059,551 | ) |                                 | $ | (4,898,596 | )    |  | $ | (8,720,283  | ) |  | $ | (25,272,762 | )
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                                      |  |                                  |            |  
|Net loss per common share                             |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Basic and diluted                                     |  | $                                | (0.11      | ) |                                 | $ | (0.11      | )    |  | $ | (0.25       | ) |  | $ | (0.73       | )
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                                      |  |                                  |            |  
|Basic and diluted weighted average shares outstanding |  |                                  | 34,810,957 |   |                                 |   | 34,293,531 |      |  |   | 34,674,943  |   |  |   | 34,000,684  |  
|                                                      |  |                                  |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  

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



4



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##### Table of Contents

ICx TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders Equity



|                                             |  |                      |  |        |        |                           |   |                    |                  |   |                     |   |  |               |           |   |                     |   |            |   |  |   |             |  
|-------------------------------------------- |  | -------------------- |  | ------ | ------ | ------------------------- | - | ------------------ | ---------------- | - | ------------------- | - |  | ------------- | --------- | - | ------------------- | - | ---------- | - |  | - | ----------- | -
|                                             |  | Unaudited            | 
|                                             |  | Stockholders Equity | 
|                                             |  | Common Stock         |  |        |        |                           |   |                    | AccumulatedOther |   |                     |   |  |               | Total     |  
|                                             |  | Shares               |  | Amount |        | AdditionalPaid-in
Capital |   | AccumulatedDeficit |                  |   | ComprehensiveIncome |   |  | TreasuryStock |           |   | StockholdersEquity |  
|Balances at January 1, 2009                  |  | 34,422,765           |  | $      | 34,423 |                           | $ | 381,701,973        |                  | $ | (204,478,210        | ) |  | $             | 2,764,094 |   |                     | $ | (2,214,912 | ) |  | $ | 177,807,368 |  
|Comprehensive income (loss):                 |  |                      |  |        |        |                           |   |                    |                  |   |                     |   |  |               |           |   |                     |   |            |   |  |   |             |  
|Net loss                                     |  |                     |  |        |       |                           |   |                   |                  |   | (8,602,593          | ) |  |               |          |   |                     |   |           |   |  |   | (8,602,593  | )
|Foreign currency translation, net of tax     |  |                     |  |        |       |                           |   |                   |                  |   |                    |   |  |               | (117,690  | ) |                     |   |           |   |  |   | (117,690    | )
|                                             |  |                      |  |        |        |                           |   |                    |                  |   |                     |   |  |               |           |   |                     |   |            |   |  |   |             |  
|                                             |  |                      |  |        |        |                           |  
|Total comprehensive loss                     |  |                     |  |        |       |                           |   |                   |                  |   | (8,602,593          | ) |  |               | (117,690  | ) |                     |   |           |   |  |   | (8,720,283  | )
|Issuances of common stock:                   |  |                      |  |        |        |                           |   |                    |                  |   |                     |   |  |               |           |   |                     |   |            |   |  |   |             |  
|Stock options, warrants and restricted stock |  | 412,411              |  |        | 412    |                           |   | 105,477            |                  |   |                    |   |  |               |          |   |                     |   |           |   |  |   | 105,889     |  
|Stock based compensation                     |  |                     |  |        |       |                           |   | 2,988,258          |                  |   |                    |   |  |               |          |   |                     |   |           |   |  |   | 2,988,258   |  
|Purchases of treasury stock                  |  |                     |  |        |       |                           |   |                   |                  |   |                    |   |  |               |          |   |                     |   | (496,722   | ) |  |   | (496,722    | )
|                                             |  |                      |  |        |        |                           |   |                    |                  |   |                     |   |  |               |           |   |                     |   |            |   |  |   |             |  
|                                             |  |                      |  |        |        |                           |  
|Balances at September 30, 2009               |  | 34,835,176           |  | $      | 34,835 |                           | $ | 384,795,708        |                  | $ | (213,080,803        | ) |  | $             | 2,646,404 |   |                     | $ | (2,711,634 | ) |  | $ | 171,684,510 |  
|                                             |  |                      |  |        |        |                           |   |                    |                  |   |                     |   |  |               |           |   |                     |   |            |   |  |   |             |  

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, |          
|                                                                            | 2009                            |           |            | 2008 | 
|Operating activities:                                                       |                                 |           |            |      |  |   |             |  
|Net loss                                                                    |                                 | $         | (8,602,593 | )    |  | $ | (24,911,821 | )
|Loss on discontinued operations                                             |                                 |           | 2,768,234  |      |  |   | 1,270,576   |  
|Loss on sale of discontinued operations                                     |                                 |           |           |      |  |   | 902,885     |  
|                                                                            |                                 |           |            |      |  |   |             |  
|                                                                            |                                 |          
|Loss from continuing operations, net of tax                                 |                                 |           | (5,834,359 | )    |  |   | (22,738,360 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |                                 |           |            |      |  |   |             |  
|Stock based compensation                                                    |                                 |           | 2,964,131  |      |  |   | 4,451,154   |  
|Depreciation and amortization                                               |                                 |           | 8,682,719  |      |  |   | 9,821,898   |  
|Deferred income taxes                                                       |                                 |           | 97,305     |      |  |   | (88,928     | )
|Increase in restricted cash                                                 |                                 |           | (27,649    | )    |  |   | (38,580     | )
|Changes in operating assets and liabilities:                                |                                 |           |            |      |  |   |             |  
|Trade accounts receivable, net                                              |                                 |           | 4,744,696  |      |  |   | 5,683,384   |  
|Unbilled revenue                                                            |                                 |           | 679,622    |      |  |   | (4,135,699  | )
|Inventories                                                                 |                                 |           | 2,012,601  |      |  |   | (7,955,987  | )
|Prepaid expenses and other assets                                           |                                 |           | (4,137,375 | )    |  |   | 770,344     |  
|Accounts payable                                                            |                                 |           | (7,129,514 | )    |  |   | (2,029,660  | )
|Accrued expenses and other liabilities                                      |                                 |           | (1,843,307 | )    |  |   | 1,072,784   |  
|Deferred revenue                                                            |                                 |           | (4,555,981 | )    |  |   | 6,437,923   |  
|                                                                            |                                 |           |            |      |  |   |             |  
|                                                                            |                                 |          
|Net cash used in continuing operating activities                            |                                 |           | (4,347,111 | )    |  |   | (8,749,727  | )
|Cash used in operation of discontinued operations                           |                                 |           | (64,751    | )    |  |   | (916,523    | )
|                                                                            |                                 |           |            |      |  |   |             |  
|                                                                            |                                 |          
|Net cash used in operating activities                                       |                                 |           | (4,411,862 | )    |  |   | (9,666,250  | )
|                                                                            |                                 |           |            |      |  |   |             |  
|                                                                            |                                 |          
|Investing activities:                                                       |                                 |           |            |      |  |   |             |  
|Purchases of property, plant and equipment                                  |                                 |           | (2,172,632 | )    |  |   | (3,538,786  | )
|Proceeds from the sale of property, plant and equipment                     |                                 |           | 206,087    |      |  |   |            |  
|Business combinations                                                       |                                 |           | (1,800,000 | )    |  |   | (7,443,805  | )
|Increase in restricted cash                                                 |                                 |           |           |      |  |   | (8,362,416  | )
|                                                                            |                                 |           |            |      |  |   |             |  
|                                                                            |                                 |          
|Net cash used in continuing investing activities                            |                                 |           | (3,766,545 | )    |  |   | (19,345,007 | )
|Proceeds from the sale of discontinued operations                           |                                 |           |           |      |  |   | 1,797,115   |  
|                                                                            |                                 |           |            |      |  |   |             |  
|                                                                            |                                 |          
|Net cash used in investing activities                                       |                                 |           | (3,766,545 | )    |  |   | (17,547,892 | )
|                                                                            |                                 |           |            |      |  |   |             |  
|                                                                            |                                 |          
|Financing activities:                                                       |                                 |           |            |      |  |   |             |  
|Proceeds from issuance of common stock                                      |                                 |           | 105,889    |      |  |   | 167,105     |  
|Borrowings under lines of credit                                            |                                 |           | 6,418,600  |      |  |   | 915,647     |  
|Repayments under lines of credit                                            |                                 |           | (6,418,600 | )    |  |   | (124,776    | )
|Repayments of notes payable and long-term debt                              |                                 |           | (91,514    | )    |  |   | (113,072    | )
|Purchase of treasury shares                                                 |                                 |           | (496,722   | )    |  |   | (905,103    | )
|Other, net                                                                  |                                 |           |           |      |  |   | (34,581     | )
|                                                                            |                                 |           |            |      |  |   |             |  
|                                                                            |                                 |          
|Net cash used in financing activities                                       |                                 |           | (482,347   | )    |  |   | (94,780     | )
|                                                                            |                                 |           |            |      |  |   |             |  
|                                                                            |                                 |          
|Effect of foreign exchange rate on cash                                     |                                 |           | 976,119    |      |  |   | (7,515      | )
|                                                                            |                                 |           |            |      |  |   |             |  
|                                                                            |                                 |          
|Net change in cash and cash equivalents                                     |                                 |           | (7,684,635 | )    |  |   | (27,316,437 | )
|Cash and cash equivalents at beginning of period                            |                                 |           | 30,353,728 |      |  |   | 64,635,940  |  
|                                                                            |                                 |           |            |      |  |   |             |  
|                                                                            |                                 |          
|Cash and cash equivalents at end of period                                  |                                 | $         | 22,669,093 |      |  | $ | 37,319,503  |  
|                                                                            |                                 |           |            |      |  |   |             |  

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, 2009 and 2008



|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 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, 2009 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.

Management of the Company is required to consider material events that occur after the date, but prior to the issuance, of the financial statements and evaluate whether such events require modification to the reported results or footnote
disclosure. The Company has evaluated subsequent events through the date of this filing, November 16, 2009.



|(b) | Allowance for Trade Accounts and Notes Receivable
|--- | -------------------------------------------------

At September 30, 2009 and December 31, 2008, trade accounts receivable, net was comprised of the following:



|                                |  |                   |            |   |                  |   |            |  
|------------------------------- |  | ----------------- | ---------- | - | ---------------- | - | ---------- | -
|                                |  | September 30,2009 |            |   | December 31,2008 |  
|U.S. government                 |  | $                 | 11,231,213 |   |                  | $ | 16,389,174 |  
|Commercial and other            |  |                   | 21,129,857 |   |                  |   | 20,540,427 |  
|                                |  |                   |            |   |                  |   |            |  
|                                |  | $                 | 32,361,070 |   |                  | $ | 36,929,601 |  
|Allowance for doubtful accounts |  |                   | (685,755   | ) |                  |   | (382,579   | )
|                                |  |                   |            |   |                  |   |            |  
|Trade accounts receivable, net  |  | $                 | 31,675,315 |   |                  | $ | 36,547,022 |  
|                                |  |                   |            |   |                  |   |            |  

No commercial customer accounted for more than 10% of net trade accounts receivable
at September 30, 2009. One commercial customer accounted for 16% of net trade accounts receivable at December 31, 2008. Additionally, the U.S. government accounted for 10% or greater of the net trade accounts receivable balance at
September 30, 2009 and December 31, 2008.



|(c) | Inventories
|--- | -----------

At
September 30, 2009 and December 31, 2008, inventories were comprised of the following:



|                         |  |                   |            |   |                  |   |            |  
|------------------------ |  | ----------------- | ---------- | - | ---------------- | - | ---------- | -
|                         |  | September 30,2009 |            |   | December 31,2008 |  
|Raw materials            |  | $                 | 11,987,360 |   |                  | $ | 16,488,914 |  
|Work in progress         |  |                   | 4,708,938  |   |                  |   | 3,090,484  |  
|Finished goods           |  |                   | 8,317,157  |   |                  |   | 7,274,370  |  
|                         |  |                   |            |   |                  |   |            |  
|                         |  |                  
|                         |  | $                 | 25,013,455 |   |                  | $ | 26,853,768 |  
|Reserve for obsolescence |  |                   | (1,006,583 | ) |                  |   | (679,342   | )
|                         |  |                   |            |   |                  |   |            |  
|                         |  |                  
|                         |  | $                 | 24,006,872 |   |                  | $ | 26,174,426 |  
|                         |  |                   |            |   |                  |   |            |  



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

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. The Company wrote off $1,260,790 of goodwill and $828,000 of intangible assets in the Solutions segment in the three and nine months ended September 30, 2009 in conjunction with discontinued
operations (Note 9). The Company has not historically incurred significant costs to renew or extend the term of recognized intangible assets.



|(e) | Revenue Recognition
|--- | -------------------

The Company recognizes revenue from product sales 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. The Company earns the majority of its service and other revenue from custom development services and project management and technology
integration services under contracts entered into with various U.S., state or local government agencies or other commercial entities that contract with these agencies. Most of these contracts are either based on costs incurred plus a fixed fee or
are based on a fixed price. The Company recognizes revenue from these contracts using the percentage of completion method. The Company principally uses labor efforts expended and estimated gross profit as a percentage of total estimated costs and
contract value or contract milestones to measure the progress of contract completeness. Revisions in cost and contract value estimates during the progress of work have the effect of adjusting earnings in the current period for work that may have
been performed in prior periods. When estimates of current costs indicate a loss, provision is made for the total anticipated loss in the current period. Under cost plus fixed fee contracts, the Company may bill and be reimbursed for costs incurred
in advance of revenue recognition if the percentage of contract completeness does not coincide with costs incurred. Additionally, certain fixed price 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, the excess is recorded as deferred revenue and contract costs in excess of expected earnings under the contract are deferred. At September 30, 2009 and December 31,
2008, the Company had included in deferred revenue $2,101,775 and $7,215,063 of excess billings or customer payments, respectively, related to percentage of completion timing differences. At September 30, 2009 and December 31, 2008, this
amount included $0 and $4,976,523, respectively, in advanced payments received from a customer for a custom platform development project. Deferred contract costs at September 30, 2009 and December 31, 2008 were not material. In certain
circumstances, revenue is recognized and costs are accrued under the percentage of completion method under cost plus and fixed fee contracts. Additionally, revenue may be recognized prior to billings on these 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, they are accrued until the costs are incurred. At
September 30, 2009 and December 31, 2008, the Company had unbilled revenue of $10,314,272 and $10,996,971, respectively, substantially all of which is expected to be collected within one year. At September 30, 2009 and
December 31, 2008, this amount included $0 and $4,889,824, respectively, of unbilled revenue related to a custom platform development project. Accrued contract costs at September 30, 2009 and December 31, 2008, were not material. The
Company had no material claims outstanding under its research and development contracts as of September 30, 2009.

Warranty income under separate agreements is recognized ratably over the life of the warranty. The Company recognizes revenue from services at the time the related services are performed. Deferred revenue includes $1,897,385 and $1,432,184
at September 30, 2009 and December 31, 2008, respectively, of warranty agreements and prepayments on service contracts.

The Company recognizes revenue from software license fees 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 $274,350 and $214,718 at September 30, 2009 and
December 31, 2008, respectively, of revenue deferred under multiple-element software arrangements for post contract customer support.



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

The Company values equity-classified, share-based payments to employees, including grants of employee stock options, at fair value on the date of grant and expenses stock-based compensation over the
applicable vesting period. Share-based awards granted or modified are recognized in compensation expense over the applicable vesting period.

During the three months ended September 30, 2009 and 2008, the Company recorded non-cash stock-based compensation expense of $986,158 and $1,365,520, respectively, including $7,030 and $15,083,
respectively, of expense associated with discontinued operations (Note 9). During the nine months ended September 30, 2009 and 2008, the Company recorded non-cash stock-based compensation expense of $2,988,258 and $4,500,704, respectively,
including $24,127 and $49,550, respectively, of expense associated with discontinued operations. As of September 30, 2009, and December 31, 2008, the Companys total unrecognized compensation cost related to stock-based awards was
$3,396,590 and $5,359,026, respectively.



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|(g) | Loss Per Share
|--- | --------------

The Company calculates basic loss per share 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, 2009, the Company had 34,810,957 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 474,930 weighted average shares of stock.

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 nine
months ended September 30, 2009, the Company had 34,674,943 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 455,555 weighted average shares of 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.



|(h) | Reclassifications
|--- | -----------------

The 2008 balances in the consolidated financial statements and notes to consolidated financial statements have been reclassified to conform to the 2009 presentation of restricted cash and discontinued operations (Note 9). Additionally,
certain 2008 balances in Note 10 to the consolidated financial statements have been reclassified to conform to the 2009 presentation, as the Company began allocating all general and administrative expenses to reportable segments. These
reclassifications had no impact on reported net income or earnings per share.



|(i) | Fair Value Measurements
|--- | -----------------------

Effective January 1, 2008, the Company adopted the provisions of FASB Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, for financial assets and liabilities. FASB ASC 820 defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. On January 1, 2009, the Company adopted the provisions of FASB ASC 820 for nonfinancial
assets and liabilities. Under FASB ASC 820, 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 must maximize the use of observable inputs and minimize the use of unobservable inputs. FASB ASC 820 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

As required under FASB ASC 820, the Company maximizes the use of observable inputs and
minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Fair value is based upon quoted market prices when available. If listed price or quotes are not available, the Company employs
internally-developed models that primarily use market-based inputs including yield curves and interest rates, among others.

The Company considers cash and cash equivalents, trade accounts receivable, accounts payable, and accrued expenses to be financial instruments in which the carrying amounts represent fair value because of the short-term nature of the
accounts. The Company also considers notes payable, lines of credit, and long-term debt to be financial instruments in which the carrying amounts approximate fair value because of their short-term nature, variable interest rates or rates that
approximate market.

Nonfinancial nonrecurring assets and liabilities included in the Companys consolidated balance
sheet include long-lived assets such as property, plant and equipment, intangibles and goodwill, which are measured at fair value to test for and measure an impairment charge, when necessary. These assets fall within level 3 of the fair value
hierarchy, as significant unobservable inputs such as the Companys projected operating results are used to estimate the fair value of these assets. During the three and nine months ended September 30, 2009, $1,260,790 of goodwill,
$828,000 of intangible assets and $150,334 of other long-term assets were written off in connection with discontinued operations to remeasure these nonfinancial assets and liabilities to fair value (Note 9).



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|(j) | 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.

During the third quarter of 2009, the Company adopted FASB Accounting Standards Codification (ASC). The FASB ASC is the single official source of authoritative, nongovernmental U.S. GAAP. Rules and interpretive releases issued by the
SEC are also sources of authoritative GAAP for SEC registrants. Adoption of the FASB ASC did not impact the Companys consolidated financial position or results of operations, as the ASC did not change U.S. GAAP.

In December 2007, the FASB issued guidance related to FASB ASC Topic 805, Business Combinations. This guidance 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. It 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, FASB ASC Section 805 requires securities issued be valued as of the
acquisition date, transaction costs incurred in connection with an acquisition be expensed, except acquiree costs, 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. This guidance is applicable to business combinations consummated on or after December 15, 2008. Early application was prohibited. These provisions 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 2009, the FASB issued additional guidance related to FASB ASC Topic 805 to amend provisions for the initial recognition and
measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. This guidance eliminates the distinction between contractual and non-contractual contingencies,
including the initial recognition and measurement criteria and instead carries forward most of the provisions for acquired contingencies. This guidance is effective for contingent assets and contingent liabilities acquired in business combinations
for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2008. These provisions may impact the Companys accounting for future business combinations.

In April 2008, the FASB issued guidance related to FASB ASC Topic 350, Intangibles  Goodwill and Other, 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. This guidance is effective as of the beginning of an entitys first fiscal year that begins
after December 15, 2008. Early adoption was prohibited. Adoption of this guidance on January 1, 2009, did not have a significant impact on the Companys consolidated financial position or results of operations.

In June 2008, the FASB issued guidance related to FASB ASC Topic 260, Earnings Per Share, that 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). The guidance indicates
that unvested share-based payment 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.
This guidance 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 was not permitted.
Adoption of this guidance on January 1, 2009, did not have a material impact on the Companys consolidated financial position or results of operations.

In November 2008, the FASB issued guidance related to FASB ASC Topic 350, Intangibles  Goodwill and Other, which clarifies the accounting for defensive intangible assets, or certain
separately identifiable intangible assets acquired in a business combination that an entity does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. This guidance requires an acquirer in a
business combination to account for a defensive intangible asset as a separate unit of accounts that should be amortized to expense over the period the asset diminishes in value. This guidance is effective for all intangible assets acquired on or
after the first fiscal year beginning on or after December 15, 2008. Early adoption was not permitted. These provisions may impact the Companys accounting for future business combinations if defensive intangible assets are acquired.

In April 2009, the FASB issued guidance related to FASB ASC Topic 825, Financial Instruments, that requires an
entity to provide disclosures about fair value of financial instruments in interim financial statements. This guidance is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. The Company adopted this guidance for its quarter ending June 30, 2009. Adoption did not have a material impact on the Companys consolidated financial position or results of
operations.

In May 2009, the FASB issued guidance related to FASB ASC Topic 855, Subsequent Events, which establishes
general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, the guidance sets forth (a) the period after the
balance sheet date during which management of a reporting entity shall



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evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (b) the circumstances under which an entity shall recognize events or
transactions occurring after the balance sheet date in its financial statements, and (c) the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. The guidance also requires disclosure of
the date through which an entity has evaluated subsequent events and the basis for that date, and is effective for interim and annual periods ending after June 15, 2009. The Company adopted these provisions for its quarter ending June 30,
2009. Adoption did not have a material impact on the Companys consolidated financial position or results of operations.

In September 2009, the FASB issued ASU 2009-6, Income Taxes (Topic 740)  Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities, which provides guidance on how to
apply the standards for uncertainty in income taxes when income taxes paid by the entity are attributable to the entity or when they are attributable to the owners. The guidance also clarifies that determination of the taxable status of the entity
is a tax position subject to the standards for uncertainty in income taxes and indicates that a reporting entity must consider the tax positions of all entities within a related group regardless of the reporting entitys tax status. This
guidance is effective for interim and annual periods ending after September 15, 2009. The Company adopted these provisions for its quarter ending September 30, 2009. Adoption did not have a material impact on the Companys
consolidated financial position or results of operations.

In October 2009, the FASB issued ASU 2009-13, Revenue
Recognition (Topic 605)  Multiple-Deliverable Revenue Arrangements  a consensus of the FASB Emerging Issues Task Force, which addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or
more units of accounting. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price should be based on vendor-specific objective evidence if available, third-party evidence if
vendor-specific objective evidence is not available, or estimated selling price if neither of these types of evidence is available. The residual method of allocation is eliminated by this guidance. Additionally, this guidance expands disclosures
related to multiple-deliverable revenue arrangements. These provisions are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted.
The Company anticipates adopting this guidance with its fiscal year beginning January 1, 2010. We are currently evaluating the impact that adoption will have, if any, on the Companys consolidated financial position or results of
operations.

In October 2008, the FASB issued ASU 2009-14, Software (Topic 985)  Certain Revenue Arrangements That
Include Software Elements  a consensus of the FASB Emerging Issues Task Force, that provides guidance on determining whether tangible products contain software that works together with the nonsoftware components of the tangible product to
deliver the tangible products essential functionality (and therefore, is excluded from the scope of the software revenue guidance) and also provides guidance on how a vendor should allocate arrangement consideration to deliverables in an
arrangement that includes both tangible products and software. These provisions are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is
permitted, as long as the vendor adopts this guidance in the same period using the same transition method used to adopt ASU 2009-13. The Company anticipates adopting this guidance with its fiscal year beginning January 1, 2010. We are currently
evaluating the impact that adoption will have, if any, 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. Hans Kobler, Executive Chairman of the Board, has an indirect ownership interest in DP1 and
DP2 through an affiliate but otherwise 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 $35,548 and $26,363 in the three months ended September 30, 2009 and 2008, respectively, and $66,466 and $93,199 in the nine months ended September 30, 2009 and 2008, respectively, pursuant to the agreement. Either party may
terminate specific services or cancel the agreement upon written notice to the other party.

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 was incurred in the three months ended September 30, 2009 and 2008, respectively. Rent expense of $81,000 was incurred in the nine months ended September 30, 2009 and 2008, 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 $17,074 and $16,897 was incurred in the three months ended September 30, 2009 and 2008, respectively. Rent expense of $51,222 and $56,050
was incurred in the nine months ended September 30, 2009 and 2008, respectively. The lease term ended on September 15, 2009. The Company used one of the six additional one year renewals available under the lease to extend the lease to
September 15, 2010. Certain family members of the Strange family hold senior management positions in one of the Companys subsidiaries.



11



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##### Table of Contents

|3. | Business Combinations
|-- | ---------------------

On
May 31, 2008, the Company acquired the assets of S3I, LLC (S3I) in a business combination accounted for as a purchase. The purchase agreement with S3I contains contingent consideration provisions based on earnings and future revenues in an
amount not to exceed $24.7 million. During the three and nine months ended September 30, 2009, the Company paid $1,800,000 to the sellers of S3I related to the contingent consideration provisions and final settlement of holdback amounts and
working capital adjustments. An additional $900,000 will be paid to the sellers in 2010 related to the contingent consideration provisions and is included in accrued expenses and other current liabilities in the Consolidated Balance Sheet. For the
three and nine months ended September 30, 2009, goodwill was increased by $161,955 related to the contingent consideration provisions.



|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
|-- | ------------

As of
September 30, 2009 and December 31, 2008, 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, 2009, no amounts were outstanding
under a line of credit with a maximum borrowing amount of $2.5 million, an effective interest rate of 5.50% and a maturity date of April 26, 2011.



|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, 2009, the Company repurchased 103,991 shares in settlement of employees tax obligations for a total of $496,722 or an average of $4.78 per share.



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

On August 11, 2009, the Company issued an offer to exchange options to purchase up to an aggregate of 2,201,849 shares of the Companys common stock, whether vested or unvested, with an exercise price per share equal to the
greater of $5.00 or the closing price per share of the Companys common stock on the date on which the New Options are granted, which was September 8, 2009. Pursuant to the exchange offer, 1,684,138 eligible stock options, including
warrants to purchase 375,000 shares of common stock, were tendered and 716,403 new stock options, including warrants to purchase 127,250 shares of common stock, were granted with an exercise price of $5.36, the closing price of the Companys
common stock on the date of grant. The incremental compensation cost associated with this exchange did not have a material impact on the Companys financial position or results of operations.

The following table summarizes activity for nonvested restricted stock (RS) and nonvested restricted stock units
(RSUs) granted under the 2007 Equity Incentive Plan for the nine months ended September 30, 2009:



|                                                  |  |                                          |   |  |                           |      
|------------------------------------------------- |  | ---------------------------------------- | - |  | ------------------------- | -----
|                                                  |  | 2009                                    
|                                                  |  | RestrictedStock andRestrictedStock Units |   |  | WeightedAverageFair Value
|Nonvested RS and RSUs outstanding at January 1    |  | 710,470                                  |   |  | $                         | 9.17 
|RS and RSUs granted                               |  | 211,996                                  |   |  |                           | 4.15 
|RS and RSUs vested                                |  | (309,243                                 | ) |  |                           | 8.41 
|RS and RSUs forfeited                             |  | (77,243                                  | ) |  |                           | 10.71
|                                                  |  |                                          |   |  |                           |      
|                                                  |  |                                         
|Nonvested RS and RSUs outstanding at September 30 |  | 535,980                                  |   |  | $                         | 7.40 
|                                                  |  |                                          |   |  |                           |      



12



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##### Table of Contents

The Company recorded stock-based compensation expense of $734,492 and $1,000,677 during the
three months ended September 30, 2009 and 2008, respectively, and $2,313,261 and $3,212,446 during the nine months ended September 30, 2009 and 2008, respectively, in connection with grants of RS and RSUs. Grants of RS and RSUs are valued
using the closing market price of the Companys common stock on the date of grant.

The aggregate intrinsic value of
outstanding RS and RSUs at September 30, 2009 was $3,193,840. Also at September 30, 2009, total compensation cost related to nonvested RS and RSU awards that had not yet been recognized totaled $2,449,658. The weighted average period over
which this amount will be recognized is estimated to be 2.2 years.

Stock option activity for options issued under the 2007
Equity Incentive Plan was as follows as of September 30, 2009, and for the nine months then ended:



|                                          |  |                         |   |  |                              |       |                                                   |      |                         |   |          
|----------------------------------------- |  | ----------------------- | - |  | ---------------------------- | ----- | ------------------------------------------------- | ---- | ----------------------- | - | ---------
|                                          |  | SharesSubject toOptions |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm(in years) |      | AggregateIntrinsicValue
|Options outstanding at January 1, 2009    |  | 2,790,527               |   |  | $                            | 9.56  |                                                   |      |                         |   |          
|Options granted                           |  | 1,260,653               |   |  |                              | 5.26  |                                                   |      |                         |   |          
|Options exercised                         |  | (54,689                 | ) |  |                              | 1.80  |                                                   |      |                         |   |          
|Options terminated, cancelled or expired  |  | (1,388,978              | ) |  |                              | 12.11 |                                                   |      |                         |   |          
|                                          |  |                         |   |  |                              |       |                                                   |      |                         |   |          
|                                          |  |                         |   | 
|Options outstanding at September 30, 2009 |  | 2,607,513               |   |  | $                            | 6.30  |                                                   | 6.35 |                         | $ | 2,582,722
|                                          |  |                         |   |  |                              |       |                                                   |      |                         |   |          
|                                          |  |                         |   | 
|Options exercisable at September 30, 2009 |  | 1,936,133               |   |  | $                            | 6.62  |                                                   | 5.27 |                         | $ | 1,975,645
|                                          |  |                         |   |  |                              |       |                                                   |      |                         |   |          

For options granted in 2009 and 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, |  | 2009 |            |   | 2008 |  
|Grant date fair value                   |  | $    | 1.78       |   |      | $ | 3.13       |  
|Risk-free interest rate                 |  |      | 2.01-2.195 | % |      |   | 3.72       | %
|Dividend yield                          |  |      |           | % |      |   |           | %
|Expected life (years)                   |  |      | 6.25-6.5   |   |      |   | 5-6.25     |  
|Expected volatility                     |  |      | 47.0       | % |      |   | 41.5%-42.7 | %

For options granted in the September 2009 option exchange, the fair value of options
was estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:



|                        |  |   |            |  
|----------------------- |  | - | ---------- | -
|Grant date fair value   |  | $ | 0.33-$1.81 |  
|Risk-free interest rate |  |   | 0.10-1.49  | %
|Dividend yield          |  |   |           | %
|Expected life (years)   |  |   | 0.12-2.69  |  
|Expected volatility     |  |   | 44.6%-70.2 | %

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



13



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##### Table of Contents

Board-discretionary stock option activity was as follows as of September 30, 2009, and
for the nine months then ended:



|                                          |  |                         |   |  |                              |      |                                                   |      |                         |   |        
|----------------------------------------- |  | ----------------------- | - |  | ---------------------------- | ---- | ------------------------------------------------- | ---- | ----------------------- | - | -------
|                                          |  | SharesSubject toOptions |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualTerm(in years) |      | AggregateIntrinsicValue
|Options outstanding at January 1, 2009    |  | 159,600                 |   |  | $                            | 0.16 |                                                   |      |                         |   |        
|Options granted                           |  |                        |   |  |                              |     |                                                   |      |                         |   |        
|Options exercised                         |  | (48,400                 | ) |  |                              | 0.16 |                                                   |      |                         |   |        
|Options terminated, cancelled or expired  |  |                        |   |  |                              |     |                                                   |      |                         |   |        
|                                          |  |                         |   |  |                              |      |                                                   |      |                         |   |        
|                                          |  |                         |   | 
|Options outstanding at September 30, 2009 |  | 111,200                 |   |  | $                            | 0.16 |                                                   | 5.78 |                         | $ | 640,512
|                                          |  |                         |   |  |                              |      |                                                   |      |                         |   |        
|                                          |  |                         |   | 
|Options exercisable at September 30, 2009 |  | 111,200                 |   |  | $                            | 0.16 |                                                   | 5.78 |                         | $ | 640,512
|                                          |  |                         |   |  |                              |      |                                                   |      |                         |   |        

Stock-based compensation expense pertaining to stock options totaled $251,666 and
$364,843 for the three months ended September 30, 2009 and 2008, respectively, and $674,997 and $1,288,258 for the nine months ended September 30, 2009 and 2008, respectively. Cash received from the exercise of stock options totaled
approximately $11,000 and $36,000 for the three months ended September 30, 2009 and 2008, respectively, and approximately $106,000 and $167,000 for the nine months ended September 30, 2009 and 2008, respectively.

The aggregate intrinsic value of outstanding options at September 30, 2009 was $3,223,234. Also at September 30, 2009, total
compensation cost related to nonvested awards that had not yet been recognized totaled $946,932. The weighted average period over which this amount will be recognized is estimated to be 3.6 years.



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

In the third quarter of 2009, the Companys Board of Directors adopted a plan of sale and put the assets of PureTech Systems, Inc. (PureTech), a unit in the Solutions segment, up for sale, as the business model of this unit no longer
aligned with the strategic plans of the Company. The Company expects to complete the sale of PureTech in the fourth quarter of 2009. In conjunction with this plan, the Company recognized a loss on discontinued operations of $2,527,777 and $2,768,234
in the three months and nine months ended September 30, 2009, respectively. This loss included a goodwill impairment charge of $1,260,790, a $828,000 impairment charge to write down PureTechs intangible assets, and a $150,334 impairment
charge to write down PureTechs non-current assets. Prior year financial statements for 2008 present the operations of PureTech as discontinued operations.

Revenues and net loss before income taxes of PureTech reported in discontinued operations are as follows:



|                             |  |                                          |          |   |      |   |            |  
|---------------------------- |  | ---------------------------------------- | -------- | - | ---- | - | ---------- | -
|                             |  | For the three months ended September 30, |         
|                             |  | 2009                                     |          |   | 2008 |  
|Revenues                     |  | $                                        | 85,972   |   |      | $ | 622,732    |  
|Net loss before income taxes |  |                                          | (288,653 | ) |      |   | (305,720   | )
|                             | 
|                             |  | For the nine months ended September 30,  |         
|                             |  | 2009                                     |          |   | 2008 |  
|Revenues                     |  | $                                        | 910,424  |   |      | $ | 1,153,017  |  
|Net loss before income taxes |  |                                          | (529,109 | ) |      |   | (1,270,576 | )



14



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##### Table of Contents

The assets and liabilities of the discontinued operations are presented separately in the
consolidated balance sheets under the captions Current assets of discontinued operations, Noncurrent assets of discontinued operations, and Current liabilities of discontinued operations and consist of the
following:



|                                        |  |                   |         |                  |   |          
|--------------------------------------- |  | ----------------- | ------- | ---------------- | - | ---------
|                                        |  | September 30,2009 |         | December 31,2008
|Assets of discontinued operations:      |  |                   |         |                  |   |          
|Accounts receivable, net                |  | $                 | 203,676 |                  | $ | 553,981  
|Inventories                             |  |                   | 27,329  |                  |   | 55,206   
|Property, plant and equipment, net      |  |                   | 35,763  |                  |   | 63,653   
|Intangibles, net                        |  |                   |        |                  |   | 1,035,000
|Goodwill                                |  |                   |        |                  |   | 1,260,790
|Other assets                            |  |                   | 351,625 |                  |   | 408,761  
|                                        |  |                   |         |                  |   |          
|                                        |  |                  
|Total assets                            |  | $                 | 618,393 |                  | $ | 3,377,391
|                                        |  |                   |         |                  |   |          
|                                        |  |                  
|Liabilities of discontinued operations: |  |                   |         |                  |   |          
|Accounts payable                        |  | $                 | 594     |                  | $ | 7,017    
|Deferred revenue                        |  |                   | 117,799 |                  |   | 191,019  
|                                        |  |                   |         |                  |   |          
|                                        |  |                  
|Total liabilities                       |  | $                 | 118,393 |                  | $ | 198,036  
|                                        |  |                   |         |                  |   |          

In the first quarter of 2008, the Company realized a loss on discontinued operations
of $902,885 related to the settlement of escrow accounts and contingent purchase consideration related to three 2007 sales of businesses in the Companys Laser segment. The Company decided to sell these units primarily because the business
models did not align with the strategic plans of the Company.



|10. | Segment 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. Intersegment revenues are fully eliminated in consolidation. Due to changes in the Companys internal
structure, we began allocating all general and administrative expenses to the Companys reportable segments in 2009, whereas a portion of general and administrative expenses remained unallocated to segments in 2008. In 2009 and 2008, all sales
and marketing expenses have been allocated to the Companys reportable segments. Segment information disclosed below for the three and nine months ended September 30, 2008, has been reclassified to conform to the 2009 presentation.
Intersegment revenues are not presented for 2008, as they are not significant. To conform to the 2009 presentation, the 2008 balances for the solutions segment have been reclassified to exclude amounts related to discontinued operations
(Note 9).

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



|                                 |  |                                               |            |   |              |   |            |           |  |   |                  |   |  |   |            |  
|-------------------------------- |  | --------------------------------------------- | ---------- | - | ------------ | - | ---------- | --------- |  | - | ---------------- | - |  | - | ---------- | -
|                                 |  | For the three months ended September 30, 2009 |           
|                                 |  | Detection                                     |            |   | Surveillance |   |            | Solutions |  |   | SegmentsCombined |  
|Total revenues                   |  | $                                             | 26,188,929 |   |              | $ | 9,245,490  |           |  | $ | 7,743,768        |   |  | $ | 43,178,187 |  
|Intersegment revenues            |  |                                               |           |   |              |   | (63,978    | )         |  |   | (293,748         | ) |  |   | (357,726   | )
|                                 |  |                                               |            |   |              |   |            |           |  |   |                  |   |  |   |            |  
|Revenues from external customers |  |                                               | 26,188,929 |   |              |   | 9,181,512  |           |  |   | 7,450,020        |   |  |   | 42,820,461 |  
|Segment operating income (loss)  |  |                                               | (258,538   | ) |              |   | (1,081,111 | )         |  |   | 426,690          |   |  |   | (912,959   | )
|Depreciation and amortization    |  |                                               | 1,992,621  |   |              |   | 395,610    |           |  |   | 87,093           |   |  |   | 2,475,324  |  
|                                 | 
|                                 |  | For the three months ended September 30, 2008 |           
|                                 |  | Detection                                     |            |   | Surveillance |   |            | Solutions |  |   | SegmentsCombined |  
|Revenues from external customers |  | $                                             | 25,419,383 |   |              | $ | 12,670,875 |           |  | $ | 6,247,592        |   |  | $ | 44,337,850 |  
|Segment operating losses         |  |                                               | (636,063   | ) |              |   | (1,691,195 | )         |  |   | (1,411,066       | ) |  |   | (3,738,324 | )
|Depreciation and amortization    |  |                                               | 2,114,367  |   |              |   | 769,322    |           |  |   | 394,485          |   |  |   | 3,278,174  |  



15



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##### Table of Contents

|                                                |  |                                              |             |   |              |   |            |           |  |   |                  |   |  |   |             |  
|----------------------------------------------- |  | -------------------------------------------- | ----------- | - | ------------ | - | ---------- | --------- |  | - | ---------------- | - |  | - | ----------- | -
|                                                |  | For the nine months ended September 30, 2009 |            
|                                                |  | Detection                                    |             |   | Surveillance |   |            | Solutions |  |   | SegmentsCombined |  
|Total revenues                                  |  | $                                            | 71,710,109  |   |              | $ | 38,713,849 |           |  | $ | 25,583,850       |   |  | $ | 136,007,808 |  
|Intersegment revenues                           |  |                                              |            |   |              |   | (71,578    | )         |  |   | (735,663         | ) |  |   | (807,241    | )
|                                                |  |                                              |             |   |              |   |            |           |  |   |                  |   |  |   |             |  
|                                                |  |                                              |             |  
|Revenues from external customers                |  |                                              | 71,710,109  |   |              |   | 38,642,271 |           |  |   | 24,848,187       |   |  |   | 135,200,567 |  
|                                                |  |                                              |             |  
|Segment operating (losses) income               |  |                                              | (3,554,728  | ) |              |   | (2,314,984 | )         |  |   | 622,295          |   |  |   | (5,247,417  | )
|Depreciation and amortization                   |  |                                              | 5,847,692   |   |              |   | 1,888,204  |           |  |   | 385,408          |   |  |   | 8,121,304   |  
|Segment property, plant and equipment additions |  |                                              | 1,944,369   |   |              |   | 82,257     |           |  |   | 54,516           |   |  |   | 2,081,142   |  
|                                                | 
|                                                |  | For the nine months ended September 30, 2008 |            
|                                                |  | Detection                                    |             |   | Surveillance |   |            | Solutions |  |   | SegmentsCombined |  
|Revenues from external customers                |  | $                                            | 68,848,768  |   |              | $ | 31,916,498 |           |  | $ | 16,737,351       |   |  | $ | 117,502,617 |  
|Segment operating losses                        |  |                                              | (8,776,268  | ) |              |   | (8,268,773 | )         |  |   | (5,683,162       | ) |  |   | (22,728,203 | )
|Depreciation and amortization                   |  |                                              | 5,883,154   |   |              |   | 2,273,584  |           |  |   | 1,177,356        |   |  |   | 9,334,094   |  
|Segment property, plant and equipment additions |  |                                              | 1,737,342   |   |              |   | 630,431    |           |  |   | 201,732          |   |  |   | 2,569,505   |  
|                                                |  |                                              |             |  
|As of September 30, 2009                        |  |                                              |             |   |              |   |            |           |  |   |                  |  
|Segment total assets                            |  | $                                            | 105,515,325 |   |              | $ | 37,660,171 |           |  | $ | 22,871,548       |   |  | $ | 166,047,044 |  
|Segment goodwill                                |  |                                              | 51,478,230  |   |              |   | 12,736,716 |           |  |   | 5,736,946        |   |  |   | 69,951,892  |  
|                                                |  |                                              |             |  
|As of December 31, 2008                         |  |                                              |             |   |              |   |            |           |  |   |                  |  
|Segment total assets                            |  | $                                            | 106,180,659 |   |              | $ | 52,108,392 |           |  | $ | 22,192,250       |   |  | $ | 180,481,301 |  
|Segment goodwill                                |  |                                              | 51,316,275  |   |              |   | 12,736,717 |           |  |   | 5,504,448        |   |  |   | 69,557,440  |  

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, |           
|                                                  |  | 2009                                     |            |   | 2008 |  
|Operating losses from reportable segments         |  | $                                        | (912,959   | ) |      | $ | (3,738,324  | )
|Unallocated depreciation and amortization expense |  |                                          | (188,516   | ) |      |   | (182,552    | )
|Interest income                                   |  |                                          | 36,196     |   |      |   | 190,840     |  
|Interest expense                                  |  |                                          | (23,845    | ) |      |   | (19,751     | )
|Other non-operating gains (losses), net           |  |                                          | (275,865   | ) |      |   | 113,858     |  
|                                                  |  |                                          |            |   |      |   |             |  
|                                                  |  |                                         
|Loss before income taxes                          |  | $                                        | (1,364,989 | ) |      | $ | (3,635,929  | )
|                                                  |  |                                          |            |   |      |   |             |  
|                                                  | 
|                                                  |  | For the nine months ended September 30,  |           
|                                                  |  | 2009                                     |            |   | 2008 |  
|Operating losses from reportable segments         |  | $                                        | (5,247,417 | ) |      | $ | (22,728,203 | )
|Unallocated depreciation and amortization expense |  |                                          | (561,415   | ) |      |   | (487,804    | )
|Interest income                                   |  |                                          | 127,167    |   |      |   | 867,293     |  
|Interest expense                                  |  |                                          | (78,358    | ) |      |   | (48,861     | )
|Other non-operating gains (losses), net           |  |                                          | 125,049    |   |      |   | (265,646    | )
|                                                  |  |                                          |            |   |      |   |             |  
|                                                  |  |                                         
|Loss before income taxes                          |  | $                                        | (5,634,974 | ) |      | $ | (22,663,221 | )
|                                                  |  |                                          |            |   |      |   |             |  



16



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##### Table of Contents

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,
|                                                                       |  | 2009                                    |           | 2008
|Total property, plant and equipment additions from reportable segments |  | $                                       | 2,081,142 |      | $ | 2,569,505
|Unallocated property, plant and equipment additions                    |  |                                         | 91,490    |      |   | 969,281  
|                                                                       |  |                                         |           |      |   |          
|                                                                       |  |                                        
|Total property, plant and equipment additions                          |  | $                                       | 2,172,632 |      | $ | 3,538,786
|                                                                       |  |                                         |           |      |   |          

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



|                                                                  |  |                    |             |                   |   |            
|----------------------------------------------------------------- |  | ------------------ | ----------- | ----------------- | - | -----------
|                                                                  |  | September 30, 2009 |             | December 31, 2008
|Total assets from reportable segments                             |  | $                  | 166,047,044 |                   | $ | 180,481,301
|Unallocated cash and cash equivalents                             |  |                    | 28,970,972  |                   |   | 31,640,943 
|Unallocated prepaid expenses and other assets                     |  |                    | 3,372,373   |                   |   | 3,778,882  
|Deferred income taxes                                             |  |                    | 19,935      |                   |   | 19,935     
|Current and noncurrent assets of discontinued operations (Note 9) |  |                    | 618,393     |                   |   | 3,377,391  
|                                                                  |  |                    |             |                   |   |            
|                                                                  |  |                   
|Total assets                                                      |  | $                  | 199,028,717 |                   | $ | 219,298,452
|                                                                  |  |                    |             |                   |   |            



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##### Table of Contents

|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 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.

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 U. S. Transportation Security
Administration, as well as various state and local governments and agencies, including the New York Police Department and the Port of Long Beach. We also provide products, components and sub-systems to leading integrators in the security and defense
industries who either resell our products or integrate them into comprehensive security installations for their end customers. The value-added-resellers and system integrators that we sell products to include The Boeing Company, Honeywell
International, Inc., Northrop Grumman Corp., Raytheon Company, SAIC, Inc. and Thermo Fisher Scientific, Inc. We also sell to military customers such as the U.S. Department of Defense, the U.S. Air Force, the U.S. Marines and the U.S. Army. We also
sell 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.



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##### Table of Contents

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 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. We were incorporated in
2003, and our business was formed through a series of complementary acquisitions in 2005. Many of these businesses were in the early stages of transitioning advanced technologies into products, integrating solutions and developing marketing and
sales strategies. Beginning in 2005, we began to develop a more comprehensive sales and marketing structure to support our business segments. A key measure of our success is product revenue growth. Because our financial statements present the
results of operations of acquired businesses from the date of acquisition, during periods in which we have significant acquisitions, we monitor revenue growth by comparing current periods against pro forma results of operations as if we had acquired
the businesses as of the beginning of the prior comparable periods.

Product Gross Profit. 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 a variety of chemical, biological, radiological, nuclear and explosive sensor
products. In our Surveillance segment, we primarily derive product revenue from the sale of integrated towers, thermal imaging cameras and radar products. In our Solutions segment, we primarily derive product revenue from the sale of command and
control advanced software products.

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.



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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.

Service and Other Revenue and Gross Profit. We derive service and other revenue from three sources:
(i) custom product design and development services, (ii) project management and technology integration services and (iii) training, installation and warranty contracts. Revenue from custom product design and development services and
project management and technology integration services is derived from our Surveillance and Solutions segments, while training, installation and warranty contract revenues are derived from all three of our segments. A significant portion of our
revenue from project management and technology integration services is derived from customers in the transportation industry. Most of our custom product design and development service contracts and 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Revenue RecognitionService and Other.

Gross profit under fixed price custom product design and development service contracts and 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. We increased our general administrative expenses in 2007 and 2006 through the use of consultants and other professionals to complete certain
accounting and legal functions. We also increased general and administrative expenses by hiring additional executive officers and advisors and in connection with our overall expansion of the business. In 2008, our general and administrative expenses
began to decline as a result of our focused effort to eliminate redundancies in our operations, primarily through reductions in personnel. In the nine months of 2009, our general and administrative expenses decreased compared to the same nine month
period last year and we believe that our general and administrative expenses will begin to stabilize or slightly decrease throughout the remainder of 2009 compared to previous years as we continue to gain efficiencies in the overall integration of
our business units and continue our efforts to control costs.

Sales and Marketing Expenses. Beginning in 2006
through the end of 2008, we increased our spending on sales, marketing and other related business development matters to support our early stage products and emerging technologies and to support anticipated future growth in our business. With the
downturn in the economy in late 2008 and the continued uncertainty in 2009, we have taken steps to scale back certain aspects of our commercial sales and marketing activities. Accordingly, in the first nine months of 2009 our sales and marketing
expenses decreased compared to the same nine month period last year and we expect that our sales and marketing expense will continue to decline compared to previous years throughout 2009.

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. Beginning in 2006 and throughout most 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. In 2008, we significantly increased our externally funded research and development and have continued to secure additional funding in 2009. Accordingly, in the first nine months of 2009 our internal
research and development expenses decreased compared to the same nine month period last year and we expect that our internal research and development expenses will continue to be lower in 2009 compared to previous years as we utilize our technical
resources on externally funded research and development activities.



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##### Table of Contents

Results of OperationsComparison of the Three Months Ended September 30, 2009
and 2008

The following table presents selected summarized consolidated financial information for the three months ended
September 30, 2009 and 2008.



|                                                                |  |                                    |        |   |      |   |        |  
|--------------------------------------------------------------- |  | ---------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                |  | Three Months EndedSeptember 30,    |       
|                                                                |  | 2009                               |        |   | 2008 |  
|                                                                |  | (dollars in thousands) (unaudited) |       
|Product revenue                                                 |  | $                                  | 19,966 |   |      | $ | 24,982 |  
|Gross profit %                                                  |  |                                    | 54.7   | % |      |   | 52.9   | %
|Contract research and development revenue                       |  | $                                  | 15,066 |   |      | $ | 8,854  |  
|Gross profit %                                                  |  |                                    | 30.7   | % |      |   | 33.3   | %
|Service and other revenue                                       |  | $                                  | 7,788  |   |      | $ | 10,502 |  
|Gross profit %                                                  |  |                                    | 26.1   | % |      |   | 34.1   | %
|                                                                |  |                                    |        |   |      |   |        |  
|                                                                |  |                                   
|Total revenue                                                   |  | $                                  | 42,820 |   |      | $ | 44,338 |  
|                                                                |  |                                    |        |   |      |   |        |  
|                                                                |  |                                   
|Gross profit %                                                  |  |                                    | 41.0   | % |      |   | 44.6   | %
|                                                                |  |                                    |        |   |      |   |        |  
|                                                                |  |                                   
|Operating income (loss) excluding depreciation and amortization |  | $                                  | 1,563  |   |      | $ | (460   | )
|Depreciation and amortization                                   |  |                                    | 2,664  |   |      |   | 3,461  |  
|                                                                |  |                                    |        |   |      |   |        |  
|                                                                |  |                                   
|Operating loss                                                  |  | $                                  | (1,101 | ) |      | $ | (3,921 | )
|                                                                |  |                                    |        |   |      |   |        |  
|                                                                |  |                                   
|Loss from continuing operations                                 |  | $                                  | (1,329 | ) |      | $ | (3,511 | )
|Loss from discontinued operations, net                          |  |                                    | (2,528 | ) |      |   | (306   | )
|                                                                |  |                                    |        |   |      |   |        |  
|                                                                |  |                                   
|Net loss                                                        |  | $                                  | (3,857 | ) |      | $ | (3,817 | )
|                                                                |  |                                    |        |   |      |   |        |  

Product Revenue and Gross Profit. Product revenue decreased $5.0 million,
or 20%, to $20.0 million in the third quarter of 2009 from $25.0 million in the third quarter of 2008. The decrease primarily resulted from reduced sales of products in our Detection segment as discussed below in Detection Segment 
Comparison of the Three Months Ended September 30, 2009 and 2008. Gross profit as a percentage of product revenue was 54.7% and 52.9% in the third quarters of 2009 and 2008, respectively. The increase in gross profit percentage was due to
product mix.

Contract Research and Development Revenue and Gross Profit. Contract research and development
revenue increased $6.2 million, or 70%, to $15.1 million in the third quarter of 2009 from $8.9 million in the third quarter of 2008. The increase was primarily due to a significant long-term contract award for the development of a nuclear and
chemical reconnaissance system in our Detection segment. Gross profit as a percentage of contract research and development revenue was 30.7% and 33.3% in the third quarters of 2009 and 2008, respectively. The reduction in gross profit is primarily
due to the mix of contract types and the estimates inherent in the recognition of revenue and costs under the percentage-of-completion method.

Service and Other Revenue and Gross Profit. Service and other revenue decreased $2.7 million, or 26%, to $7.8 million in the third quarter of 2009 from $10.5 million in the third quarter of 2008.
The majority of the decrease resulted from the delivery of custom platforms in our Surveillance segment under contracts that ended earlier this year. Gross profit as a percentage of service and other revenue was 26.1% and 34.1% in the third quarters
of 2009 and 2008, respectively. Gross profit decreased in the third quarter of 2009 primarily 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 $2.8 million, or 72%, to $1.1 million in the third quarter of 2009 from
$3.9 million in the third quarter of 2008. The decrease in operating loss primarily resulted from a reduction in operating expenses. The reduction in operating expenses resulted from reduced spending on internal research and development because more
of our technical resources were dedicated to externally funded contract research and development projects and reduced sales, marketing, and general and administrative expenses primarily from reductions in personnel as we continued to make progress
towards integrating our business units and eliminating redundancies in our operations. Operating income (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 income (loss) excluding depreciation and
amortization is a more meaningful measure of our recurring operations and an indicator of our working capital requirements. Operating income (loss) excluding depreciation and amortization increased $2.1 million, or 420%, to $1.6 million in the third
quarter of 2009 from a loss of $(0.5) million in the third quarter of 2008 due to reduced operating expenses as explained earlier in this section.



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Loss from Continuing Operations.Our loss from continuing operations decreased $2.2
million, or 63%, from $3.5 million loss in the third quarter of 2008 to a $1.3 million loss in the third quarter of 2009 primarily due to reduced operating expenses as explained under Operating Loss above.

Loss from Discontinued Operations. In the third quarter of 2009, our Board of Directors adopted a plan of sale and put the assets of
PureTech Systems, Inc. (PureTech), a unit in the Solutions segment, up for sale, as the business model of this unit no longer aligned with our strategic plans. We expect to complete the sale of PureTech in the fourth quarter of 2009. In connection
with this plan, we recognized a loss on discontinued operations of $2.5 million which included a goodwill impairment charge of $1.3 million, a $0.8 million impairment charge to write down PureTechs intangible assets and a $0.2 million
impairment charge to write down PureTechs long-lived assets.

Net Loss. Net loss increased $0.1 million, or
3%, to $3.9 million in the third quarter of 2009 from $3.8 million in the third quarter of 2008. The net loss for the third quarter of 2009 included $2.3 million in impairment charges in connection with the discontinued operations of PureTech.
Without the impact of discontinued operations, our net loss was reduced compared to the third quarter last year primarily because of a decrease in operating expenses as explained under Operating Loss above.

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, 2009 and 2008



|                                          |  |                                   |        |   |      |   |        |  
|----------------------------------------- |  | --------------------------------- | ------ | - | ---- | - | ------ | -
|                                          |  | Three Months EndedSeptember 30,   |       
|                                          |  | 2009                              |        |   | 2008 |  
|                                          |  | (dollars in thousands)(unaudited) |       
|Revenue and gross profit %                |  |                                   |        |   |      |   |        |  
|Product revenue                           |  | $                                 | 10,800 |   |      | $ | 16,716 |  
|Contract research and development revenue |  |                                   | 14,594 |   |      |   | 8,070  |  
|Service and other revenue                 |  |                                   | 795    |   |      |   | 633    |  
|                                          |  |                                   |        |   |      |   |        |  
|                                          |  |                                  
|Total revenue                             |  | $                                 | 26,189 |   |      | $ | 25,419 |  
|                                          |  |                                   |        |   |      |   |        |  
|                                          |  |                                  
|Gross profit %                            |  |                                   | 41.5   | % |      |   | 51.5   | %
|                                          |  |                                   |        |   |      |   |        |  
|                                          |  |                                  
|Operating loss                            |  | $                                 | (258   | ) |      | $ | (636   | )
|                                          |  |                                   |        |   |      |   |        |  

Product Revenue. Product revenue decreased $5.9 million, or 35%, to $10.8
million in the third quarter of 2009 from $16.7 million in the third quarter of 2008. The majority of the decrease resulted from fewer sales of our explosive and radiation detection products. We sell our detector products primarily to the federal
government, from which we have recently experienced a trend toward higher volume purchases on a less frequent basis. In 2008, purchases of detector products were lower in volume and occurred on a more frequent basis. We believe this trend has caused
quarterly variability in our detection product revenue, and we believe this trend might continue in the future. Additionally, the Department of Defense delayed the passage of their fiscal year 2010 budget during our third quarter, which we believe
resulted in fewer sales of our products during the third quarter. We believe that this delay could also lead to lower sales of our products in the fourth quarter.

Contract Research and Development Revenue. Contract research and development revenue in the third quarter of 2009 increased $6.5 million, or 80%, to $14.6 million in the third quarter of 2009
from $8.1 million in the third quarter of 2008. The increase is primarily due to continued progress on the development of a nuclear and chemical reconnaissance system from a significant contract that was awarded to us in the fourth quarter of 2008.
We also continue to see increased government spending on defense and security-related programs that are pertinent to our business.

Service and Other Revenue. Service and other revenue in the third quarter of 2009 increased $0.2 million, or 33%, to $0.8 million in the third quarter of 2009 from $0.6 million in the third quarter of 2008.



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##### Table of Contents

Gross Profit. Gross profit as a percentage of revenue decreased from 51.5% in the
third quarter of 2008 to 41.5% in the third quarter of 2009 primarily due to a higher percentage of revenue from contract research and development projects which carry lower gross margins than revenue from product sales.

Operating Loss. Operating loss decreased $0.3 million, or 50%, to $0.3 million in the third quarter of 2009 from $0.6 million in
the third quarter of 2008. A $2.6 million decrease in operating expenses was offset by a decrease in gross profit of $2.2 million over the comparable quarter. The decrease in gross profit is due to a higher percentage of revenue from contract
research and development projects which carry lower gross margins than revenue from product sales. The decrease in operating expenses resulted from reduced spending on internal research and development because more of our technical resources were
dedicated to externally funded contract research and development projects, and reduced sales and marketing expenses primarily from reductions in personnel as we continued to make progress towards integrating our business units and eliminating
redundancies in our operations.

Surveillance SegmentComparison of the Three Months Ended September 30, 2009 and
2008



|                                          |  |                                   |        |   |      |   |        |  
|----------------------------------------- |  | --------------------------------- | ------ | - | ---- | - | ------ | -
|                                          |  | Three Months EndedSeptember 30,   |       
|                                          |  | 2009                              |        |   | 2008 |  
|                                          |  | (dollars in thousands)(unaudited) |       
|Revenue and gross profit %                |  |                                   |        |   |      |   |        |  
|Product revenue                           |  | $                                 | 7,111  |   |      | $ | 6,523  |  
|Contract research and development revenue |  |                                   | 472    |   |      |   | 612    |  
|Service and other revenue                 |  |                                   | 1,662  |   |      |   | 5,536  |  
|                                          |  |                                   |        |   |      |   |        |  
|                                          |  |                                  
|Total revenue                             |  | $                                 | 9,245  |   |      | $ | 12,671 |  
|                                          |  |                                   |        |   |      |   |        |  
|                                          |  |                                  
|Gross profit %                            |  |                                   | 43.4   | % |      |   | 34.5   | %
|                                          |  |                                   |        |   |      |   |        |  
|                                          |  |                                  
|Operating loss                            |  | $                                 | (1,081 | ) |      | $ | (1,691 | )
|                                          |  |                                   |        |   |      |   |        |  

Product Revenue. Product revenue increased $0.6 million, or 9%, to $7.1
million in the third quarter of 2009 from $6.5 million in the third quarter of 2008. The increase is primarily due to increased sales of our imaging equipment and integrated platforms.

Contract Research and Development Revenue. Contract research and development revenue decreased $0.1 million, or 17%, to $0.5
million in the third quarter of 2009 from $0.6 million in the third quarter of 2008.

Service and Other
Revenue. Service and other revenue in the third quarter of 2009 decreased $3.8 million, or 69%, to $1.7 million in the third quarter of 2009 from $5.5 million in the third quarter of 2008. The decrease resulted from the delivery of
integrated platforms under custom development contacts that ended earlier this year.

Gross Profit. Gross profit as a
percentage of revenue was 43.4% and 34.5% in the third quarters of 2009 and 2008, respectively. The decrease in gross profit resulted from a higher percentage of revenue from product sales which carry higher gross margins than revenue from custom
development contracts.

Operating Loss. Operating loss decreased $0.6 million, or 35%, to $1.1 million in the
third quarter of 2009 from $1.7 million in the third quarter of 2008. The improvement primarily resulted from a $1.0 million decrease in operating expenses due to reductions in personnel as we continued to make progress towards integrating our
business units and eliminating redundancies in our operations.



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Solutions SegmentComparison of the Three Months Ended September 30, 2009 and
2008



|                                          |  |                                   |       |   |      |   |        |  
|----------------------------------------- |  | --------------------------------- | ----- | - | ---- | - | ------ | -
|                                          |  | Three Months EndedSeptember 30,   |      
|                                          |  | 2009                              |       |   | 2008 |  
|                                          |  | (dollars in thousands)(unaudited) |      
|Revenue and gross profit %                |  |                                   |       |   |      |   |        |  
|Product revenue                           |  | $                                 | 2,144 |   |      | $ | 1,743  |  
|Contract research and development revenue |  |                                   | 63    |   |      |   | 172    |  
|Service and other revenue                 |  |                                   | 5,537 |   |      |   | 4,333  |  
|                                          |  |                                   |       |   |      |   |        |  
|                                          |  |                                  
|Total revenue                             |  | $                                 | 7,744 |   |      | $ | 6,248  |  
|                                          |  |                                   |       |   |      |   |        |  
|                                          |  |                                  
|Gross profit %                            |  |                                   | 34.7  | % |      |   | 36.6   | %
|                                          |  |                                   |       |   |      |   |        |  
|                                          |  |                                  
|Operating income (loss)                   |  | $                                 | 427   |   |      | $ | (1,411 | )
|                                          |  |                                   |       |   |      |   |        |  

Product Revenue. Product revenue increased $0.4 million, or 24%, to $2.1
million in the third quarter of 2009 from $1.7 million in the third quarter of 2008 primarily due to increase sales of our security monitoring products and software.

Service and Other Revenue. Service and other revenue increased $1.2 million, or 28%, to $5.5 million in the third quarter of 2009 from $4.3 million in the third quarter of 2008. The increase was
primarily attributable to contracts for project management and the integration of technologies for intelligent transportation systems.

Gross Profit. Gross profit as a percentage of revenue was 34.7% and 36.6% in the third quarters of 2009 and 2008, respectively. Gross profit decreased because a greater proportion of our revenue in the third quarter of 2009 was
derived from lower margin project management, integration and installation services as compared to the third quarter of 2008 in which a greater proportion of our revenue was derived from higher margin contract engineering and design services.

Operating Income (Loss). Operating income increased $1.8 million, or 129%, to $0.4 million in the third quarter
of 2009 from a $1.4 million loss in the third quarter of 2008. The improvement in our operations resulted primarily from a $0.4 million increase in gross profit due to revenue growth, and a $1.4 million decrease in operating expenses primarily from
reductions in personnel as we continued to make progress towards integrating our business units and eliminating redundancies in our operations.

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 three months ended September 30, 2009 and
2008:



|                                                                                           |  |                                   |        |   |      |   |        |  
|------------------------------------------------------------------------------------------ |  | --------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                           |  | Three Months EndedSeptember 30,   |       
|                                                                                           |  | 2009                              |        |   | 2008 |  
|                                                                                           |  | (dollars in thousands)(unaudited) |       
|Reconciliation of segment operating losses to consolidated loss from continuing operations |  |                                   |        |   |      |   |        |  
|Segment operating losses                                                                   |  | $                                 | (912   | ) |      | $ | (3,738 | )
|Unallocated depreciation and amortization expenses                                         |  |                                   | (189   | ) |      |   | (183   | )
|Interest expense                                                                           |  |                                   | (24    | ) |      |   | (20    | )
|Interest income                                                                            |  |                                   | 36     |   |      |   | 191    |  
|Other nonoperating gains (losses), net                                                     |  |                                   | (276   | ) |      |   | 114    |  
|Income tax benefit                                                                         |  |                                   | 36     |   |      |   | 125    |  
|                                                                                           |  |                                   |        |   |      |   |        |  
|                                                                                           |  |                                  
|Consolidated loss from continuing operations                                               |  | $                                 | (1,329 | ) |      | $ | (3,511 | )
|                                                                                           |  |                                   |        |   |      |   |        |  



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##### Table of Contents

Results of OperationsComparison of the Nine Months Ended September 30, 2009
and 2008

The following table presents selected summarized consolidated financial information for the nine months ended
September 30, 2009 and 2008.



|                                                                |  |                                   |         |   |      |   |         |  
|--------------------------------------------------------------- |  | --------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                |  | Nine Months EndedSeptember 30,    |        
|                                                                |  | 2009                              |         |   | 2008 |  
|                                                                |  | (dollars in thousands)(unaudited) |        
|Product revenue                                                 |  | $                                 | 58,410  |   |      | $ | 68,546  |  
|Gross profit %                                                  |  |                                   | 52.1    | % |      |   | 52.1    | %
|Contract research and development revenue                       |  | $                                 | 39,041  |   |      | $ | 30,652  |  
|Gross profit %                                                  |  |                                   | 27.4    | % |      |   | 33.5    | %
|Service and other revenue                                       |  | $                                 | 37,750  |   |      | $ | 18,305  |  
|Gross profit %                                                  |  |                                   | 27.7    | % |      |   | 35.7    | %
|                                                                |  |                                   |         |   |      |   |         |  
|                                                                |  |                                  
|Total revenue                                                   |  | $                                 | 135,201 |   |      | $ | 117,503 |  
|                                                                |  |                                   |         |   |      |   |         |  
|                                                                |  |                                  
|Gross profit %                                                  |  |                                   | 38.2    | % |      |   | 44.7    | %
|                                                                |  |                                   |         |   |      |   |         |  
|                                                                |  |                                  
|Operating income (loss) excluding depreciation and amortization |  | $                                 | 2,874   |   |      | $ | (13,394 | )
|Depreciation and amortization                                   |  |                                   | 8,683   |   |      |   | 9,822   |  
|                                                                |  |                                   |         |   |      |   |         |  
|                                                                |  |                                  
|Operating loss                                                  |  | $                                 | (5,809  | ) |      | $ | (23,216 | )
|                                                                |  |                                   |         |   |      |   |         |  
|                                                                |  |                                  
|Loss from continuing operations                                 |  | $                                 | (5,835  | ) |      | $ | (22,738 | )
|Loss from discontinued operations, net                          |  |                                   | (2,768  | ) |      |   | (1,271  | )
|Loss on sale of discontinued operations, net                    |  |                                   |        |   |      |   | (903    | )
|                                                                |  |                                   |         |   |      |   |         |  
|                                                                |  |                                  
|Net loss                                                        |  | $                                 | (8,603  | ) |      | $ | (24,912 | )
|                                                                |  |                                   |         |   |      |   |         |  

Product Revenue and Gross Profit. Product revenue decreased $10.1
million, or 15%, to $58.4 million in the nine months ended September 30, 2009 from $68.5 million in the nine months ended September 30, 2008. The decrease primarily resulted from reduced sales of products in our Detection segment which was
partially offset by increased product sales in our Surveillance segment, as discussed below in Detection Segment  Comparison of the Nine Months Ended September 30, 2009 and 2008 and in Surveillance Segment 
Comparison of the Nine Months Ended September 30, 2009 and 2008. Gross profit as a percentage of product revenue was 52.1% in both the nine months ended September 30, 2009 and 2008.

Contract Research and Development Revenue and Gross Profit. Contract research and development revenue increased $8.3 million, or
27%, to $39.0 million in the nine months ended September 30, 2009 from $30.7 million in the nine months ended September 30, 2008. In our Detection segment, contract research and development revenue increased $14.2 million in the nine
months ended September 30, 2009 compared to the same period last year primarily due to a significant long-term contract award for the development of a nuclear and chemical reconnaissance system. The increased revenue from Detection was offset
by a $5.5 million reduction in contract research and development revenue in our Surveillance segment in the nine months ended September 30, 2009 compared to the same period in 2008. The decrease in Surveillance revenue resulted from the
delivery of prototype platforms under a contract that ended in 2008. Gross profit as a percentage of contract research and development revenue was 27.4% and 33.5% in the nine months ended September 30, 2009 and 2008, respectively. The reduction
in gross profit is primarily due to the mix of contract types and the estimates inherent in the recognition of revenue and costs under the percentage-of-completion method.

Service and Other Revenue and Gross Profit. Service and other revenue increased $19.5 million, or 107%, to $37.8 million in the nine
months ended September 30, 2009 from $18.3 million in the nine months ended September 30, 2008. Service and other revenue in our Solutions segment accounted for approximately $9.0 million of the increase, the majority of which was related
to performance under project management and integration contracts in connection with intelligent transportation systems and video networking and surveillance. In our Surveillance segment, service and other revenue accounted for approximately $9.9
million of the revenue increase, the majority of which relates to the delivery of custom platforms. Gross profit as a percentage of service and other revenue was 27.7% and 35.7% in the nine months ended September 30, 2009 and 2008,
respectively. Gross profit decreased in the nine months ended September 30, 2009 primarily due to the mix of contract types and the estimates inherent in recognizing revenue and costs under the percentage-of-completion method of accounting.



25



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##### Table of Contents

Operating Loss. Operating loss decreased $17.4 million, or 75%, to $5.8 million
in the nine months ended September 30, 2009 from $23.2 million in the nine months ended September 30, 2008. The decrease is primarily related to an $18.4 million decrease in operating expenses. The decrease in operating expenses resulted
from reduced spending on internal research and development because more of our technical resources were dedicated to externally funded contract research and development projects, and reduced sales and marketing expenses and general and
administrative expenses primarily from reductions in personnel as we continued to make progress towards integrating our business units and eliminating redundancies in our operations. Operating income (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 income (loss) excluding depreciation and amortization is a more meaningful measure of our recurring operations and an indicator of our working capital requirements. Operating income (loss) excluding
depreciation and amortization increased $16.3 million, or 122%, to $2.9 million in the nine months ended September 30, 2009 from a loss of $(13.4) million in the nine months ended September 30, 2008 due to reduced operating expenses as
explained earlier in this section.

Loss from Continuing Operations. Our loss from continuing operations decreased
$16.9 million, or 74%, to $5.8 million in the nine months ended September 30, 2009 from $22.7 million in the nine months ended September 30, 2008 primarily due to reduced operating expenses as explained in the Operating Loss
section above.

Loss from Discontinued Operations.In the third quarter of 2009, our Board of Directors adopted a plan
of sale and put the assets of PureTech Systems, Inc. (PureTech), a unit in the Solutions segment, up for sale, as the business model of this unit no longer aligned with our strategic plans. We expect to complete the sale of PureTech in the fourth
quarter of 2009. In connection with this plan, we recognized a loss on discontinued operations of $2.8 million which included a goodwill impairment charge of $1.3 million, a $0.8 million impairment charge to write down PureTechs intangible
assets and a $0.2 million impairment charge to write down PureTechs long-lived assets.

Net Loss. Net loss
decreased $16.3 million, or 65%, to $8.6 million in the nine months ended September 30, 2009 from $24.9 million in the nine months ended September 30, 2008 primarily due to reduced operating expenses as explained in the Operating
Loss section above.

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 Nine Months Ended September 30, 2009 and 2008



|                                          |  |                                   |        |   |      |   |        |  
|----------------------------------------- |  | --------------------------------- | ------ | - | ---- | - | ------ | -
|                                          |  | Nine Months EndedSeptember 30,    |       
|                                          |  | 2009                              |        |   | 2008 |  
|                                          |  | (dollars in thousands)(unaudited) |       
|Revenue and gross profit %                |  |                                   |        |   |      |   |        |  
|Product revenue                           |  | $                                 | 30,981 |   |      | $ | 43,277 |  
|Contract research and development revenue |  |                                   | 38,252 |   |      |   | 24,143 |  
|Service and other revenue                 |  |                                   | 2,477  |   |      |   | 1,429  |  
|                                          |  |                                   |        |   |      |   |        |  
|                                          |  |                                  
|Total revenue                             |  | $                                 | 71,710 |   |      | $ | 68,849 |  
|                                          |  |                                   |        |   |      |   |        |  
|                                          |  |                                  
|Gross profit %                            |  |                                   | 40.7   | % |      |   | 49.8   | %
|                                          |  |                                   |        |   |      |   |        |  
|                                          |  |                                  
|Operating loss                            |  | $                                 | (3,555 | ) |      | $ | (8,776 | )
|                                          |  |                                   |        |   |      |   |        |  

Product Revenue. Product revenue decreased $12.3 million, or 28%, to
$31.0 million in the nine months ended September 30, 2009 from $43.3 million in the nine months ended September 30, 2008. The decrease primarily resulted from fewer sales of our explosive detection and radiation products. We sell our
detector products primarily to the federal government, from which we have recently experienced a trend toward higher volume purchases on a less frequent basis. In 2008, purchases of detector products were lower in volume and occurred on a more
frequent basis. We believe this trend has caused quarterly variability in our detection product revenue, and we believe this trend might continue in the future. Additionally, the Department of Defense delayed the passage of their fiscal year 2010
budget during our third quarter, which we believe resulted in fewer sales of our products during the third quarter. We believe that this delay could also lead to lower sales of our products in the fourth quarter.



26



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##### Table of Contents

Contract Research and Development Revenue. Contract research and development
revenue in the nine months ended September 30, 2009 increased $14.2 million, or 59%, to $38.3 million in the nine months ended September 30, 2009 from $24.1 million in the nine months ended September 30, 2008. The increase is
primarily due to continued progress on the development of a nuclear and chemical reconnaissance system from a significant contract that was awarded to us in the fourth quarter of 2008. We also continue to see increased government spending on defense
and security-related programs that are pertinent to our business.

Service and Other Revenue. Service and other
revenue in the nine months ended September 30, 2009 increased $1.1 million, or 79%, to $2.5 million in the nine months ended September 30, 2009 from $1.4 million in the nine months ended September 30, 2008, primarily due to an
increase in contracts to provide training to customers.

Gross Profit. Gross profit as a percentage of revenue
decreased from 49.8% in the nine months ended September 30, 2008 to 40.7% in the nine months ended September 30, 2009 primarily due to a higher percentage of revenue from contract research and development projects which carry lower gross
margins than revenue from product sales.

Operating Loss. Operating loss decreased $5.2 million, or 59%, to $3.6
million in the nine months ended September 30, 2009 from $8.8 million in the nine months ended September 30, 2008. A decrease in operating expenses of $10.3 million was offset by a decrease in gross profit of $5.1 million over the
comparable period. The decrease in gross profit is due to a higher percentage of revenue from contract research and development projects which carry lower gross margins than revenue from product sales. The decrease in operating expenses resulted
from reduced spending on internal research and development because more of our technical resources were dedicated to externally funded contract research and development projects, and reduced sales and marketing expenses and general and
administrative expenses primarily from reductions in personnel as we continued to make progress towards integrating our business units and eliminating redundancies in our operations.

Surveillance SegmentComparison of the Nine Months Ended September 30, 2009 and 2008



|                                          |  |                                   |        |   |      |   |        |  
|----------------------------------------- |  | --------------------------------- | ------ | - | ---- | - | ------ | -
|                                          |  | Nine Months EndedSeptember 30,    |       
|                                          |  | 2009                              |        |   | 2008 |  
|                                          |  | (dollars in thousands)(unaudited) |       
|Revenue and gross profit %                |  |                                   |        |   |      |   |        |  
|Product revenue                           |  | $                                 | 21,638 |   |      | $ | 19,221 |  
|Contract research and development revenue |  |                                   | 789    |   |      |   | 6,303  |  
|Service and other revenue                 |  |                                   | 16,287 |   |      |   | 6,392  |  
|                                          |  |                                   |        |   |      |   |        |  
|                                          |  |                                  
|Total revenue                             |  | $                                 | 38,714 |   |      | $ | 31,916 |  
|                                          |  |                                   |        |   |      |   |        |  
|                                          |  |                                  
|Gross profit %                            |  |                                   | 36.4   | % |      |   | 37.4   | %
|                                          |  |                                   |        |   |      |   |        |  
|                                          |  |                                  
|Operating loss                            |  | $                                 | (2,315 | ) |      | $ | (8,269 | )
|                                          |  |                                   |        |   |      |   |        |  

Product Revenue. Product revenue increased $2.4 million, or 13%, to $21.6
million in the nine months ended September 30, 2009 from $19.2 million in the nine months ended September 30, 2008. The increase is primarily due to increased sales of our imaging equipment and integrated platform products.

Contract Research and Development Revenue. Contract research and development revenue decreased $5.5 million, or 87%, to $0.8
million in the nine months ended September 30, 2009 from $6.3 million in the nine months ended September 30, 2008 primarily due to the delivery of prototype platforms under a research and development contract that ended in the second
quarter of 2008.

Service and Other Revenue. Service and other revenue in the nine months ended September 30,
2009 increased $9.9 million, or 155%, to $16.3 million in the nine months ended September 30, 2009 from $6.4 million in the nine months ended September 30, 2008. The increase resulted from the delivery of platforms under custom development
contacts.

Gross Profit. Gross profit as a percentage of revenue was 36.4% and 37.4% in the nine months ended
September 30, 2009 and 2008, respectively. The decrease in gross profit resulted from a higher percentage of revenue from custom development projects which carry a lower gross profit than revenue from product sales.

Operating Loss. Operating loss decreased $6.0 million, or 72%, to $2.3 million in the nine months ended September 30, 2009
from $8.3 million in the nine months ended September 30, 2008. The improvement resulted from a $2.2 million increase in gross profit from revenue growth, and a $3.8 million decrease in operating expenses primarily from reductions in personnel
as we continued to make progress towards integrating our business units and eliminating redundancies in our operations.



27



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##### Table of Contents

Solutions SegmentComparison of the Nine Months Ended September 30, 2009 and
2008



|                                          |  |                                   |        |   |      |   |        |  
|----------------------------------------- |  | --------------------------------- | ------ | - | ---- | - | ------ | -
|                                          |  | Nine Months EndedSeptember 30,    |       
|                                          |  | 2009                              |        |   | 2008 |  
|                                          |  | (dollars in thousands)(unaudited) |       
|Revenue and gross profit %                |  |                                   |        |   |      |   |        |  
|Product revenue                           |  | $                                 | 5,912  |   |      | $ | 6,047  |  
|Contract research and development revenue |  |                                   | 219    |   |      |   | 206    |  
|Service and other revenue                 |  |                                   | 19,453 |   |      |   | 10,484 |  
|                                          |  |                                   |        |   |      |   |        |  
|                                          |  |                                  
|Total revenue                             |  | $                                 | 25,584 |   |      | $ | 16,737 |  
|                                          |  |                                   |        |   |      |   |        |  
|                                          |  |                                  
|Gross profit %                            |  |                                   | 32.6   | % |      |   | 37.7   | %
|                                          |  |                                   |        |   |      |   |        |  
|                                          |  |                                  
|Operating income (loss)                   |  | $                                 | 623    |   |      | $ | (5,684 | )
|                                          |  |                                   |        |   |      |   |        |  

Product Revenue. Product revenue decreased $0.1 million, or 2%, to $5.9
million in the nine months ended September 30, 2009 from $6.0 million in the nine months ended September 30, 2008.

Service and Other Revenue. Service and other revenue increased $9.0 million, or 86%, to $19.5 million in the nine months ended September 30, 2009 from $10.5 million in the nine months ended September 30, 2008. The increase
was primarily attributable to performance under contracts for project management and the integration of technologies for intelligent transportation systems.

Gross Profit. Gross profit as a percentage of revenue was 32.6% and 37.7% in the nine months ended September 30, 2009 and 2008, respectively. Gross profit decreased because a greater
proportion of our revenue in the first nine months of 2009 was derived from lower margin project management, integration and installation services as compared to the third quarter of 2008 in which a greater proportion of our revenue was derived from
higher margin contract engineering and design services.

Operating Income (Loss). Operating income (loss)
increased $6.3 million, or 111%, to $0.6 million in the nine months ended September 30, 2009 from a $5.7 million loss in the nine months ended September 30, 2008. The improved operating results were primarily the result of a $2.0 million
increase in gross profit due to revenue growth, and a $4.3 million decrease in operating expenses primarily from reductions in personnel as we continued to make progress towards integrating our business units and eliminating redundancies in our
operations.

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 nine months ended September 30, 2009 and 2008:



|                                                                                           |  |                                   |        |   |      |   |         |  
|------------------------------------------------------------------------------------------ |  | --------------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                           |  | Nine Months EndedSeptember 30,    |       
|                                                                                           |  | 2009                              |        |   | 2008 |  
|                                                                                           |  | (dollars in thousands)(unaudited) |       
|Reconciliation of segment operating losses to consolidated loss from continuing operations |  |                                   |        |   |      |   |         |  
|Segment operating losses                                                                   |  | $                                 | (5,247 | ) |      | $ | (22,729 | )
|Unallocated depreciation and amortization expenses                                         |  |                                   | (562   | ) |      |   | (486    | )
|Interest expense                                                                           |  |                                   | (78    | ) |      |   | (49     | )
|Interest income                                                                            |  |                                   | 127    |   |      |   | 867     |  
|Other nonoperating gains (losses), net                                                     |  |                                   | 125    |   |      |   | (266    | )
|Income tax expense                                                                         |  |                                   | (200   | ) |      |   | (75     | )
|                                                                                           |  |                                   |        |   |      |   |         |  
|                                                                                           |  |                                  
|Consolidated loss from continuing operations                                               |  | $                                 | (5,835 | ) |      | $ | (22,738 | )
|                                                                                           |  |                                   |        |   |      |   |         |  



28



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##### Table of Contents

Liquidity and Capital Resources

As of September 30, 2009, our principal sources of liquidity were cash and cash equivalents (including restricted cash) of $31.1 million
and accounts receivable of $31.7 million. 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, additional reductions in sales and marketing
expenses and general and administrative expenses, prioritizing internal research and development spending and increasing revenue through organic growth. Due to our continued focus on reducing operating expenses, our operating losses excluding
depreciation and amortization have been steadily decreasing, and we experienced positive operating income excluding depreciation and amortization of $1.6 million for each of the quarters ended September 30, 2009 and June 30, 2009, an
improvement of $2.0 million over the operating loss excluding depreciation and amortization of $0.4 million for the quarter ended March 31, 2009. At September 30, 2009, we had firm backlog of approximately $78 million and unfunded backlog
of approximately $338 million. 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 our initial public offering in November 2007, customer payments for our products and services, lines of credit and short term loans and proceeds from the sale of businesses. We were incorporated in 2003 and have primarily
grown our business organically and through a series of complementary acquisitions in 2005. Many of the acquired 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 into 2008, we increased our investment in
sales, marketing and other related business development structures 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 2008 and 2007 through the use of consultants and other professionals to complete certain accounting and legal functions.
Consequently, our cumulative net losses, which amounted to approximately $213.1 million at September 30, 2009, 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 acquisition agreements for 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.

The following table shows our cash and cash equivalents (including restricted cash) and working capital as of September 30, 2009 and December 31, 2008:



|                                                                              |  |                         |        |                        |   |       
|----------------------------------------------------------------------------- |  | ----------------------- | ------ | ---------------------- | - | ------
|                                                                              |  | As of September 30,2009 |        | As of December 31,2008
|                                                                              |  | (dollars in thousands) 
|                                                                              |  | (unaudited)             |        |                       
|Cash and cash equivalents                                                     |  | $                       | 31,125 |                        | $ | 38,782
|Working capital (excluding assets and liabilities of discontinued operations) |  |                         | 77,297 |                        |   | 76,324

The following table shows our cash flows from operating, investing and financing
activities for the nine months ended September 30, 2009 and 2008.



|                                                     |  |                                   |        |   |      |   |         |  
|---------------------------------------------------- |  | --------------------------------- | ------ | - | ---- | - | ------- | -
|                                                     |  | Nine Months EndedSeptember 30,    |       
|                                                     |  | 2009                              |        |   | 2008 |  
|                                                     |  | (dollars in thousands)(unaudited) |       
|Summary of cash flow:                                |  |                                   |        |   |      |   |         |  
|Cash flows used in operating activities              |  | $                                 | (4,412 | ) |      | $ | (9,666  | )
|Cash flows used in investing activities              |  |                                   | (3,767 | ) |      |   | (17,548 | )
|Cash flows used in financing activities              |  |                                   | (482   | ) |      |   | (95     | )
|Effect of foreign exchange rate on cash              |  |                                   | 976    |   |      |   | (7      | )
|                                                     |  |                                   |        |   |      |   |         |  
|                                                     |  |                                  
|Consolidated net change in cash and cash equivalents |  | $                                 | (7,685 | ) |      | $ | (27,316 | )
|                                                     |  |                                   |        |   |      |   |         |  

Cash Flows used in 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.



29



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##### Table of Contents

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 $5.3 million, or 55%, to $4.4 million for the nine months ended September 30, 2009 from $9.7 million in the nine months ended September 30, 2008 primarily due to a smaller loss from continuing
operations and a net decrease in operating assets and liabilities, including a reduction in cash used to purchase inventory in 2009 and an increase in cash provided by billing and collecting revenue as signified by a decrease in unbilled revenue in
2009 as compared to 2008. These increases were offset by additional cash used to prepay expenses, purchase other assets and reduce accounts payable in 2009. 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 and reducing sales and marketing costs by scaling back our plans to expand commercial sales channels.
Additionally, we are shifting the utilization of our technical resources from internal research and development to externally funded research and development contracts.

Cash Flows used in Investing Activities. Cash flows from investing activities primarily relate to business acquisitions and dispositions and capital expenditures. In the nine months ended
September 30, 2009, cash flows used in investing activities included $2.2 million of capital expenditures and $1.8 million of cash paid for a business combination that occurred in 2008. In the nine months ended September 30, 2008, cash
flows used in investing activities included $3.5 million of capital expenditures, $7.4 million of cash paid for business acquisitions and $8.4 million of cash that was restricted as to use in 2008, offset by $1.8 million of cash proceeds released
from escrow related to the sale of a company in 2007. Capital expenditures for the nine months ended September 30, 2009 and 2008 primarily pertain to the expansion of facilities and the acquisition of computer equipment and manufacturing and
lab equipment. Capital expenditures also included costs associated with the implementation of an enterprise software system throughout the company.

Cash Flows used in Financing Activities. Net debt issuances (repayments), in the nine months ended September 30, 2009 and 2008 were $0.1 million and $0.7 million, respectively.

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. A significant portion 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.

Revenue Recognition  Contract Research and Development and
Services. 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.

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  Service and Other. Service and other revenue is primarily derived from custom product design
and development services, sales of custom designed products and project management and technology 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. Under U.S. GAAP, 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.



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Goodwill and Identifiable Intangible Assets. 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, 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 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.

Customer
contractual relationships also constitute a significant portion of identifiable intangible assets recognized by us. 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, 2009, we had goodwill of $70.0 million and identifiable
intangible assets, net of accumulated amortization, of $11.7 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.
GAAP, goodwill is not amortized.



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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. U.S. GAAP 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 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 the following methods: discounted cash flow, similar transactions and guideline company. Indications of value from all three methods are used to derive the reporting
units ultimate fair value by calculating a weighted average value based on these three methods. Values resulting from the three methods are weighted based on factors and assumptions related to the inputs used in each of the methods, giving
more weight to inputs believed to be more reliable based on characteristics of the individual reporting units, market conditions and the current business environment. We receive and utilize quoted market prices in active markets to validate results
produced by these three methods, including aggregating the values of the reporting units and comparing this value to the market capitalization of the consolidated company. The discounted cash flow valuation approach 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.

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 goodwill impairment and a related non-cash impairment charge against earnings, if the estimated fair value for the reporting unit is less than the carrying value of
the net assets of the reporting unit, including its goodwill. During the quarter ended September 30, 2009, the Company recorded a goodwill impairment charge of $1.3 million associated with discontinued operations. There was no goodwill
impairment charge during the quarter ended September 30, 2008.

Stock-based Compensation. U.S. GAAP 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. Share-based awards granted or modified are
recognized in compensation expense over the applicable vesting period. We recognize this expense on a straight-line basis over the options expected terms.

During the nine months ended September 30, 2009 and 2008, we granted 1,260,653 and 98,250 stock options, respectively. During the nine months ended September 30, 2009 and 2008, we granted
211,996 and 514,726 shares, respectively, of restricted stock and restricted stock units 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.

We estimate the grant date fair value of stock option awards 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 $4.09
to $14.00. 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, 2009 and 2008, we recognized stock-based compensation expense of $1.0 million and
$1.4 million, respectively. For the nine months ended September 30, 2009 and 2008, we recognized stock-based compensation expense of $3.0 million and $4.5 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. We recognize compensation expense only for the portion of stock options that are expected to vest.



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As of September 30, 2009, our total unrecognized compensation expense related to
stock-based awards granted to employees and non-employee directors was approximately $3.4 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, 2009, we had net operating loss carryforwards available for U.S. federal and state income taxes of $108.1 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.

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. 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, 2009 and 2008, 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 three months ended September 30, 2009 and 2008, this translation adjustment, net of tax, was a gain of $0.8 million and a loss of $1.1 million, respectively. For the nine
months ended September 30, 2009 and 2008, this translation adjustment, net of tax, was a loss of $0.1 million and $0.4 million, respectively. We also maintain cash balances denominated in foreign currencies. At September 30, 2009, we had
$1.2 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 (including restricted cash) of $31.1 million at September 30,
2009. 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, 2009, 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, 2009, no amounts were outstanding under this line of credit. As such, changes in interest rates do not create material
exposure to our business. Increases in interest rates on any future outstanding balances, however, will increase interest expense.



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

Evaluation of
Disclosure Controls and Procedures

As of September 30, 2009, 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.

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 2009 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, 2008.

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. 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. Furthermore, a significant, sustained decline in our stock price
and market capitalization may result in impairment of certain of our intangible assets, including goodwill, and a significant charge to earnings in our financial statements during the period in which an impairment is determined to exist. Despite the
fact that our market cap has been lower than our book value at times throughout 2009, we do not believe this would require us to perform an interim or event-driven impairment analysis based on the duration and depth of the market decline. Due to the
ongoing uncertainty in market conditions, which may continue to negatively impact our market capitalization, we will continue to monitor and evaluate the carrying value of our goodwill. In the event we are required to reduce the carrying value of
our goodwill, any such impairment charge could materially reduce our results of operations.

If we do not successfully expand our direct
sales and service organizations and partnering arrangements, we may not be able to increase our sales or adequately support our customers

We sell substantially all of our services and license substantially all of our products through our direct sales organization. Our future success depends on attracting, assimilating and retaining a highly
trained direct sales force and entering into successful partnering arrangements, both domestically and internationally. Moreover, given the large-scale deployment required by some of our customers, we anticipate the need to hire and retain a number
of highly trained customer service and support personnel at such times as are necessary to support our customers requirements. Failure to add qualified sales and customer service representatives could result in our inability to increase sales
and support our customers.



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

Issuer Purchases of Equity Securities

During the period July 1, 2009
to September 30, 2009, we purchased the following shares:



|               |  |                                    |  |                            |      |                                                                              |     |                                                                             |    
|-------------- |  | ---------------------------------- |  | -------------------------- | ---- | ---------------------------------------------------------------------------- | --- | --------------------------------------------------------------------------- | ---
|Period         |  | Total Numberof SharesPurchased (1) |  | Average PricePaid perShare |      | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms |     | Maximum Number ofShares that May YetBe Purchased Underthe Plans or Programs
|July 1-31      |  | 3,814                              |  | $                          | 5.14 |                                                                              | N/A |                                                                             | N/A
|August 1-31    |  | 3,049                              |  | $                          | 4.89 |                                                                              | N/A |                                                                             | N/A
|September 1-30 |  | 2,125                              |  | $                          | 5.90 |                                                                              | 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our exchange offer to exchange outstanding options for new options expired just
before midnight on September 8, 2009. On that date, we granted an aggregate of 716,403 new stock options in exchange for the 1,684,138 stock options tendered in the exchange offer. For more information regarding the exchange offer, please see our
Schedule TO filed on August 11, 2009, as well as the five amendments thereto filed between August 24, 2009 and October 27, 2009.



|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
|------- | --------



|     |  |                                                                                                                                     
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------
|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**



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

|** | Furnished herewith
|-- | ------------------



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

Dated: November 16, 2009



ICX TECHNOLOGIES, INC.By:

/S/ COLIN J. CUMMINGColin J. CummingChief Executive Officer (Principal Executive Officer)By:

/S/ DEBORAH D.
MOSIERDeborah D. MosierChief Financial Officer (Principal Financial and Accounting Officer)




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INDEX TO EXHIBITS



|               |  |                                                                                                                                   
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | 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



37