**EXHIBIT 13**

 

**SELECTED CONSOLIDATED FINANCIAL DATA**
|                                                 |   | **For the  year ended  December 31,**    |   | **For the  year ended  December 31,** |   | **For the  two-month  period ended  December 31,** |   | **For the  years ended  October 31,** |   |
|------------------------------------------------------|--------|------------------------------------------|--------|---------------------------------------|--------|----------------------------------------------------|--------|---------------------------------------|--------|
|                                                 |   | **2001**                                 |   | **2000**                              |   | **1999**                                           |   | **1999**                              |   | **1998** |   | **1997** |   |
|                                                 |   | **(in thousands except per share data)** |   |
| **Statement of Income Data:**                        |   |                                     |   |                                  |   |                                               |   |                                  |   |   |   |   |   |
| Net sales:                                           |   |                                     |   |                                  |   |                                               |   |                                  |   |   |   |   |   |
| Digital Multimedia and Networking                    |   | 11,644                                   |   | 10,730                                |   | 1,348                                              |   | 12,444                                |   | 10,583 |   | 11,645 |   |
| Wireline Data Communications                         |   | 1,114                                    |   | 2,558                                 |   | 84                                                 |   | 17,446                                |   | 13,477 |   | 17,421 |   |
| Wireless Data Communications                         |   | 11,500                                   |   | 7,002                                 |   | 869                                                |   | 3,846                                 |   | 1,171 |   | — |   |
| Total net sales                                      |   | 24,258                                   |   | 20,290                                |   | 2,301                                              |   | 33,736                                |   | 25,231 |   | 29,066 |   |
| Cost of sales                                        |   | 14,546                                   |   | 12,020                                |   | 1,711                                              |   | 13,689                                |   | 11,335 |   | 13,476 |   |
| Amortization and depreciation                        |   | 267                                      |   | 270                                   |   | 35                                                 |   | 714                                   |   | 949 |   | 1,044 |   |
| Inventory write-downs                                |   | 191                                      |   | —                                |   | —                                             |   | —                                |   | 2,201 |   | — |   |
| Gross profit                                         |   | 9,254                                    |   | 8,000                                 |   | 555                                                |   | 19,333                                |   | 10,746 |   | 14,546 |   |
| Research and development expenses                    |   | 2,755                                    |   | 3,430                                 |   | 473                                                |   | 3,468                                 |   | 3,113 |   | 2,746 |   |
| Selling, general, administrative and other  expenses |   | 10,710                                   |   | 10,983                                |   | 2,247                                              |   | 16,002                                |   | 15,345 |   | 8,509 |   |
| Amortization and depreciation                        |   | 2,701                                    |   | 2,593                                 |   | 434                                                |   | 2,620                                 |   | 2,002 |   | 1,071 |   |
| Business restructuring charges                       |   | 418                                      |   | —                                |   | —                                             |   | —                                |   | 1,598 |   | — |   |
| Operating loss                                       |   | (7,330                                   | )      | (9,006                                | )      | (2,599                                             | )      | (2,757                                | )      | (11,312 | ) | 2,220 |   |
| Interest and other income, net                       |   | 934                                      |   | 1,900                                 |   | 100                                                |   | 404                                   |   | 1,074 |   | 2,488 |   |
| Gain on disposition of assets and business           |   | —                                   |   | —                                |   | 12,680                                             |   | —                                |   | — |   | — |   |
| Equity in net losses of affiliate                    |   | —                                   |   | —                                |   | —                                             |   | —                                |   | (422 | ) | — |   |
| Minority interest                                    |   | 3,139                                    |   | 3,146                                 |   | 591                                                |   | 2,418                                 |   | 736 |   | — |   |
| Earnings (loss) before income taxes                  |   | (3,257                                   | )      | (3,960                                | )      | 10,772                                             |   | 65                                    |   | (9,924 | ) | 4,708 |   |
| Income tax benefit (expense)                         |   | 115                                      |   | —                                |   | (861                                               | )      | (1,682                                | )      | (1,279 | ) | (1,112 | ) |
| Net earnings (loss)                                  |   | $                                        | (3,142 | )                                     | $      | (3,960                                             | )      | $                                     | 9,911  |   | $ | (1,617 | ) | $ | (11,203 | ) | $ | 3,596 |   |
| Earnings (loss) per share                            |   | $                                        | (0.32  | )                                     | $      | (0.40                                              | )      | $                                     | 0.96   |   | $ | (0.16 | ) | $ | (1.04 | ) | $ | 0.32 |   |
| Weighted average shares outstanding                  |   | 10,446                                   |   | 10,512                                |   | 10,343                                             |   | 10,378                                |   | 10,818 |   | 11,077 |   |
| Working capital                                      |   | $                                        | 11,332 |                                  | $      | 16,876                                             |   | $                                     | 24,812 |   | $ | 12,513 |   | $ | 17,806 |   | $ | 35,092 |   |
| Total assets                                         |   | $                                        | 42,974 |                                  | $      | 45,942                                             |   | $                                     | 56,405 |   | $ | 46,628 |   | $ | 54,406 |   | $ | 54,430 |   |
| Debt                                                 |   | $                                        | — |                                  | $      | —                                             |   | $                                     | — |   | $ | — |   | $ | 6,000 |   | $ | 4,500 |   |
| Shareholders’ equity                            |   | $                                        | 34,108 |                                  | $      | 36,902                                             |   | $                                     | 42,908 |   | $ | 30,021 |   | $ | 32,246 |   | $ | 45,264 |   |

 

See notes to consolidated financialstatements

- Note A - Summary of Significant Accounting Policies

- Note B - Investments and Divestitures

 

E-3

----

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**

**AND RESULTS OF OPERATIONS**

 

***Forward-Looking Statement***

 

*This document contains certain forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934.  These statements include, among other things, statementsregarding trends, strategies, plans, beliefs, intentions, expectations, goalsand opportunities.  Forward-lookingstatements are typically identified by words or phrases such as “believe,”“expect,” “anticipate,” “intend,” “estimate,” “assume,” “strategy,” “plan,”“outlook,” “outcome,” “continue,” “remain,” “trend,” and variations of suchwords and similar expressions, or future or conditional verbs such as “will,”“would,” “should,” “could,” “may,” or similar expressions.  All statements and information herein andincorporated by reference herein, other than statements of historical fact, areforward-looking statements that are based upon a number of assumptionsconcerning future conditions that ultimately may prove to be inaccurate.  Many phases of the Company’s operations aresubject to influences outside its control. The Company cautions that these forward-looking statements are subjectto numerous assumptions, risks and uncertainties, which change over time.  These forward-looking statements speak onlyas of the date of this Annual Report, and the Company assumes no duty to updateforward-looking statements.  Actualresults could differ materially from those anticipated in these forward-lookingstatements and future results could differ materially from historicalperformance.*

 

*Any one or any combination of factors could have a materialadverse effect on the Company’s results of operations or could cause actualresults to differ materially from forward-looking statements or historicalperformance.  These factors include: thepace of technological change; variations in quarterly operating results; delaysin the development, introduction and marketing of new wireless products andservices; customer acceptance of products and services; economic conditions;the inability to attain revenue and earnings growth; changes in interest rates;inflation; the introduction, withdrawal, success and timing of businessinitiatives and strategies; competitive conditions; the extent and timing of technologicalchanges; changes in customer spending; the loss of intellectual propertyprotection; general economic conditions and conditions affecting the capitalmarkets.  Actual events, developmentsand results could differ materially from those anticipated or projected in theforward-looking statements as a result of certain uncertainties set forth belowand elsewhere in this document. Subsequent written or oral statements attributable to the Company orpersons acting on its behalf are expressly qualified in their entirety by thecautionary statements in this report and those in the Company’s reportspreviously and subsequently filed with the Securities and Exchange Commission.*

 

**Overview**

 

Numerex Corp. (the “Company”) is a technology company comprised ofoperating subsidiaries that develop and market a wide range of communicationsproducts and services. The Company’s primary focus is wireless datacommunications utilizing proprietary network technologies. The Companyprimarily offers products and services in wireless data communications throughCellemetry® and Data1SourceTM, and digital multimedia networking through PowerPlayTM. These services enable customers around the globe to monitor and moveinformation for a variety of applications from home and business security todistance learning. In addition, the Company offers wireline alarm securityproducts and services, as well as telecommunications network operationalsupport systems.

 

The following is a discussion of the consolidated financial conditionand results of operations of the Company for the fiscal years ended December31, 2001 and 2000 and 2000 and 1999 and December 31, 2000 and October 31,1999.  This discussion should be read inconjunction with the Company’s consolidated financial statements, the relatednotes thereto, and other financial information included elsewhere in thisreport.

 

**Background**

 

The Company’s business began in July 1992 with the acquisition of theDerived Channel wireline business, including certain proprietary intellectualproperty rights, rights to Derived Channel technology and rights to market suchtechnology in certain countries, including the United Kingdom. The Companyexpanded its business primarily through the acquisition of complementarybusinesses, product lines, and proprietary technologies, including itsinvestment in Digilog and DCX Systems in 1994, Broadband and Uplink in 1997 andsubsequent investments in Uplink in 1998 and 2001.

 

In May 1998, the Company, BellSouth Wireless and BellSouth Corporationcompleted a transaction whereby Cellemetry, a joint venture between the Companyand BellSouth Wireless, was formed. Cellemetry is a Delaware limited liability company owned 60% by theCompany and 40% by BellSouth Wireless. The parties entered into an operating agreement (the “Operating Agreement”),which deals with, among other things, the conduct of the business ofCellemetry.  In addition, the OperatingAgreement provides certain restrictions as to distributions and the right totransfer ownership interests in Cellemetry. Cellemetry is taxed as a partnership for federal, state, and foreignincome tax purposes.

 

In November 1999, the Company and BellSouth Wireless completed therestructuring of the Cellemetry Operating Agreement. Under the terms of therestructuring, the Operating Agreement has been modified (“First Amendment tothe Operating

 

E-4

----

 

Agreement”) and the Cellemetry Business Planhas been modified, revised and extended through November 1, 2004, (“ModifiedBusiness Plan”).  All respective rightsunder the Operating Agreement that previously triggered on May 15, 2001, threeyears from the date of the formation of Cellemetry, have been revised totrigger on November 1, 2002, and all financial performance tests have beenamended to reflect the Modified Business Plan. In addition, the price at which the Company may, at its sole option,elect that BellSouth Wireless put its ownership interest in Cellemetry to theCompany has been revised and set at $17,000,000.

 

The restructuringalso permits Cellemetry to seek to find a strategic investor (“Third PartyInvestment”) to invest new capital

in exchange for up to 15%of Cellemetry.  In connection with anysuch Third Party Investment, the Company’s ownership interest in Cellemetrywill not be diluted below 51% and BellSouth Wireless’s will not be dilutedbelow 34%.

 

Under the First Amendment tothe Operating Agreement the Company, from and including May 15, 1999, is nolonger under an obligation to make any additional capital contributions to Cellemetry.  The Company committed to provide up to$5,500,000 in interest bearing debt financing to Cellemetry. As of December 31,2001, the Company has provided total interest bearing debt-financing amountingto $15,023,000.

 

Also, under the FirstAmendment to the Operating Agreement the Company conveyed Uplink toCellemetry.  In addition, the Companyissued to BellSouth Wireless 30,000 Shares of Series A Convertible RedeemablePreferred Stock of the Company (“Preferred Stock”).  The Preferred Stock is redeemable, at the Company’s option,commencing November 1, 2000, on the basis of a pre-set annual redemption priceper share.  Also, the Preferred Stock,at BellSouth Wireless’s option, commencing November 1, 2003, or November 1,2002, should the Company’s common stock exceed a pre-set market price for agiven period of time, is convertible into 625,000 shares of common stock of theCompany, approximately 6% of the Company’s common stock.  The Preferred Stock carries certainregistration rights for the common stock upon such conversion.

 

Also in November 1999, the Company sold the entire stock of its whollyowned subsidiary, Bronze base Limited (“Bronze base”) to BritishTelecommunications plc (“BT”). Bronzebase is an English limited liability company, which owns all ofthe stock of Versus Technology Limited (“Versus Technology”).

 

**Other**

 

The Company generatessubstantially all of its net sales from the sale of equipment, systems andsoftware products and recurring network service revenues to its customers.  Products are typically shipped soon afterorder placement.  Therefore, sales orderbacklog historically has not been a meaningful indicator for the Company.

 

TheCompany’s financial results may fluctuate from quarter to quarter as a resultof factors, including the timing of product shipments, new productintroductions and equipment, product and system sales that historically havebeen of a non-recurring nature.

 

**CriticalAccounting Policies**

** **

FinancialReporting Release No. 60, which was recently released by the Securities andExchange Commission, requires all companies to include a discussion of criticalaccounting policies or methods used in the preparation of financial statements.Note A of the Notes to the Consolidated Financial Statements includes a summaryof the significant accounting policies and methods used in the preparation ofNumerex’s Consolidated Financial Statements. The following is a briefdiscussion of the more significant accounting policies and methods used. Inaddition, Financial Reporting Release No. 61 was recently released by the SECto require all companies to include a discussion to address, among otherthings, liquidity, off-balance sheet arrangements, contractual obligations andcommercial commitments.

 

**General**

 

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the dates of the financial statementsand the reported amounts of revenues and expenses during the reporting periods.The most significant estimates and assumptions relate to revenue recognition,accounts receivable and allowance for doubtful accounts, inventories and theadequacy of reserves for excess and obsolete inventories, accounting for incometaxes and valuation of goodwill and other intangible assets. Actual amountscould differ significantly from these estimates.

 

 

E-5

----

 

**Revenue Recognition**

 

The Company’s revenue isgenerated from three sources:

•    the supply of product, under non recurringagreements,

•    the provision of services, under nonrecurring agreements, and,

•    the provision of data transportation services,under recurring or multi-year contractually based agreements.

 

Revenue is recognized whenpersuasive evidence of an agreement exists, the product or service has beendelivered, fees and prices are fixed and determinable, collectibility isprobable and when all other significant obligations have been fulfilled.

 

TheCompany recognizes revenue from product sales at the time of shipment andpassage of title. The Company offers customers the right to return productsthat do not function properly within a limited time after delivery. The Companycontinuously monitors and tracks such product returns and records a provisionfor the estimated amount of such future returns, based on historical experienceand any notification received of pending returns. While such returns havehistorically been within expectations and the provisions established, theCompany cannot guarantee that it will continue to experience the same returnrates that it has experienced in the past. Any significant increase in productfailure rates and the resulting credit returns could have a material adverseimpact on operating results for the period or periods in which such returnsmaterialize.

 

The Company recognizesrevenue from the provision of services at the time of the completion, deliveryor performance of the service. In the case of revenue derived from maintenanceservices the Company recognizes revenue ratably over the contract term. Incertain instances the Company may under an appropriate agreement advance chargefor the service to be provided. In these instances the Company recognizes theadvance charge as deferred revenue (classified as a liability) and releases therevenue ratably over future periods in accordance with the contract term as theservice is completed, delivered or performed.

 

The Company also recognizesrevenue from the provision of ‘multiple element service agreements’, whichinvolve both the supply of product and the provision of services over amulti-year arrangement.

 

Accountingprinciples for agreements involving multiple elements require the Company toallocate earned revenue to each element based on the relative fair value of theelements. The arrangement fee for multiple-element arrangements is allocated toeach element, such as design, product supply, product integration,installation, maintenance, support and warranty services, based on the relativefair values of the elements. The Company determines the fair value of eachelement in multi-element arrangements based on vendor-specific objectiveevidence (“VSOE”). VSOE for each element is based on the price charged when thesame element is sold separately or could be purchased from an unrelatedsupplier. If evidence of fair value of all delivered elements exists butevidence does not exist for one or more undelivered elements, then revenue isrecognized using the residual method. Under the residual method, the fair valueof the undelivered element is deferred and is recognized ratably over thecontract term on an earned basis. In the case of the supply of product theCompany maintains title to the product and transfers title at the completion ofthe contract term.

 

TheCompany’s arrangements do not generally include acceptance clauses. However,arrangements involving multiple element service agreements include certainmilestones and levels of certification, acceptance occurs upon the Company’scertification of its completion of each of the various elements.

 

The Company recognizesrevenue from the provision of its data transportation services when the Companyperforms the services or processes transactions in accordance with contractualperformance standards. Revenue is earned monthly on the basis of the contractedmonthly fee and an excess message fee charge, should it apply, that is volumebased.  In certain instances the Companymay under an appropriate agreement advance charge for the data transportservice to be provided. In these instances the Company recognizes the advancecharge (even if nonrefundable) as deferred revenue (classified as a liability)and releases the revenue over future periods in accordance with the contractterm as the data transport service is delivered or performed.

 

**Accounts Receivable and Allowance ForDoubtful Accounts**

 

TheCompany’s estimate for its allowance for doubtful accounts related to tradereceivables is based on two methods. The amounts calculated from each of thesemethods are combined to determine the total amount reserved.

 

•      first, the Company evaluates specificaccounts where information exists that the customer may have an inability tomeet its financial obligations (bankruptcy, etc.). In these cases, the Companyuses its judgment, based on the best available facts and circumstances, andrecords a specific reserve for that customer against amounts due to reduce thereceivable to the amount that is expected to be collected. These specificreserves are reevaluated and adjusted as additional information is receivedthat impacts the amount reserved; and,

 

•      second, a general reserve is establishedfor all customers based on a range of percentages applied to aging categories.

 

E-6

----

 

These percentages are based on historical collection and write-offexperience. If circumstances change (i.e. higher than expected defaults or anunexpected material adverse change in a major customer’s ability to meet itsfinancial obligation to the Company), the Company’s estimates of therecoverability of amounts due the Company could be reduced by a materialamount. 

 

TheCompany recognizes that material differences may result in the amount andtiming of expenses for any period if the Company made different judgments orutilized different estimates. The Company’s allowance for doubtful accountsamounted to $534,000, as of December 31, 2001.

 

**Inventoriesand Reserves For Excess, Slow-Moving and Obsolete Inventory**

 

TheCompany values inventory at the lower of cost or market, which equates to netrealizable value. The Company continually evaluates the composition of itsinventory and identifies, with estimates, potential future excess, obsolete andslow-moving inventories. The Company specifically identifies obsolete productsfor reserve purposes and analyzes historical usage, forecasted production basedon demand forecasts, current economic trends, and historical write-offs whenevaluating the adequacy of the reserve for excess and slow-moving inventory. Ifthe Company is not able to achieve its expectations of the net realizable valueof the inventory at its current value, the Company would adjust its reservesaccordingly.

 

Materialdifferences in estimates of excess, slow-moving and obsolete inventory mayresult in the amount and timing of cost of sales for any period if the Companymade different judgments or utilized different estimates. The Company’s reservefor excess, slow-moving and obsolete inventory amounted to $931,000, as ofDecember 31, 2001. 

 

**Valuationof Goodwill and Other Intangible Assets**

 

TheCompany assesses the impairment of goodwill and identifiable intangible assetswhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable. Factors considered important which could trigger animpairment review include the following:

 

•          significant underperformancerelative to expected historical or projected future operating results;

•          significant changes in themanner of use of the acquired assets or the strategy for the overall      business; and,

•          significant negativeindustry or economic trends.

 

Whendetermined that the carrying value of goodwill and other intangible assets maynot be recoverable based upon the existence of one or more of the aboveindicators of impairment, the Company measures any impairment based on aprojected discounted cash flow method using a discount rate determined bymanagement to be commensurate with the risk inherent in the Company’s currentbusiness model. Net goodwill and other intangible assets amounted to$20,205,000 as of December 31, 2001.

 

In 2002, SFAS No. 142,Goodwill and Other Intangible Assets became effective and as a result, theCompany will cease to amortize $10,983,000 of goodwill. The Company hadrecorded $733,000 of amortization on these amounts during 2001 and would haverecorded approximately $768,000 of amortization during 2002. In lieu ofamortization, the Company is required to perform an initial impairment reviewof goodwill in 2002 and an annual impairment review thereafter. Currently theCompany does not expect to record an impairment charge upon completion of theinitial impairment review. However, there can be no assurance that at the timethe review is completed a material impairment charge will not be recorded.

 

Theabove listing is not intended to be a comprehensive list of all of Numerex’saccounting policies. In many cases, the accounting treatment of a particulartransaction is specifically dictated by generally accepted accountingprinciples, with no need for management’s judgment in their application. Thereare also areas in which management’s judgment in selecting any availablealternative would not produce a materially different result. See the Company’saudited consolidated financial statements and notes thereto which begin on pageF-1 of this Annual Report on Form 10-K which contain accounting policies andother disclosures required by generally accepted accounting principles.

** **

**Fiscal Year End**

 

The Company on April 28,2000 determined that it would change its fiscal year end from a fiscal yearending on October 31 to a calendar fiscal year ending on December 31. Thetransition period under applicable Securities and Exchange Commissionregulations is the two-month period November 1, 1999, to December 31, 1999.

 

E-7

----

 

**SELECTED CONSOLIDATED STATEMENTS OFOPERATION**

 

**DIRECT AND PRO-FORMA COMPARISON**

 
|                                                 |   | **For the  year ended  December 31,  2001** |   | **For the  year ended  December 31,  2000** |   | **For the  year ended  December 31,  1999(1)** |   | **Pro-forma  for the  year ended  December 31,  1999(2)** |   |
|------------------------------------------------------|--------|---------------------------------------------|--------|---------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------------------|--------|
|                                                 |   | **(in thousands except per share data)**    |   |
| **Statement of Income Data:**                        |   |                                        |   |                                        |   |                                           |   |                                                      |   |
| Net sales:                                           |   |                                        |   |                                        |   |                                           |   |                                                      |   |
| Digital Multimedia and Networking                    |   | 11,644                                      |   | 10,730                                      |   | 12,769                                         |   | 12,769                                                    |   |
| Wireline Data Communications                         |   | 1,114                                       |   | 2,558                                       |   | 15,926                                         |   | 3,555                                                     |   |
| Wireless Data Communications                         |   | 11,500                                      |   | 7,002                                       |   | 4,199                                          |   | 4,199                                                     |   |
| Total net sales                                      |   | 24,258                                      |   | 20,290                                      |   | 32,894                                         |   | 20,523                                                    |   |
| Cost of sales                                        |   | 14,546                                      |   | 12,020                                      |   | 16,172                                         |   | 12,803                                                    |   |
| Depreciation and amortization                        |   | 267                                         |   | 270                                         |   | 557                                            |   | 168                                                       |   |
| Inventory write-downs                                |   | 191                                         |   | —                                      |   | —                                         |   | —                                                    |   |
| Gross profit                                         |   | 9,254                                       |   | 8,000                                       |   | 16,165                                         |   | 7,552                                                     |   |
| Research and development expenses                    |   | 2,755                                       |   | 3,430                                       |   | 3,582                                          |   | 3,122                                                     |   |
| Selling, general, administrative and other  expenses |   | 10,710                                      |   | 10,983                                      |   | 13,442                                         |   | 10,906                                                    |   |
| Depreciation and amortization                        |   | 2,701                                       |   | 2,593                                       |   | 2,701                                          |   | 2,308                                                     |   |
| Business restructuring charges                       |   | 418                                         |   | —                                      |   | —                                         |   | —                                                    |   |
| Operating loss                                       |   | (7,330                                      | )      | (9,006                                      | )      | (3,560                                         | )      | (8,784                                                    | )      |
| Interest and other income, net                       |   | 934                                         |   | 1,900                                       |   | 462                                            |   | 413                                                       |   |
| Gain on disposition of assets and business           |   | —                                      |   | —                                      |   | 12,680                                         |   | —                                                    |   |
| Minority interest                                    |   | 3,139                                       |   | 3,146                                       |   | 2,633                                          |   | 2,633                                                     |   |
| Earnings (loss) before income taxes                  |   | (3,257                                      | )      | (3,960                                      | )      | 12,215                                         |   | (5,738                                                    | )      |
| Income tax benefit (expense)                         |   | 115                                         |   | —                                      |   | (2,429                                         | )      | —                                                    |   |
| Net earnings (loss)                                  |   | $                                           | (3,142 | )                                           | $      | (3,960                                         | )      | $                                                         | 9,786  |   | (5,738 | ) |
| Basic earnings (loss) per share                      |   | $                                           | (0.32  | )                                           | $      | (0.40                                          | )      | $                                                         | 0.95   |   | (0.55 | ) |
| Weighted average shares outstanding                  |   | 10,446                                      |   | 10,512                                      |   | 10,345                                         |   | 10,345                                                    |   |

 

----

(1) The Selected Consolidated Statements of Operation ‘For the yearended December 31, 1999’ is presented inclusive of the impact of (i) thedisposition of assets and business, net of income tax, relating to theCompany’s Wireline Data Communications (Derived Channel) and, (ii) operations relating to certain of theCompany’s Wireline Data Communications (Derived Channel), in all periodspresented.

 

(2) The Selected Consolidated Statements of Operation ‘Pro-forma forthe year ended December 31, 1999’ is presented exclusive of the impact of (i)the disposition of assets and business, net of income tax, relating to theCompany’s Wireline Data Communications (Derived Channel) and, (ii) operationsrelating to certain of the Company’s Wireline Data Communications (DerivedChannel), in all periods presented.

 

E-8

----

 

**Result ofOperations**

 

The following table setsforth, for the periods indicated, the percentage of net sales represented byselected items in the Company’s Consolidated Statements of Operations.

 
|                                                 |   | **For the  year ended  December 31,  2001** |   | **For the  year ended  December 31, 2000** |   | **For the  two-month  period ended December 31, 1999** |   | **For the  year ended  October 31, 1999** |   |
|------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------------------|--------|-------------------------------------------|--------|
| Net sales:                                           |   |                                        |   |                                       |   |                                                   |   |                                      |   |
| Digital Multimedia and Networking                    |   | 48.0                                        | %      | 52.9                                       | %      | 58.6                                                   | %      | 36.9                                      | %      |
| Wireless Data Communications                         |   | 4.6                                         | %      | 12.6                                       | %      | 3.6                                                    | %      | 51.7                                      | %      |
| Wireless Data Communications                         |   | 47.4                                        | %      | 34.5%                                      | %      | 37.8                                                   | %      | 11.4                                      | %      |
| Total net sales                                      |   | 100.0                                       | %      | 100.0                                      | %      | 100.0                                                  | %      | 100.0                                     | %      |
|                                                 |   |                                        |   |                                       |   |                                                   |   |                                      |   |
| Cost of sales                                        |   | 60.0                                        | %      | 59.3                                       | %      | 74.4                                                   | %      | 40.6                                      | %      |
| Depreciation and  amortization                       |   | 1.1                                         | %      | 1.3                                        | %      | 1.5                                                    | %      | 2.1                                       | %      |
| Inventory write-downs                                |   | 0.8                                         | %      | 0.0                                        | %      | 0.0                                                    | %      | 0.0                                       | %      |
| Gross profit                                         |   | 38.1                                        | %      | 39.4                                       | %      | 24.1                                                   | %      | 57.3                                      | %      |
|                                                 |   |                                        |   |                                       |   |                                                   |   |                                      |   |
| Research and development expenses                    |   | 11.4                                        | %      | 16.9                                       | %      | 20.6                                                   | %      | 10.3                                      | %      |
| Selling, general,  administrative and other expenses |   | 44.1                                        | %      | 54.1                                       | %      | 97.6                                                   | %      | 47.4                                      | %      |
| Depreciation and  amortization                       |   | 11.1                                        | %      | 12.8                                       | %      | 18.9                                                   | %      | 7.8                                       | %      |
| Special charges                                      |   | 1.7                                         | %      | 0.0                                        | %      | 0.0                                                    | %      | 0.0                                       | %      |
| Operating loss                                       |   | (30.2                                       | )%     | (44.4                                      | )%     | (113.0                                                 | )%     | (8.2                                      | )%     |
|                                                 |   |                                        |   |                                       |   |                                                   |   |                                      |   |
| Gain on  disposition of assets and business          |   | 0.0                                         | %      | 0.0                                        | %      | 551.1                                                  | %      | 0.0                                       | %      |
| Net earnings (loss)                                  |   | (13.0                                       | )%     | (19.5                                      | )%     | 430.7                                                  | )%     | (4.8                                      | )%     |

 

----

See notes to consolidated financialstatements

-Note A - Summary of Significant Accounting Policies

-Note B - Investments and Divestitures

 

**FiscalYears Ended December 31, 2001 and December 31, 2000.**

 

Netsales increased 19.6% to $24,258,000 for the year ended December 31, 2000, ascompared to $20,290,000 for the year ended December 31, 1999.

 

The19.6% increase in net sales in fiscal 2001 as compared to fiscal 2000 embodiesan increase of 16.4% in product sales revenues predominantly derived fromincreased sales from Wireless Data Communications and, to a lesser extent,Digital Multimedia offset by a decrease in Wireline Data Communications (DerivedChannel) product sales revenues and an increase of 28.0% in service revenuespredominantly derived from increased service revenues from Wireless DataCommunications offset by a decrease in Networking service revenues.

 

DigitalMultimedia and Networking product and service sales and revenues increased 8.5%to $11,644,000 for the year ended December 31, 2001, as compared to $10,730,000for the year ended December 31, 2000.

 

Theprincipal reason for the increase in product and service sales and revenues infiscal 2001 as compared to fiscal 2000 was a 19.3% increase in DigitalMultimedia product and service sales and revenues resulting from the transitionto the marketing and sale of the digital hardware and software based productplatform, Power PlayTM. In addition, product and service sales and revenues

 

E-9

----

 

from Digital Multimedia werealso positively impacted by continued growth in network or data solutionproduct sales and related services. Networking product and service sales andrevenues decreased 7.7% resulting from a reduction in sales activity from thetelecommunications industry.

 

WirelineData Communications (Derived Channel) product and service sales and revenuesdecreased 56.5% to $1,114,000 for the year ended December 31, 2001, as comparedto $2,558,000 for the year ended December 31,2000.

 

The principal reason for thedecrease in sales in fiscal 2001 as compared to fiscal 2000 was the ongoingdecline in Wireline Data Communications (Derived Channel) sales activityresulting from the divestment of the Company’s Derived Channel technology inNovember 1999 and the resulting de-emphasis on the sale and marketing ofDerived Channel technology. One-time product and service contract sales andrevenues generated from Australia in the three-month period ended March 31,2000, impacted on the fiscal year comparison. Excluding the Australian one-timeproduct and services contract sales and revenues, Wireline Data Communications(Derived Channel) product and service sales and revenues decreased 22.5%.

 

WirelessData Communications product and service sales and revenues increased 64.2% to$11,500,000 for the year ended December 31, 2001, as compared to $7,002,000 forthe year ended December 31, 2000.

 

Theprincipal reason for the increase in product and service sales and revenues infiscal 2001 as compared to fiscal 2000 was the continued growth in productsales, driven by the Company’s Circuit WatchTM, Fast Track Wireless SolutionsTMand UplinkTM product offerings and service revenues, driven by the Company’sCellemetry®, Data1SourceTM, Fast Track Wireless SolutionsTM andUplinkTM service offerings, resulting from the marketing and sales effort toestablish the Company as a recognized national and international wireless datacommunications service provider.

 

Costof sales increased 21.0% to $14,546,000 for the year ended December 31, 2001,as compared to $12,020,000 for the for the year ended December 31, 2000.

 

Theprincipal reason for the increase in cost of sales in fiscal 2001 as comparedto fiscal 2000 resulted from the combined impact of the Company’s increasedlevel of sales activity and in particular the increased levels of product salesfrom Digital Multimedia and Wireless Data Communications offset, to an extent,by the decrease in Networking and Wireline Data Communications (DerivedChannel) product sales activity, particularly the one-time product and servicecontract sales and revenues generated from Australia in the three-month periodended March 31, 2000.

 

Costof sales depreciation and amortization decreased 1.1% to $267,000 for the yearended December 31, 2001, as compared to $270,000 for the for the year endedDecember 31, 2000.

 

Inventorywrite-downs amounted to $191,000 for the year ended December 31, 2001, andrepresented a one-time non-cash charge to cover the write-down of excess andobsolete Digital Multimedia analog product inventory.

 

Grossprofit as a percentage of net sales decreased to 38.2% for the year endedDecember 31, 2001, as compared to 39.4% for the year ended December 31, 2000.

 

The principal reason for thedecrease in gross profit in fiscal 2001 as compared to fiscal 2000 was thecombined impact of the one-time product and service contract sales and revenuesgenerated from Australia in the three-month period ended March 31, 2000, andthe one-time non-cash charge to cover the write-down of excess and obsoleteDigital Multimedia analog product inventory offset, to a lesser extent, by thegross profit earned on the increased levels of product sales from DigitalMultimedia and Wireless Data Communications. Excluding the impact of theone-time product and service contract sales and revenues generated fromAustralia in the three-month period ended March 31, 2000, and the one-timeinventory write-down gross margin increased to 38.9% in fiscal 2001 as comparedto 35.9% in fiscal 2000.

 

Researchand development expenses decreased 19.7% to $2,755,000 for the year endedDecember 31, 2001, as compared to $3,430,000 for the year ended December 31,2000.

 

Theprincipal reason for the decrease in research and development expenses infiscal 2001 as compared to fiscal 2000 resulted primarily from decreasedDigital Multimedia and Wireless Data Communications expenditures following thecompletion of a number of projects.

 

Selling,general, administrative and other expenses decreased 2.5% to $10,710,000 forthe year ended December 31, 2001, as

 

E-10

----

 

compared to $10,983,000 forthe year ended December 31, 2000.

 

Theprincipal reason for the decrease in selling, general, administrative and otherexpenses in fiscal 2001 as compared to the fiscal 2000 resulted from an overalldecrease in administration, management and organizational expenses and salesand marketing activity and expenditures.

 

Operatingexpense depreciation and amortization increased 4.2% to $2,701,000 for the yearended December 31, 2001, as compared to $2,593,000 for the year ended December31, 2000.

 

Theincrease in operating expense depreciation and amortization in fiscal 2001 ascompared to fiscal 2000 resulted primarily from increased fixed assetadditions.

 

Business restructuringcharges amounted to $418,000 for the year to December 31, 2001, and representedcharges incurred to cover employee separation costs.

 

Interestand other income decreased 50.8% to $934,000 for the year ended December 31,2001, as compared to $1,900,000 for the year ended December 31, 2000.

 

Thedecrease in interest and other income in fiscal 2001 as compared to fiscal 2000is primarily related to decreased interest income earned on cash balances andthe impact in fiscal 2000 of the release of funds held in escrow and an overprovision for federal and state taxes in connection with the divestment of theCompany’s Derived Channel technology.

 

Minorityinterest decreased 0.2% to $3,139,000 for the year ended December 31, 2001, ascompared to $3,146,000 for the year ended December 31, 2000. The gainrepresents that portion of the losses of the Company’s Wireless DataCommunications business that is not accounted for by the Company.

 

TheCompany, due to its loss position from operations, did not record a taxprovision for the years ended December 31, 2001, and 2000, respectively.However, the Company has recorded the recovery of income tax amounting to$115,000 following the completion and submittal of the Company’s federal incometax returns in connection with an assessed over payment of federal income taxinstallments in connection with the sale of the Company’s Derived Channel technology.

 

TheCompany recorded a net loss of $3,142,000 for the year ended December 31, 2001,as compared to a net loss of $3,960,000 for the year ended December 31, 2000.

 

Theprincipal reason for the decrease in the net loss for fiscal 2001 as compared to2000 was the increase in product and service sales and revenues and associatedunderlying gross profit and the decrease in operating expenses.

 

Theweighted average and diluted shares outstanding decreased to 10,446,177 for theyear ended December 31, 2001, as compared to weighted average and dilutedshares outstanding of 10,512,391 for the year ended December 31, 2000.

 

**Fiscal Years Ended December 31, 2000 and October 31,1999.**

 

Net sales decreased 39.9% to$20,290,000 for the year ended December 31, 2000, as compared to $33,736,000for the year ended October 31, 1999.

 

Digital Multimediaand Networking product and service sales and revenues decreased 13.8% to$10,730,000 for the year ended December 31, 2000, as compared to $12,444,000for the year ended October 31, 1999.

 

Theprincipal reason for the decrease in sales in fiscal 2000 as compared to fiscal1999 was a 30.9% decrease in Digital Multimedia product sales resulting fromthe transition from the marketing and sale of analog based product to the marketingand sale of the new digital hardware and software based product platform, PowerPlayTM.

 

Thedecrease in sales was partially offset by a 37.1% increase in Networkingproduct and service sales resulting from growth in its core businessactivities.

 

WirelineData Communications (Derived Channel) product and service sales and revenuesdecreased 85.3% to $2,558,000 for the year ended December 31, 2000, as comparedto $17,446,000 for the year ended October 31, 1999.

 

E-11

----

 

Theprincipal reason for the decrease in sales in fiscal 2000 as compared to fiscal1999 was the loss, for the entire period, of Wireline Data Communications(Derived Channel) product and service sales and revenues resulting from thedivestment of the Company’s Derived Channel technology and the de-emphasizingof the sale and marketing of Derived Channel technology.

 

WirelessData Communications product and service sales and revenues increased 82.1% to$7,002,000 for the year ended December 31, 2000, as compared to $3,846,000 forthe year ended October 31, 1999.

 

Theprincipal reason for the increase in product and service sales and revenues infiscal 2000 as compared to fiscal 1999 was the continued growth in productsales, driven by the Company’s UplinkTM product offerings, and service revenues,driven by the Company’s Cellemetry® service offerings, resultingfrom the marketing and sales effort to establish the Company as a recognizednational and international wireless data communications service provider.

 

Costof sales decreased 12.2% to $12,020,000 for the year ended December 31, 2000,as compared to $13,689,000 for the for the year ended October 31, 1999.

 

Thedecrease in cost of sales in fiscal 2000 as compared to fiscal 1999 resulted primarilyfrom the loss, for the entire period, of Wireline Data Communications (DerivedChannel) cost of sales expenses resulting from the divestment of the Company’sDerived Channel technology.

 

Costof sales depreciation and amortization decreased 62.2% to $270,000 for the yearended December 31, 2000, as compared to $714,000 for the for the year endedOctober 31, 1999.

 

Thedecrease in cost of sales depreciation and amortization in fiscal 2000 ascompared to fiscal 1999 resulted primarily from the loss, for the entireperiod, of Wireline Data Communications (Derived Channel) cost of salesdepreciation and amortization expenses resulting from the divestment of theCompany’s Derived Channel technology.

 

Grossprofit as a percentage of net sales decreased to 39.4% for the year endedDecember 31, 2000, as compared to 57.3% for the year ended October 31, 1999.The decrease in gross profit in fiscal 2000 as compared to fiscal 1999 resultedprimarily from the loss, for the entire period, of Wireline Data Communications(Derived Channel) gross profit resulting from the divestment of the Company’sDerived Channel technology.

 

Researchand development expenses decreased 1.1% to $3,430,000 for the year endedDecember 31, 2000, as compared to $3,468,000 for the year ended October 31,1999.

 

Thedecrease in research and development expenses in fiscal 2000 as compared tofiscal 1999 resulted primarily from the loss, for the entire period, ofWireline Data Communications (Derived Channel) research and developmentexpenses resulting from the divestment of the Company’s Derived Channeltechnology offset by increased Wireless Communications research and developmentexpenditures.

 

Selling,general, administrative and other expenses decreased 31.4% to $10,983,000 forthe year ended December 31, 2000, as compared to $16,002,000 for the year endedOctober 31, 1999.

 

Thedecrease in selling, general, administrative and other expenses in fiscal 2000as compared to fiscal 1999 resulted primarily from the loss, for the entireperiod, of Wireline Data Communications (Derived Channel) expenses resultingfrom the divestment of the Company’s Derived Channel technology.

 

Operatingexpense depreciation and amortization decreased 1.0% to $2,593,000 for the yearended December 31, 2000, as compared to $2,620,000 for the for the year endedOctober 31, 1999.

 

Thedecrease in operating expense depreciation and amortization in fiscal 2000 ascompared to fiscal 1999 resulted primarily from the loss, for the entireperiod, of Wireline Data Communications (Derived Channel) operating expensedepreciation and amortization resulting from the divestment of the Company’sDerived Channel technology.

 

Interestand other income increased 370.3% to $1,900,000 for the year ended December 31,2000, as compared to $404,000 for the year ended October 31, 1999.

 

Theincrease in interest and other income was primarily related to interest incomeearned on cash balances and the release of funds held in escrow and an overprovision for federal and state taxes in connection with the divestment of theCompany’s Derived

 

E-12

----

 

Channel technology.

 

Minorityinterest increased 30.1% to $3,146,000 for the year ended December 31, 2000, ascompared to $2,418,000 for the year ended October 31, 1999. The gain representsthat portion of the losses of the Company’s Wireless Data Communicationsbusiness that is not accounted for by the Company.

 

TheCompany, due to the loss position from operations, did not record a taxprovision for the year ended December 31, 2000 as compared to a tax provisionof $1,682,000 for the year ended October 31, 1999. The tax provision in fiscal1999 resulted from earnings from the Company’s Wireline Data Communications(Derived Channel) United Kingdom operations, which was fully taxable.

 

TheCompany recorded a net loss of $3,960,000 for the year ended December 31, 2000,as compared to a net loss of $1,617,000 for the year ended October 31, 1999.

 

Theweighted average and diluted shares outstanding increased to 10,512,000 for theyear ended December 31, 2000, as compared to weighted average and dilutedshares outstanding of 10,378,000 for the year ended October 31, 1999.

 

**FiscalYears Ended December 31, 2000 and December 31, 1999**

 

 In November 1999 the Company divested itsDerived Channel technology to BT. The transaction comprised the sale of theCompany’s Derived Channel technology and wholly owned subsidiary, Bronze base,an English limited liability company, which owned all of the stock of VersusTechnology. As part of the transaction the Company retained the right tomarket, under license, derived channel in North, Central and South America,South Korea and Australia.

 

Themanagement discussion and analysis of financial condition and results ofoperations which follows covers the Company’s year ended December 31, 2000,comparing the same against (i) the year ended December 31, 1999, and (ii) on apro forma basis the year ended December 31, 1999, adjusted for income andexpenditures directly related to the Company’s divested Derived Channeltechnology.

 

**DirectComparison - Inclusive of the results of the divested Derived Channeltechnology.**

 

Net sales decreased 38.3% to$20,290,000 for the year ended December 31, 2000, as compared to $32,894,000for the year ended December 31, 1999.

 

Digital Multimedia and Networking product and service sales andrevenues decreased 16.0% to $10,730,000 for the year ended December 31, 2000,as compared to $12,769,000 for the year ended December 31, 1999.

 

Theprincipal reason for the decrease in sales in fiscal 2000 as compared to fiscal1999 was a 33.2% decrease in Digital Multimedia product sales resulting fromthe transition from the marketing and sale of analog based product to themarketing and sale of the new digital hardware and software based productplatform, Power PlayTM.  The decrease insales was partially offset by a 37.1% increase in Networking product andservice sales resulting from growth in its core business activities.

 

WirelineData Communications (Derived Channel) product and service sales and revenuesdecreased 84.0% to $2,558,000 for the year ended December 31, 2000, as comparedto $15,926,000 for the year ended December 31, 1999.

 

The principal reason for thedecrease in sales in fiscal 2000 as compared to fiscal 1999 was the loss, forthe entire period, of Wireline Data Communications (Derived Channel) productand service sales and revenues resulting from the divestment of the Company’sDerived Channel technology and the de-emphasis on the sale and marketing of theCompany’s Derived Channel technology.

 

WirelessData Communications  product and servicesales and revenues increased 66.8% to $7,002,000 for the year ended December31, 2000, as compared to $4,199,000 for the year ended December 31, 1999.

 

Theprincipal reason for the increase in product and service sales and revenues infiscal 2000 as compared to fiscal 1999 was the continued growth in productsales, comprising a 34.5% increase in product revenues year over year, drivenby the Company’s UplinkTM product offerings and service revenues, comprising a140.1% increase in service revenues year over year, driven by the Company’sCellemetry® service offerings, resulting from the marketing andsales effort to establish the Company as a recognized

 

E-13

----

 

national and internationalwireless data communications service provider.

 

Costof sales decreased 25.7% to $12,020,000 for the year ended December 31, 2000,as compared to $16,172,000 for the for the year ended December 31, 1999.

 

Thedecrease in cost of sales in fiscal 2000 as compared to fiscal 1999 resultedprimarily from the loss, for the entire period, of Wireline Data Communications(Derived Channel) cost of sales expenses resulting from the divestment of theCompany’s Derived Channel technology.

 

Costof sales depreciation and amortization decreased 51.5% to $270,000 for the yearended December 31, 2000, as compared to $557,000 for the for the year endedDecember 31, 1999.

 

Thedecrease in cost of sales depreciation and amortization in fiscal 2000 ascompared to fiscal 1999 resulted primarily from the loss, for the entireperiod, of Wireline Data Communications (Derived Channel) cost of salesdepreciation and amortization expenses resulting from the divestment of theCompany’s Derived Channel technology.

 

Grossprofit as a percentage of net sales decreased to 39.4% for the year endedDecember 31, 2000, as compared to 49.1% for the year ended December 31, 1999.The decrease in gross profit in fiscal 2000 as compared to fiscal 1999 resultedprimarily from the loss, for the entire period, of Wireline Data Communications(Derived Channel) gross profit resulting from the divestment of the Company’sDerived Channel technology.

 

Researchand development expenses decreased 4.2% to $3,430,000 for the year endedDecember 31, 2000, as compared to $3,582,000 for the year ended December 31,1999.

 

Thedecrease in research and development expenses in fiscal 2000 as compared tofiscal 1999 resulted primarily from the loss, for the entire period, ofWireline Data Communications (Derived Channel) research and developmentexpenses resulting from the divestment of the Company’s Derived Channeltechnology offset by increased Wireless Data Communications research anddevelopment expenditures.

 

Selling, general,administrative and other expenses decreased 18.3% to $10,983,000 for the yearended December 31, 2000, as compared to $13,442,000 for the year ended December31, 1999.

 

Thedecrease in selling, general, administrative and other expenses in fiscal 2000as compared to fiscal 1999 resulted primarily from the loss, for the entireperiod, of Wireline Data Communications (Derived Channel) expenses resultingfrom the divestment of the Company’s Derived Channel technology.

 

Operatingexpense depreciation and amortization decreased 4.0% to $2,593,000 for the yearended December 31, 2000, as compared to $2,701,000 for the for the year endedDecember 31, 1999.

 

Thedecrease in operating expense depreciation and amortization in fiscal 2000 ascompared to fiscal 1999 resulted primarily from the loss, for the entireperiod, of Wireline Data Communications (Derived Channel) cost of salesdepreciation and amortization expenses resulting from the divestment of theCompany’s Derived Channel technology.

 

Interestand other income increased 311.3% to $1,900,000 for the year ended December 31,2000, as compared to $462,000 for the year ended December 31, 1999.

 

The increase in interest andother income in fiscal 2000 as compared to fiscal 1999 was primarily related tointerest income earned on cash balances and the release of funds held in escrowand an over provision for federal and state taxes in connection with thedivestment of the Company’s Derived Channel technology.

 

Gainon the disposition of assets and business decreased to zero for the year endedDecember 31, 2000, as compared to $12,680,000 for the year ended December 31,1999.

 

 In November 1999 the Company divested itsDerived Channel technology to BT. The transaction comprised the sale of theCompany’s Derived Channel technology and wholly owned subsidiary, Bronze base,an English limited liability company, which owned all of the stock of VersusTechnology.

 

Minorityinterest increased 19.5% to $3,146,000 for the year ended December 31, 2000, ascompared to $2,633,000 for the

 

E-14

----

 

year ended December 31,1999. The gain represents that portion of the losses of the Company’s WirelessData Communications business that are not accounted for by the Company.

 

The Company, due to the loss position from operations, did not record atax provision for the year ended December 31, 2000, as compared to a taxprovision of $2,429,000 for the year ended December 31, 1999. The tax provisionin fiscal 1999 resulted from earnings from the Company’s Wireline DataCommunications (Derived Channel) United Kingdom operations, which was fullytaxable, $1,568,000; and taxes on the disposition of assets and businessrelating to the Company’s Derived Channel technology, $861,000.

 

TheCompany recorded a net loss of $3,960,000 for the year ended December 31, 2000,as compared to net earnings of $9,786,000 for the year ended December 31, 1999.

 

Theweighted average and diluted shares outstanding increased to 10,512,000 for theyear ended December 31, 2000, as compared to weighted average and dilutedshares outstanding of 10,345,000 for the year ended December 31, 1999.

 

**Pro-FormaComparison - Exclusive of the results of the divested Derived Channeltechnology.**

 

Ona pro forma comparative basis, excluding sales of the divested Derived Channeltechnology, net sales decreased 1.1% to $20,290,000 for the year ended December31, 2000, as compared to $20,523,000 for the year ended December 31, 1999.

 

The1.1% decrease in net sales in fiscal 2000 as compared to fiscal 1999 embodies adecrease of 16.1% in product revenues and an increase of 91.5% in servicerevenues, respectively.

 

Ona pro forma comparative basis, excluding sales of the divested Derived Channeltechnology, Wireline Data Communications (Derived Channel) product and servicesales and revenues decreased 28.1% to $2,558,000 for the year ended December31, 2000, as compared to $3,555,000 for the year ended December 31, 1999.

 

The principal reason for thedecrease in sales in fiscal 2000 as compared to fiscal 1999 was the de-emphasison the sale and marketing of Derived Channel technology in the U.S. followingthe sale of the Company’s Derived Channel technology.

 

 The decrease in Wireline Data Communications (Derived Channel)revenues in fiscal 2000 as compared to fiscal 1999 was positively impacted byone-time product and service contract revenues earned in Australia that wasreflected in the Company’ financial statements for the three-month period endedMarch 31, 2000. Excluding the Australian product and services contractrevenues, Wireline Data Communications (Derived Channel) product and servicerevenues decreased 64.5%.

 

Ona pro forma comparative basis, excluding cost of sales of the divested DerivedChannel technology, cost of sales  decreased 6.1% to $12,020,000 for the year ended December 31, 2000, ascompared to $12,803,000 for the year ended December 31, 1999.

 

Theprincipal reason for the decrease in cost of sales in fiscal 2000 as comparedto fiscal 1999 was the decrease in Digital Multimedia product sales with aconsequent decrease in cost of sales expenditures which resulted from thetransition from the marketing and sale of analog based product to the marketingand sale of the new digital hardware and software based product platform, PowerPlayTM. In addition, the decrease in cost of sales was positively impacted bythe decrease in Wireline Data Communications (Derived Channel) product andservice revenues and consequent decrease in cost of sales expenditures.

 

Thedecrease in cost of sales expenditures was offset by a combination of increasedcost of sales expenditures, due to increased product and service sales andrevenues and support costs, from Networking and Wireless Data Communications.

 

Ona pro forma comparative basis, excluding gross profit of the divested DerivedChannel technology, gross profit as a percentage of net sales increased to39.4% for the year ended December 31, 2000, as compared to 36.8% for the yearended December 31, 1999.

 

Theincrease in gross profit in fiscal 2000 as compared to fiscal 1999 resultedfrom the combined impact of the increase in higher gross profit earning Companyproduct and service sales and revenues particularly the Company’s Wireless DataCommunications business resulting from the growth in product sales andrecurring service revenues, and the decrease in Company cost of salesexpenditures.

 

Ona pro forma comparative basis, excluding research and development expenses ofthe divested Derived Channel technology, research and development expensesincreased 9.9% to $3,430,000 for the year ended December 31, 2000, as comparedto $3,122,000 for the year ended December 31, 1999.

 

E-15

----

 

 

Theprincipal reason for the increase in research and development expenses infiscal 2000 as compared to fiscal 1999 was the increase in research anddevelopment expenses in the Company’s Wireless Data Communications business.

 

Ona pro forma comparative basis, excluding selling, general, administrative andother expenses of the divested Derived Channel technology, selling, general,administrative and other expenses increased 0.7% to $10,983,000 for the yearended December 31, 2000, as compared to $10,906,000 for the year ended December31, 1999.

 

Theprincipal reason for the increase in selling, general, administrative and otherexpenses in fiscal 2000 as compared to fiscal 1999 was an increase inmanagement and organizational expenses and selective sales and marketingactivity.

 

Ona pro forma comparative basis, excluding interest and other income of thedivested Derived Channel technology, interest and other income increased 360.0%to $1,900,000 for the year ended December 31, 2000, as compared to $413,000 forthe year ended December 31, 1999.

 

Theincrease in interest and other income in fiscal 2000 as compared to fiscal 1999was primarily related to interest income earned on cash balances and therelease of funds held in escrow and an over provision for federal and statetaxes in connection with the divestment of the Company’s Derived Channeltechnology.

 

Ona pro forma comparative basis, excluding the results of operations of thedivested Derived Channel technology, the Company’s loss before income taxes andnet loss decreased 31.0% to $3,960,000 for the year ended December 31, 2000, ascompared to $5,738,000 for the year ended December 31, 1999.

 

TheCompany, excluding the results of operations of the divested Derived Channeltechnology, due to the loss position from operations, did not record a taxprovision for the year ended December 31, 2000, or for the year ended December31, 1999.

 

Thedecrease in the net loss for fiscal 2000 as compared to fiscal 1999 wasprimarily the result of the composition of increased product and service salesand revenues, the continuing growth of the Company’s recurring service revenuesand decreased cost of sales expenditures leading to increased gross profit.

 

 

**SelectedQuarterly Financial Data**

 

Thefollowing tables detail certain unaudited financial data of the Company foreach quarter of the last two fiscal years ended December 31, 2001, and 2000,respectively.

 

The information has been prepared from the books and records of theCompany in accordance with generally accepted accounting principles for interimfinancial information.  In the opinionof management, all (including only normal, recurring adjustments) considerednecessary for fair presentation have been included.  Interim results for any quarter are not necessarily indicative ofthe results that may be expected for any future period.

 

E-16

----

 

**SelectedQuarterly Financial Data (Unaudited)**
|                                                |   | **Three Months Ended**                    |       |
|-----------------------------------------------------|--------|-------------------------------------------|------------|
|                                                |   | **March 31, 2001**                        |       | **June 30,  2001** |   | **September 30, 2001** |   | **December 31, 2001** |   |
|                                                |   | **(in thousands, except per share data)** | ** ** |
| Net sales:                                          |   |                                      |       |   |   |   |   |   |   |
|                                                |   |                                      |       |   |   |   |   |   |   |
| Digital Multimedia and Networking                   |   | $                                         | 3,016      |   | $ | 3,209 |   | $ | 2,859 |   | $ | 2,560 |   |
| Wireline Data Communications                        |   | 248                                       |       | 165 |   | 168 |   | 533 |   |
| Wireless Data Communications                        |   | 2,038                                     |       | 2,716 |   | 3,218 |   | 3,528 |   |
| Total net sales                                     |   | 5,302                                     |       | 6,090 |   | 6,245 |   | 6,621 |   |
|                                                |   |                                      |       |   |   |   |   |   |   |
| Cost of sales                                       |   | 3,181                                     |       | 3,863 |   | 3,928 |   | 3,574 |   |
| Depreciation and amortization                       |   | 73                                        |       | 72 |   | 64 |   | 58 |   |
| Inventory write-downs                               |   | —                                    |       | 191 |   | — |   | — |   |
| Gross profit                                        |   | 2,048                                     |       | 1,964 |   | 2,253 |   | 2,989 |   |
|                                                |   |                                      |       |   |   |   |   |   |   |
| Research and development expenses                   |   | 844                                       |       | 689 |   | 584 |   | 638 |   |
| Selling, general, administrative and other expenses |   | 2,704                                     |       | 2,899 |   | 2,549 |   | 2,558 |   |
| Depreciation and amortization                       |   | 670                                       |       | 673 |   | 689 |   | 669 |   |
| Business restructuring charges                      |   | 101                                       |       | 317 |   | — |   | — |   |
| Operating loss                                      |   | (2,271                                    | )          | (2,614 | ) | (1,569 | ) | (876 | ) |
|                                                |   |                                      |       |   |   |   |   |   |   |
| Net loss                                            |   | (1,025                                    | )          | (1,337 | ) | (621 | ) | (159 | ) |
| Basic earnings (loss) per share                     |   | (0.10                                     | )          | (0.14 | ) | (0.06 | ) | (0.02 | ) |
| Weighted average shares outstanding                 |   | 10,391                                    |       | 10,396 |   | 10,481 |   | 10,515 |   |
|                                                     |        |                                           |            |  |  |  |  |  |  |  |  |  |  |

 
|                                               |   | **Three Months Ended**                    | ** ** |
|----------------------------------------------------|--------|-------------------------------------------|------------|
|                                               |   | **March 31, 2000**                        |       | **June 30,  2000** |   | **September 30, 2000** |   | **December 31, 2000** | ** ** |
|                                               |   | **(in thousands, except per share data)** | ** ** |
| Net sales:                                         |   |                                      |       |   |   |   |   |   |   |
| Digital Multimedia and Networking                  |   | $                                         | 2,161      |   | $ | 2,679 |   | $ | 2,893 |   | $ | 2,997 |   |
| Wireline Data Communications                       |   | 1,671                                     |       | 338 |   | 349 |   | 200 |   |
| Wireless Data Communications                       |   | 1,307                                     |       | 1,916 |   | 1,834 |   | 1,945 |   |
| Total net sales                                    |   | 5,139                                     |       | 4,933 |   | 5,076 |   | 5,142 |   |
|                                               |   |                                      |       |   |   |   |   |   |   |
| Cost of sales                                      |   | 2,373                                     |       | 2,763 |   | 3,216 |   | 3,668 |   |
| Depreciation and amortization                      |   | 53                                        |       | 68 |   | 72 |   | 77 |   |
| Inventory write-downs                              |   | —                                    |       | — |   | — |   | — |   |
| Gross profit                                       |   | 2,713                                     |       | 2,102 |   | 1,788 |   | 1,397 |   |
|                                               |   |                                      |       |   |   |   |   |   |   |
| Research and development expenses                  |   | 786                                       |       | 940 |   | 843 |   | 861 |   |
| Selling, general administrative and other expenses |   | 2,554                                     |       | 3,089 |   | 2,942 |   | 2,398 |   |
| Depreciation and amortization                      |   | 645                                       |       | 639 |   | 644 |   | 665 |   |
| Business restructuring charges                     |   | —                                    |       | — |   | — |   | — |   |
| Operating loss                                     |   | (1,272                                    | )          | (2,566 | ) | (2,641 | ) | (2,527 | ) |
|                                               |   |                                      |       |   |   |   |   |   |   |
| Net loss                                           |   | (382                                      | )          | (1,432 | ) | (1,132 | ) | (1,014 | ) |
|                                               |   |                                      |       |   |   |   |   |   |   |
| Basic earnings (loss) per share                    |   | (0.04                                     | )          | (0.14 | ) | (0.11 | ) | (0.11 | ) |
| Weighted average shares outstanding                |   | 10,434                                    |       | 10,781 |   | 10,446 |   | 10,390 |   |
|                                                    |        |                                           |            |  |  |  |  |  |  |  |  |  |  |

 

E-17

----

 

**Liquidityand Capital Resources**

 

TheCompany has been able to fund its operations and working capital requirementsfrom cash flow generated by operations, the proceeds from a public offeringcompleted in April 1995 and the proceeds from the sale of its Derived Channeltechnology in November 1999.

 

Netcash used in operating activities decreased 58.6% to $2,997,000 for the yearended December 31, 2001, as compared to $7,242,000 for the year ended December31, 2000. The decrease in cash used in fiscal 2001 as compared to fiscal 2000was primarily due to the Company’s decreased loss position and to therecoupment of its investment in working capital.

 

Netcash used in investing activities increased 36.0% to $2,214,000 for the yearended December 31, 2001, as compared to $1,628,000 for the year ended December31, 2000. The increase in cash used in fiscal 2001 as compared to fiscal 2000was due to the impact of reduced investment in tangible and intangible assetsoff-set by the cash outlay in acquiring the minority shareholdings in BroadbandNetworks, Inc. and Uplink Security, Inc..

 

Netcash provided by financing activities increased 103.6% to $74,000 for the yearended December 31, 2001, as compared to net cash used in financing activitiesof $2,046,000 for the year ended December 31, 2000.

 

Thedecrease in cash used in fiscal 2001 as compared to fiscal 2000 was primarilyaccounted for by the receipt of $362,000 of proceeds from the exercise of stockoptions which resulted in the issue of an additional 104,601 shares of theCompany’s Class A Common Stock and principal payments on capital leases of$48,000 in fiscal 2001 against the receipt of $2,232,000 of proceeds from theexercise of stock options which resulted in the issue of an additional 548,012shares of the Company’s Class A Common Stock, principal payments on capitalleases of $38,000 and the payment of $4,000,000 for the repurchase of 500,000shares of the Company’s Class A Common Stock in fiscal 2000 .

 

TheCompany had working capital balances of $11,332,000, $16,876,000 and$24,812,000, respectively, as of December 31, 2001, December 31, 2000, andDecember 31, 1999. In addition, the Company had cash balances of $5,401,000,$10,567,000 and $21,490,000, respectively, as of December 31, 2001, December31, 2000, and December 31, 1999.

 

TheCompany’s business has not been capital intensive and, accordingly, capitalexpenditures have not been material.  Todate, the Company has funded all capital expenditures from working capital,proceeds from the public offering and the proceeds from the sale of its DerivedChannel technology in November 1999.

 

TheCompany is obligated under the First Amendment to the Operating Agreement ofCellemetry to fund the operations of Cellemetry to an amount of $5,500,000 byway of interest bearing debt financing to be available to fund the operationsof Cellemetry and its wholly owned subsidiary Uplink. At December 31, 2001, theCompany had provided the full amount of the facility to Cellemetry and theCompany may, but is not obligated, to continue to fund Cellemetry withadditional interest bearing debt financing. All borrowings carry the Prime Rateof interest. At December 31, 2000, the Company had provided total interestbearing debt-financing amounting to $15,023,000.

 

Expansionof the Company’s Digital Multimedia business in fiscal 2002, including theestablishment and increased market penetration of Power PlayTM, may requiregreater capital investments than in the past.

 

TheCompany believes that its cash and cash equivalents, including funds availablefrom the divestment of its Derived Channel technology, will be sufficient tofinance its operating and capital requirements in fiscal 2002.

 

Cashrequirements for future expansion of the Company’s operations will be evaluatedon an as-needed basis and may involve external financing.  The Company does not expect that suchexpansion, should it occur, will have a materially negative impact on theCompany’s ability to fund its existing operations.

 

**Effect ofInflation**

 

Inflationhas not been a material factor affecting the Company’s business.  In recent years the cost of electroniccomponents has remained relatively stable, due to competitive pressures withinthe industry, which has enabled the Company to contain its manufacturing andoperations costs.  The Company’s generaloperating expenses, such as salaries, employee benefits, and facilities costsare subject to normal inflationary pressures.

 

E-18

----

 

**Foreign Currency**

 

TheCompany’s functional and reporting currency is the U.S. Dollar. Fluctuations inforeign currency exchange rates are not expected to have a material impact onthe Company’s results of operations or liquidity.

 

E-19

----