**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**


(Mark
      One)


[
      X
      ]  ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For
      the
      Fiscal Year ended December
      31, 2005


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 No. 0-22920**NUMEREX
                CORP.**(Exact
                Name of Registrant as Specified in its Charter)Pennsylvania
            
            11-2948749(State
                or Other Jurisdiction of Incorporation or Organization)
            
            (IRS
                Employer Identification No.)1600
                Parkwood Circle
              Suite
                500
              Atlanta,
                Georgia
            
            30339-2119(Address
                of principal executive offices)
            
            (Zip
                Code)Registrant's
                Telephone Number, Including Area Code:(770)
                693-5950Securities
                Registered Pursuant to Section 12(b) of the Act:NoneSecurities
                Registered Pursuant to Section 12(g) of the Act:Class
                A Common Stock, no par value(Title
                of Class)







Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities
      Act.     Yes o No þ





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or 15 (d) of the
      Act.     Yes o No þ





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 þ No o





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§229.405 of this chapter) is not contained herein, and will
      not be contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this
      Form 10-K or any amendment to this
      Form 10-K. þ





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
      (Check one):


Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filer þ





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








The
      aggregate market value of voting and non-voting common stock held by
      nonaffiliates of the registrant (7 025,644 shares) based on the closing
      price of the registrant’s common stock as reported on the NASDAQ National Market
      on June 30, 2005, was $35,830,784. For purposes of this computation, all
      officers, directors, and 10% beneficial owners of the registrant are deemed
      to
      be affiliates. Such determination should not be deemed to be an admission that
      such officers, directors, or 10% beneficial owners are, in fact, affiliates
      of
      the registrant.





The
      number of shares outstanding of the registrant’s Class A Common Stock as of
      March 13, 2006, was 12,570,519 shares.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Certain
      portions of the Company’s Proxy Statement to be filed in connection with its
      2005 Annual Meeting of Shareholders are incorporated by reference in Part III
      of
      this Report.





**NUMEREX
      CORPORATION**


**ANNUAL
      REPORT ON FORM 10-K**


**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2005**





**TABLE
      OF
      CONTENTS**


**Page****PART
                  I****Item
                  1.**
              **Business**
              **3****Item
                  1A.**
              **Risk
                  Factors**
              **12****Item
                  1B.**
              **Unresolved
                  Staff Comments**
              **16****Item
                  2.**
              **Properties**
              **16****Item
                  3.**
              **Legal
                  Proceedings**
              **16****Item
                  4.**
              **Submission
                  of Matters to a Vote of Security Holders**
              **16****PART
                  II****Item
                  5.**
              **Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity****Securities**
              **17****Item
                  6.**
              **Selected
                  Consolidated Financial Data**
              **17****Item
                  7.**
              **Management’s
                  Discussion and Analysis of Financial Condition and Results of Operations**
              **18****Item
                  7A.**
              **Quantitative
                  and Qualitative Disclosures about Market Risk**
              **29****Item
                  8.**
              **Financial
                  Statements and Supplementary Data**
              **30****Item
                  9.**
              **Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure**
              **51****Item
                  9A.**
              **Controls
                  and Procedures**
              **51****Item
                  9B.**
              **Other
                  Information**
              **51****PART
                  III****Item
                  10.**
              **Directors
                  and Executive Officers of the Registrant**
              **51****Item
                  11.**
              **Executive
                  Compensation**
              **51****Item
                  12.**
              **Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters**
              **51****Item
                  13.**
              **Certain
                  Relationships and Related Transactions**
              **51****Item
                  14.**
              **Principal
                  Accounting Fees and Services**
              **51****PART
                  IV****Item
                  15.**
              **Exhibits,
                  Financial Statement Schedules**
              **52**





****  ****  ****


2


***Forward-Looking
      Statements***





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





*Any
      one or any combination of factors could have a material adverse effect on the
      Company's results of operations or could cause actual results to differ
      materially from forward-looking statements or historical performance. These
      factors include: the pace of technological change; variations in quarterly
      operating results; delays in the development, introduction and marketing of
      new
      wireless products and services; 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 business initiatives and strategies; competitive conditions; the
      extent and timing of technological changes; changes in customer spending; the
      loss of intellectual property protection; general economic conditions and
      conditions affecting the capital markets. Actual events, developments and
      results could differ materially from those anticipated or projected in the
      forward-looking statements as a result of certain uncertainties set forth below
      and elsewhere in this document. Subsequent written or oral statements
      attributable to the Company or persons acting on its behalf are expressly
      qualified in their entirety by the cautionary statements in this report and
      those in the Company’s reports previously and subsequently filed with the
      Securities and Exchange Commission.*







**PART
      I**


**Item
      1. Business**





**Overview**





Numerex
      Corp. is a wireless machine-to-machine (M2M) communications, technology and
      solutions business. We combine our network services, products, and application
      development capabilities to create innovative packaged and custom-designed
      M2M
      offerings for customers across multiple market segments. We make possible
      real-time wireless data communications, monitoring, tracking, and service
      management tailored to the needs of each application and industry, such as
      vehicle location and tracking, wireless security solutions, utilities, vending,
      and remote device monitoring. In addition to our core M2M business, we market
      proprietary digital multimedia products for video conferencing and data
      collaboration to the educational and distance learning markets. We also provide
      networking and integration services to major telecommunications companies.
      We
      primarily serve customers throughout the United States, Canada and Latin
      America.





M2M
      is
      defined as electronic (wireless) data communication between people, devices
      and
      systems that turns data into actionable information. M2M addresses the needs
      of
      such industries as security, vending, the automotive aftermarket, healthcare,
      gas and oil, utilities and others - and diverse applications, including remote
      monitoring, vehicle location and tracking, fleet management, telemedicine,
      meter
      reading, and more.





Over
      the
      past three years, as M2M has emerged as a robust and growing industry, we have
      established and maintained a market leading position, with our fixed and mobile
      solutions. We
      market
      and sell these products and services through our AirdeskTM and UplinkTM Wireless
      Divisions. End-to-end branded solutions include UplinkTM, MobileGuardianTM and
      VendViewTM. In addition, “white label” products and solutions are available for
      distribution through Value Added Resellers (VARs) and OEMs, which integrate
      various Numerex products and services into their own offerings. Other product
      and service offerings provided by the wireless divisions include Wireless Data Networks,
      Network Services, Network Access Technology, and private-labeled application
      development and customer support.





In
      addition to providing solutions through our M2M Wireless Divisions, we develop
      and market products and services for video and data collaboration through our
      Digital Multimedia Division under the PowerPlayTM  and
      IPContactTM  brands.
      We also market telecommunications networking support and wireline products
      and
      services through our DigilogTM  and
      DCXTM  brands.





While
      we
      are primarily focused on delivering wireless M2M service to almost any vertical
      sector, we have developed industry-specific expertise in wireless security,
      mobile tracking and asset recovery, as well as remote asset management. As
      a
      result, many leading M2M organizations partner with us not only for development
      and integration of our wireless platform to their device and application, but
      also to assist them through the complexities of launching a product into their
      markets.


3


As
      a
      result, we provide much more than network connectivity to our partners. And
      we
      are always looking to expand our expertise by entering, through partnering
      relationships into new vertical sectors conducive to our long-term recurring
      revenue model.





Our
      strategic vision is to be recognized as the leading provider of M2M wireless
      solutions for customers in our target markets by:


·
            Providing
                best-in-class solutions to the M2M communications market and expanding
                our
                success in mobile and fixed security and remote monitoring into other
                market segments across all
                industries.


·
            Creating
                a culture of excellence in customer service and product integrity
                through
                innovation and vigilance.


·
            Delivering
                quality products and services that meet and anticipate the evolving
                needs
                of our customers.


·
            Striving
                to be “The Perfect Partner”--
                asingle-stop shop for M2M technology, solutions and
                support.


·
            Enhancing
                shareholder value through a financial model of sustainable growth
                based on
                long-term recurring service
                revenues.





**Background**





Our
      business began in July 1992 with the acquisition of technology referred to
      as
“Derived Channel”, which enables data transmission over an existing telephone
      line without interfering with voice communications over that same telephone
      line. We expanded our business primarily through the acquisition of
      complementary businesses, product lines, and proprietary technologies. In
      November 1999, we sold the Derived Channel technology to British
      Telecommunications PLC (“BT”).





In
      May
      1998, Numerex Corp., BellSouth Corporation and BellSouth Wireless, now
“Cingular,” completed a transaction whereby Cellemetry LLC, a joint venture
      between Numerex and Cingular, was formed. Cellemetry LLC provides a
      cost-effective, two-way wireless data communications network throughout the
      United States, Canada, Mexico, Colombia, Argentina, Paraguay, the Dutch
      Antilles, and Puerto Rico, with plans for further expansion into other
      international markets. On March 28, 2003, we acquired Cingular’s interest in
      Cellemetry LLC.





Three
      distinct business groups operate within Numerex: Wireless Data Communications,
      Digital Multimedia and Wireline. Our Wireless Data Communications Group is
      made
      up of Cellemetry, Mobile Guardian, Uplink and VendView offerings. Our Digital
      Multimedia Group is comprised of BNI Solutions and Digilog. Our Wireline group
      is DCX.





In
      early
      2006, we completed the acquisition of Airdesk. The acquisition of Airdesk,
      with
      its years of experience in the M2M market, helps secure our position as a
      premiere provider of wireless M2M products and services. In addition, Airdesk
      brings a substantial customer base of end users as well as partners who offer
      their own M2M services within a variety of vertical industries that we currently
      do not serve. These include point-of-sale, utilities, healthcare, fleet
      management, and others.





Through
      our Airdesk Division, we will offer a variety of wireless network, critical
      support services and end-to-end solutions to our newly acquired customer base
      as
      well as the management of our customers with the exception of Uplink’s security
      customers. Airdesk will now be equipped with new comprehensive fixed and mobile
      wireless data solutions and network services, as well as additional technical
      support services to better serve our combined customer base and strategic
      partners across the board.








**SEGMENT
      1 — WIRELESS DATA COMMUNICATIONS DIVISION**





**Machine-to-Machine
      Communications (M2M)**





Our
      M2M
      solutions are evolving to continually support our position as an M2M market
      leader. We have established our business through product and service delivery
      in
      four categories: end-to-end solutions, networks, network services, and network
      access technology. End-to-end solutions have typically been delivered under
      their own distinct brands -- including Uplink, MobileGuardian and VendView
      -
      while all non end-to-end solutions have historically been delivered under the
      Cellemetry or CellemetryXG brand.





As
      the
      strengths of Numerex and Airdesk are integrated to provide the best solutions
      for partners and customers, Airdesk will serve as Numerex’s wireless M2M
      products and services division, offering all components of the M2M value chain
      for fixed and mobile applications. For branded security solutions, Numerex’s
      wireless M2M division will continue to grow its successful Uplink wireless
      security solutions under the Uplink Division. In addition, Numerex’s turnkey
      wireless platforms will be offered through Airdesk to customers and partners
      not
      interested in building their own products. We currently offer end-to-end
      solutions to resellers and developers who seek private-labeled solutions
      designed to rapidly enter their markets.





4


**Fixed
      End-to-End Solutions**





***Uplink*** TM ***:
      Wireless Security Communications***





Uplink
      is
      a dedicated wireless communications solution for security monitoring that
      reports the alarms, status, and messages generated by security systems. Uplink
      delivers this solution by providing a secure, dedicated cellular link and
      network access module that transmits alarms to virtually any alarm-receiving
      center or monitoring service.





A
      stand-alone sensor, alarm panel output, or alarm panel serial connection
      provides the trigger to one of Uplink’s family of network access modules, which
      in turn transmits the alarm event over the Numerex data networks. The Numerex
      Gateway accepts the incoming signal and logs it for immediate viewing through
      the password-secured Web interface. Depending on the selected reporting options
      and alarm monitoring station receiver, the decoded signal can be forwarded
      via
      encrypted IP or PSTN to the alarm monitoring station. As an option, a
      customizable text message can be sent to any email-enabled device or to an
      alphanumeric pager. The Uplink Network Operations Center in Atlanta activates
      and manages the service for its dealers.





As
      part
      of Numerex’s Wireless Data Division, we continue development of Digital Uplink,
      with new hardware products including the Digicell AnyNet and Digital 1650.
      We
      also continue our focus on providing private-label fixed solutions in the
      tradition of Uplink, as well as developing new mobile solutions appropriate
      for
      Uplink customers. We plan to launch Uplink’s next generation “Digital Uplink” in
      early 2006.





*Uplink
      Sales and Marketing*





Uplink
      is
      distributed through master distributors to a network of over 4,500 certified
      Uplink alarm and security dealers in North America for both commercial and
      residential alarm security markets. Uplink private label and custom services
      are
      marketed through direct business development and partnering initiatives. Our
      planned product initiatives for Uplink in 2006 include a suite of new digital
      offerings.





***VendViewTM*** ****** ***Wireless
      Vending Solution***





VendView,
      a product and service offering, is a dedicated wireless vending machine
      monitoring solution that combines wireless network access modules, monitoring
      devices, and the Numerex wireless data network. Once installed in vending
      machines, the devices report critical data, such as inventory levels, machine
      operating information (i.e., temperature levels), and authorized/unauthorized
      entry into the vending machine. The information is encrypted and available
      to
      the customer through a secure VendView Internet portal. This application is
      particularly valuable to vending operators that have machines widely dispersed
      in large geographic areas or in remote locations and where wireline
      communications are unavailable or unreliable.





*VendView* *TM* *Sales
      and M* *arketing*





VendView
      is currently marketed and sold directly to bottlers in the United States,
      Mexico, and the Caribbean. In 2005 we ceased product development and marketing
      initiatives related to VendView. Instead, we have partnered with an industry
      leading vending solution to jointly provide vending solutions based on their
      technology and Numerex’s Network and Services. Under this arrangement Numerex
      will private-label and market the end-to-end vending solution under the VendView
      brand. Our contribution to the solution includes our network services. Our
      technology partner is providing technology for installation in the vending
      machines and the back-end application. Our technology partner will also market
      the product under their own brand with network services provided by
      Numerex.




**Mobile
      End-To-End Solutions**




***MobileGuardianTM:
      Wireless Vehicle Location and Recovery***





MobileGuardian,
      a product and service offering, is a Web-based vehicle location and recovery
      solution that combines the accuracy of the GPS (Global Positioning System),
      the
      Numerex Network and wireless communications technology.





If
      the
      alarm system of a vehicle equipped with MobileGuardian is
      triggered, a message is sent to the MobileGuardian device located in the
      vehicle, which then wirelessly transmits a theft alert notification over the
      Numerex Data Network to the vehicle’s owner via the owner’s wireless phone,
      email, or pager. The owner may logon to the secure MobileGuardian Web site
      to
      send an immediate locate request to the vehicle; the owner may then remotely
      disable the vehicle at the touch of a button and prevent it from being restarted
      while he or she calls the authorities to report the theft and give them the
      location of the vehicle. Being able to immediately and accurately report the
      location of the stolen vehicle and prevent its further movement improves the
      chances that the owner will recover the vehicle and generally shortens the
      timeframes in which such recovery occurs.


5


A
      vehicle’s owner also can use the MobileGuardian system to simply track his or
      her vehicle even if its alarm system has not been triggered. Via the MobileGuardian
      website, MobileGuardian owners
      can purchase additional “locates,” or messaging, beyond those allotted at the
      time of purchase in order to track or disable his or her vehicle at any
      time.




***MobileGuardian
      Sales and Marketing***





Our
      primary distribution strategy for MobileGuardian involves multiple sales
      channels that service auto dealerships and the finance providers that serve
      auto
      sales. Currently, Southwest Dealer Services is the primary product sales channel
      for the MobileGuardianTM branded solution in the new car market. The
      dealer/distributor typically installs the MobileGuardianTM product at the auto
      dealership location . Our Network Operations Center in Atlanta provides
      application and network support to dealers.





In
      addition, through our new Airdesk Division we continue to aggressively target
      new distributors to deliver MobileGuardianTM as a private-label mobile tracking
      and recovery solution into a variety of markets, including the sub-prime
      markets.





We
      believe that MobileGuardian is competitively priced and offers value-added
      features, such as extensive network coverage, immediate notification of a breach
      and/or activation of the vehicle’s alarm system and vehicle tracking. We believe
      MobileGuardian is competitively well positioned in the established vehicle
      location and recovery markets both as a branded solution and as a private-label,
      digital mobile tracking and recovery solution. We plan to release
      MobileGuardian’s next-generation, Digital MobileGuardian, in 2006.





**Networks
      and Network Services**





***Airdesk®
      M2M Solutions with Numerex Networks***





Going
      forward, the Airdesk Division will be the umbrella M2M brand that provides
      our
      M2M solutions, Numerex Network, and an array of solution services that support
      the M2M value chain. These services include specific, vertically focused M2M
      applications combined with our Numerex Network and services. Numerex services
      offered through Airdesk are comprised of application engineering and
      development, customized billing, GPS mapping for mobile applications, network
      and application implementation management, back-end message delivery management,
      application and network support, and interactive voice and Web services.





Airdesk
      customers receive 7/24/365 network support from our Network Operations Center
      in
      Atlanta, Georgia. We believe that Airdesk provided application engineering
      and
      development services help reduce the development and engineering time for
      applications by providing most of the information and resources necessary to
      more rapidly bring applications to market. In many instances customers seeking
      M2M solutions are not equipped to develop the application internally. They
      may
      dominate a market and see an opportunity for an M2M product in that particular
      market but lack the expertise to develop the product. DeWalt is a good example.
      DeWalt dominates the construction tool market and saw the opportunity for an
      M2M
      security product for that market. Instead of attempting to build the product
      from scratch DeWalt has relied on Numerex’s expertise to rapidly develop and
      deploy the solution. ****





With
      the
      establishment of the Airdesk Division, we anticipate rebranding the existing
      CellemetryXG solutions, including the Numerex Network, making them an integral
      part of the Airdesk wireless M2M platform and offering.





***Numerex
      Network***





Serving
      Airdesk and Uplink, the Numerex Network is capable of supporting a variety
      of
      remote applications that are either fixed or mobile. From GSM and CDMA digital
      and Cellemetry network offerings, to premium 24/7/365 network support services,
      Numerex Networks support continued expansive coverage, legacy network
      interoperability, and expanded gateway capabilities for higher bandwidth M2M
      applications. The Numerex Network provides extensive digital and analog wireless
      network services and coverage in the Continental US, Canada, the Caribbean,
      and
      Mexico.





***Cellemetry®
      Network, a Numerex Legacy***





The
      term
“Cellemetry” is an acronym that stands for cellular telemetry and is used when
      referring to the technology developed and offered historically by Cellemetry
      LLC. Numerex was a pioneer in offering analog data network services and products
      even before M2M emerged as an industry with vast market opportunities. For
      years, Cellemetry has been the largest wireless data network (analog) in the
      Western Hemisphere, tapping the unused capacity of the cellular telephone
      network’s overhead control channels and the SS7/IS-41/IS-95 network protocols to
      deliver two-way short data messages. CellemetryXG emerged as Numerex’s
      end-to-end offering of wireless network technology, devices and services in
      2005. Cellemetry will continue to offer CDMA-based control channel network
      service beyond the phase-out of analogue-based control channel, expected to
      take
      place in February 2008, or thereabout, pursuant to the FCC’s mandate. After the
      phase-out, wireless network operators, such


6


as
      Cingular and Verizon, will no longer obligated to support their analogue
      networks. Recently, Cingular announced its intention to not continue support
      of
      analogue after February 2008 or shortly thereafter. Even though the FCC may
      extend the February 2008 date, we anticipate the phase-out as inevitable and
      have taken steps to transition our network offerings to GSM, GPRS, CDMA, IXRTT,
      and various SMS-based technology. We have accomplished this by securing
      long-term agreements with certain wireless network operators that offer GSM
      and
      CDMA service. Our network infrastructure includes gateway and switching
      technology similar to that used by other wireless network
      operators.





As
      advanced wireless technology, networks, and devices have emerged, Numerex
      Network offerings -- including digital networks and new network access modules
      -- have also evolved to bring partners and customers the most flexibility and
      options for their specific M2M requirements. Going forward, Numerex’s end-to-end
      wireless network offerings will begin migration from the traditional Cellemetry
      offering to Numerex Network digital network and services. Network services
      will
      be delivered through the Airdesk and Uplink Wireless Divisions of our Wireless
      Data Communications organization.





***Network
      Access Technology***





We
      design, develop, manufacture and market a suite of network access modules
      (wireless data modems) that provide the physical and electrical interface
      between the customer’s application and the Numerex Network. Examples of the
      various Numerex-manufactured modules include the DigiCell 1500, Digicell AnyNet,
      and Uplink 1650 used for security applications and FT-GPS used for mobile
      applications. The Network Modules are configurable as generic product offerings
      for VAR application development, as fully configured modules for OEM
      integration, or as a component of our end-to-end solutions.





We
      also
      source Network Access Technology from industry partners in order to deliver
      a
      wider portfolio of products and services.





With
      our
      acquisition of Airdesk, we became the number one distributor of Wavecom radio
      modules in North America. Wavecom is a leading manufacturer of compact, rugged
      and reliable radio modules. Radio modules are only one component in an M2M
      solution. Support, integration, application development, networks, web services,
      etc. are all added to the radio module to provide a full end-to-end
      solution.  Numerex
      intends to enhance the Airdesk distribution model for Wavecom and other radio
      modules by offering these added services to this growing customer
      base





**SEGMENT
      2 — DIGITAL MULTIMEDIA AND NETWORKING**





**Digital
      Multimedia Products and Services**





Through
      our Digital Multimedia Division, we design, develop, and market complete video
      conferencing and digital multimedia system products and services for
      high-quality communications networks through the use of high-speed wide area
      networks (WAN). We offer this service either as a data-only capability or as
      part of delivering the PowerPlay application discussed below. Our high-speed
      data solutions enable network operators to provide a wide range of video and
      data services, including Internet access, high-speed data transfer, and
      interactive video conferencing and voice service. The use of fiber optics in
      our
      broadband transmission network provides improved signal quality for
      long-distance transmission, increased bandwidth, immunity to interfering
      signals, and significant cost savings and reliability over coaxial cable-based
      network technologies. We believe that our digital multimedia systems enable
      the
      deployment of sophisticated architectures at generally lower costs and with
      less
      hardware and complexity than competing offerings.





*PowerPlayTM* :
      We have
      developed, and continue to enhance, a line of software, data, and fiber optic
      transmission products. In addition, we have developed a digital multimedia
      solution for high-bandwidth private network applications. PowerPlay is an
      integrated hardware-software system that supports user-friendly control of
      all
      network devices, including VCRs, cameras, and switches. It allows interactive
      videoconferencing over the same network platform that carries standard data
      traffic. PowerPlay permits the scheduling and conduct of video conferencing
      via
      a desktop workstation, a roll-about cart, or a configured classroom or business
      environment. The PowerPlay system incorporates proprietary software and both
      Company and third-party-developed hardware, and is compatible with all
      standards-based transmission networks. We believe that PowerPlay is unique
      in
      its capability to deliver full-motion video signals while using a relatively
      small amount of bandwidth.





*IPContactTM:* IPContact,
      which supplements PowerPlay, is a
      desktop
      videoconferencing software version that boasts high-quality and high-performance
      video. IPContact is also available as a customer support tool within the Numerex
      Network service offerings.




*System
      Solution Services* :
      We
      design and implement wide area networks using in-house manufactured products
      and
      products supplied by third parties. We also train end users as an integral
      aspect of providing complete system solutions. We believe our total system
      solution focus differentiates us from our competitors while providing an
      additional source of revenue growth.





7


**Sales
      and Marketing**





We
      market
      our digital multimedia products and services through a combination of system
      integrators and VARs. We have established relationships with a number of
      multiple system cable operators (MSOs), which generally look to private networks
      such as those we help develop as a means of augmenting and extending their
      public networks, and as a source of new revenues in the increasingly competitive
      environment.





We
      have
      developed relationships with a number of traditional systems integrators under
      which we have provided system design services and have assisted with the
      installation of our video conferencing and digital multimedia system products.
      We believe that systems integrators provide a viable avenue to the market and
      intend to continue to expand our efforts in this area.





**Networking
      Products and Services**





In
      the
      last decade the telecommunications industry has changed its networks to
      establish, control, and track connections. The improved network is responsible
      for most of the enhanced communication services implemented in the last few
      years. Using Signaling System Seven (SS7) protocol, the improved network has
      allowed for call forwarding, last-number redial, call blocking, and many other
      telephone features offered today. In addition, federal guidelines now mandate
      Local Number Portability (LNP), a capability that allows customers to keep
      the
      same telephone number should they change wireless phone carriers.





We
      provide products under the Digilog  brand
      that assist both wireline and wireless carriers in the engineering,
      installation, and servicing of this new telecommunications control network.
      These telecommunications network operational support systems and services can
      be
      categorized as: Services, including system integration (rack and stack) and
      installation, Test Access, and Interconnecting Devices.





*System
      Integration (rack and stack) and Installation* :
      We are
      approved to provide installation services for a number of major
      telecommunications companies. We also provide system integration services.
      Integration services are the assembly of both customer-supplied components
      and
      components manufactured by DigilogTM into rack and cabinet configurations for
      installation in the telephone central office.





*Test
      Access:* The
      Digilog Network Analysis and Monitoring System (NAMS) is a network overlay
      system that enables a user to monitor the operation of the SS7 network from
      a
      central site. The system provides prompt alarm notification of a network
      failure, automatic activation of backup devices, and a means to track down
      operational database errors. In this application, we supply the access products
      and the system software in partnership with Agilent Technologies, which supplies
      the remote-controlled Protocol Analyzers.





*Interconnecting
      Devices:* Our
      Digilog Channel Access Unit (CAU) product provides the physical interconnection
      between the SS7 network and complex monitoring devices such as the AcceSS7
      system from a major telecommunications equipment provider. It was developed
      to
      meet a strong need to interconnect several applications monitoring computers
      to
      a single network tap point. In addition to the CAU, our interconnect products
      include resistor panels, special cables, fuse panels, and the integration of
      other third-party equipment.





**Sales
      and Marketing**





Our
      networking products are sold and marketed under the Digilog brand. Distribution
      is focused on wireless and wireline telecommunications companies through system
      integration agreements with Agilent and other suppliers of telecommunications
      and monitoring equipment and services. Establishing relationships with existing
      telecom suppliers and vendors facilitates access to a much broader market
      without the additional expense of a large and specialized sales
      force.





**SEGMENT
      3 - WIRELINE**





Although
      we have sold our Derived Channel technology to British Telecom, we retain the
      right to market this service in North, Central, and South America, South Korea,
      and Australia. We provide this service through our DCX Systems and DCX Australia
      subsidiaries.





Our
      licensed technology creates a Derived Channel on an existing telephone line
      by
      using an inaudible frequency below the voice communications spectrum for data
      transmission. Derived Channel technology uses this inaudible or low-tone
      frequency to transmit monitoring information between a microprocessor at the
      user’s protected premises and a microprocessor located at the telephone
      company’s central office. This creates a two-way communication system that
      continuously monitors the integrity of a user’s telephone line and security
      system. Derived Channel operates over a regular voice telephone line with no
      interference, whether or not the telephone is in use. In addition, the low-tone
      signal can be encrypted for additional security.


8


We
      believe that Derived Channel differs from most other alarm transport
      technologies in three significant ways: 1) Derived Channel operates over
      existing telephone lines, eliminating the need for a dedicated line service
      to
      the telephone customer; 2) Derived Channel communicates by means of an
      encrypted, continuous, and inaudible signal and is transmitted even while the
      telephone is otherwise in use; and 3) telephone line integrity and security
      system operation are automatically monitored at frequent intervals through
      test
      signals generated by network equipment located at the telecommunication
      company’s central office. The continuous signaling originating at the protected
      premises provides prompt reporting of line disruptions, telephone system
      outages, or alarm conditions.







**GENERAL**





**Suppliers**





We
      rely
      on third-party subcontractors, both in the United States and overseas, to
      manufacture most of the equipment used to provide our wireless data product
      solutions, Derived Channel, and networking equipment and products. In addition,
      some of our products are obtained from sole-source suppliers. The loss of a
      subcontractor or supplier could cause a disruption in our business due to the
      short lead times demanded by certain customers.





**Competition**





We
      have
      one direct competitor for our Cellemetry network technology—Aeris.net, formerly
      Aeris Communication, Inc., which uses the service name Micro Burst. Several
      competitors are emerging that provide M2M network services on GSM and CDMA
      technology. There is also some renewed interest by the wireless carriers in
      this
      market. Numerous indirect competitors are actively pursuing the short message
      wireless data transport market, principally two-way paging, dedicated packet
      radio, private radio, low earth orbit satellites, and PCS. Principal competitive
      factors when selecting a network provider are network reliability and overall
      coverage. We believe that our ubiquitous North American coverage, pricing,
      end-to-end solution offerings, and system performance will enable us to
      effectively maintain and increase our current market share. However, many of
      our
      competitors have greater financial and other resources than we do, which may
      provide them a competitive advantage in marketing and selling, as well as
      technological advantages obtained through greater outlays of resources for
      research and development.





Our
      Uplink security products and services have two primary competitors in its
      existing channels of distribution—Ademco’s Alarmnet C and Telular’s Teleguard
      Databurst, both of which use the Aeris.net wireless communications solution.
      The
      principal competitive factors when making a product selection in the business
      and consumer security industry are price, reliability, and industry
      certification status. GE Interlogix and DSC Skyroute also offer competitive
      hardware product solutions with their network service provided by Cellemetry’s
      wireless communication solution, although the products are marketed through
      different channels. We believe that Uplink’s products and airtime communications
      charges are competitively priced.





We
      have
      several competitors offering vehicle location and recovery services, but our
      principal direct competitor in the new car dealer after-market vehicle location
      and recovery business is LoJack Corporation, the industry market leader. OnStar
      Corp., a subsidiary of General Motors Corp., which offers a full suite of
      concierge services, markets and sells their services primarily through auto
      manufacturers. The principal competitive factors are coverage, user
      interactions, timely notification, and the ability to locate a vehicle at any
      time on demand. There are also numerous other companies that currently offer
      or
      are developing other wireless products and services in this area.





The
      market for our digital multimedia high-bandwidth broadband transmission
      equipment and software has been characterized by rapid technological change.
      The
      principal competitive factors in this market include product performance, ease
      of use, reliability, price, breadth of product line, sales and distribution
      capability, technical support and service, customer relations, and general
      industry and economic conditions. The ability to provide complete systems
      solutions, including system integration, network management capabilities, and
      the expertise to migrate existing systems to more complete broadband networks,
      has also become a critically important vendor selection criterion in recent
      years. In addition, users require increasingly sophisticated applications to
      make the best use of these networks.





Competitors
      for our digital multimedia products and services include a number of companies
      that have developed videoconferencing technology, including Polycom, Tandberg,
      and VCON. Other competitors include manufacturers of fiber transmission
      equipment, who offer comparable products but do not provide a complete system
      solution, including software. Many of our competitors have greater financial
      and
      other resources than we do.





Because
      of its proprietary nature, we believe that we are the only licensed provider
      of
      Derived Channel products in Australia. Our principal competition in the
      commercial security market consists of alternative methods of monitoring line
      integrity, such as dedicated telephone line service. Although security systems
      using a dedicated telephone line are considered reliable, they are a more
      expensive alternative to our Derived Channel technology. We believe that our
      Derived Channel represents, from a price performance perspective, the most
      secure and most reliable form of primary alarm data transport. However, there
      are other competing wireline and wireless technologies.


9


We
      believe that our networking business is unique among vendors of support systems
      for SS7 in that we have been a long-term provider of both diagnostic equipment
      and testing systems. We believe that our presence in telephone central offices
      on a day-to-day basis gives our networking business a unique perspective on
      the
      needs of the central office project manager.





**Research
      and Development**





Technology
      is subject to rapid change, so the introduction of new products, technologies,
      and applications in our markets could adversely affect our business. Our success
      will depend, in part, on our ability to enhance existing products and introduce
      new products and applications on a timely basis. We plan to continue to devote
      a
      portion of our resources to research and development.




We
      continue to invest in improvements to various Numerex technologies, including
      Cellemetry and its service capabilities, on an ongoing basis. Our primary focus
      in this respect is the development of expanded capabilities of our service
      bureau, further communications costs reductions, and additional enhancement
      to
      application-specific capabilities.





The
      Cellemetry Network currently supports both TDMA and CDMA switch technologies.
      It
      is our opinion that the CDMA protocol will continue to expand domestically
      because it is the preferred technology of two of the largest cellular providers
      in the U.S. We are finalizing efforts on the integration of a Cellemetry digital
      CDMA radio into our products. These Cellemetry digital radios will operate
      on
      both the CDMA and AMPs networks to ensure continued ubiquitous, reliable
      coverage along with legacy support. In conjunction with our CDMA development
      initiative, we are focused on providing a multi-protocol SMS offering that
      provides greater bandwidth. Other major advantages of this supplemental offering
      are that, unlike other data transport methods, SMS operates across the new
      switch technologies (CDMA and GSM) as well as legacy technologies (TDMA).





Digital
      Cellemetry will also offer a wireless solution by combining existing analog
      and
      digital technologies into multi-mode/multi-band radios, allowing for maximum
      coverage and obsolescence protection. This strategy will also provide our
      customers a high level of flexibility for deployment not restricted by location
      or application. Numerex offers this choice in a logical, flexible, and
      cost-effective migration plan that is designated to maintain our current
      functionality, secure our and our customers’ investment in existing solutions,
      embrace new and evolving technology, and provide a new array of wireless
      solutions.





We
      have
      focused on providing customers with industry benchmark solutions that go beyond
      control channel transport of machine messages. With digital network migration
      well under way, it is important to provide the market and customers with a
      clear
      migration path from legacy analog networks and services to the new digital
      networks and IP platforms.





Prudent
      integration of new digital and web technology into our wireless businesses
      is an
      active and on-going process. We are committed to taking full advantage of such
      new technology whenever and wherever it makes sense for our
      customers.




**Product
      Warranty and Service**





Our
      wireless communications business provides a one-year parts and labor warranty
      on
      all products. Our Wireline data communications (Derived Channel) business
      provides customers with limited one-year warranties on scanners and message
      switch software, while Subscriber Terminal Units (STUs) are typically sold
      with
      a one-year labor and materials warranty. Our digital multimedia business
      provides either a one-year warranty on parts and labor, depending on the scale
      and type of product provided. Our networking business provides a one- or
      two-year warranty on all telecommunications networking products. In addition,
      a
      help desk and training support is offered to users of telecommunications
      networking products. To date, the cost of our warranty programs have not been
      material.





**Intellectual
      Property**





We
      hold
      patents covering our technology related to Cellemetry in the United States
      and
      various other countries. These patents expire between 2011 and 2022. Through
      Cellemetry, we license certain technologies related to Cellemetry under licenses
      with BellSouth Corporation. We also own other intellectual property relating
      to
      our products. We hold patents through Cellemetry LLC, which primarily cover
      the
      delivery of the Cellemetry wireless data communications service. **** These
      patents expire between 2010 and 2022. It is our practice to apply for patents
      as
      we develop new products or processes suitable for patent protection. No
      assurance can be given about the scope of the patent protection.





We
      believe that the rapid technological developments in the telecommunications
      industry may limit the protection afforded by patents. Accordingly, we believe
      that our success will also depend on our manufacturing, engineering, and
      marketing know-how and the quality and economic value of our products and
      solutions.





Cellemetry
      is a registered trademark of Numerex Corp. We believe that no individual
      trademark or trade name is material to our competitive position in the industry.


10


**Regulation**





Federal,
      state, and local telecommunications laws and regulations have not posed any
      significant impediments to either the delivery of wireless data signals using
      the Cellemetry network or the provision of alarm services by telephone companies
      using Derived Channel technology. We may be subject to certain
      telecommunications taxes and fees, including the federal universal service
      charge.





By
      February 2008, the FCC plans to eliminate its requirement that cellular carriers
      offer analog service pursuant to the Advanced Mobile Phone Service (AMPS)
      standard. At that time, cellular carriers may stop offering analog AMPS cellular
      service and use the spectrum for other purposes. Cellemetry, which currently
      uses the control channel of AMPS cellular service, would have to migrate its
      service to the control channels of digital CDMA wireless service or to the
      Short
      Message Services of digital CDMA or GSM wireless service, and customers that
      use
      services based on Cellemetry would have to replace incompatible radios where
      AMPS service is no longer available. Our wireless products and services that
      make use of the Cellemetry network would be similarly affected. While we expect
      that AMPS standard to be available for a period of time after 2008, we are
      continuing to work on digital alternatives, and we introduced our first beta
      digital products in 2005. This will allow us to provide Cellemetry-based
      services into the foreseeable future. Also, by moving to the digital standard,
      we will be able to add greater functionality compared to the current products
      on
      the AMPS standard.





In
      addition, some of our products, including derived-channel STUs, Uplink radios,
      and certain digital multimedia products, require FCC certification for
      compliance with standards designed to prevent damage to the telephone network
      and to restrict radio frequency interference. Any of our products currently
      used
      in the United States and subject to these requirements have received all
      required certifications. However, anticipated design changes will require
      additional compliance testing and certification.




We
      must
      obtain certification from Underwriters Laboratories for our products sold in
      the
      United States in order to serve monitoring applications with higher levels
      of
      insurance risk, such as bank security alarm systems and fire alarm monitoring
      systems. Certain of our digital multimedia products also require certification
      from Underwriters Laboratories. We intend to obtain any required Underwriters
      Laboratories certifications.





Regulations
      similar to the above may exist in other countries. In the event that we did
      not
      comply with any such regulations, or if our current or future products do not
      meet various regulatory standards or receive and maintain all required
      certifications, our business could be adversely affected.




**Employees**





As
      of
      March 15, 2006, we had 98 employees in the U.S., consisting of 4 in
      manufacturing, 41 in sales, marketing and customer service, 32 in engineering
      and operations and 21 in management and administration. We have experienced
      no
      work stoppages and none of our employees are represented by collective
      bargaining arrangements. We believe our relationship with our employees is
      good.





**Available
      Information**





We
      make
      available free of charge through our website at *www.nmrx.com* our
      annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports
      on Form 8-K, and all amendments thereto filed or furnished pursuant to 13(a)
      or
      15(d) of the Securities and Exchange act of 1934, as soon as reasonably
      practicable after such reports are filed with or furnished to the Securities
      and
      Exchange Commission. Our filings are also available through the Securities
      and
      Exchange Commission via their website, http://www.sec.gov .
      You may
      also read and copy any materials we file with the SEC at the SEC's Public
      Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain
      information on the operation of the Public Reference Room by calling the SEC
      at
      1-800-SEC-0330. The information contained on our website is not incorporated
      by
      reference in this annual report on form 10-K and should not be considered a
      part
      of this report.




**Executive
      Officers of the Registrant**





Our
      executive officers, and all persons chosen to become executive officers, and
      their ages and positions as of March 15, 2006, are as follows:





**Name**
              **Age**
              **Position**Stratton
                  J. Nicolaides*
              52
              Chairman
                  of the Board of Directors, Chief Executive OfficerMichael
                  A. Marett
              51
              Executive
                  Vice President, Chief Operating OfficerAlan
                  B. Catherall
              52
              Executive
                  Vice President, Chief Financial
                  Officer


*Member
      of the Board of Directors


11


Mr.
      Nicolaides has served as Chief Executive Officer of the Company since April
      2000, having served as Chief Operating Officer from April 1999 until March
      2000
      and as Chairman of the Board since December 1999. From July 1994 until April
      1999, Mr. Nicolaides managed a closely held investment partnership.





Mr.
      Marett has been an Executive Vice President of the Company since February 2001.
      In February 2005 he was named Chief Operating Officer. From 1999 to 2001, Mr.
      Marett was Vice President, Sales and Marketing, of TManage, Inc., which provided
      planning, installation, and support services to companies with large remote
      workforces. From 1997 to 1999 Mr. Marett was Vice President, Business
      Development, of Mitel Business Communications Systems, a division of Mitel
      Corporation. Prior to this position Mr. Marett held a number of executive
      positions at Bell Atlantic.




Mr.
      Catherall has been the Executive Vice President and Chief Financial Officer
      of
      the Company since June 2003. From 1998 to 2002, Mr. Catherall served as Chief
      Financial Officer of AirGate PCS, a NASDAQ-listed wireless company. From 1996
      to
      1998, Mr. Catherall was a partner in Tatum CFO LLP, a financial services
      consulting company. Prior to this, he held a number of executive and management
      positions at MCI Communications.




**Item
      1A. Risk Factors**





*An
      investment in our common stock involves a high degree of risk. You should
      carefully consider the following information about these risks before buying
      shares of our common stock. The following risks and uncertainties are not the
      only ones facing us. Additional risks and uncertainties of which we are unaware
      or we currently believe are not material could also adversely affect us. In
      any
      case, the value of our common stock could decline, and you could lose all or
      part of your investment. You should also refer to the other information
      contained in this Form 10-K or incorporated herein by reference, including
      our
      consolidated financial statements and the notes to those statements. See also,
      “Special Note Regarding Forward-Looking Statements.”*






**Risks
      Related to Our Financial Condition**






*Although
      we earned a profit in 2005, we have a history of losses and are uncertain as
      to
      our future profitability.*






Although
      we earned a profit for the year ended December 31, 2005, we have otherwise
      had a
      net loss each year since 1998. We may not sustain operating income, net earnings
      or positive cash flow from operations in the future..






In
      addition, we expect to continue to incur significant operating costs and, as
      a
      result, will need to generate significant additional revenues to achieve
      profitability, which profitability may not continue to occur. If our revenues
      do
      not grow as needed to offset these costs, our business may not
      succeed.




*We
      are a holding company and therefore our ability to make payments on our debt
      depends on cash flow from our subsidiaries* .





We
      are a
      holding company. Our only material assets are our ownership interests in our
      subsidiaries. Consequently, we depend on distributions or other intercompany
      transfers from our subsidiaries to make payments on our debt. Distributions
      and
      intercompany transfers to us from our subsidiaries will depend on:





·  the
      earnings of our subsidiaries;


·  covenants
      contained in agreements to which we or our subsidiaries are or may become
      subject;


·  business
      and tax considerations; and


·  applicable
      law, including laws regarding the payment of dividends and
      distributions.







We
      cannot
      assure you that the operating results of our subsidiaries or the distributions
      they make to us at any given time will be sufficient to make distributions
      or
      other payments to us or that any distribution and/or payments will be adequate
      to pay our debt, including interest payments, when due.






**Risks
      Related to Our Business**






*The
      businesses in which we operate are highly competitive, and we may not be able
      to
      compete effectively.*






We
      face
      competition from many companies with significantly greater financial resources,
      well-established brand names and larger customer bases. Numerous companies
      also
      may try to enter our market and expose us to greater price competition for
      our
      services. We expect competition to intensify in the future. If our competitors
      successfully focus on the markets we serve, our business could be adversely
      affected.




12




*We
      operate in new and rapidly evolving markets where rapid technological change
      can
      quickly make products, including those that we offer,
      obsolete.*






We
      operate in industries that are subject to evolving industry standards, rapid
      technological changes and rapid changes in customer demands. These changes,
      individually or collectively, can adversely affect our business. If the demand
      for our products declines due to changes in technology, and we are unable to
      develop new products and services that successfully address market demand,
      our
      business will be adversely affected. In the event we keep pace with
      technological change, any delays in our development, introduction and marketing
      of new wireless or digital multimedia products and services, or those of our
      suppliers, could have an adverse effect on our business.






*Failure
      of our products and services to gain market acceptance would adversely affect
      our financial condition.*






Over
      the
      past three years we have introduced *Any* Net,
      a
      wireless security system, MobileGuardian, a vehicle tracking solution, VendView,
      a vending management service, and IPContact, a desktop videoconferencing
      software package. If these products and services, or any of our other existing
      products and services, do not perform as expected, or if our sales are less
      than
      expected, our business may be adversely affected.






*Our
      current business plan contemplates significant expansion, which we may be unable
      to manage.*







To
      the
      extent that we are successful in implementing our business strategy, we may
      experience periods of rapid expansion in the future. In order to manage growth,
      whether organic or through acquisitions, effectively, we will need to maintain
      and improve our operating systems and expand, train and manage our employees.
      Expansion through acquisitions will require integration of new employees,
      processes and procedures and computer systems, which can be both difficult
      and
      taxing from a human resources perspective. In addition, we must carefully manage
      product inventory levels to meet demand. Inaccuracies in expected demand could
      result in insufficient or excessive inventories and unexpected additional
      expenses. We must also expand the capacity of our sales, distribution and
      installation networks in order to achieve continued growth in our existing
      and
      future markets. The failure to manage growth effectively in any of these areas
      could have a material adverse effect on our business, financial condition and
      results of operations.




*We
      may require additional capital to fund further development, and our competitive
      position could decline if we are unable to obtain additional
      capital.*






We
      may
      need to raise additional funds to support operations, respond to competitive
      pressures and changes in technology, or respond to unanticipated requirements.
      To do so, we may need to raise additional funds through public or private equity
      or debt financings. We cannot assure you that additional funding will be
      available to us at the time it is needed, or on terms acceptable to us. This
      could have a material adverse effect on our ability to operate our
      business.






*If
      we
      experience product defects or failures, our costs could increase and delay
      product shipments.*






Our
      products and services are complex. While we test our products, they may still
      have errors, defects or bugs that we find only after commercial production
      has
      begun. In the past, we have experienced errors, defects and bugs in connection
      with new products. Our customers may not purchase our products if the products
      have reliability, quality or compatibility problems. Furthermore, product
      errors, defects or bugs could result in additional development costs, diversion
      of resources from our other development efforts, claims by our customers or
      others against us, or the loss of credibility with our current and prospective
      customers. Historically, the time required for us to correct defects has caused
      delays in product shipments and resulted in lower than expected revenues.
      Significant capital and resources may be required to address and fix problems
      in
      new products.






If
      our
      products do not function properly, we may have lower than expected revenues,
      and
      net income would likely be adversely impacted.






*We
      depend on contract manufacturers to manufacture substantially all of our
      products, and any delay or interruption in manufacturing would result in delayed
      or reduced shipments to our customers.*






We
      outsource the manufacturing of our products to independent companies and do
      not
      have internal manufacturing capabilities to meet the demands of our customers.
      Any delay, interruption or termination of the manufacture of our products could
      harm our ability to provide our products to our customers and, consequently,
      could have a material adverse effect on our business and
      operations.






*A
      large portion of our revenues is derived from sales to distributors, and changes
      in the productivity of our distribution channels*  *or
      any disruption of our distribution channel could adversely affect the sale
      of
      our products and services.*






We
      primarily sell our products through distributors. Our sales could be affected
      by
      disruptions in the relationships between our distributors or between our
      distributors and end users of our products or services. Also, distributors
      may
      choose not to emphasize our products and services to their customers. Any of
      these actions or results could lead to decreased sales. **** *The
      structure of our company may limit the voting power of our stockholders, and
      certain Factors May Inhibit Changes in Control of our company.*




13




The
      concentration of ownership of our common stock may have the effect of delaying,
      deferring or preventing a change in control, merger, consolidation or tender
      offer that could involve a premium over the price of our common stock.
      Currently, our executive officers, directors and greater-than-five percent
      stockholders and their affiliates, in the aggregate, beneficially own
      approximately 47% of our outstanding common stock. These stockholders, if they
      vote together, are able to exercise significant influence over all matters
      requiring stockholder approval, including the election of directors and approval
      of significant corporate transactions and matters. The interests of these
      stockholders may be different than those or our unaffiliated stockholders and
      our unaffiliated stockholders may be dissatisfied with the outcome of votes
      that
      may be controlled by our affiliated stockholders.






Our
      articles of incorporation generally limit holdings by persons of our common
      stock to no more than 10% without prior approval by our Board. Except as
      otherwise permitted by the Board, no stockholder has the right to cast more
      than
      10% of the total votes regardless of the number of shares of common stock owned.
      In addition, if a person acquires holdings in excess of this ownership limit,
      our Board may terminate all voting rights of the person during the time that
      the
      ownership limit is violated, bring a lawsuit against the person seeking
      divestiture of amounts in excess of the limit, or take other actions as the
      Board deems appropriate. Our articles of incorporation also have a procedure
      that gives us the right to purchase shares of common stock held in excess of
      the
      ownership limit.






In
      addition, our articles of incorporation permit our Board to authorize the
      issuance of preferred stock without stockholder approval. Any future series
      of
      preferred stock may have voting provisions that could delay or prevent a change
      in control or other transaction that might involve a premium price or otherwise
      be in the best interests of our common stockholders.




*If
      we
      do not adapt to changing regulations that affect us our business would
      suffer.*





We
      operate in a technological environment characterized by rapid change in
      products, capabilities, and both consumer and societal expectations. As a
      result, the regulatory environment in which we operate is continually changing
      as it adjusts to address new issues in a rapidly changing industry. Future
      regulations could make our products illegal or obsolete, or may require us
      to
      make substantial changes to our products in order to continue to market
      them.





For
      example, by 2008, cellular carriers will no longer be required by the FCC to
      provide analog service pursuant to the Advanced Mobile Phone Service (AMPS)
      standard. Cellular carriers may stop offering analog AMPS cellular service.
      Cellemetry, which currently operates using AMPS cellular service, would have
      to
      begin operating on other wireless service channels, and customers that use
      services that involve Cellemetry would have to replace incompatible equipment.
      Other products and services that we make and that depend on Cellemetry, such
      as
      Mobile Guardian, would be similarly affected. While we are currently developing
      a digital standard, we might not be successful in such development. Furthermore,
      even if such development is successful there can be no assurance that we will
      be
      successful in transitioning out existing customer base to our digital
      networks.





Many
      of
      the ultimate consumers of our PowerPlay products and services are elementary
      and
      secondary schools that pay for their purchases with funding that they receive
      through the FCC’s e-rate program. Changes in this program could affect demand
      for our PowerPlay products and services. ****





If
      we
      fail to adapt to regulatory changes, our product offerings would decrease,
      which
      would have a negative impact on our business, results of operations, and
      financial condition.







*We
      may not be able to achieve our operational growth goals if we do not operate
      our
      Cellemetry network efficiently and generate additional traffic.*






Our
      long-term success depends on our ability to operate, manage and maintain a
      reliable and cost effective network, as well as our ability to keep pace with
      changes in technology. Furthermore, our network operations are dependent on
      third parties. If we experience technical or logistical impediments to our
      ability to transfer traffic onto our network, fail to generate additional
      traffic on our network, or if we experience difficulties with our third party
      providers, we may not achieve our revenue goals or otherwise be successful
      in
      growing our business.






*We
      may lose customers if we experience system failures that significantly disrupt
      the availability and quality of the service our network
      provides.*






The
      operation of our Cellemetry network depends on our ability to avoid or limit
      any
      interruptions in service to our customers. Interruptions in service or
      performance problems, for whatever reason, could undermine confidence in our
      services and cause us to lose customers or make it more difficult to attract
      new
      customers. In addition, because most of our customers are businesses, any
      significant interruption in service could result in lost profits or other losses
      to our customers. Although we attempt to disclaim or limit liability in our
      agreements with these customers, a court may not enforce a disclaimer of or
      limitation on liability, which could expose us to losses.






The
      failure of any equipment on our network, or those of our customers, could result
      in the interruption of that customer’s service until necessary repairs are made
      or replacement equipment is installed. Network failures, delays and errors
      may
      result from natural disasters, power losses, security breaches, viruses or
      terrorist acts. These failures or faults cause delays, service interruptions,
      expose




14




us
      to
      customer liability or require expensive modifications that could have a material
      adverse effect on our business and operating results.






*We
      may have difficulty identifying the source of a problem in our Cellemetry
      network.*






If
      and
      when a problem occurs on our Cellemetry network, it may be difficult to identify
      the source of the problem due to the overlay of our network with the cellular
      telephone network and our network’s reliance on the cellular network. The
      occurrence of hardware or software errors, regardless of whether such errors
      are
      caused by our products or our Cellemetry network, may result in the delay or
      loss of market acceptance of our products and services, and any necessary
      revisions may result in significant and additional expenses. The occurrence
      of
      some of these types of problems may seriously harm our business, financial
      condition or operations.






*We
      operate internationally, which subjects us to international regulation and
      business uncertainties that create additional risk for us.*




We
      have a
      subsidiary operating in Australia and are doing business in the Caribbean,
      South
      America, Canada and Japan. Accordingly, we are subject to international
      regulation and business uncertainties. International sales and operations may
      be
      subject to additional risks than those risks in the United States, such as
      the
      following:


·  imposition
      of government controls,


·  political
      instability,


·  export
      license requirements,


·  restrictions
      on the export of critical technology,


·  currency
      exchange rate fluctuations,


·  generally
      longer receivables collection periods and difficulty in collecting,


accounts
      receivable,


·  trade
      restrictions and changes in tariffs,


·  difficulties
      in staffing and managing international operations, and


·  potential
      insolvency of international dealers.




In
      addition, the laws of certain countries do not protect our products as much
      as
      the laws of the United States do, which may lead to the potential loss of our
      proprietary technology through theft, piracy or a failure to protect our rights.
      These factors may have a material adverse effect on our future international
      sales and, consequently, on our business and results of operations.




*The
      loss of intellectual property protection, specifically, our patents, both U.S.
      and international, could have a material adverse effect on our
      operations.*






Our
      future success and competitive position depend upon our ability to obtain and
      maintain intellectual property protection, especially with regard to patents
      on
      the technology used in our core business. Loss of such protection could
      compromise any advantage obtained and, therefore, impact our sales, market
      share
      and results. Furthermore, our future or pending patent applications may not
      be
      issued with the scope of the claims sought by us, if at all. In addition, others
      may develop technologies that are similar or superior to our technology,
      duplicate our technology or design around the patents owned or licensed by
      us.
      Effective patent, trademark, copyright and trade secret protection may be
      unavailable or limited in foreign countries where we may need protection. We
      cannot be sure that steps taken by us to protect our technology will prevent
      misappropriation of the technology.




Our
      services are highly dependent upon our technology and the scope and limitations
      of our proprietary rights therein. In order to protect our technology, we rely
      on a combination of patents, copyrights and trade secret laws, as well as
      certain customer licensing agreements, employee and third-party confidentiality
      and non-disclosure agreements, and other similar arrangements. If our assertion
      of proprietary rights is held to be invalid, or if another party’s use of our
      technology were to occur to any substantial degree, our business, financial
      condition and results of operations could be materially adversely
      affected.




*Our
      competitors may obtain patents that could restrict our ability to offer our
      products and services, or subject us to additional costs, which could impede
      out
      ability to offer our products and services and otherwise adversely affect
      us.*




Several
      of our competitors have obtained and can be expected to obtain patents that
      cover products or services directly or indirectly related to those offered
      by
      us. There can be no assurance that we are aware of all patents containing claims
      that may pose a risk of infringement by its products or services. In addition,
      patent applications in the United States are confidential until a patent is
      issued and, accordingly, we cannot evaluate the extent to which our products
      or
      services may infringe on future patent rights held by others.





Furthermore,
      even with technology that we develop independently, a third party may claim
      that
      we are using inventions claimed by their patents and may go to court to stop
      us
      from engaging in our normal operations and activities, such as research and
      development and the sale of any of our products or services. These lawsuits
      are
      expensive and would consume time and other resources. The court could decide
      that we are infringing the third party’s patents and would order us to stop the
      activities claimed by the patent and/or order us to pay the other party’s
      damages for having infringed their patents. There is no guarantee that the
      prevailing patent owner would offer us a license so that we could continue
      to
      engage in activities claimed by the patent, or that such a license, if made
      available to us, could be acquired on commercially acceptable terms.





Some
      licenses we obtain may be nonexclusive and, therefore, our competitors may
      have
      access to the same technology licensed to us. If we fail to obtain a required
      license or are unable to design around a patent, we may be unable to sell some
      of our products, and


15


there
      can
      be no assurance that we would be able to design and incorporate alternative
      technologies, without a material adverse effect on our business, financial
      condition and results of operations.




*Our
      products and information are subject to secrecy and confidentiality obligations,
      violations of which may not be able to be remedied.*




Although
      we have taken, and will continue to take, steps to protect the confidential
      nature of our proprietary and trade secret information, we cannot control
      whether secrecy obligations will be honored or whether disputes will arise
      related to this information. There is a risk that the steps we have taken will
      not prevent misappropriation of our technology or that others might
      independently develop substantially equivalent products and processes or
      otherwise gain access to our technology. In addition, we cannot rule out that
      we
      will not be subjected to claims from others that we are infringing on their
      patents or are misappropriating their trade secrets or confidential proprietary
      information.




We
      seek
      to protect our trade secrets and proprietary know-how, in part, through
      confidentiality agreements with our employees and licensees. We cannot guarantee
      that the other parties will not violate these agreements, that we will have
      adequate remedies for any breach, or that our trade secrets will not otherwise
      become known or be independently developed by competitors. We cannot be certain
      that we will, in connection with every relationship, be able to maintain the
      confidentiality of our technology, which if released could materially affect
      our
      business. To the extent that our licensees develop inventions or processes
      independently that may be applicable to our products, disputes may arise as
      to
      the ownership of the proprietary rights to this information. These inventions
      or
      processes will not necessarily become our property, but may remain the property
      of these persons or their full-time employers. We could be required to make
      payments to the owners of these inventions or processes, either in the form
      of
      cash, equity or a combination thereof.








**Item
      1B. Unresolved Staff Comments.**





None.





**Item
      2. Properties.**





All
      of
      our facilities are leased. Set forth below is certain information with respect
      to our leased facilities:





**Location**
              **Principal
                  Business**
              **Square
                  Footage******
              **Lease
                  Term******Willow
                  Grove, Pennsylvania
              Networking
                  and Wireline Data Communications
              10,000
              2008State
                  College, Pensylvania
              Digital
                  Multimedia
              10,788
              Month
                  to MonthAtlanta,
                  Georgia
              Wireless
                  Data Communications and Principal Executive Office
              20,494
              2011Norcross,
                  Georgia
              Wireless
                  Data Communications
              1,658
              2005





We
      conduct engineering, sales and marketing, and administrative activities at
      many
      of these locations. **** We
      believe that our existing facilities are adequate for our current needs. As
      we
      grow and expand into new markets and develop additional products, we may require
      additional space, which we believe will be available at reasonable rates.





We
      engage
      in limited manufacturing, equipment and product assembly and testing for certain
      products. We also use contract manufacturers for production, sub-assembly and
      final assembly of certain products. We believe there are other manufacturers
      that could perform this work on comparable terms.





**Item
      3. Legal Proceedings.**





None
      other than in the ordinary course of business.




**Item
      4. Submission of Matters to a Vote of Security Holders.**





Not
      applicable.


16


**PART
      II**





**Item
      5. Market for the Registrant's Common Stock and Related Shareholder
      Matters.**





The
      Company’s Common Stock trades publicly on the NASDAQ National Market System
      under the symbol NMRX. We currently do not pay any cash dividends. In deciding
      whether or not to declare or pay dividends in the future, the Board of Directors
      will consider all relevant factors, including our earnings, financial condition
      and working capital, capital expenditure requirements, any restrictions
      contained in loan agreements and market factors and conditions.





The
      following table sets forth, for the fiscal quarters indicated, the high and
      low
      sales prices per share for the Common Stock on the NASDAQ National Market for
      the applicable periods.





**Fiscal
                2005**
            
            **High**
            
            **Low**First
                Quarter (January 1, 2005 to March 31, 2005)
            
            $
            5.10
            
            $
            3.50Second
                Quarter (April 1, 2005 to June 30, 2005)
            
            
            5.71
            
            
            3.68Third
                Quarter (July 1, 2005 to September 30, 2005)
            
            
            4.99
            
            
            3.50Fourth
                Quarter (October 1, 2005 to December 31, 2005)
            
            
            5.25
            
            
            3.50**Fiscal
                2004**
            
            
            **High**
            
            
            **Low**First
                Quarter (January 1, 2004 to March 31, 2004)
            
            $
            5.10
            
            $
            3.50Second
                Quarter (April 1, 2004 to June 30, 2004)
            
            
            5.71
            
            
            3.68Third
                Quarter (July 1, 2004 to September 30, 2004)
            
            
            4.99
            
            
            3.50Fourth
                Quarter (October 1, 2004 to December 31, 2004)
            
            
            5.25
            
            
            3.50





As
      of
      March 13, 2006, there were 68 holders of record of our Common Stock, approximately 9
      beneficial shareholders and 12,570,519 shares of Common Stock
      outstanding.





**Item
      6. Selected Financial Data.**





*The
      following selected financial data should be read in conjunction with the
      consolidated financial statements and the notes contained in “Item 8. Financial
      Statements and Supplementary Data” and the information contained in “Item 7.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.” Historical results are not necessarily indicative of future
      results.*





The
      following financial information was derived using the consolidated financial
      statements of Numerex Corp. The
      table
      lists historical financial data of the Company for the fiscal years ended
      December 31, 2005, 2004, 2003, 2002 and 2001.





December
                31, 2005
            
            December
                31, 2004
            
            December
                31, 2003
            
            December
                31, 2002
            
            December
                31, 2001(in
                thousands)**Statement
                of Operations Data**Revenues
            
            $
            29,946
            
            $
            22,993
            
            $
            20,157
            
            $
            24,501
            
            $
            24,258Gross
                profit
            
            
            12,717
            
            
            10,039
            
            
            9,029
            
            
            10,221
            
            
            9,254Operating
                income (loss)
            
            
            961
            
            
            (1,631
            )
            
            (2,726
            )
            
            (7,468
            )
            
            (7,330
            )Net
                income (loss)
            
            
            593
            
            
            (2,079
            )
            
            (1,404
            )
            
            (7,450
            )
            
            (3,142
            )Earnings
                (loss) per common share (diluted)
            
            
            0.05
            
            
            (0.19
            )
            
            (0.13
            )
            
            (0.71
            )
            
            (0.32
            )**Balance
                Sheet Data**Total
                Assets
            
            $
            36,348
            
            $
            32,612
            
            $
            33,970
            
            $
            37,111
            
            $
            42,974Capital
                lease obligations (short and long term)
            
            
            118
            
            
            35
            
            
            344
            
            
            1,573
            
            
            472Shareholders'
                equity
            
            
            27,729
            
            
            23,652
            
            
            25,366
            
            
            27,615
            
            
            34,108**Cash
                Flow Data**Net
                cash provided by (used in) operations
            
            $
            3,277
            
            $
            1,520
            
            $
            706
            
            $
            (2,890
            )
            $
            (3,237
            )





17


**Item
      7. Management's Discussion and Analysis of Financial Condition and Results
      of
      Oper****ations.**





**Overview**





Numerex
      Corp is a wireless machine-to-machine communications, technology and solutions
      business. The Company combines its network services, products and applications
      development capabilities to create innovative packaged and custom designed
      machine-to-machine offerings for customers across multiple market
      segments.





Fiscal
      year 2005 represented a marked improvement over prior periods. Full year
      revenues of almost $30 million increased $7 million or 30% from 2004. Nearly
      all
      of this increase came from our wireless division where 2005 revenues grew 53%
      compared to 2004.





Gross
      margins for 2005 were 42.5% compared with 43.7% in 2004. This was due to strong
      acceleration in wireless data product sales which typically earn a lower margin
      than that generated by service revenue. These product sales, however, should
      result in enhanced recurring service revenue in subsequent periods.





For
      fiscal year 2005 overheads, which include selling, general and administrative
      costs as well as research and development expenses and bad debt costs,
      collectively were $10.1 million or less than 1% higher than for 2004. In fact,
      selling, general and administrative (SG&A) expenses have shown no
      significant increase in absolute terms in the last three years while total
      revenues have increased more than 50%. SG&A expenses, which represented over
      44% of revenues in 2004, were less than 30% in 2005.





As
      a
      result of strengthening revenues, a minimal decrease in gross margins and
      continued control over costs, we recorded a $2.7 million improvement in net
      income in 2005, compared to a loss of $2.1 million for the year ended December
      31, 2004 to a profit of almost $600 thousand for the comparative period in
      2005.





Numerex’s
      balance sheet also shows similar improvement in 2005. For example, cash balances
      at December 31, 2005 were almost $4.4 million compared to $1.7 million at
      December 31, 2004. In addition, because of principal repayments and conversions
      to equity, our total debt has been reduced from $3.7 million at December 31,
      2004 to $1.2 million at December 31, 2005.





Subsequent
      to December 31, 2005 the $1.2 million of debt at year-end has been converted
      to
      equity and therefore eliminated. This event favorably impacts our cash flow
      due
      to reduced principal repayments and interest expense, which we believe further
      solidifies our financial strength.





The
      following is a discussion of our consolidated financial condition and results
      of
      operations for the fiscal years ended December 31, 2005 and 2004 and 2003.
      This
      discussion should be read in conjunction with our consolidated financial
      statements, the related notes thereto, and other financial information included
      elsewhere in this report.








**Critical
      Accounting Policies**





Note
      A of
      the Notes to the Consolidated Financial Statements includes a summary of the
      significant accounting policies and methods used in the preparation of Numerex’s
      Consolidated Financial Statements. The following is a brief discussion of the
      more significant accounting policies and methods used.





**General**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and the disclosure of contingent assets and liabilities at the
      dates
      of the financial statements and 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 the adequacy of reserves for excess and obsolete
      inventories, accounting for income taxes and valuation of goodwill and other
      intangible assets. Actual amounts could differ significantly from these
      estimates.





**Revenue
      Recognition**





We
      primarily sell products, recurring services (most billed on a monthly basis)
      and
      on-demand services. Product revenues are recognized at the time title passes
      to
      the customer, which in most cases is at the time of shipment.


18


We
      bill
      most of our recurring service revenues on a monthly basis, which are generated
      by providing customers access to our wireless machine-to-machine communications
      network (the “Network”). We sell these services to retailers and wholesalers of
      the service. For services sold to retailers, monthly service fees are generally
      a fixed monthly amount billed one month in advance. We defer the advance billing
      for the service and recognize the revenue when the services are provided. For
      services sold to wholesalers, the customers are billed a fixed base fee in
      advance and usage fees in arrears at the end of each month. Again, we defer
      the
      advance billing of the base fee and recognize the revenues when the services
      are
      performed.




We
      also
      provide services on a demand basis. These types of services are generally
      completed in a short period of time (usually less than one month) and are billed
      and the revenue recognized when the services are completed.





**Accounts
      Receivable and Allowance for Doubtful Accounts**





Our
      estimate for our allowance for doubtful accounts related to trade receivables
      is
      estimated based on two methods. The amounts calculated from each of these
      methods are combined to determine the total amount reserved. First, we evaluate
      specific accounts where information exists that the customer may have an
      inability to meet its financial obligations. In these cases, we use our
      judgment, based on the best available facts and circumstances, and record a
      specific reserve for that customer to reduce the receivable to the amount that
      is expected to be collected. These specific reserves are reevaluated and
      adjusted as additional information is received that impacts the amount reserved.
      Second, we establish a general reserve for all customers based on a range of
      percentages applied to aging categories. These percentages are based on
      historical collection and write-off experience. If circumstances change, (i.e.
      higher than expected defaults or an unexpected material adverse change in a
      major customer’s ability to meet its financial obligation to us), our estimates
      of the recoverability of amounts due to us could be changed by a material
      amount.


**Inventories
      and Reserves for Excess, Slow-Moving and Obsolete
      Inventory**





We
      value
      our inventory at the lower of cost or market. We continually evaluate the
      composition of our inventory and identify, with estimates, potential future
      excess, obsolete and slow-moving inventories. We specifically identify obsolete
      products for reserve purposes and analyze historical usage, forecasted
      production based on demand forecasts, current economic trends, and historical
      write-offs when evaluating the adequacy of the reserve for excess and
      slow-moving inventory. If we are not able to achieve our expectations of the
      net
      realizable value of the inventory at its current carrying value, we would adjust
      our reserves accordingly.





**Valuation
      of Goodwill and Other Intangible Assets**





In
      accordance with Financial Accounting Standards Board Statement No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets,* (“SFAS
      No. 144”) and Statement of Financial Accounting Standards No. 142, *Goodwill
      and Other Intangible Assets* (“SFAS
      No. 142”), we do not amortize goodwill and other intangible assets with
      indefinite lives. Our long-lived and intangible assets and goodwill are subject
      to annual impairment tests, which require us to estimate the fair value of
      our
      business compared to the carrying value. The impairment reviews require an
      analysis of future projections and assumptions about our operating performance.
      Should such review indicate the assets are impaired, we would record an expense
      for the impaired assets.




Annual
      tests or other future events could cause us to conclude that impairment
      indicators exist and that our goodwill is impaired. For example, if we had
      reason to believe that our recorded goodwill and intangible assets had become
      impaired due to decreases in the fair market value of the underlying business,
      we would have to take a charge to income for that portion of goodwill or
      intangible assets that we believed was impaired. Any resulting impairment loss
      could have a material adverse impact on our financial position and results
      of
      operations. Net goodwill and intangible assets amounted to $22.3 million as
      of
      December 31, 2005.





**Deferred
      Tax Valuation Allowance**





We
      record
      a valuation allowance to reduce our deferred tax assets to the amount that
      is
      more likely than not to be realized. In determining the amount of the valuation
      allowance, we consider estimated future taxable income as well as feasible
      tax
      planning strategies in each taxing jurisdiction in which we operate.
      Historically, we have recorded a deferred tax valuation allowance in an amount
      equal to our net deferred tax assets. If we determine that we will ultimately
      be
      able to utilize all or a portion of the deferred tax assets for which a
      valuation allowance has been provided, the related portion of the valuation
      allowance will be released to income as a credit to income tax expense.
      Beginning in fiscal year 2006, management will begin to evaluate the deferred
      tax valuation allowance on a quarterly basis.


19


**Result
      of Operations**





The
      following table sets forth, for the periods indicated, certain revenue and
      expense items and the percentage increases and decreases for those items in
      the
      Company’s Consolidated Statements of Operations.





(in
                thousands, except per share amounts)
            
            **For
                the years ended December 31,**
            
            **2005
                vs. 2004**
            
            **2004
                vs. 2003****2005**
            
            **2004**
            
            **2003**
            
            **%
                Change**
            
            **%
                Change**Net
                sales:Wireless
                Data CommunicationsProduct
            
            $
            11,919
            
            $
            5,913
            
            $
            4,839
            
            
            101.6
            %
            
            22.2
            %Service
            
            
            10,409
            
            
            8,687
            
            
            7,848
            
            
            19.8
            %
            
            10.7
            %Sub-total
            
            
            22,328
            
            
            14,600
            
            
            12,687
            
            
            52.9
            %
            
            15.1
            %Digital
                Multimedia and NetworkingProduct
            
            
            2,271
            
            
            3,434
            
            
            2,647
            
            
            -33.9
            %
            
            29.7
            %Service
            
            
            4,297
            
            
            3,968
            
            
            3,518
            
            
            8.3
            %
            
            12.8
            %Sub-total
            
            
            6,568
            
            
            7,402
            
            
            6,165
            
            
            -11.3
            %
            
            20.1
            %WirelineProduct
            
            
            383
            
            
            350
            
            
            449
            
            
            9.4
            %
            
            -22.0
            %Service
            
            
            667
            
            
            641
            
            
            856
            
            
            4.1
            %
            
            -25.1
            %Sub-total
            
            
            1,050
            
            
            991
            
            
            1,305
            
            
            6.0
            %
            
            -24.1
            %Total
                net salesProduct
            
            
            14,573
            
            
            9,697
            
            
            7,935
            
            
            50.3
            %
            
            22.2
            %Service
            
            
            15,373
            
            
            13,296
            
            
            12,222
            
            
            15.6
            %
            
            8.8
            %Total
                net sales
            
            
            29,946
            
            
            22,993
            
            
            20,157
            
            
            30.2
            %
            
            14.1
            %Cost
                of product sales (excluding depreciation)
            
            
            11,303
            
            
            7,626
            
            
            6,043
            
            
            48.2
            %
            
            26.2
            %Cost
                of services (excluding depreciation and amortization)
            
            
            5,748
            
            
            4,943
            
            
            4,443
            
            
            16.3
            %
            
            11.3
            %Depreciation
                and amortization
            
            
            178
            
            
            385
            
            
            642
            
            
            -53.8
            %
            
            -40.0
            %**Gross
                Profit**
            
            
            12,717
            
            
            10,039
            
            
            9,029
            
            
            26.7
            %
            
            11.2
            %**Gross
                Profit %**
            
            
            42.5
            %
            
            43.7
            %
            
            44.8
            %Selling,
                general, and administrative expenses
            
            
            8,663
            
            
            8,625
            
            
            8,371
            
            
            0.4
            %
            
            3.0
            %Research
                and development expenses
            
            
            1,106
            
            
            906
            
            
            905
            
            
            22.1
            %
            
            0.1
            %Bad
                debt expense
            
            
            325
            
            
            475
            
            
            551
            
            
            -31.6
            %
            
            -13.8
            %Depreciation
                and amortization
            
            
            1,662
            
            
            1,664
            
            
            1,928
            
            
            -0.1
            %
            
            -13.7
            %**Operating
                earnings (loss)**
            
            
            961
            
            
            (1,631
            )
            
            (2,726
            )
            
            -158.9
            %
            
            -40.2
            %Interest
                expense, net
            
            
            (311
            )
            
            (637
            )
            
            (354
            )
            
            -51.2
            %
            
            79.9
            %Other
                income and (expense), net
            
            
            (5
            )
            
            (52
            )
            
            56
            
            
            -90.4
            %
            
            -192.9
            %Gain
                on sale of business
            
            
            -
            
            
            250
            
            
            1,712Provision
                for income taxes
            
            
            (52
            )
            
            (9
            )
            
            (92
            )
            
            -100.0
            %**Net
                earnings (loss)**
            
            
            593
            
            
            (2,079
            )
            
            (1,404
            )
            
            -128.5
            %
            
            48.1
            %Basic
                income (loss) per common share
            
            $
            0.05
            
            $
            (0.19
            )
            $
            (0.13
            )Diluted
                income (loss) per common share
            
            $
            0.05
            
            $
            (0.19
            )
            $
            (0.13
            )Basic
            
            
            11,231
            
            
            10,798
            
            
            10,934Diluted
            
            
            11,482
            
            
            10,798
            
            
            10,934


See
      notes
      to consolidated financial statements





20


**Fiscal
      Years Ended December 31, 2005 and December 31, 2004**





Net
      sales
      increased 30.2% to $29.9 million for the year ended December 31, 2005 from
      $23.0
      million for the year ended December 31, 2004. The increase in net sales in
      2005
      is attributable to a 50.3% increase in total product sales and a 15.6% increase
      in service sales. Substantially all of this increase is attributable to a $7.7
      million increase in product and service sales in Wireless Data Communications
      in
      2005, partially offset by a $1.2 million decrease in Digital Multimedia and
      Networking product sales.





Cost
      of
      product sales increased 48.2% to $11.3 million for the year ended December
      31,
      2005 from $7.6 million for the year ended December 31, 2004. This increase
      was
      primarily the result of higher product sales volume in the Wireless Data
      Communications and Wireline, partially offset by lower Digital Multimedia and
      Networking product sales.





Cost
      of
      services increased 16.3% to $5.7 million for the year ended December 31, 2005
      from $4.9 million for the year ended December 31, 2004. This increase was
      primarily the result of higher service sales volume in Wireless Data
      Communications, Digital Multimedia and Networking and Wireline.





Cost
      of
      sales depreciation and amortization expense decreased 53.8% to $178,000 for
      the
      year ended December 31, 2005 from $385,000 for the year ended December 31,
      2004.
      This decrease was primarily the result of assets in our Digital Multimedia
      and
      Networking division becoming fully depreciated during 2005.





Gross
      profit as a percentage of net sales was 42.5% for the year ended December 31,
      2005 as compared to 43.7% for the year ended December 31, 2004. The gross profit
      percentage decreased slightly in 2005 because product sales as a percentage
      of
      total sales increased to 37.7% for the year ended December 31, 2005 compared
      to
      33.2% for the year ended December 31, 2004. Since product sales entail higher
      costs of sale, gross profit as a percentage of sales is generally less on
      product sales than service sales, and so the increase in product sales in 2005
      resulted in a slight decrease in the total gross profit percentage. The decrease
      in gross profit as a percentage of sales for the period ended December 31,
      2005
      versus the comparable period in2004 was partially offset by a reduction in
      depreciation expense due to some assets in Digital Multimedia and Networking
      becoming fully depreciated during 2005.





Selling,
      general, and administrative expenses increased 0.4% to $8.7 million for the
      year
      ended December 31, 2005 from $8.6 million for the year ended December 31, 2004.
      As a percentage of sales, selling, general, and administrative expenses
      decreased to 28.9% for the year ended December 31, 2005 from 37.5% for the
      year
      ended December 31, 2004. Selling, general, and administrative expenses decreased
      as a percentage of revenue for the year primarily because our revenues increased
      while these costs essentially remained flat.





Research
      and development expenses increased 22.1% to $1.1 million for the year ended
      December 31, 2005 from $906,000 for the year ended December 31, 2004. Research
      and development expenses increased primarily due to the reclassification of
      certain personnel to research and development from selling, general and
      administrative positions. We expect research and development costs to continue
      at current levels.





Bad
      debt
      expense decreased 31.6% to $325,000 for the year ended December 31, 2005 from
      $475,000 for the comparable 2004 period. Bad debt expense continued to decrease
      during 2005 as a result of our implementation of more stringent credit policies
      and collections processes in 2004.





Operating
      expense depreciation and amortization expense remained constant at $1.7 million
      for the year ended December 31, 2005 as compared to the year ended December
      31,
      2004.





Interest
      expense (net) decreased to $311,000 in 2005 from $637,000 in 2004. This decrease
      was primarily the result of reduced interest expense on a note held by the
      Laurus Master Fund (“Laurus”) initially issued on January 15, 2004 in the amount
      of $4.5 million. On July 6, 2005 we voluntarily converted $2.3 million of the
      outstanding debt associated with the note into 500,000 shares of our common
      stock. On August 1, 2005 we converted the remaining outstanding portion of
      the
      debt associated with the note into 209,000 shares of our common stock. As a
      result, we have reduced our total interest expense. The majority of ongoing
      interest expense is related to a second $1,500,000 note that we issued to Laurus
      on January 28, 2005. Please see Note A(11) to our Consolidated Financial
      Statements for additional information about our transactions with
      Laurus.





Foreign
      currency loss decreased to $5,000 for the year ended December 31, 2005 from
      $52,000 for the year ended December 31, 2004. This decrease was the result
      of
      decreased foreign currency loses on sales to Canadian customers.




21


As
      discussed in Note F to our Consolidated Financial Statements, we are entitled
      to
      the benefits of certain net operating loss carry forwards. However, we believe
      it is unlikely that we will utilize the deferred tax items, therefore, we have
      not recorded a federal tax benefit for the year ended December 31, 2005. The
      $52,000 provision for income taxes for the year ended December 31, 2005 is
      related to certain state income taxes. The $9,000 income tax expense for the
      year ended December 31, 2004 is related to certain state and foreign income
      taxes.





Basic
      and
      diluted earning (loss) per common share increased to earnings of $0.05 per
      share
      for year ended December 31, 2005 as compared to a loss of $0.19 per share for
      the year ended December 31, 2004.





Weighted
      average and diluted shares outstanding increased to 11,482,000 at December
      31,
      2005 from 10,798,000 at December 31, 2004. This increase is primarily due to
      our
      issuance of 3.2 million shares to Laurus in connection with the conversion
      of
      our $4.5 million note, as discussed above.








**Fiscal
      Years Ended December 31, 2004 and December 31, 2003**





Net
      revenues increased 14.1% to $23.0 million for the year ended December 31, 2004
      as compared to $20.2 million for the year ended December 31, 2003. The increase
      in total net revenues for the year ended December 31, 2004 is attributable
      to a
      22.2% increase in total product sales and an 8.8% increase in service revenue.
      Most of the product sales and service revenue increase for the year ended
      December 31, 2004, compared to the same period in 2003, was in Digital
      Multimedia and Networking and Wireless Data Communications in the amount of
      $3.2
      million. These increases were partially offset by a decrease in Wireline
      Security product sales and service revenue of $314,000.





Cost
      of
      product sales increased 26.2% to $7.6 million for the year ended December 31,
      2004 as compared to $6.0 million for the year ended December 31, 2003. The
      increase in cost of sales was primarily the result of higher product sales
      volume in the Wireless Data Communications and Digital Multimedia &
Networking, which were partially offset by lower Wireline product sales. We
      also
      experienced an increase in the cost of our Wireless Services products during
      the
      year ended December 31, 2004 versus the same periods in 2003. We have identified
      alternative sources of these products that we believe should defray some of
      these increases in future periods.





Cost
      of
      services increased 11.3% to $4.9 million for the year ended December 31, 2004
      as
      compared to $4.4 million for the year ended December 31, 2003. The increase
      in
      cost of services for the twelve months ended December 31, 2004 versus the same
      period in 2003 was primarily the result of higher service revenue volume in
      Wireless Data Communications and higher service revenue volume in Digital
      Multimedia and Networking. Additionally, we received a one-time credit against
      network service provider costs that occurred in quarter ended June 30, 2003
      that
      did not occur in 2004.





Cost
      of
      sales depreciation and amortization expense decreased 40% to $385,000 for the
      year ended December 31, 2004 as compared to $642,000 for the year ended December
      31, 2003. This decrease was primarily due to the sale of the assets relating
      to
      Data1Source, which was sold in September 2003.





Gross
      profit, as a percentage of net revenue, was 43.7% for the year ended December
      31, 2004 as compared to 44.8% for the year ended December 31, 2003. The total
      gross profit as a percentage of revenue decreased for the twelve month period
      ended December 31, 2004 compared to the same period in 2003 because product
      sales were 42.1% of total revenue for the year ended December 31, 2004 versus
      39.3% for the year ended December 31, 2003. Since, gross profit as a percentage
      of revenue is generally less on product sales than for service revenue, the
      increase in product sales versus service revenue decreased the total gross
      profit as a percentage of revenue. The decreases in gross profit as a percentage
      of revenue for the twelve months period ended December 31, 2004 versus the
      same
      period in 2003 were partially offset by a reduction of depreciation expense
      due
      to the sale of the assets relating of Data1Source.





Selling,
      general, administrative and other expenses increased 3.0% to $8.6 million for
      the year ended December 31, 2004 as compared to $8.4 million for the year ended
      December 31, 2003. As a percentage of revenue, selling, general, administrative
      and other expenses decreased to 37.5% for the year ended December 31, 2004
      as
      compared to 41.5% for the year ended December 31, 2003. Selling, general,
      administrative and other expenses decreased as a percentage of revenue for
      the
      year primarily due to reductions in personnel in our Mobile Guardian division.





Research
      and development expenses remained constant at $906,000 for the year ended
      December 31, 2004. We expense research and development costs and expect such
      costs to continue at current levels.


22


Bad
      debt
      expense decreased 13.8% to $475,000 for the year ended December 31, 2004 as
      compared to $551,000 for the year ended December 31, 2003. Bad debt decreased
      during the period as a result of the implementation of more stringent credit
      policies and collections processes as well as an improvement in general economic
      conditions.





Operating
      expense depreciation and amortization expense decreased 13.7% to $1.7 million
      for the year ended December 31, 2004 as compared to $1.9 million for the year
      ended December 31, 2003. This was due to some older assets becoming fully
      depreciated while we have had a limited requirement for the purchase of new
      equipment.





Net
      interest expense increased to $637,000 in 2004 compared to $354,000 for the
      prior year. This increase was primarily the result of interest expense on the
      $4,500,000 convertible note payable to Laurus Master. This convertible note
      payable replaced the $3,500,000 note payable to Cingular. The note payable
      to
      Laurus Master Fund has a higher effective interest rate than the Cingular note
      payable, however, the Laurus note has a longer term. We issued the note payable
      to Cingular on March 28, 2003, thus the twelve month period ended December
      31,
      2003 had approximately nine months of interest expense, while the Laurus Master
      Fund note payable was issued by us on January 15, 2004, therefore, the twelve
      month period ended December 31, 2004 had approximately eleven and a half months
      of interest expense.





Gain
      on
      the sale of business of $250,000 for the twelve-month period ended December
      31,
      2004 was due to the receipt of a contingent payment in March 2004 on the sale
      of
      Data1Source in September 2003 since a contingency associated with the sale
      was
      favorably met. The gain on the sale of business of $1,712,000 twelve-month
      period ended December 31, 2003 was attributable to the sale of
      Data1Source.





Foreign
      currency loss of $52,000 for the year ended December 31, 2004 versus a gain
      of
      $56,000 was mostly the result of foreign currency loses on sales to Canadian
      customers.




We
      did
      not utilize the deferred tax items so we have not recorded a federal tax benefit
      for the year ended December 31, 2004. The $9,000 for the twelve-month period
      ended December 31, 2004 is related to certain state and foreign income taxes.
      The $92,000 in income tax expense for the twelve-month period ended December
      31,
      2003 is related to our operations in Australia and certain state income taxes.
      We recorded a net loss of $2.1 million for the year ended December 31, 2004
      compared to a net loss of $1.4 million for the year ended December 31, 2003.





Basic
      and
      diluted loss per common share increased to $(0.19) for year ended December
      31,
      2004 as compared to $(0.13) for the year ended December 31, 2003, which includes
      the gain on the sale of Data1Source.





The
      weighted average and diluted shares outstanding decreased to 10,798,000 for
      the
      year ended December 31, 2004 as compared to 10,934,000 for the year ended
      December 31, 2003. The decrease in weighted average basic shares outstanding
      for
      the twelve-month period ended was primarily due to our repurchase on March
      28,
      2003 of 625,000 shares of our common stock held by Cingular. This was partially
      offset by shares issued under the employee stock purchase plan.

































































23


**Segment
      Information**





**Net
                Sale by Segment:**
            
            **For
                the years ended December 31,**
            
            **2005
                vs. 2004**
            
            **2004
                vs. 2003**(In
                thousands)
            
            **2005**
            
            **2004**
            
            **2003**
            
            **%
                Change**
            
            **%
                Change**Net
                sales:Wireless
                Data CommunicationsProduct
            
            $
            11,919
            
            $
            5,913
            
            $
            4,839
            
            
            101.6
            %
            
            22.2
            %Service
            
            
            10,409
            
            
            8,687
            
            
            7,848
            
            
            19.8
            %
            
            10.7
            %Sub-total
            
            
            22,328
            
            
            14,600
            
            
            12,687
            
            
            52.9
            %
            
            15.1
            %Digital
                Multimedia and NetworkingProduct
            
            
            2,271
            
            
            3,434
            
            
            2,647
            
            
            -33.9
            %
            
            29.7
            %Service
            
            
            4,297
            
            
            3,968
            
            
            3,518
            
            
            8.3
            %
            
            12.8
            %Sub-total
            
            
            6,568
            
            
            7,402
            
            
            6,165
            
            
            -11.3
            %
            
            20.1
            %Wireline
                SecurityProduct
            
            
            383
            
            
            350
            
            
            449
            
            
            9.4
            %
            
            -22.0
            %Service
            
            
            667
            
            
            641
            
            
            856
            
            
            4.1
            %
            
            -25.1
            %Sub-total
            
            
            1,050
            
            
            991
            
            
            1,305
            
            
            6.0
            %
            
            -24.1
            %Total
                net salesProduct
            
            
            14,573
            
            
            9,697
            
            
            7,935
            
            
            50.3
            %
            
            22.2
            %Service
            
            
            15,373
            
            
            13,296
            
            
            12,222
            
            
            15.6
            %
            
            8.8
            %Total
                net sales
            
            
            29,946
            
            
            22,993
            
            
            20,157
            
            
            30.2
            %
            
            14.1
            %








**Percent
                of Total Sales****2005**
            **2004**
            **2003**Net
                sales:Wireless
                Data CommunicationsProduct
            39.8%
            25.7%
            24.0%Service
            34.8%
            37.8%
            38.9%Sub-total
            74.6%
            63.5%
            62.9%Digital
                Multimedia and NetworkingProduct
            7.6%
            14.9%
            13.1%Service
            14.3%
            17.3%
            17.5%Sub-total
            21.9%
            32.2%
            30.6%Wireline
                SecurityProduct
            1.3%
            1.5%
            2.2%Service
            2.2%
            2.8%
            4.2%Sub-total
            3.5%
            4.3%
            6.5%Total
                net salesProduct
            48.7%
            42.2%
            39.4%Service
            51.3%
            57.8%
            60.6%Total
                net sales
            100.0%
            100.0%
            100.0%








24


**Fiscal
      Years Ended December 31, 2005 and December 31, 2004**





Net
      revenues from Wireless Data Communications increased 52.9% to $22.3 million
      for
      the year ended December 31, 2005 as compared to $14.6 million for the year
      ended
      December 31, 2004. This increase was the result of a 101.6% increase in product
      sales and a 19.8% increase in service revenues compared to the same period
      last
      year. The increase in Wireless Data Communications product sales of $6.0 million
      for the year ended December 31, 2005 versus the same period in 2004 was
      primarily the result of increased sales of our vehicle security products and
      tracking services, MobileGuardian® and increased sales of our Uplink Security
      devices used for wireless communications between alarm installations and central
      monitoring stations. The increase in the Wireless Data Communication services
      revenue was primarily due to an increase in the number of connections to our
      Cellemetry wireless network. Connection increases were generated by sales of
      our
      security products as well as those generated by value added resellers who
      utilize the Cellemetry network to provide customer solutions. We continue to
      focus on increasing connections to our network due to the recurring nature
      of
      service revenues.





Net
      revenue from Digital Multimedia and Networking decreased 11.3% to $6.6 million
      for the year ended December 31, 2005 as compared to $7.4 million for the year
      ended December 31, 2004. This decrease was primarily due to a 33.9% decrease
      in
      product sales to $2.3 million, primarily due to decreased sales of our
      interactive videoconferencing products (PowerPlayTM) directly or indirectly (as a
      subcontractor) to distance-learning customers. Capital spending by targeted
      distance learning customers is largely funded by government entities and, as
      a
      result, is difficult to predict and can fluctuate significantly from period
      to
      period. The decrease in product sales was offset by an 8.3% increase in Digital
      Multimedia and Networking service revenues, which increased to $4.3 million
      for
      the year ended December 31, 2005 compared to $4.0 million during the same period
      in 2004. Most of this increase was due to substantial increases in sales of
      integration and installation services. Installation and integration services
      are
      primarily, either directly or indirectly, provided to large wireline and
      wireless telecommunication companies. While service revenues have increased
      for
      the year, we cannot predict whether telecommunications customers will maintain
      their current level of capital expenditures.





Net
      revenues from Wireline Security increased 6.0% to $1.1 million for the year
      ended December 31, 2005 as compared to $991,000 for the year ended December
      31,
      2004. This increase is attributable to a 9.4% increase in product sales to
      $383,000 for the year ended December 31, 2005, compared to $350,000 for the
      year
      ended December 31, 2004. This increase in product sales is due to sales of
      maintenance parts to a customer in Australia with which we have an equipment
      supply agreement, as discussed further below.





**Fiscal
      Years Ended December 31, 2004 and December 31, 2003**





Net
      revenues from Wireless Data Communications increased 15.1% to $14.6 million
      for
      the year ended December 31, 2004 as compared to $12.7 million for the year
      ended
      December 31, 2003. The increase in net revenues was the result of a 22.2%
      increase in product sales and a 10.7% increase in service sales compared to
      the
      prior year . The $1.1 million increase in Wireless Data Communications product
      sales of for the year ended December 31, 2004 versus the same period in 2003
      was
      primarily the result of increased sales of our new wireless vending machine
      monitoring product (VendViewTM) and in our vehicle security products and tracking
      services, MobileGuardian®. The VendView product was only introduced in the
      fourth quarter of 2003. Product sales also increased due to higher demand for
      Uplink Security devices used for wireless communications between alarm
      installations and central monitoring stations. The increase in the Wireless
      Data
      Communication services was primarily due to an increase in the number of
      connections to our Cellemetry wireless network. These increases were achieved
      even though we sold our short messaging service Data1Source in September 2003.
      Connection increases were generated by sales of our security products as well
      as
      those generated by value added resellers who utilize the Cellemetry network
      to
      provide customer solutions.





Net
      revenues from Digital Multimedia and Networking increased 20.1% to $7.4 million
      for the year ended December 31, 2004 as compared to $6.2 million for the year
      ended December 31, 2003. The increase in 2004 was primarily due to a 29.7%
      increase in product sales to $3.4 million, primarily due to increased sales
      of
      our interactive videoconferencing products (PowerPlayTM) directly or indirectly
      (as a subcontractor) to distance-learning customers. In addition, Digital
      Multimedia and Networking service revenues increased 12.8% to $4.0 million
      for
      the year ended December 31, 2004 compared to $3.5 million during the same period
      in 2003. Most of this increase was due to substantial increases in integration
      and installation services. Installation and integration services are primarily,
      either directly or indirectly, provided to large wireline and wireless
      telecommunication companies. Wireless carrier demand for these services can
      fluctuate dramatically in response to an environment of increasing customer
      demand for their services while at the same time they attempt to control their
      own capital expenditures. There was a significant increase of installation
      and
      integration services by the wireless carriers in the second and third quarter
      of
      2004 as a result of government mandated provision of emergency 911 services
      by
      the end of this year.





Net
      revenues from Wireline Security decreased 24.1% to $991,000 for the year ended
      December 31, 2004 as compared to $1.3 million for the year ended December 31,
      2003. Most of the Wireline product sales in 2003 were the sales of maintenance
      parts to a customer in Australia with which we have an equipment supply
      agreement (the “Agreement”). Pursuant to the Agreement, in May 2003, we shipped
      $583,000 of wireline security detection equipment to the customer, in exchange
      for a share of the customer’s future revenues. Although, under the Agreement,
      the customer retains title to this equipment following its acceptance, it must
      meet certain obligations under the Agreement, or pay amounts specified in the
      Agreement. Since the actual revenue that will be generated by the sale of the
      equipment was uncertain at December 31, 2004, we did not recognize revenue
      on
      the equipment sale as of that date. During the twelve-month period ended
      December 31, 2004 there was sales of maintenance parts to the customer that
      were
      not made pursuant to the Agreement. The sale price was fixed and payable in
      accordance with our normal terms and conditions. Accordingly, we recognized
      revenues from the sales of the maintenance parts to the customer in the
      twelve-month period ended December 31, 2004 and 2003. The customer completed
      installation of the wireline security detection equipment in December 2003.
      We
      received our first share of revenues from the services in the third quarter
      of
      2004.





**Selected
      Quarterly Financial Data**





The
      following tables detail certain unaudited financial data of Numerex for each
      quarter of the last two fiscal years ended December 31, 2005, and 2004,
      respectively.





Our
      financial results may fluctuate from quarter to quarter as a result of certain
      factors related to our business, including the timing of product shipments,
      new
      product introductions and equipment, and product and system sales that
      historically have been of a non-recurring nature.





This
      information has been prepared from our books and records in accordance with
      generally accepted accounting principles for interim financial information.
      In
      the opinion of management, all (including only normal, recurring) adjustments
      considered necessary for fair presentation have been included. Interim results
      for any quarter are not necessarily indicative of the results that may be
      expected for any future period.




















































































































25


**Selected
      Quarterly Financial Data (Unaudited)**





**For
                the Three Months Ended**(in
                thousands)
            
            **March
                31,**
            
            **June
                30,**
            
            **September
                30,**
            
            **December
                31,****2005**
            
            **2005**
            
            **2005**
            
            **2005**Net
                sales:Wireless
                Data CommunicationsProduct
            
            $
            2,310
            
            $
            2,474
            
            $
            3,059
            
            $
            4,077Service
            
            
            2,546
            
            
            2,531
            
            
            2,558
            
            
            2,772Sub-total
            
            
            4,856
            
            
            5,005
            
            
            5,617
            
            
            6,849Digital
                Multimedia and NetworkingProduct
            
            
            275
            
            
            728
            
            
            953
            
            
            315Service
            
            
            824
            
            
            1,155
            
            
            1,251
            
            
            1,067Sub-total
            
            
            1,099
            
            
            1,883
            
            
            2,204
            
            
            1,382Wireline
                SecurityProduct
            
            
            37
            
            
            324
            
            
            9
            
            
            13Service
            
            
            185
            
            
            151
            
            
            179
            
            
            153Sub-total
            
            
            222
            
            
            475
            
            
            188
            
            
            166Total
                net salesProduct
            
            
            2,622
            
            
            3,526
            
            
            4,021
            
            
            4,405Service
            
            
            3,555
            
            
            3,837
            
            
            3,988
            
            
            3,992Total
                net sales
            
            
            6,177
            
            
            7,363
            
            
            8,009
            
            
            8,397Cost
                of product sales (excluding depreciation)
            
            
            2,186
            
            
            2,505
            
            
            2,991
            
            
            3,622Cost
                of services (excluding depreciation and amortization)
            
            
            1,255
            
            
            1,548
            
            
            1,533
            
            
            1,413Depreciation
                and amortization
            
            
            51
            
            
            53
            
            
            41
            
            
            46**Gross
                Profit**
            
            
            2,685
            
            
            3,257
            
            
            3,444
            
            
            3,316Selling,
                general, and administrative expenses
            
            
            2,152
            
            
            2,094
            
            
            2,215
            
            
            2,194Research
                and development expenses
            
            
            270
            
            
            286
            
            
            278
            
            
            273Bad
                debt expense
            
            
            58
            
            
            101
            
            
            83
            
            
            83Depreciation
                and amortization
            
            
            454
            
            
            438
            
            
            386
            
            
            371**Operating
                loss**
            
            
            (249
            )
            
            338
            
            
            482
            
            
            395Interest
                income (expense)
            
            
            (192
            )
            
            (94
            )
            
            (62
            )
            
            27**Net
                earnings (loss)**
            
            
            (441
            )
            
            244
            
            
            420
            
            
            422Provision
                for Income taxes
            
            
            39
            
            
            4
            
            
            9
            
            
            -**Net
                earnings (loss)**
            
            $
            (480
            )
            $
            240
            
            $
            411
            
            $
            422Foreign
                currency translation adjustment
            
            
            (6
            )
            
            (1
            )
            
            (1
            )
            
            20**Comprehensive
                earnings (loss)**
            
            $
            (486
            )
            $
            239
            
            $
            410
            
            $
            442Basic
                income (loss) per common share
            
            $
            (0.04
            )
            $
            0.02
            
            $
            0.04
            
            $
            0.04Diluted
                income (loss) per common share
            
            $
            (0.04
            )
            $
            0.02
            
            $
            0.03
            
            $
            0.04Basic
            
            
            10,837
            
            
            10,903
            
            
            11,528
            
            
            11,642Diluted
            
            
            10,837
            
            
            11,957
            
            
            12,023
            
            
            11,873





26


**Selected
      Quarterly Financial Data (Unaudited)**





**For
                the Three Months Ended**(in
                thousands)
            
            **March
                31,**
            
            **June
                30,**
            
            **September
                30,**
            
            **December
                31,****2004**
            
            **2004**
            
            **2004**
            
            **2004**Net
                sales:Wireless
                Data CommunicationsProduct
            
            $
            1,421
            
            $
            1,309
            
            $
            1,485
            
            $
            1,698Service
            
            
            1,991
            
            
            2,143
            
            
            2,150
            
            
            2,403Sub-total
            
            
            3,412
            
            
            3,452
            
            
            3,635
            
            
            4,101Digital
                Multimedia and NetworkingProduct
            
            
            320
            
            
            819
            
            
            1,322
            
            
            973Service
            
            
            709
            
            
            1,153
            
            
            1,028
            
            
            1,078Sub-total
            
            
            1,029
            
            
            1,972
            
            
            2,350
            
            
            2,051Wireline
                SecurityProduct
            
            
            151
            
            
            143
            
            
            45
            
            
            11Service
            
            
            177
            
            
            186
            
            
            142
            
            
            136Sub-total
            
            
            328
            
            
            329
            
            
            187
            
            
            147Total
                net salesProduct
            
            
            1,892
            
            
            2,271
            
            
            2,852
            
            
            2,682Service
            
            
            2,877
            
            
            3,482
            
            
            3,320
            
            
            3,617Total
                net sales
            
            
            4,769
            
            
            5,753
            
            
            6,172
            
            
            6,299Cost
                of product sales (excluding depreciation)
            
            
            1,630
            
            
            1,858
            
            
            2,043
            
            
            2,095Cost
                of services (excluding depreciation and amortization)
            
            
            910
            
            
            1,288
            
            
            1,395
            
            
            1,350Depreciation
                and amortization
            
            
            110
            
            
            100
            
            
            87
            
            
            88**Gross
                Profit**
            
            
            2,119
            
            
            2,507
            
            
            2,647
            
            
            2,766Selling,
                general, and administrative expenses
            
            
            2,153
            
            
            2,310
            
            
            2,074
            
            
            2,118Research
                and development expenses
            
            
            278
            
            
            202
            
            
            205
            
            
            221Bad
                debt expense
            
            
            168
            
            
            116
            
            
            131
            
            
            60Depreciation
                and amortization
            
            
            427
            
            
            409
            
            
            411
            
            
            417**Operating
                loss**
            
            
            (907
            )
            
            (530
            )
            
            (174
            )
            
            (50
            )Interest
                income (expense)
            
            
            136
            
            
            (179
            )
            
            (148
            )
            
            (218
            )**Net
                loss**
            
            
            (771
            )
            
            (709
            )
            
            (322
            )
            
            (268
            )Provision
                for Income taxes
            
            
            -
            
            
            -
            
            
            18
            
            
            (9
            )**Net
                loss**
            
            $
            (771
            )
            $
            (709
            )
            $
            (340
            )
            $
            (259
            )Foreign
                currency translation adjustment
            
            
            (69
            )
            
            (2
            )
            
            (13
            )
            
            -**Comprehensive
                loss**
            
            $
            (840
            )
            $
            (711
            )
            $
            (353
            )
            $
            (259
            )Basic
                loss per common share
            
            $
            (0.08
            )
            $
            (0.07
            )
            $
            (0.03
            )
            $
            (0.02
            )Diluted
                loss per common share
            
            $
            (0.08
            )
            $
            (0.07
            )
            $
            (0.03
            )
            $
            (0.02
            )Basic
            
            
            10,792
            
            
            10,796
            
            
            10,798
            
            
            10,798Diluted
            
            
            10,792
            
            
            10,796
            
            
            10,798
            
            
            10,798





27


**Liquidity
      and Capital Resources** ****





We
      had
      working capital of $4.8 million as of December 31, 2005 compared to working
      capital of $1.2 million at December 31, 2004. We had cash balances of $4.4
      million and $1.7 million, respectively, as of December 31, 2005 and December
      31,
      2004.





The
      majority of the increase in working capital reflects the increase in our cash
      balances as well as an increase in accounts receivable related to increased
      sales.





Net
      cash
      provided by operating activities was $3.3 million for the year ended December
      31, 2005 as compared to $1.5 million for the year ended December 31, 2004.
      This
      $1.8 million improvement was partially due to an increase in net earnings to
      $593,000 from a $2.1 operating loss in 2004. The increase was also due to an
      increase in accounts payable of $1.2 million, partially offset by an increase
      in
      notes receivable of $746,000.





Net
      cash
      used in investing activities was $2.8 million for the year ended December 31,
      2005 as compared to $570,000 for the year ended December 31, 2004. The increase
      in cash used in investing activities was primarily due to a short-term
      investment in commercial paper as well as the addition of tangible and
      intangible assets. ****





Net
      cash
      provided by financing activities was $691,000 for the twelve months ended
      December 31, 2005 as compared to $84,000 for the twelve months ended December
      31, 2004. This increase was primarily due to proceeds from the note payable
      we
      issued to Laurus in January 2005, partially offset by principal payments on
      both
      of the Laurus notes of $713,000 and principal payments on capital lease
      obligations of $99,000. Cash provided by financing activities during the year
      ended December 31, 2004 was primarily from the proceeds of the note payable
      issued to Laurus in January 2004, partially offset by principal payments on
      this
      note of $468,000 and principal payments on capital lease obligations of
      $309,000.





Our
      business has traditionally not been capital intensive and, accordingly, capital
      expenditures have not been material. To date, we have funded all capital
      expenditures from working capital, capital leases and other long-term
      obligations, and the proceeds from notes payable we have issued.





We
      paid
      principal and interest of approximately $713,000 on our notes payable during
      the
      twelve months ended December 31, 2005. Laurus opted to convert 111,720 shares
      of
      our common stock at a price of $4.56 per share for principal payment on our
      notes during the twelve months ended December 31, 2005. We voluntarily converted
      $3,233,040 of the outstanding debt associated with the Laurus note issued in
      January 2004 into 709,000 shares of our common stock during the twelve months
      ended December 31, 2005.





We
      believe that our existing cash and cash equivalents, together with cash
      generated from operations, will be more than sufficient to meet our operating
      requirements for at least the next twelve months. This belief could be affected
      by unexpected operating losses, a material adverse change in our operating
      business or a default under our outstanding notes payable. We continually
      consider other sources of funding, including the sale of certain non-core
      assets.





**Contractual
      Obligations**





The
      table
      below sets forth our contractual obligations at December 31, 2005.





Payments
                due by period(in
                thousands)
            Total
            Less
                than 1 Year
            1
                -
                3 Years
            3
                -
                5 Years
            More
                than 5 YearsLong-term
                Debt*
            $1,208
            $490
            $718Capital
                lease obligations
            118
            58
            60Operating
                lease obligations
            2,488
            414
            846
            818
            410Total
            $3,814
            $962
            $1,624
            $818
            $410





*
      This
      debt is convertible into the Company’s common stock at both the Company’s and
      Lender’s option depending on the Company’s stock price (see description of this
      financing in the Liquidity and Capital Resources section above).








28


**Off-Balance
      Sheet Arrangements**





As
      of
      December 31, 2005, we did not have any off-balance sheet arrangements, as
      defined in Item 303(a)(4)(ii) of SEC regulation S-K.





**Item
      7A. Quantitative and Qualitative Disclosures about Market
      Risk.**





**Effect
      of Inflation**





Inflation
      has not been a material factor affecting our business. In recent years the
      cost
      of electronic components has remained relatively stable, due to competitive
      pressures within the industry, which has enabled us to contain our manufacturing
      and operations costs. Our general operating expenses, such as salaries, employee
      benefits, and facilities costs are subject to normal inflationary pressures,
      but
      to date inflation has not had a material effect on our operating
      results.





**Foreign
      Currency**





Our
      functional and reporting currency is the U.S. Dollar. Fluctuations in foreign
      currency exchange rates have not, and are not expected to have a material impact
      on our results of operations or liquidity.



















29


**ITEM
      8.**  **FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**Page****Consolidated
                  Balance Sheets as of December 31, 2005 and 2004**
              **30****Consolidated
                  Statements of Operations of the Years ended December 31, 2005,
                  2004 and
                  2003**
              **31****Consolidated
                  Statements of Shareholders’ Equity for the Years ended December 31, 2005,
                  2004 and 2003**
              **32****Consolidated
                  Statements of Cash Flows for the Years ended December 31, 2005,
                  2004 and
                  2003**
              **33****Notes
                  to Consolidated Financial Statements**
              **34****Report
                  of Independent Registered Public Accounting Firm**
              **49**


30





**NUMEREX
                CORP.****CONSOLIDATED
                BALANCE SHEET**(In
                thousands, except share information)**December
                31,**
            
            **December
                31,****2005**
            
            **2004****ASSETS**CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            2,821
            
            $
            1,684Short-term
                investments
            
            
            1,538
            
            
            -Accounts
                receivable, less allowance for doubtful accounts of $1,418 at December
                31,
                2005 and $1,084 at December 31, 2004:
            
            
            6,046
            
            
            3,986Notes
                Receivable
            
            
            -
            
            
            41Inventory
            
            
            1,694
            
            
            1,561Prepaid
                expenses and other current assets
            
            
            517
            
            
            736TOTAL
                CURRENT ASSETS
            
            
            12,616
            
            
            8,008Property
                and Equipment, Net
            
            
            986
            
            
            840Goodwill,
                Net
            
            
            15,014
            
            
            15,014Other
                Intangibles, Net
            
            
            6,268
            
            
            7,213Software,
                Net
            
            
            1,020
            
            
            598Other
                Assets
            
            
            444
            
            
            939**TOTAL
                ASSETS**
            
            $
            36,348
            
            $
            32,612**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**CURRENT
                LIABILITIESAccounts
                payable
            
            $
            3,911
            
            $
            2,601Other
                current liabilities
            
            
            1,876
            
            
            1,603Accrued
                commission
            
            
            450
            
            
            -Note
                payable, current
            
            
            490
            
            
            1,637Deferred
                revenues
            
            
            1,056
            
            
            906Obligations
                under capital leases, current portion
            
            
            58
            
            
            33TOTAL
                CURRENT LIABILITIES
            
            
            7,841
            
            
            6,780LONG
                TERM LIABILITIESObligations
                under capital leases and other long term liabilities
            
            
            60
            
            
            2Note
                Payable
            
            
            718
            
            
            2,178TOTAL
                LONG TERM LIABILITIES
            
            
            778
            
            
            2,180SHAREHOLDERS’
                EQUITYPreferred
                stock - no par value; authorized 3,000,000; none issued
            
            
            -
            
            
            -Class
                A common stock - no par value; authorized 30,000,000; issued 14,033,877
                shares at December 31, 2005 and 13,203,660 shares at December 31,
                2004
            
            
            40,050
            
            
            36,872Additional
                paid-in-capital
            
            
            1,136
            
            
            809Treasury
                stock, at cost, 2,391,400 shares on December 31, 2005 and December
                31,
                2004
            
            
            (10,197
            )
            
            (10,197
            )Class
                B common stock - no par value; authorized 5,000,000; none
                issued
            
            
            -
            
            
            -Accumulated
                other comprehensive income (loss)
            
            
            (8
            )
            
            13Accumulated
                deficit
            
            
            (3,252
            )
            
            (3,845
            )TOTAL
                SHAREHOLDERS' EQUITY
            
            
            27,729
            
            
            23,652**TOTAL
                LIABILITIES AND SHAREHOLDERS’ EQUITY**
            
            $
            36,348
            
            $
            32,612





See
      accompanying notes to consolidated financial statements.


31





**NUMEREX
                CORP. AND
                SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME**(In
                thousands, except per share data)**FOR
                THE YEARS****ENDED
                DECEMBER 31,****2005**
            
            **2004**
            
            **2003****Net
                sales:**Product
            
            $
            14,573
            
            $
            9,697
            
            $
            7,935Service
            
            
            15,373
            
            
            13,296
            
            
            12,222**Total
                net sales**
            
            
            **29,946**
            
            
            **22,993**
            
            
            **20,157**Cost
                of product sales (excluding depreciation)
            
            
            11,303
            
            
            7,626
            
            
            6,043Cost
                of services (excluding depreciation and amortization)
            
            
            5,748
            
            
            4,943
            
            
            4,443Depreciation
                and amortization
            
            
            178
            
            
            385
            
            
            642**Gross
                Profit**
            
            
            **12,717**
            
            
            **10,039**
            
            
            **9,029**Selling,
                general, and administrative expenses
            
            
            8,663
            
            
            8,624
            
            
            8,371Research
                and development expenses
            
            
            1,106
            
            
            906
            
            
            905Bad
                debt expense
            
            
            325
            
            
            476
            
            
            551Depreciation
                and amortization
            
            
            1,662
            
            
            1,664
            
            
            1,928**Operating
                earnings (loss)**
            
            
            **961**
            
            
            **(1,631**
            **)**
            
            **(2,726**
            **)**Net
                interest expense
            
            
            (311
            )
            
            (637
            )
            
            (354
            )Gain
                on sale of assets
            
            
            -
            
            
            250
            
            
            1,712Net
                other income and (expense)
            
            
            (5
            )
            
            (52
            )
            
            56**Earnings
                (loss) before income taxes**
            
            
            **645**
            
            
            **(2,070**
            **)**
            
            **(1,312**
            **)**Provision
                for income taxes
            
            
            52
            
            
            9
            
            
            92**Net
                earnings (loss)**
            
            
            **593**
            
            
            **(2,079**
            **)**
            
            **(1,404**
            **)****Other
                comprehensive income (loss), net of income taxes:****Foreign
                currency translation adjustment**
            
            
            20
            
            
            (84
            )
            
            106**Comprehensive
                earnings (loss)**
            
            **$**
            **613**
            
            **$**
            **(2,163**
            **)**
            **$**
            **(1,298**
            **)****Basic
                earnings (loss) per share**
            
            **$**
            **0.05**
            
            **$**
            **(0.19**
            **)**
            **$**
            **(0.13**
            **)****Diluted
                earnings (loss) per share**
            
            **$**
            **0.05**
            
            **$**
            **(0.19**
            **)**
            **$**
            **(0.13**
            **)**Weighted
                average common shares used in per share calculationBasic
            
            
            11,231
            
            
            10,798
            
            
            10,934Diluted
            
            
            11,482
            
            
            10,798
            
            
            10,934





See
      accompanying note to consolidated financial statements


32


**NUMEREX
                CORP. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENT OF SHAREHOLDERS'EQUITY**AccumulatedDESCRIPTION:
            
            Common
            
            
            
            
            
            Treasury
            
            Other
            
            Retained
            
            TOTALShares
            
            $AMT
            
            APIC
            
            Stock
            
            Comprehensive
            
            EarningsBalance
                @ 12/31/02
            
            
            13,169
            
            $
            36,769
            
            $
            439
            
            
            ($9,222
            )
            
            ($9
            )
            
            ($362
            )
            $
            27,615Issuance
                of shares under Directors Stock Plan
            
            
            12
            
            
            22
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            22Issuance
                of shares in connection with employee stock purchase plan
            
            
            1
            
            
            2
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2Purchase
                of treasury stock
            
            
            -
            
            
            -
            
            
            -
            
            
            (975
            )
            
            -
            
            
            -
            
            
            (975
            )Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            106
            
            
            -
            
            
            106Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,404
            )
            
            (1,404
            )Balance
                @ 12/31/03
            
            
            13,182
            
            
            36,793
            
            
            439
            
            
            (10,197
            )
            
            97
            
            
            (1,766
            )
            
            25,366Issuance
                of shares under Directors Stock Plan
            
            
            7
            
            
            28
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            28Issuance
                of shares in connection with employee stock purchase plan
            
            
            5
            
            
            5
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5Issuance
                of shares in connection with warrants
            
            
            -
            
            
            -
            
            
            370
            
            
            -
            
            
            -
            
            
            -
            
            
            370Issuance
                of shares in lieu of debt payment
            
            
            10
            
            
            46
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            46Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (84
            )
            
            -
            
            
            (84
            )Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,079
            )
            
            (2,079
            )Balance
                @ 12/31/04
            
            
            13,204
            
            
            36,872
            
            
            809
            
            
            (10,197
            )
            
            13
            
            
            (3,845
            )
            
            23,652Issuance
                of shares under Directors Stock Plan
            
            
            7
            
            
            27
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            27Issuance
                of shares in connection with employee stock purchase plan
            
            
            1
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            0Issuance
                of shares in lieu of debt payment
            
            
            822
            
            
            3,151
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,151Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (21
            )
            
            -
            
            
            (21
            )Issuance
                of warrants
            
            
            -
            
            
            -
            
            
            172
            
            
            -
            
            
            -
            
            
            -
            
            
            172Beneficial
                Conversion Feature
            
            
            -
            
            
            -
            
            
            154
            
            
            -
            
            
            -
            
            
            -
            
            
            154Net
                earnings (loss)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            593
            
            
            593Balance
                @ 12/31/05
            
            
            14,034
            
            $
            40,050
            
            $
            1,135
            
            
            ($10,197
            )
            
            ($8
            )
            
            ($3,252
            )
            $
            27,729




See
      accompanying notes to consolidated financial statement


33




**NUMEREX
                CORP. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS**(In
                Thousands)**For
                the years ended December 31,****2005**
            
            **2004**
            
            **2003**Cash
                flows from operating activities:Net
                earnings (loss)
            
            $
            593
            
            $
            (2,079
            )
            $
            (1,404
            )Adjustments
                to reconcile net loss to net cash provided byoperating
                activities:Depreciation
            
            
            562
            
            
            671
            
            
            1,062Amortization
            
            
            1,279
            
            
            1,380
            
            
            1,508Allowance
                for Doubtful Accounts
            
            
            34
            
            
            476
            
            
            551Inventory
                Reserves
            
            
            (642
            )
            
            284
            
            
            272Non
                cash interest expense
            
            
            104
            
            
            255
            
            
            -Gain
                on Sale of business unit
            
            
            -
            
            
            (250
            )
            
            (1,712
            )Compensation
                Expense
            
            
            65
            
            
            71
            
            
            60Changes
                in assets and liabilities which provided(used)
                cash:Accounts
                and notes receivable
            
            
            (2,056
            )
            
            (1,310
            )
            
            1,411Inventory
            
            
            509
            
            
            1,615
            
            
            775Prepaid
                expenses & interest receivable
            
            
            129
            
            
            79
            
            
            303Other
                assets
            
            
            497
            
            
            -
            
            
            86Accounts
                payable
            
            
            1,311
            
            
            101
            
            
            (1,613
            )Other
                liabilities
            
            
            742
            
            
            96
            
            
            (549
            )Deferred
                Revenue
            
            
            150
            
            
            131
            
            
            (44
            )Net
                cash provided by operating activities:
            
            
            3,277
            
            
            1,520
            
            
            706Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (517
            )
            
            (215
            )
            
            (75
            )Purchase
                of intangible and other assets
            
            
            (756
            )
            
            (386
            )
            
            (2,604
            )Purchase
                of short-term investment
            
            
            (1,538
            )
            
            -
            
            
            -Proceeds
                the from sale of a business
            
            
            -
            
            
            200
            
            
            3,197Increase
                (decrease) in deposits and long term receivables
            
            
            -
            
            
            (169
            )
            
            -Net
                cash provided by (used in) investing activities
            
            
            (2,811
            )
            
            (570
            )
            
            518Cash
                flows from financing activities:Proceeds
                from exercise of common stock options
            
            
            3
            
            
            33
            
            
            25Proceeds
                from line of credit
            
            
            -
            
            
            -
            
            
            400Proceeds
                from note payable and debt
            
            
            1,500
            
            
            4,283
            
            
            -Purchase
                of treasury stock
            
            
            -
            
            
            -
            
            
            (975
            )Principal
                payments on capital lease obligations
            
            
            (99
            )
            
            (309
            )
            
            (1,271
            )Principal
                payments on notes payable and debt
            
            
            (712
            )
            
            (3,922
            )
            
            (400
            )Dividend
                payment on preferred stock
            
            
            -
            
            
            -
            
            
            (480
            )Net
                cash provided by (used in) financing activities:
            
            
            692
            
            
            84
            
            
            (2,701
            )Effect
                of exchange differences on cash
            
            
            (21
            )
            
            (84
            )
            
            74Net
                increase (decrease) in cash and cash equivalents
            
            
            1,137
            
            
            950
            
            
            (1,403
            )Cash
                and cash equivalents at beginning of year
            
            
            1,684
            
            
            734
            
            
            2,137Cash
                and cash equivalents at end of year
            
            $
            2,821
            
            $
            1,684
            
            $
            734Supplemental
                Disclosures of Cash Flow InformationCash
                payments for:Interest
            
            
            231
            
            
            360
            
            
            354Income
                taxes
            
            
            52
            
            
            26
            
            
            92Disclosure
                of non-cash activities:Capital
                leases
            
            
            182
            
            
            32
            
            
            3Non
                cash interest expense
            
            
            104
            
            
            255
            
            
            -Non
                cash financing payments
            
            
            3,329
            
            
            -
            
            
            -Non
                cash leasehold improvement
            
            
            158
            
            
            -
            
            
            -


See
      accompanying notes to consolidated financial statements.


34


**NUMEREX
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**Years
      ended December 31, 2005, 2004 and 2003**








**NOTE
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





A
      summary
      of the significant accounting policies consistently applied in the preparation
      of the accompanying financial statements follows:





**1.**  **Nature
      of Business**





Numerex
      Corp. is a technology company comprised of operating subsidiaries that develop
      and market a wide range of communications products and services. Our primary
      focus is wireless data communications utilizing proprietary network
      technologies. We primarily offer products and services in wireless data
      communications through Cellemetry, and digital multimedia networking through
      PowerPlay and IPContact. Uplink Security, Inc., a wholly owned subsidiary of
      Cellemetry, provides cost effective alarm security products, services, and
      related technical support utilizing Cellemetry wireless data communications
      technology. In February 2003 we introduced MobileGuardian, a Web-based vehicle
      location and recovery solution that combines the accuracy of GPS (Global
      Positioning System) and Cellemetry wireless data communications technology.
      We
      also introduced VendView, a product and service offering that is a Web-based
      vending machine monitoring solution that also uses the Cellemetry wireless
      data
      communications technology. These services enable customers around the globe
      to
      monitor and move information for a variety of applications from home and
      business security to distance learning. In addition, we offer wireline alarm
      security products and services, as well as telecommunications network
      operational support systems.





**2.**  **Principles
      of Consolidation**





The
      consolidated financial statements include the results of operations and
      financial position of Numerex and its wholly owned subsidiaries. Intercompany
      accounts and transactions have been eliminated in consolidation.





**3.**  **Cash
      and Cash Equivalents**





Cash
      equivalents of $2.8 million and $1.7 million at December 31, 2005 and 2004,
      respectively, consist of overnight repurchase agreements, money market deposit
      accounts, amounts on deposit in a foreign bank and restricted cash held as
      a
      letter of credit. Cash of $60,000 and $35,000 at December 31, 2005 and 2004,
      respectively was held in our foreign bank account. Restricted cash of $46,000
      was held as a letter of credit on December 31, 2005.





**4.**  **Short-Term
      Investments**





Short-term
      investments that have an original maturity between three months and one year
      and
      a remaining maturity of less than one year are classified as either
      held-to-maturity or available-for-sale. Held-to-maturity securities are stated
      at amortized cost as it is our intent to hold these securities until maturity.
      Available-for-sale securities are recorded at fair value and are classified
      as
      current assets due to our intent and practice to hold these readily marketable
      investments for less than one year. Any unrealized holding gains and losses
      related to available-for-sale securities are recorded, net of tax, as a separate
      component.





The
      investment securities held by the Company at December 31, 2005 are debt
      instruments and classified as held-to-maturity. The fair value of the securities
      are $1,538,000 and the unrecognized gain amounted to $9,000. The contractual
      maturity of the debt securities is $1,547,000. The security will mature on
      February 13, 2006.





**5.**  **Intangible
      Assets**





Intangible
      assets consist of developed software, patents and acquired intellectual
      property, and goodwill. These assets, except for goodwill, are amortized over
      their expected useful lives. Developed software is amortized using the
      straight-line method over 3 to 5 years. Patents and acquired intellectual
      property are amortized using the straight-line method over 7 to 16 years. In
      accordance with the Statement of Financial Accounting Standards No. 142 (“SFAS
      142), there is no goodwill amortization in 2005, 2004 and 2003.





We
      capitalize software development costs when project technological feasibility
      is
      established and conclude capitalization when the product is ready for release.
      Software development costs incurred prior to the establishment of technological
      feasibility are expensed as incurred. We capitalized $411,000, $139,000 and
      $92,000 during the years ended December 31, 2005, 2004 and 2003, respectively.
      The increase in capitalization in 2005 is related to our development efforts
      for
      digital products. Amortization of capitalized software was $101,000 for the
      year
      ended December 31, 2005, $61,000 for the year ended December 31, 2004 and
      $46,000 for the year ended December 31, 2003.





We
      adopted SFAS 142 on January 1, 2002. In connection with the adoption, we
      reviewed the classification of our goodwill and other intangible assets,
      reassessed the useful lives previously assigned to other intangible assets,
      and
      discontinued amortization of goodwill .
      SFAS
      142 also requires that an impairment test be performed on goodwill at least
      annually. This test requires that the fair value of each reporting unit as
      a
      whole be compared to its carrying value including goodwill. If the reporting
      unit’s fair value exceeds its carrying value, goodwill is not impaired. If,
      however, the carrying value of the reporting unit exceeds its fair value, a
      second step of the impairment test is required. This second test requires that
      an estimate of the implied fair value of goodwill be compared to its carrying
      amount. If the carrying amount of goodwill exceeds the implied value, the
      goodwill is impaired and is written down to the implied fair value. The implied
      fair value of goodwill is the excess of the fair value of the reporting unit
      as
      a whole, over the fair values that would be assigned to its assets and
      liabilities in a purchase business combination. We tested goodwill for
      impairment as of December 31, 2005, using our 3-year business plan and
      calculating a discounted cash flow based on that plan to determine the fair
      value of the reporting units. As a result, we determined that the fair value
      of
      our reporting units exceeded their carrying value, thus no impairment was
      recorded. The components of intangible assets are as follows:





**December
                  31,**
              
              **December
                  31,**(In
                  thousands)
              
              **2005**
              
              **2004**Wireless
                  Data CommunicationsGoodwill
              
              $
              12,284
              
              $
              12,284Accumulated
                  Amortization
              
              
              (1,405
              )
              
              (1,405
              )Digital
                  Multimedia and NetworkingGoodwill
              
              
              5,409
              
              
              5,409Accumulated
                  Amortization
              
              
              (1,274
              )
              
              (1,274
              )Goodwill,
                  net
              
              $
              15,014
              
              $
              15,014Purchased
                  and developed software
              
              
              3,268
              
              
              2,664Patents,
                  trade and service marks
              
              
              11,452
              
              
              11,449Intangible
                  and other assets
              
              
              503
              
              
              361Total
                  intangible assets
              
              
              15,223
              
              
              14,474Accumulated
                  amortization
              
              
              (7,935
              )
              
              (6,663
              )Intangible
                  assets, net
              
              $
              7,288
              
              $
              7,811





The
      Company expects amortization expense for the next five years to be as follows
      based on intangible assets as of December 31, 2005 (in thousands):


2006
              
              $
              1.1
                  million2007
              
              
              930,0002008
              
              
              871,0002009
              
              
              793,0002010
              
              
              772,000Thereafter
              
              
              750,000





35


**6.**  **** **Property
      and Equipment**





Depreciation
      is provided in amounts sufficient to relate the cost of depreciable assets
      to
      operations over their estimated service lives. Leased property under capital
      leases is amortized over the lives of the respective leases or over the service
      lives of the assets for those leases, whichever is shorter. Depreciation for
      property and equipment is calculated using the straight-line method over the
      following estimated lives:





·
            Short-term
                leasehold improvements over the term of the lease3-10
                years


·
            Plant
                and machinery4-10
                years


·
            Equipment,
                fixtures and fittings3-10
                years





**7.**  **** **Impairment
      of Long-lived Assets**





We
      adopted SFAS No. 144 on January 1, 2002. In accordance with SFAS No. 144,
      long-lived assets, such as property and equipment, and purchased intangibles
      subject to amortization, are reviewed for impairment whenever events or changes
      in circumstances indicate that the carrying amount of an asset may not be
      recoverable. Recoverability of assets to be held and used is measured by a
      comparison of the carrying amount of an asset to estimated undiscounted future
      cash flows expected to be generated by the asset. If the carrying amount of
      an
      asset exceeds its estimated future cash flows, an impairment charge is
      recognized by the amount by which the carrying amount of the asset exceeds
      the
      fair value of the asset. Assets to be disposed of by sale would be separately
      presented in the consolidated balance sheet and reported at the lower of the
      carrying amount or fair value less costs to sell, and are no longer depreciated.
      The assets and liabilities of a disposed group classified as held for sale
      would
      be presented separately in the appropriate asset and liability sections of
      the
      consolidated balance sheet.




**8.**  **Income
      Taxes**  ****





We
      account for income taxes using the asset and liability method in accordance
      with
      SFAS 109, Accounting for Income Taxes. Under the asset and liability method,
      deferred income taxes are recognized for the tax consequences of 2 temporary
      differences 2 by
      applying enacted statutory tax rates applicable to future years to differences
      between the financial statement carrying amounts and the tax bases of existing
      assets and liabilities. A valuation allowance is provided for deferred tax
      assets when it is more likely than not that the assets will not be
      realized.





**9.**  **Inventory**





Inventory
      and work-in progress are stated at the lower of cost (first-in, first-out
      method) or market.





**10** .  **Notes
      Receivable**





We
      did
      not have any notes receivable at December 31, 2005. We had $133,000 of notes
      receivable ($41,000 short term and $92,000 long term) at December 31, 2004.
      These notes were paid in full in 2005.





**11.**  **Allowance
      for Doubtful Accounts**





We
      maintain an allowance for estimated losses resulting from the inability of
      our
      customers to make required payments. The allowance for doubtful accounts is
      based principally upon specifically identified amounts where collection is
      deemed doubtful. Additional non-specific allowances are recorded based on
      historical experience and management’s assessment of a variety of factors
      related to the general financial condition and business prospects of our
      customer base. Management reviews the collectibility of individual accounts
      and
      assesses the adequacy of the allowance for doubtful accounts monthly. Account
      balances are charged off against the allowance after all means of collection
      have been exhausted and the potential for recovery is considered remote.





**12.**  **Other
      Assets**





In
      May
      2003, we shipped $583,000 of wire-line security detection equipment to a
      customer in Australia. This equipment has been installed at several sites based
      on an equipment supply agreement (the “Agreement”) with this customer. The
      Agreement allows the customer to generate additional revenues by providing
      additional services to its customers. We will share in these revenues as payment
      for the equipment. While this customer retains title to this equipment from
      acceptance (which occurred May 2003), it must meet certain obligations under
      the
      Agreement or pay amounts specified in the Agreement. Since the actual revenue
      that will be generated by the sale of the equipment is uncertain at this time,
      we are recognizing revenue on the sale of the equipment equal to the payments
      received from this customer from this revenue share. We also recognized cost
      of
      sales equal to the payments received from the customer and reduced the value
      of
      this asset. We received our first payments from this customer in September
      2004.
      Currently we expect to receive at least the full value of the equipment from
      this revenue share, however, as more information becomes available, we will
      reassess the accounting treatment for the project. At June 30, 2003, the value
      of the wire-line equipment was transferred from inventory to other assets.
      The
      carrying value of the equipment was $304,000 at December 31, 2005 and $477,000
      at December 31, 2004.





**13.**  **Note
      Payable**





On
      January 28, 2005, the Company completed a private placement to Laurus Master
      Fund, Ltd. (“Laurus”) of (i) a Convertible Term
      Note
      in the original principal amount of $1,500,000 (the “Second Company Note”), and
      (ii) a warrant to purchase up to 100,000 shares of our common stock (the “Second
      Warrant”). The Second Company Note bears interest at the rate of eight percent
      (8%) per annum, matures on January 28, 2008 and is secured by substantially
      all
      of our assets and our U.S. subsidiaries (except DCX Systems Australia Pty
      Limited). Each of our U.S. subsidiaries also has executed and delivered a
      guaranty to Laurus. The Second Company Note requires that interest and principal
      thereunder is to be paid monthly, and provides that such monthly principal
      and
      interest payments may be paid by us either in cash or in common stock, subject
      to certain limitations. If the monthly payment then due is paid by us using
      common stock, then the number of shares to be issued by us to Laurus will be
      determined based upon a fixed conversion price of $5.31 per share. Otherwise,
      if
      the monthly payment then due is paid by us using cash, then we are required
      to
      pay Laurus an amount equal to one hundred two percent (102%) of the amount
      then
      due and payable. The Second Company Note also provides that Laurus may convert
      all or any portion of the outstanding principal amount


36


of
      the
      Second Company Note into shares of common stock, subject to certain limitations.
      The Second Warrant is exercisable by Laurus until January 28, 2012, and has
      two
      separate pricing tranches. The first pricing tranche is exercisable for up
      to
      50,000 shares of common stock at a price of $5.51 per share. The second pricing
      tranche is exercisable for up to 50,000 shares of common stock at a price of
      $5.72 per share. We were required
      to register the common stock underlying the Second Company Warrant for resale
      by
      Laurus, and have such registration declared effective, by August 28, 2005. Such
      registration statement was declared effective June 17, 2005. The Second Company
      Note also contains a Beneficial Conversion Feature with a contingent conversion
      option. The value of the Beneficial Conversion Feature was measured as of the
      commitment date. The value at the commitment date was $154,000. The value will
      be amortized ratably over the remaining period of the Note once the
      contingencies have been met. As of December 31, 2005 $17,000 has been amortized.





On
      January 13, 2004, we completed our first private placement to Laurus of (i)
      a
      Convertible Term Note in the aggregate principal amount of $4,500,000 (the
      “First Company Note”), and (ii) a warrant to purchase up to 300,000 shares of
      the Company’s common stock (the “First Warrant”). The First Warrant is
      exercisable by Laurus until January 13, 2011, and has three separate tranches.
      The first tranche is exercisable for up to 150,000 shares
      of common stock at a price of $ 4.75 per
      share. The second tranche is exercisable for up to 100,000 shares
      of common stock at a price of $ 5.17 per
      share. The third tranche is exercisable for up to 50,000 shares
      of common stock at a price of $ 5.99 per
      share. We also agreed to register the common stock underlying the First Company
      Warrant for resale by Laurus, and have such registration declared effective,
      by
      August 13, 2004. Such registration statement was declared effective on November
      22, 2004. Thus, under the terms of the First Company Warrant, we were required
      to increase the number of shares of common stock underlying the First Company
      Warrant by 15,000 additional shares per
      month (at
      an
      exercise price of $5.99 per share) during the period from August 13, 2004
      through November 22, 2004. As a result, an additional 66,000 warrants were
      issued and are covered by the First Warrant Agreement.





On
      July
      6, 2005 we voluntarily converted $2,280,000 of the outstanding debt associated
      with the First Company Note into 500,000 shares of common stock. On August
      1,
      2005 we converted the $953,040 remaining outstanding portion of the debt
      associated with the First Company Note into 209,000 shares of common stock.
      As a
      result of these transactions, the only outstanding debt of the Company,
      excluding capital leases, is the Second Company Note of $1,500,000. However,
      the
      Warrants associated with the First Company Note remain outstanding.




Laurus
      is
      an "accredited investor" as defined in Rule 501(d) of Regulation D under the
      Securities Act of 1933, as amended (the "Securities Act"). The Company issued
      the securities to Laurus in reliance on the exemption from registration provided
      by Section 4(2) under the Securities Act.





As
      a
      result of the July 6, 2005 and the August 1, 2005 transactions with Laurus,
      stockholders have experienced dilution and will experience future dilution
      based
      on transactions with Laurus, or the equity securities may have rights,
      preferences or privileges senior to those of the common stockholders. In
      addition, as a result of issuing debt, those securities have rights, preferences
      and privileges senior to those of the common stock holders. If we are unable
      to
      repay the Company Notes, Laurus has the right to demand full payment of all
      outstanding principal and interest due under the Company Notes and invoke its
      right to the collateral under the related security agreements.





**14.**  **Shareholders’
      Equity**





Shareholders’
      equity increased by $4.1 million for the twelve months ended December 31, 2005.
      The increase in Shareholders’ equity was due, in part, to a $3.2 million
      issuance of common shares which was related to the conversion of the First
      Company Note. Shareholders’ equity also increased due to net earnings of
      $593,000 and a $326,000 increase in additional paid in capital. The increase
      in
      addition paid in capital was due to $172,000 related to the issuance of warrants
      related to the Second Company note and $154,000 related to the Beneficial
      Conversion Feature that is also related to the Second Company note.





**15.**  **Fair
      Value of Financial Instruments**





Our
      financial instruments include cash, accounts receivable, notes receivable and
      accounts payable. The carrying value of the financial instruments approximates
      fair value due to the relatively short period to maturity. The carrying value
      of
      the note payable approximates fair value and bears cash interest at 8%, which
      approximates market rates of similar instruments.





**16.**  **Use
      of Estimates**





In
      preparing our financial statements, management is required to make estimates
      and
      assumptions that affect the reported amounts of assets and liabilities, the
      disclosure of contingent assets and liabilities at the date of the financial
      statements, and the reported amounts of revenues and expenses during the
      reporting period. Actual results


37


could
      differ from those estimates.





**17.**  **Concentration
      of Credit Risk**





We
      maintain our cash and short term investment balances in financial institutions,
      which at times may exceed federally insured limits. We had cash balances in
      excess of these limits of $4,259,000 and $1,584,000 for the years ended December
      31, 2005 and 2004, respectively. We have not experienced any losses in such
      accounts and believe we are not exposed to any significant credit risk on cash
      and cash equivalents.





**18.**  ******Revenue
      Recognition**





Our
      revenue is generated from three sources:


·  the
      supply of product, under non recurring agreements,


·  the
      provision of services, under non recurring agreements, and,


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





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





We
      recognize revenue from product sales at the time of shipment and passage of
      title. We offer customers the right to return products that do not function
      properly within a limited time after delivery. We continuously monitor and
      track
      such product returns and record a provision for the estimated amount of such
      future returns, based on historical experience and any notification received
      of
      pending returns. While such returns have historically been within expectations
      and the provisions established, we cannot guarantee that we will continue to
      experience the same return rates that we have experienced in the past. Any
      significant increase in product failure rates and the resulting credit returns
      could have a material adverse impact on operating results for the period or
      periods in which such returns materialize.




We
      recognize revenue from the provision of services at the time of the completion,
      delivery or performance of the service. In the case of revenue derived from
      maintenance services we recognize revenue ratably over the contract term. In
      certain instances we may under an appropriate agreement advance charge for
      the
      service to be provided. In these instances we recognize the advance charge
      as
      deferred revenue (classified as a liability) and release the revenue ratably
      over future periods in accordance with the contract term as the service is
      completed, delivered or performed.





Our
      arrangements do not generally include acceptance clauses. However, arrangements
      involving multiple element service agreements include certain milestones and
      levels of certification, acceptance occurs upon our certification of our
      completion of each of the various elements.





We
      recognize revenue from the provision of our data transportation services when
      we
      perform the services or process transactions in accordance with contractual
      performance standards. Revenue is earned monthly on the basis of the contracted
      monthly fee and an excess message fee charge, should it apply, that is volume
      based. In certain instances we may under an appropriate agreement advance charge
      for the data transport service to be provided. In these instances we recognize
      the advance charge (even if nonrefundable) as deferred revenue (classified
      as a
      liability) and release the revenue over future periods in accordance with the
      contract term as the data transport service is delivered or performed.





**19.**  **** **Foreign
      Currency Transactions**





While
      the
      majority of our transactions and the transactions of our subsidiaries occur
      in
      the United States in U.S. dollars, a limited number are made in Canadian
      dollars, Australian dollars, and British pounds sterling. Such transactions
      include recurring service revenues billed to customers in Canada that are
      denominated in Canadian dollars, some transactions between Numerex Corp. and
      its
      small subsidiary in Australia are denominated in Australian dollars. Gains
      and
      losses from these transactions are included in income as they occur. For the
      year ended December 31, 2005 the Company had a foreign currency loss of $5,000,
      a loss of $52,000 for the year ended December 31, 2004 and a loss of $60,000
      for
      the year ended December 31, 2003.





**20.**  **** **Research
      and Developme** nt





Research
      and development expenses are charged to operations in the period in which they
      are incurred. For the Years ended December 31, 2005, 2004 and 2003 research
      and
      development costs amounted to $1.1 million, $906,000 and $905,000,
      respectively.


38




**21.**  **Provision
      for Warranty Claims**





Estimated
      warranty expense is charged over the warranty period of the warranted products.
      Warranty expenses have not been significant.





**22.**  **Stock-Based
      Compensation**





Effective
      November 1, 1996, we adopted the provisions of SFAS No. 123, Accounting for
      Stock-Based Compensation *.* SFAS
      No.
      123 encourages, but does not require, companies to record compensation cost
      for
      stock-based compensation plans at fair value. We have elected to continue to
      account for stock-based compensation in accordance with Accounting Principles
      Board ( 2 APB 2 )
      Opinion
      No. 25, Accounting For Stock Issued to Employees, and related interpretations,
      as permitted by SFAS 123. Compensation expense for stock options is measured
      as
      the excess, if any, of the quoted market price of our stock at the date of
      the
      grant over the amount an employee must pay to acquire the stock (see Note
      J).





Had
      compensation expense for our aforementioned stock option plans been determined
      based on the fair value at the grant dates for awards under those plans under
      the provisions of SFAS No. 123, our net earnings (loss) and earnings (loss)
      per
      share would have been changed to the following pro forma amounts:












**For
                the years ended December 31,**(In
                thousands, except per share data)
            
            **2005**
            
            **2004**
            
            **2003**Net
                earnings (loss) - as reported
            
            $
            593
            
            $
            (2,079
            )
            $
            (1,404
            )Less
                total stock-based compensation expense determined under fair value
                based
                method for all awards
            
            
            455
            
            
            637
            
            
            2,355Pro
                forma net earnings (loss)
            
            $
            138
            
            $
            (2,716
            )
            $
            (3,759
            )Basic
                earnings (loss) per share:As
                reported
            
            $
            0.05
            
            $
            (0.19
            )
            $
            (0.13
            )Pro
                forma
            
            $
            0.01
            
            $
            (0.25
            )
            $
            (0.34
            )Diluted
                earnings (loss) per share:As
                reported
            
            $
            0.05
            
            $
            (0.19
            )
            $
            (0.13
            )Pro
                forma
            
            $
            0.01
            
            $
            (0.25
            )
            $
            (0.34
            )








The
      pro
      forma effect on net loss and loss per share for the years ended December 31,
      2005, 2004, and 2003, respectively, by applying SFAS No. 123, may not be
      indicative of the pro forma effect on net earnings (loss) in future years since
      SFAS No. 123 does not take into consideration pro forma compensation expense
      related to awards made prior to November 1, 1995, and since additional awards
      in
      future years are anticipated.





**23.**  **Earnings
      (Loss) Per Share**





Basic
      net
      earnings per common share available to common shareholders is based on the
      weighted-average number of common shares outstanding excluding the dilutive
      impact of common stock equivalents. For periods in which we have net earnings,
      we base diluted net earnings per share on the weighted-average number of common
      shares outstanding and dilutive potential common shares, such as dilutive common
      stock equivalents.





The
      numerator in calculating both basic and diluted net earnings per share for
      each
      period is net earnings. The denominator is based on the following number of
      common shares:





39




**For
                the years ended December 31,**(In
                thousands, except per share data)
            
            **2005**
            
            **2004**
            
            **2003**Common
                Shares:Weighted
                average common shares outstanding
            
            
            11,231
            
            
            10,798
            
            
            10,934Dilutive
                effect of common stock equivalents
            
            
            251
            
            
            -
            
            
            -Total
            
            
            11,482
            
            
            10,798
            
            
            10,934Net
                earnings (loss):
            
            
            593
            
            
            (2,079
            )
            
            (1,404
            )Net
                earnings (loss) per share:Basic
            
            
            0.05
            
            
            (0.19
            )
            
            (0.13
            )Diluted
            
            
            0.05
            
            
            (0.19
            )
            
            (0.13
            )





For
      the
      twelve months ended December 31, 2005, we excluded options to purchase 1,044,015
      shares of common stock and common stock equivalents from the computation of
      diluted earnings per share. We excluded these share amounts because the exercise
      prices of those shares were greater than the average market price of the common
      stock during the applicable period.





Because
      of the antidulitive effect of the net loss, potential common shares resulting
      from options, convertible debt and warrants were excluded from the calculation
      of diluted earnings per share for the twelve months ended December 31, 2004
      and
      for the twelve months ended December 31, 2003. For the twelve months ended
      December 31, 2004, options to purchase 200,710 shares of common stock and common
      stock equivalents, and for the twelve months ended December 31, 2003 options
      to
      purchase 62,149 shares of common stock and common stock equivalents would have
      been taken into account in calculating diluted earnings per share were it not
      for the antidilutive effect of the net loss.





As
      of
      December 31, 2005, we had a total of 1,379,015 options outstanding, as of
      December 31, 2004, we had a total of 1,404,515 options outstanding and as of
      December 31, 2003 we had a total of 1,200,515 options outstanding.





**24.** **Advertising
      Expenses**





Advertising
      expenses are charged to operations in the period in which they are incurred.
      For
      the Years ended December 31, 2005, 2004 and 2003 advertising costs amounted
      to
      $391,000, $314,000 and $389,000, respectively.





**25.** **Recent
      Accounting Pronouncements**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No.
      123(R)”). SFAS No. 123(R) requires that the compensation cost relating to
      share-based payment transactions, including grants of employee stock options,
      be
      recognized in financial statements. That cost will be measured based on the
      fair
      value of the equity or liability instruments at the time of issuance. SFAS
      No.
      123(R) covers a wide range of share-based compensation arrangements including
      stock options, restricted share plans, performance-based awards, share
      appreciation rights, and employee share purchase plans. The effect of the
      standard will be to require entities to measure the cost of employee services
      received in exchange for stock awards based on its grant-date fair value and
      to
      recognize the cost over the period the employee is required to provide services
      for the award.




Effective
      January 1, 2006 we adopted SFAS No. 123(R), *Share-Based
      Payment* ,
      or
      Statement 123(R). We plan to use the modified prospective transition method
      for
      our existing stock-based compensation plans. Under the modified prospective
      transition method, the fair value-based accounting method will be used for
      all
      employee awards granted, modified, or settled after the adoption date.
      Compensation cost related to the nonvested portion of awards outstanding as
      of
      that date will be based on the grant-date fair value of those awards as
      calculated under the original provisions of SFAS No. 123. Under this method,
      it
      is estimated that the adoption of SFAS No. 123(R) will result in approximately
      $350,000 of stock-based compensation expense before taxes in 2006 related to
      non-vested employee options issued prior to the adoption date. We anticipate
      we
      will grant additional employee stock options during 2006. The fair value of
      these grants is not included in the amount above, as the impact of these grants
      cannot be predicted at this time because it will depend on the number of
      share-based payments granted and the then current fair values.






In
      November 2004, the FASB released revised SFAS No. 151, “Inventory Costs - an
      amendment of ARB No. 43” (“SFAS No. 151”). The new standard requires abnormal
      amounts of idle facility expense, freight, handling costs, and wasted material
      (spoilage) to be recognized as current-period charges. It also requires that
      allocation of fixed production overhead to the costs of conversion be based
      on
      the normal capacity of the production facilities. The




40




requirements
      of the standard will be effective for inventory costs incurred during fiscal
      years beginning after June 15, 2005. Although we are still evaluating the impact
      that the adoption of SFAS No. 151 will have on our Consolidated Financial
      Statements, we currently do not believe it will have a material impact as we
      have not historically had any abnormally low levels of production, unplanned
      downtime, labor or material shortages.






In
      December 2004, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 153 (“SFAS 153”), “Exchanges of
      Nonmonetary Assets—an amendment of APB Opinion No. 29”. SFAS 153 amends the
      guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions”,
      based on the principle that exchanges of nonmonetary assets should be measured
      based on the fair value of the assets exchanged. The guidance in Opinion 29,
      however, included certain exceptions to that principle. SFAS 153 amends Opinion
      29 to eliminate the exception for nonmonetary exchanges of similar productive
      assets and replaces it with a general exception for exchanges of nonmonetary
      assets that do not have commercial substance. A nonmonetary exchange has
      commercial substance if the future cash flows of the entity are expected to
      change significantly as a result of the exchange. The provisions of SFAS 153
      are
      effective for nonmonetary asset exchanges occurring in fiscal periods beginning
      after June 15, 2005. The provisions of SFAS 153 are not expected to have a
      material effect on the Company’s consolidated financial statements.






In
      May 2005, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 154 (“SFAS 154”), “Accounting Changes
      and Error Corrections,” a replacement of APB Opinion No. 20 and FASB
      Statement No. 3. SFAS 154 requires retrospective application to prior
      period financial statements for changes in accounting principles, unless it
      is
      impracticable to determine either the period-specific effects or the cumulative
      effect of the change. SFAS 154 also requires that retrospective application
      of a
      change in accounting principle be limited to the direct effects of the change.
      Indirect effects of a change in accounting principle should be recognized in
      the
      period of the accounting change. SFAS 154 further requires a change in
      depreciation, amortization or depletion method for long-lived, non-financial
      assets to be accounted for as a change in accounting estimate affected by a
      change in accounting principle. SFAS 154 will become effective for the Company’s
      fiscal year beginning January 1, 2006. The provisions of SFAS 154 are not
      expected to have a material effect on the Company’s consolidated financial
      statements.







The
      above
      discussion is not intended to be a comprehensive list of all of our accounting
      policies. In many cases, the accounting treatment of a particular transaction
      is
      specifically dictated by accounting principles generally accepted in the United
      States of America, with no need for management’s judgment in their application.
      There are also areas in which management’s judgment in selecting any available
      alternative would not produce a materially different result. See our audited
      consolidated financial statements and notes which begin on page 33 of this
      Annual Report on Form 10-K which contains accounting policies and other
      disclosures required by accounting principles generally accepted in the United
      States of America.





**26.** **Reclassification**




Certain
      prior year amounts have been reclassified to conform to the current period
      presentation.







**NOTE
      B - LIQUIDITY** ****





As
      disclosed in the financial statements, our operations generated cash in 2005.
      We
      continue to add products and distribution channels for our products and we
      closely monitor our costs. Our long term success will depend upon continued
      operating earnings and increased cash flow.





We
      believe that our existing cash and cash equivalents, together with cash
      generated from operations, will be sufficient to meet our operating requirements
      through at least December 31, 2006. This belief could be affected by future
      operating losses in excess of expectations, a material adverse change in our
      operating business or a default under the Company Note. The Company is also
      considering other sources of funding.








**NOTE
      C - INVESTMENTS AND DIVESTITURES**





On
      September 15, 2003, we sold the Data1Source mobile messaging service through
      our
      entity Data1Source LLC. The selling price was approximately $3,400,000 with
      $3,200,000 paid in cash at closing and $200,000 due in six months, if certain
      criteria were met. The resulting gain included in other income in the year
      ended
      December 31, 2003 was $1,712,000. Cost associated with the transaction included
      the net book value of the assets sold, including software and computer hardware,
      and transaction costs, including finder’s fees and legal costs. At closing,
      certain obligations of ours were paid. These costs included the first payment
      due on the note payable to Cingular (see below)


41


of
      $1,500,000 and a $605,000 payoff of the lease obligation on the software sold
      with Data1Source. Subsequent to the sale of Data1Source LLC, we used a portion
      of the proceeds to pay off the entire outstanding balance of $400,000 on our
      revolving line of credit. The sale of Data1Source LLC did not meet the
      requirements to be considered a significant disposition. In March 2004, we
      received the contingent payment on the sale of Data1Source LLC because the
      criteria specified in the agreement had been met. Accordingly we recognized
      an
      additional $250,000 gain on the sale during the year ended December 31, 2004.





On
      March
      28, 2003, we acquired Cingular’s interest in Cellemetry and the 625,000 shares
      of our stock owned by Cingular for $5,000,000. Under the terms of the agreement,
      we agreed to pay Cingular $1,500,000 by December 15, 2003, $2,000,000 by
      September 30, 2004 and $1,500,000 by December 15, 2004. Our obligation was
      secured by the pledge of the stock of all our subsidiaries (except Digilog)
      and
      a lien on the assets of all our subsidiaries (except Digilog) and accrued
      interest at a rate of eight percent (8%) per annum. On September 15, 2003,
      we
      made the first payment of $1,500,000 due Cingular on the note using a portion
      of
      the proceeds from the sale of Data1Source LLC and paid the remaining balance
      on
      January 13, 2004 from a portion of the proceeds from the term note payable
      to
      Laurus Master Fund, Ltd.




**NOTE
      D - INVENTORY**





Inventory
      consisted of the following:




**December
                31,**(In
                thousands)
            
            **2005**
            
            **2004**Raw
                materials
            
            $
            349
            
            $
            830Work-in-progress
            
            
            8
            
            
            13Finished
                goods
            
            
            1,654
            
            
            1,685Less
                reserve for obsolescence
            
            
            (317
            )
            
            (967
            )Inventory
            
            $
            1,694
            
            $
            1,561








**NOTE
      E - PROPERTY AND EQUIPMENT**





Property
      and equipment consisted of the following:




**December
                31,**(In
                thousands)
            
            **2005**
            
            **2004**Leasehold
                improvements
            
            $
            645
            
            $
            449Plant
                and machinery
            
            
            7,925
            
            
            7,327Equipment,
                fixtures, fittings
            
            
            572
            
            
            687Total
                property and equipment
            
            
            9,142
            
            
            8,463Accumulated
                depreciation
            
            
            (8,156
            )
            
            (7,623
            )Property
                and equipment, net
            
            
            986
            
            
            840








**NOTE
      F - INCOME TAXES**





For
                the periods noted below, the provisions for income taxes consists
                of the
                following:





**December
                31,**(in
                thousands)
            
            **2005**
            
            **2004**
            
            **2003**Current:Federal
            
            $
            -
            
            $
            -
            
            $
            -State
            
            
            52
            
            
            9
            
            
            30Foreign
            
            
            -
            
            
            -
            
            
            62Deferred:Federal
            
            
            -
            
            
            -
            
            
            -Foreign
            
            
            -
            
            
            -
            
            
            -$
            52
            
            $
            9
            
            $
            92


Income
      taxes recorded by the Company differ from the amounts computed by applying
      the
      statutory U.S. federal income tax rate to income before income taxes. The
      following schedule reconciles income tax expense (benefit) at the statutory
      rate
      and the actual income tax expense as reflected in the consolidated statements
      of
      operations for the respective periods:




**December
                  31,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **2003**Income
                  tax (benefit) computed at U.S. corporate tax rate of 34%
              
              $
              219
              
              
              ($704
              )
              
              ($595
              )Adjustments
                  attributable toValuation
                  allowance
              
              
              (241
              )
              
              677
              
              
              595State
                  Tax
              
              
              34
              
              
              9
              
              
              30Foreign
                  Tax
              
              
              6
              
              
              6
              
              
              62Non-deductible
                  expenses
              
              
              16
              
              
              21
              
              
              -Other
              
              
              18
              
              
              -
              
              
              -$
              52
              
              $
              9
              
              $
              92




The
      components of the Company’s net deferred tax assets and liabilities are as
      follows:




(in
                    thousands)
                
                **December
                    31,****2005**
                
                **2004**Current
                    deferred tax assetInventories
                
                $
                115
                
                $
                392Accruals
                
                
                642
                
                
                471Other
                
                
                292
                
                
                337Valuation
                
                
                (1,049
                )
                
                (1,200
                )-Non-Current
                    deferred tax assetIntangibles
                
                
                (270
                )
                
                (224
                )Foreign
                    NOL carry forward
                
                
                88
                
                
                42Net
                    operating loss carry forward
                
                
                9,084
                
                
                9,051Tax
                    credit carry forward
                
                
                1,202
                
                
                1,202Differences
                    between book andtax
                    basis of property & equiment
                
                
                286
                
                
                185Valuation
                
                
                (10,390
                )
                
                (10,256
                )-Total
                
                $
                -
                
                $
                -





The
      change in the valuation allowance is attributable to current year book/tax
      differences and state net operating losses presented on a gross rather than
      net
      basis.





Net
      operating loss carry forwards available at December 31, 2005, expire as follows:





(in
                thousands)
            
            
            
            Year
                ofAmount
            
            ExpirationFederal
                operating losses
            
            $
            17,639
            
            
            2006
                - 2024State
                operating losses
            
            $
            61,930
            
            
            2007
                - 2024Foreign
            
            $
            295
            
            
            N/A








We
      are entitled
      to the benefits of certain net operating loss carry forwards for income tax
      purposes. Subject to applicable regulations, net operating loss carry forwards
      may be offset against income in future years to reduce the our future tax
      liability. In March 2004, we filed a ruling request with the Internal Revenue
      Service (IRS) for an


42


extension
      of time to file an election to carry forward some net operating losses that
      were
      in question.  In July 2004, we received permission to carry the net
      operating losses forward.  Therefore, we are entitled to the benefits of
      the net operating loss carry forwards.  The net operating loss carry
      forwards have been recorded as an asset in the financial statements with a
      corresponding valuation allowance. We will continue to evaluate the need for
      the
      valuation allowance on a quarterly basis beginning the first quarter of fiscal
      year 2006.








**NOTE
      G - SIGNIFICANT CUSTOMER, CONCENTRATION OF CREDIT RISK AND RELATED
      PARTIES**





We
      had
      one supplier from which our purchases were approximately 69% of cost of product
      sales for the year ended December 31, 2005, 37% of cost of product sales for
      the
      year ended December 31, 2004 and 13% of cost of product sales for the year
      ended
      December 31, 2003. Our accounts payable to this supplier was approximately
      $2.2
      million and $700,000 at December 31, 2005 and 2004, respectively. The components
      included in the products purchased from this supplier can be sourced from other
      suppliers.





We
      conducted business with one related party during the year ended December 31,
      2005. Mr. Ryan, a director on the Company’s Board of Directors is also partner
      in the law firm of Salisbury & Ryan LLP. Salisbury & Ryan LLP provided
      legal services to the Company in fiscal 2005 and will continue to provide such
      services during fiscal 2006. During fiscal 2005 and 2004, Salisbury & Ryan
      LLP charged legal fees of approximately $263,000 and $175,000. Our accounts
      payable to Salisbury & Ryan LLP was $49,000 and $27,000 at December 31, 2005
      and 2004, respectively. During fiscal 2003, Salisbury & Ryan LLP charged us
      approximately $360,000.








**NOTE
      H - COMMITMENTS AND CONTINGENCIES**





**Capital
      Leases**





We
      conduct a portion of our operations with leased equipment. For financial
      reporting purposes, minimum lease rentals relating to the equipment have been
      capitalized.





The
      related assets and obligations have been recorded using our incremental
      borrowing rate at the inception of the lease. The leases expire at various
      dates
      through 2007. The net carrying value of assets financed by capital lease
      obligations is approximated $129,000 as of December 31, 2005. The following
      is a
      schedule by years of future minimum lease payments under capital leases together
      with the present value of the net minimum lease payments as of December 31,
      2005
      (in thousands).




2006
            
            $
            622007
            
            
            61Total
                minimum lease payments
            
            
            123Less
                amount representing interest
            
            
            (5
            )Present
                value of net minimum lease payments
            
            $
            118




**Operating
      Leases**





We
      lease
      certain property and equipment under non-cancelable operating leases with
      initial terms in excess of one year. Future minimum lease payments under such
      non-cancelable operating leases subsequent to December 31, 2005, (in thousands)
      are as follows:




2006
            
            $
            4142007
            
            
            4202008
            
            
            4262009
            
            
            4202010
            
            
            398Beyond
                2010
            
            
            410Total
                minimum lease payments
            
            $
            2,488





Rent
      expense, including short-term leases, amounted to approximately $781,000,
      $777,000 and $759,000 for the years ended December 31, 2005, 2004, and 2003
      respectively.


43


**NOTE
      I** **- BENEFIT PLANS**





**Savings
      and Investment Plan**





We
      sponsor a 401(k) savings and investment plan, a plan that covers all eligible
      employees of Numerex Corp and its subsidiaries. Employees are eligible for
      participation on the enrollment date following six months of service. We
      contribute an amount equal to 50% of the portion of the employee’s elective
      deferral contribution that do not exceed 6% of the employee’s total compensation
      for each payroll period in which an elective deferral is made. Our contribution
      is made in cash on a monthly basis. Our matching contributions are vested over
      a
      three year period at a rate of 33% per year. Approximately $101,000, $82,000
      and
      $44,000 were expensed for the years ended December 31, 2005, 2004 and 2003.





**Employee
      Stock Purchase Plan**





All
      employees of Numerex and its subsidiaries are entitled to participate in a
      discounted Employee Stock Purchase Plan. This plan allows employees to elect
      to
      have an amount withheld from their pay that is held in an account for the
      purchase of our common stock. The plan has two measurement dates per year -
      July
      1 and January 1, which is used to determine the stock price at a 15% discount
      and number of shares issued to the employee. There are a total of 500,000 shares
      authorized of which 450 and 1,675 were issued in the year ended December 31,
      2005 and December 31, 2004 at an average share price of $4.16 and $2.60,
      respectively. We had 496,978 shares available to be issued for this plan at
      December 31, 2005.





**NOTE
      J** **- STOCK OPTION PLANS**





We
      have
      outstanding stock options granted pursuant to three stock option plans. The
      1994
      Long-Term Incentive Plan (the “1994 Plan”), which was adopted in 1994, the
      Non-Employee Director Stock Option Plan (the “Director Plan”) which was adopted
      in 1996, and the  Long-Term
      Incentive Plan (the “1999 Plan”). The 1994 Plan and the Director Plan were
      terminated and replaced by the 1999 Plan and was effective for options granted
      as of and from October 25, 1999. Options outstanding under the 1994 Plan and
      the
      Director Plan remain in effect, but no new options may be granted under those
      plans.





Under
      the
      1999 Stock Option Plan, options to purchase Class A common shares are
      granted in the form of both incentive stock options and non-qualified stock
      options. The number of options granted under this plan is determined with each
      grant, except with respect to non-employee directors, who receive grants of
      non-qualified options of 4,000 shares at the end of each fiscal quarter. The
      price of such grants is equal to the closing market price of the shares on
      the
      date of grant. Options are exercisable based on the terms of such options,
      but
      no more than 10 years after the date of grant.





Options
      issued under the 1999 Plan typically vest ratably over a four-year period.
      Options issued under the 1994 Plan typically vest over a five-year period.
      Certain options issued under the 1994 Plan have cliff-vesting terms at the
      end
      of a five-year period and terms which provide for the acceleration of vesting
      upon the attainment of specified market prices for our common stock for a period
      of 60 days.





In
      the
      event of a “change in control” as defined in the 1999 Plan, 1994 Plan and
      Director Plan, respectively, all outstanding options become fully vested and
      are
      subject to exercise.





Incentive
      stock options and nonqualified stock options granted under the 1999 and 1994
      Plans, respectively, expire 10 years after the grant date unless an option
      holder’s employment is terminated. Under such circumstances, the options
      typically expire three months from the date of employment termination.





Incentive
      and nonqualified options exercisable at December 31, 2005 and 2004 totaled
      838,078 and 662,988, respectively. Options available for grant at
      December 31, 2005, for the 1999 Plan are 335,566 shares.





The
      fair
      value of each option on the date of grant for 2005, 2004, and 2003 was estimated
      using the Black-Scholes options pricing model with the following weighted
      average assumptions: no dividend yield for all years; expected volatility of
      69.8% for 2005, 77% for 2004 and 137% for 2003; risk-free interest rate of
      4.35%
      for 2005, 3.69% for 2004 and 3.79% for 2003; and expected option lives of 6.7
      years for 2005, 4.2 years for 2004 and 6.9 years for 2003.





The
      exercise price for 1,379,015 options outstanding at December 31, 2005, is
      between $1.00 and $12.94. Such options will expire on average in 6.7 years.
      The
      weighted average fair value of options granted during 2005, 2004, and 2003
      was
      $3.09, $5.04 and $2.30, respectively, on the date of grant.


44


A
      summary
      of the status of the Company’s stock option plans as of December 31, 2005,
      2004, and 2003 and changes during the years ended on those dates is presented
      below:





For
                the years ended December 31,FYE
                12-31-05
            FYE
                12-31-04
            FYE
                12-31-03Weighted
            
            Weighted
            
            WeightedAverage
            
            Average
            
            AverageShares
            Ex.
                Price
            Shares
            Ex.
                Price
            Shares
            Ex.
                PriceOutstanding,
                beginning of year
            1,404,515
            4.88
            1,200,515
            5.21
            1,058,873
            6.17Options
                granted
            173,500
            4.53
            458,250
            4.47
            333,000
            2.45Options
                exercised
            -
            -
            -
            -
            -
            -Options
                cancelled
            (170,250)
            5.71
            -
            -
            -
            -Options
                expired
            (28,750)
            4.69
            (254,250)
            5.86
            (191,358)
            5.67Outstanding,
                end of year
            1,379,015
            4.74
            1,404,515
            4.85
            1,200,515
            5.21Exercisable,
                end of year
            838,078
            5.28
            662,988
            5.83
            616,640
            6.18








The
      following table summarizes information about fixed stock options outstanding
      at
      December 31, 2005:





**Options
                outstanding**
            
            **Options
                exercisable****Range
                of exercise prices**
            **Number
                outstanding at December 31, 2005**
            **Weighted
                average remaining contractual life (years)**
            **Weighted
                average exercise price**
            
            **Number
                exercisable at December 31, 2005**
            **Weighted
                average exercise price**$1.00
                -   4.00
            590,865
            6.85
            $3.08
            
            322,990
            $3.034.01
                -   8.00
            618,150
            7.19
            $5.15
            
            349,088
            $5.608.01
                -   12.94
            170,000
            4.57
            $9.02
            
            166,000
            $8.981,379,015
            6.72
            $4.74
            
            838,078
            $5.28








**NOTE
      K - GEOGRAPHIC INFORMATION**





**Segment
      Information**





Below
      is
      segment information for reportable segments of  Numerex
      is a technology company comprised of operating subsidiaries that develop and
      market a wide range of communications products and services. Our primary
      focus is wireless data communications utilizing proprietary network
      technologies. The four reporting segments are Wireless
      Data Communications , which is
      made up of all of our wireless machine-to-machine communications products and
      services, Digital Multimedia and Networking , which
      includes our networking products and services and video conferencing products,
      Wireline , which are is our
      wire-line security detection products and services, and unallocated corporate
      expenses.





***Wireless
      Data Communications Segment***





The
      Wireless Data segment is a solutions provider of wireless machine-to machine
      (M2M) communications, delivering comprehensive wireless solutions over the
      company’s proprietary wireless data network, CellemetryXGTM. The Company’s
      wireless data network is dedicated to the delivery of M2M communications
      throughout the United States, Canada, Mexico, the Caribbean and much of Latin
      America. M2M is defined as electronic data communications between people,
      devices, and systems that turn data into information that companies can act
      upon.





The
      Wireless Data segment develops, operates, markets, and sells products and
      services CellemetryXGTM, Cellemetry®, UplinkTM, MobileGuardianTM, and VendViewTM
brands, as well as distribution through Value Added Resellers (VARs) who have
      integrated the CellemetryXG Network and components into their own offerings.





45


***Digital
      Multimedia and Networking Segment***





The
      Digital Multimedia and Networking segment systems permit network operators
      to
      provide a wide range of video and data services, including Internet access,
      high-speed data transfer, and interactive video conferencing and voice service.
      The use of fiber optics in the broadband transmission network provides improved
      signal quality for long-distance transmission, increased bandwidth, immunity
      to
      interfering signals, and significant cost savings and reliability over coaxial
      cable-based network technologies. The Company markets it’s digital multimedia
      products and services through a combination of system integrators and
      VARs.





In
      addition, Digital Multimedia and Networking segment provides products under
      the
      DigilogTM brand that assist both wireline and wireless carriers in the
      engineering, installation, and servicing of this new telecommunications control
      network. These telecommunications network operational support systems and
      services include system integration (rack and stack) and installation, Test
      Access, and Interconnecting Devices.





***Wireline
      Segment***





The
      Wireline segment’s licensed technology creates a Derived Channel on an existing
      telephone line by using an inaudible frequency below the voice communications
      spectrum for data transmission. This creates a two-way communication system
      that
      continuously monitors the integrity of a user’s telephone line and security
      system. Derived Channel operates over a regular voice telephone line with no
      interference, whether or not the telephone is in use. The Company provides
      this
      service through its DCX Systems and DCX Australia subsidiaries.





Financial
      information for each reportable segment is as follows as of and for the years
      ended December 31, 2005, 2004 and 2003:


These
      are
      no inter-segment revenues.





Year
                Ended December 31, 2005Wireless
                Data Communications
            
            Digital
                Multimedia & Networking
            
            Wireline
            
            TotalRevenues
                from external customers
            
            $
            22,328
            
            $
            6,568
            
            $
            1,050
            
            $
            29,946Interest
                income
            
            
            2
            
            
            -
            
            
            1
            
            
            3Interest
                expense
            
            
            2
            
            
            5
            
            
            1
            
            
            8Depreciation
                and amortization
            
            
            1,201
            
            
            332
            
            
            121
            
            
            1,654Income
                tax expense
            
            
            44
            
            
            4
            
            
            4
            
            
            52Gain
                on sale of assets
            
            
            -
            
            
            -
            
            
            -
            
            
            0Segment
                profit/(loss) before tax
            
            
            956
            
            
            107
            
            
            11
            
            
            1,074Segment
                assets
            
            
            23,274
            
            
            6,563
            
            
            800
            
            
            30,637Year
                Ended December 31, 2004Wireless
                Data Communications
            
            
            Digital
                Multimedia & Networking
            
            
            Wireline
            
            
            TotalRevenues
                from external customers
            
            $
            14,600
            
            $
            7,402
            
            $
            991
            
            $
            22,993Interest
                income
            
            
            -
            
            
            1
            
            
            1
            
            
            2Interest
                expense
            
            
            4
            
            
            30
            
            
            -
            
            
            34Depreciation
                and amortization
            
            
            1,312
            
            
            495
            
            
            120
            
            
            1,927Income
                tax expense
            
            
            4
            
            
            2
            
            
            (6
            )
            
            0Gain
                on sale of assets
            
            
            250
            
            
            -
            
            
            -
            
            
            250Segment
                profit/(loss) before tax
            
            
            (1,862
            )
            
            402
            
            
            77
            
            
            (1,383
            )Segment
                assets
            
            
            23,954
            
            
            6,815
            
            
            1,153
            
            
            31,922


46





Year
                Ended December 31, 2003Wireless
                Data Communications
            
            Digital
                Multimedia & Networking
            
            Wireline
            
            TotalRevenues
                from external customers
            
            $
            12,687
            
            $
            6,164
            
            $
            1,306
            
            $
            20,157Interest
                income
            
            
            3
            
            
            11
            
            
            2
            
            
            16Interest
                expense
            
            
            38
            
            
            86
            
            
            -
            
            
            124Depreciation
                and amortization
            
            
            1,709
            
            
            579
            
            
            107
            
            
            2,395Income
                tax expense
            
            
            23
            
            
            3
            
            
            66
            
            
            92Gain
                on sale of assets
            
            
            1,712
            
            
            -
            
            
            -
            
            
            1,712Segment
                profit/(loss) before tax
            
            
            (1,947
            )
            
            320
            
            
            468
            
            
            (1,159
            )Segment
                assets
            
            
            21,763
            
            
            9,514
            
            
            1,562
            
            
            32,839








**Net
                Loss**
            
            **Year
                ended December 31,****2005**
            
            **2004**
            
            **2003**Total
                earnings (loss) for reportable segments
            
            $
            1,074
            
            $
            (1,383
            )
            $
            (1,159
            )Unallocated
                corporate expenses
            
            
            (481
            )
            
            (696
            )
            
            (245
            )Net
                loss
            
            $
            593
            
            $
            (2,079
            )
            $
            (1,404
            )**Assets**
            
            **Year
                ended December 31,****2005**
            
            
            **2004**
            
            
            **2003**Total
                assets for reportable segments
            
            $
            30,637
            
            $
            31,922
            
            $
            32,839Elimination
                of receivables from corporate
            
            
            -
            
            
            -
            
            
            (358
            )Other
                unallocated assets
            
            
            5,711
            
            
            690
            
            
            1,489Consolidated
                total assets
            
            $
            36,348
            
            $
            32,612
            
            $
            33,970








Segment
            
            Unallocated
            
            ConsolidatedTotals
            
            Corporate
            
            Totals**Other
                Significant Items****Year
                ended December 31, 2005**Interest
                income
            
            $
            3
            
            $
            22
            
            $
            25Interest
                expense
            
            
            11
            
            
            325
            
            
            336Net
                interest expense
            
            
            8
            
            
            303
            
            
            311Depreciation
                and amortization
            
            
            1,654
            
            
            186
            
            
            1,840Income
                tax expense
            
            
            52
            
            
            -
            
            
            52**Year
                ended December 31, 2004**Interest
                income
            
            $
            2
            
            $
            1
            
            
            3Interest
                expense
            
            
            34
            
            
            606
            
            
            640Net
                interest expense
            
            
            32
            
            
            605
            
            
            637Depreciation
                and amortization
            
            
            1,927
            
            
            121
            
            
            2,048Income
                tax expense
            
            
            -
            
            
            9
            
            
            9Gain
                on sale of assets
            
            
            250
            
            
            -
            
            
            250**Year
                ended December 31, 2003**Interest
                income
            
            
            16
            
            
            17
            
            
            33Interest
                expense
            
            
            124
            
            
            263
            
            
            387Net
                interest expense
            
            
            108
            
            
            246
            
            
            354Depreciation
                and amortization
            
            
            2,395
            
            
            175
            
            
            2,570Income
                tax expense
            
            
            92
            
            
            -
            
            
            92Gain
                on sale of assets
            
            
            1,712
            
            
            -
            
            
            1,712








Information
      about the Company's operations in different geographic areas for the years
      ended
      December 31, 2005, 2004, and 2003 respectively, are as follows:





(in
                thousands)
            
            **U.S.**
            
            **Australia**
            
            **Consolidated****Net
                Sales**2005
                - Year
            
            $
            29,604
            
            $
            342
            
            $
            29,9462004
                - Year
            
            
            22,588
            
            
            405
            
            
            22,9932003
                - Year
            
            
            19,513
            
            
            644
            
            
            20,157**Operating
                profit/(loss)**2005
                - Year
            
            
            1,124
            
            
            (163
            )
            
            9612004
                - Year
            
            
            (1,496
            )
            
            (135
            )
            
            (1,631
            )2003
                - Year
            
            
            (2,911
            )
            
            185
            
            
            (2,726
            )**Identifiable
                assets**2005
                - Year
            
            
            35,173
            
            
            1,175
            
            
            36,3482004
                - Year
            
            
            31,656
            
            
            956
            
            
            32,6122003
                - Year
            
            
            32,757
            
            
            1,213
            
            
            33,970








47


**NOTE
      L - SUBSEQUENT EVENTS**




**AirDesk**  **Acquisition - Unaudited**


On
      January 5, 2006 we completed the acquisition of the assets of AIRDESK, Inc.
      through our wholly-owned subsidiary, Airdesk LLC. The result of Airdesk’s
      operations will be included in the consolidated financial statements from this
      date. The assets relate to AIRDESK’s machine-to-machine (M2M) solutions and
      services business in the United States and Canada. The acquisition solidifies
      our position as one of the market’s most comprehensive wireless M2M networks and
      solutions provider. The acquisition aligns AIRDESK’s digital M2M products and
      portfolio of industry-leading radio modules with our M2M network and services
      platform.





The
      assets acquired consist of furniture, fixtures, equipment (consisting of
      hardware and software), inventory, distribution rights agreements, accounts
      receivable, trademarks and other intellectual property, including AIRDESK’s
      network gateway and billing system and “Airsource” database library.





Total
      consideration for the asset purchase is approximately $3,967,000 payable in
      the
      form of shares of our common stock and the assumption of certain existing
      indebtedness of AIRDESK, Inc. In addition, if certain revenue and other
      performance targets are achieved, we could issue an additional 300,000 shares
      of
      our common stock (valued at approximately $1,500,000) over a three-year period.





We
      assumed approximately $2,382,000 of debt, of which $1,199,000 was paid in cash
      at closing of the transaction as a reduction of part of the debt, and the
      balance of $1,183,000 is payable over a two-year period. We also issued shares
      of common stock valued at approximately $196,000 to AIRDESK at closing and
      deposited the remaining shares of common stock, valued at approximately
      $1,132,000, with an Escrow Agent. AIRDESK retains voting and dividend rights
      to
      these shares while held in escrow. The Escrow Agent will release the shares
      of
      common stock to AIRDESK over a two-year period in accordance with the terms
      of
      the Escrow Agreement. In addition, we incurred approximately 257,000 of direct
      acquisition expenses that are included in the purchase price.


48


The
      following table summarizes the estimated fair values of the assets acquired
      and
      liabilities assumed at the date of acquisition. We are in the process of
      obtaining third-party valuations of certain intangible assets; thus, the
      allocation of the purchase price is subject to refinement.





(in
                thousands)
            
            **At
                January 5, 2006**Current
                assets
            
            $
            2,525Property,
                plant and equipment
            
            
            444Other
                non-current assets
            
            
            12Intangible
                assets
            
            
            2,255Goodwill
            
            
            1,637Total
                assets acquired
            
            
            6,873Current
                liabilities
            
            
            (3,388
            )Long-term
                debt
            
            
            (700
            )Total
                liabilities assumed
            
            
            (4,088
            )Net
                assets acquired
            
            $
            2,785





The
      $2,255,000 of acquired intangible assets was comprised of $1,510,000 assigned
      to
      customer relationships, $668,000 assigned to trademarks, and $77,000 assigned
      to
      a non-compete. The estimated useful life of the customer relationships is 9
      years and the estimated useful life of the non-compete is 2 years. The
      trademarks are not subject to amortization.





The
      $1,637,000 of goodwill was assigned to the wireless data communications
      segment.





**Laurus
      Conversion**


On
      February 6, 2006, Laurus converted $1,263,780 of our outstanding debt into
      238,000 shares of common stock. The result of this transaction was to eliminate
      our Second Note with Laurus, excluding the warrants issued with the Second
      Note.
      These warrants along with the warrants issued with the First Company Note,
      which
      total 400,000, remain outstanding.


49


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Shareholders and Board of


Directors
      of Numerex Corp. and Subsidiaries





We
      have
      audited the accompanying consolidated balance sheets of Numerex Corp. and
      subsidiaries (the “Company”) as of December 31, 2005, and 2004 and the
      related consolidated statements of operations and comprehensive income,
      shareholders’ equity and cash flows for each of the three years ended December
      31, 2005. These financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements based on our audits.





We
      conducted our audits in accordance with standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. The Company is not
      required to have, nor were we engaged to perform an audit of its internal
      control over financial reporting. Our audit included consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above, present
      fairly, in all material respects, the consolidated financial position of Numerex
      Corp. and subsidiaries as of December 31, 2005 and 2004 and the results of
      their
      operations and their cash flows for each of the three years ended December
      31,
      2005, in conformity with accounting principles generally accepted in the United
      States of America.





Our
      audit
      was conducted for the purpose of forming an opinion on the basic consolidated
      financial statements taken as a whole.  The Schedule II for the years ended
      December 31, 2005, 2004 and 2003, listed in the Index at Item 15(a) is presented
      for purposes of additional analysis and is not a required part of the basic
      financial statements.  This schedule has been subjected to the auditing
      procedures applied in the audits of the basic consolidated financial statements
      and, in our opinion, is fairly stated in all material respects in relation
      to
      the basic consolidated financial statements taken as a whole.





/s/    Grant
      Thornton LLP





Atlanta,
      Georgia


February
      23, 2006













50


**Item
      9. Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure.**





Not
      applicable.





**Item
      9A. Controls and Procedures.**





Under
      the
      supervision and with the participation of our Chief Executive Officer and Chief
      Financial Officer, management has evaluated the effectiveness of the design
      and
      operation of our disclosure controls and procedures.  Based upon that
      evaluation, the Chief Executive Officer and Chief Financial Officer concluded
      that these disclosure controls and procedures are effective as of December
      31,
      2005.  No changes were made in the Company’s internal control over
      financial reporting during the year ended December 31, 2005 that have materially
      affected, or are reasonably likely to materially affect, the internal control
      over financial reporting.


**Item
        9B. Other Information.**




As
      previously reported, on January 5, 2006 we acquired the assets of AIRDESK,
      Inc.
      through our wholly-owned subsidiary, Airdesk LLC. We have evaluated the
      significance of the acquisition as of December 31, 2005 and concluded that
      neither the audited consolidated financial statements of AIRDESK nor pro forma
      financial information regarding the acquisition is required.





**PART
      III**





**Item
      10. Directors and Executive Officers of the Registrant.**





Except
      as
      set forth above under “Business - Executive Officers of the Registrant,” the
      information required by Item 10 of Form 10-K is incorporated by reference from
      the Company's Proxy Statement relating to the 2005 Annual Meeting of
      Shareholders to be filed pursuant to General Instruction G (3) to Form 10-K.
      Also incorporated by reference is the information under the caption “Section
      16(a) Beneficial Ownership Reporting Compliance.”





**Item
      11. Executive Compensation.**





Incorporated
      by reference from the our Proxy Statement relating to the 2005 Annual Meeting
      of


Shareholders
      to be filed pursuant to General Instruction G (3) to Form 10-K.





**Item
      12. Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.**





Except
      as
      set forth below, the information required by Item 12 of Form 10-K is
      incorporated by reference from our Company's Proxy Statement relating to the
      2005 Annual Meeting of Shareholders to be filed pursuant to General Instruction
      G (3) to Form 10-K.








**Equity
      Compensation Plan Information**





(a)
            (b)
            (c)Plan
                category
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            Weighted-average
                exercise price of outstanding options, warrants and rights
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))Equity
                compensation plans approved by security holders
            2,776,000
            $6.72
            224,263Equity
                compensation plans not approved by security holders
            -
            -
            -Total
            2,776,000
            $6.72
            224,263





**Item
      13. Certain Relationships and Related Transactions.**





Incorporated
      by reference from our Proxy Statement relating to the 2005 Annual Meeting of
      Shareholders to be filed pursuant to General Instruction G (3) to Form 10-K.





**Item
      14. Principal Accounting Fees and Services**





Incorporated
      by reference from our Proxy Statement relating to the 2005 Annual Meeting of
      Shareholders to be filed pursuant to General Instruction G (3) to Form
      10-K.








51


**PART
      IV**





**Item
      15. Exhibits, Financial Statement Schedules.**





(a)
      Documents filed as part of this report:





1.
            Consolidated
                Financial Statements; All financial statements of the Company as
                described
                in Item I of this report on Form 10-K.


2.
            Financial
                statement schedule included in Part IV of this Form:


Page


Report
      of
      Independent Registered Public Accounting Firm      50


Schedule
      II - Valuation and qualifying accounts      53





3.
      Exhibits




2.1 1 Numerex
      Corp. and British Telecommunications plc, Agreement Relating to the sale and
      purchase of the whole of the issued shares capital of Bronzebase Limited, dated
      November 12, 1999





2.2 2 Asset
      Transfer Agreement by and between Airdesk, LLC and Airdesk, Inc., effective
      January 1, 2006





3.1 3 Amended
      and Restated Articles of Incorporation of the Company





3.2 3 Bylaws
      of
      the Company





4.1 7 Securities
      Purchase Agreement, dated January 28, 2005, by and between the Company and
      Laurus





4.2 7 Convertible
      Term Note, dated January 28, 2005, by and between the Company and
      Laurus





4.3 7 Common
      Stock Purchase Warrant, dated January 28, 2005, by and between the Company
      and
      Laurus





4.4 7 Security
      Agreement, dated January 28, 2005, by and among the Company, its U.S.
      subsidiaries, and Laurus





4.5 67 Guaranty,
      dated January 28, 2005, entered into by each of the Company’s U.S. Subsidiaries,
      in connection with the note payable issued to Laurus





4.6 7 Registration
      Rights Agreement, dated January 28, 2005, by and between the Company and
      Laurus








10.1 3 The
      Numerex Corp. Savings and Profit Sharing Plan -- Summary Plan Description
      (Management Compensation Plan)





10.2 4 Amended
      and Restated 1994 Employee Stock Option Plan (Management Compensation Plan)





10.3 5 Amended
      and Restated 1994 Stock Option Plan for Non-Employee Directors (Management
      Compensation Plan)




10.4 6 Registration
      Agreement between the Company and Dominion dated July 13, 1992




10.5 5 Letter
      Agreement between the Company and Dominion (now Gwynedd) dated October 25,
      1994
      re: designation of director


10.6 8 1999
      Long-Term Incentive Plan (Management Compensation Plan)




11  Computation of Earnings Per Share





21  Subsidiaries of Numerex Corp.





23  Consent
      of Grant Thornton LLP.





31.1  Rule
      13a-14(a) Certification of Chief Executive Officer





31.2  Rule
      13a-14(a) Certification of Chief Financial Officer





32.1  Rule
      13a-14(b) Certification of Chief Executive Officer


32.2  Rule
      13a-14(b) Certification of Chief Financial Officer








1
            Incorporated
                by reference to the Exhibits filed with the Company's Current Report
                on
                Form 8-K filed with the Securities and Exchange Commission on November
                26,
                1999 (File No. 0-22920)





2  Incorporated
      by reference to the Exhibits filed with the Current Report on Form 8-K filed
      with the Securities and Exchange Commission on January 11, 2006 (File No.
      0-22920)





3
            Incorporated
                by reference to the Exhibits filed with the Company's Annual Report
                on
                Form 10-K filed with the Securities and Exchange Commission for the
                year
                ended October 31, 1995 (File No. 0-22920)





4  Incorporated
      by reference to the Exhibits filed with the Company's Annual Report on Form
      10-K
      filed with the Securities and Exchange Commission on January 27, 1997 for the
      year ended October 31, 1996 (File No. 0-22920)





5  Incorporated
      by reference to the Exhibits filed with the Company's Registration Statement
      on
      Form S-1 filed with the Securities and Exchange Commission (File No.
      33-89794)





6  Incorporated
      by reference to the Exhibit filed with the Company's Current Report on Form
      8-K
      filed with the Securities and Exchange Commission on July 20, 1994 (File No.
      0-22920)





7  Incorporated
      by reference to the Exhibits filed with the Company's Current Report on Form
      8-K
      Filed with the Securities and Exchange Commission on February 3, 2005 (File
      No.
      0-22920)





8  Incorporated
      by reference to the Exhibits filed with the Company's Quarterly Report on Form
      10-Q filed with the Securities and Exchange Commission on August 14, 2000 (File
      No. 0-22920)




52


SCHEDULE
      II





**NUMEREX
      CORP.**





**VALUATION
      AND QUALIFYING ACCOUNTS**





**Years
      ended December 31, 2005, 2004, 2003**


(in
      thousands)




Balance
                at beginning of Period
            Additions
                charged to expense
            Deductions
            
            Balance
                at end of PeriodDescription**Year
                ended December 31, 2005:**Accounts
                receivableAllowance
                for uncollectible accounts
            1,084
            325
            9
            a
            1,418InventoryAllowance
                for obsolescence
            967
            66
            (716)
            b
            317**Year
                ended December 31, 2004:**Accounts
                receivableAllowance
                for uncollectible accounts
            609
            475
            
            
            1,084InventoryAllowance
                for obsolescence
            681
            286
            
            
            967**Year
                ended December 31, 2003:**Accounts
                receivableAllowance
                for uncollectible accounts
            1,275
            551
            (1,217)
            a
            609InventoryAllowance
                for obsolescence
            776
            272
            (367)
            b
            681(a)
                Amounts written off as uncollectible, net of recoveries.(b)
                Inventory physically disposed.








53


**SIGNATURES**








Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.




**NUMEREX
              CORP.**Date: March
              13, 2006
            By:
            /s/ Stratton
              J. NicolaidesChief Executive OfficerTitle


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




**Signature**
              **Capacity**
              **Date**/s/
                  Stratton J. NicolaidesStratton
                  J. Nicolaides
              Chairman
                  and Chief Executive Officer
              March
                  13, 2006/s/
                  Brian C. BeazerBrian
                  C. Beazer
              Director
              March
                  13, 2006/s/
                  George BensonGeorge
                  Benson
              Director
              March
                  13, 2006/s/
                  Matthew J. FlaniganMatthew
                  J. Flanigan
              Director
              March
                  13, 2006/s/
                  Allan H. LiuAllan
                  H. Liu
              Director
              March
                  13, 2006/s/
                  John G. RaosJohn
                  G. Raos
              Director
              March
                  13, 2006/s/
                  Andrew J. RyanAndrew
                  J. Ryan
              Director
              March
                  13, 2006/s/
                  Nicholas Davidge
              Director
              March
                  13, 2006Nicholas
                  Davidge/s/
                  Alan B. CatherallAlan
                  B. Catherall
              Executive
                  Vice President,
              March
                  13, 2006Chief
                  Financial Officer,Principal
                  Accounting Officer