** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10–K**
| **(Mark One)** |
|----------------|

** **

| **ý** | **ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------|

** **

**For the Fiscal Year ended December31, 2001**

**or**

| **o** | **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**

** **

**NUMEREXCORP.**

(Exact Name ofRegistrant as Specified in its Charter)

** **

| **Pennsylvania**                                                                    |   | **11-2948749**                     |
|-------------------------------------------------------------------------------------|--------|------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization)                     |   | (IRS Employer  Identification No.) |
|                                                                                |   |                               |
| **1600  Parkwood Circle Suite 200 Atlanta, Georgia**                                |   | **30339-2119**                     |
| (Address of  principal executive offices)                                           |   | (Zip Code)                         |
|                                                                                |   |                               |
| Registrant’s  Telephone Number, Including Area Code:   **(770) 693-5950** |

 

SecuritiesRegistered Pursuant to Section 12(b) of the Act:  None

 

SecuritiesRegistered Pursuant to Section 12(g) of the Act:

 
| **Class  A Common Stock, no par value** |   | **10,659,000**                                       |
|-----------------------------------------|--------|------------------------------------------------------|
| (Title of Class)                        |   | (Number of  Shares Outstanding as of March 26, 2002) |

 

Indicate by check mark whether the Registrant (i) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (ii) hasbeen subject to such filing requirements for the past 90 days.

 

Yes ý No o

 

o                               Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of the Registrant’s knowledge,in definitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K.

 

The aggregate market value of voting stock held by non–affiliatesof the Reg­istrant is $63,064,359(1)

## ** **

 

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## **DOCUMENTS INCORPORATED BY REFERENCE**

 

Certain portions of theCompany’s Annual Report to Shareholders for the year ended December 31, 2001,are incorporated by reference in Part I and Part II of this Report and certainprovisions of the Company’s Proxy Statement to be filed in connection with its2002 Annual Meeting of Shareholders are incorporated by reference in Part IIIof this Report.

 

Other documentsincorporated by reference are listed in the Exhibit Index.

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(1) The aggregate dollar amount of the voting stockset forth equals the number of shares of the Company’s Common Stockoutstanding, reduced by the amount of Common Stock held by officers, directorsand shareholders owning 10% or more of the Company’s Common Stock, multipliedby $8.60, the last reported sale price for the Company’s Common Stock on March26, 2002.  The information providedshall in no way be construed as an admission that any officer, director or 10%shareholder in the Company may be deemed an affiliate of the Company or thatsuch person is the beneficial owner of the shares reported as being held byhim, and any such inference is hereby disclaimed.  The information provided herein is included solely for recordkeeping purposes of the Securities and Exchange Commission.

 

## **PRELIMINARY NOTE**

 

*Unless otherwise indicated or thecontext otherwise requires:  (i) the“Company” refers to Numerex Corp. and its wholly-owned and controlled subsidiaries, (ii) all references toCommon Stock in this report refer to the Company’s Class A Common Stock and(iii) all references in this report to fiscal years are to the Company’s fiscalyears ended December 31, 2001, and 2000, respectively, and October 31 of eachpreceding year*

 

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## **TABLE OF CONTENTS**

| Table of Contents |                                                                                            | Page   |
|-------------------|-------------------------------------------------------------------------------------------------|--------|
|              |                                                                                            | (i)    |
|              |                                                                                            |   |
|              | **PART I**                                                                                      |   |
|              |                                                                                            |   |
| Item 1.           | **Business**                                                                                    | 1      |
| Item 2.           | **Properties**                                                                                  | 12     |
| Item 3.           | **Legal Proceedings**                                                                           | 13     |
| Item  4.          | **Submission  of Matters to a Vote of Security Holders**                                        | 13     |
|              |                                                                                            |   |
|              | **PART II**                                                                                     |   |
|              |                                                                                            |   |
| Item  5.          | **Market  for Registrant’s Common Equity and Related Shareholder Matters**                 | 13     |
| Item 6.           | **Selected Financial  Data**                                                                    | 13     |
| Item  7           | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | 14     |
| Item  8.          | **Financial  Statements and Supplementary Data**                                                | 14     |
| Item  9           | **Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure**       | 14     |
|              |                                                                                            |   |
|              | **PART III**                                                                                    |   |
|              |                                                                                            |   |
| Item  10.         | **Directors  and Executive Officers of the Registrant**                                         | 14     |
| Item 11.          | **Executive  Compensation**                                                                     | 14     |
| Item  12.         | **Security  Ownership of Certain Beneficial Owners and Management**                             | 14     |
| Item  13.         | **Certain  Relationships and Related Transactions**                                             | 14     |
|              |                                                                                            |   |
|              | **PART IV**                                                                                     |   |
|              |                                                                                            |   |
| Item 14.          | **Exhibits,  Financial Statement Schedules, and Reports on Form 8-K**                           | 14     |
|              | **List of Financial Statements**                                                                | 14     |
|              | **List of  Exhibits**                                                                           | 14     |
|              | **Signatures**                                                                                  | 17     |
|              | **Index  to Financial Statements**                                                              | F-1    |

 

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***Forward-Looking Statements***

 

*This document contains certainforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934.  These statements include, among otherthings, statements regarding trends, strategies, plans, beliefs, intentions,expectations, goals and opportunities. Forward-looking statements are typically identified by words or phrasessuch as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,”“strategy,” “plan,” “outlook,” “outcome,” “continue,” “remain,” “trend,” andvariations of such words and similar expressions, or future or conditionalverbs such as “will,” “would,” “should,” “could,” “may,” or similarexpressions.  All statements andinformation herein and incorporated by reference herein, other than statementsof historical fact, are forward-looking statements that are based upon a numberof assumptions concerning future conditions that ultimately may prove to beinaccurate.  Many phases of theCompany’s operations are subject to influences outside its control.  The Company cautions that theseforward-looking statements are subject to numerous assumptions, risks anduncertainties, which change over time. These forward-looking statements speak only as of the date of thisAnnual Report, and the Company assumes no duty to update forward-lookingstatements.  Actual results could differmaterially from those anticipated in these forward-looking statements andfuture results could differ materially from historical performance.*

 

*Any one or any combination offactors could have a material adverse effect on the Company’s results ofoperations or could cause actual results to differ materially fromforward-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; customeracceptance of products and services; economic conditions; the inability toattain revenue and earnings growth; changes in interest rates; inflation; theintroduction, withdrawal, success and timing of business initiatives andstrategies; competitive conditions; the extent and timing of technologicalchanges; changes in customer spending; the loss of intellectual propertyprotection; general economic conditions and conditions affecting the capitalmarkets.  Actual events, developmentsand results could differ materially from those anticipated or projected in theforward-looking statements as a result of certain uncertainties set forth belowand elsewhere in this document. Subsequent written or oral statements attributable to the Company orpersons acting on its behalf are expressly qualified in their entirety by thecautionary statements in this report and those in the Company’s reportspreviously and subsequently filed with the Securities and Exchange Commission.*

 

###### **PART I**

 

# **Item 1.  Business**

 

# **Overview**

 

Numerex Corp. (the“Company”) is a technology company comprised of operating subsidiaries thatdevelop and market a wide range of communications products and services. TheCompany’s primary focus is wireless data communications utilizing proprietarynetwork technologies. The Company primarily offers products and services inwireless data communications through Cellemetry® and Data1SourceTM,and digital multimedia through PowerPlayTM. These services enable customersaround the globe to monitor and move information for a variety of applicationsfrom home and business security to distance learning. In addition, the Companyoffers wireline alarm security products and services, as well as telecommunicationsnetwork operational support systems.

 

The Company’sprimary strategic objectives are to:

 

•      Implement awireless data communications strategy which incorporates the development,marketing and sale of Cellemetry®, UplinkTM, Data1SourceTM, Circuit WatchTM,FastTrack Wireless SolutionsTM and other wireless network technology,applications, products, and services.

•      Acquiretechnologies, which complement and enhance the Company’s wireless datacommunications strategy.

•      Acquire ordevelop lines of business, which complement the Company’s technologystrategies, and are designed to enhance strategic objectives, and augmentshareholder value.

•      Expand allbusiness lines with a focus on a financial model of recurring revenues.

 

Through CellemetryLLC (“Cellemetry”) a joint venture with BellSouth Wireless LLC (“BellSouthWireless”), formerly BellSouth Wireless, Inc., the Company provides a costeffective, two-way wireless data communication network throughout

 

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NorthAmerica, Argentina, Dutch Antilles, Paraguay and Puerto Rico with plans tofurther expand in international markets.

 

Through Uplink Security, Inc. (“Uplink”), a whollyowned subsidiary of Cellemetry, the Company provides a cost effective, alarmsecurity products, services, and related technical support utilizingCellemetry® wireless data communications technology.  Utilizing Cellemetry®, as a means of data communications,combined with proprietary message processing and interface technologies, theCompany believes that it has positioned Uplink to be an industry leader forcost effective wireless alarm communication. Cellemetry’s® interface technologyprovides the foundation of design and development of applications and solutionsin certain business sectors other than fixed alarm security. In addition, theUplink products and services complement the Company’s wireline technology forthe fixed alarm security market.

 

Data1SourceTM, a proprietary and patent pendingtechnology of the Company, provides the Company another cost-effective means oftransporting data over digital wireless data networks. Through a centralizedservice bureau, the Data1SourceTM offering of Short Message Service (“SMS”)provides TDMA, CDMA and GSM wireless data carriers with a broad range ofdigital services including web-based and e-mail-based text messaging, SMSTouch-ToneTM paging, subscriber-customized Internet content services such asnews headlines, ring tones, sports scores, stock quotes, and othercustomer-specific information. The Company plans to increase the marketpenetration of its Data1SourceTM service to wireless data carriers. Data1SourceTMdevelopment and marketing efforts derive from and leverage the Company’s corewireless data technology Cellemetry® and its existing relationships withwireless data carriers.

 

Through its Circuit WatchTM product offering theCompany provides a cost effective T-1 telecommunication network integritymonitoring for users requiring notification of critical wireline networkcircuit interruptions or breaks. Status is provided by utilizing the Company’score wireless data technology Cellemetry® as the message delivery medium.

 

Through its FastTrack Wireless SolutionsTM suite ofproducts and services the Company provides for users and application developersa turnkey suite of interactive web-based wireless machine to machine (M2M)interface solutions, which monitor and control both fixed and mobilegeographically remote systems. These applications utilize the Company’swireless data technology Cellemetry® and deliver cost effective and efficientproduct and service solutions. FastTrack Wireless SolutionsTM also providesusers and application developers cost effective mobile asset trackingcapability utilizing a combination of Global Positioning System (GPS)technology and the Company’s wireless data technology Cellemetry® as themessage delivery medium.

 

Through its subsidiaries, Broadband Networks, Inc.(“Broadband”) and BNI Solutions LLC (“BNI Solutions”) the Company principallydesigns, develops, markets, and sells PowerPlayTM its digital multimediaproduct. PowerPlayTM is designed for a wide range of applications, which requirehigh quality interactive video, audio and data communication. With a focus onthe “distance learning” horizontal Power PlayTM can schedule or produce‘on-demand’ multimedia conferencing between any combination of desktopworkstations, mobile roll about projection units, or dedicated conferencerooms. Each station has access to all of the resources of the entirenetwork.  This includes: securepoint-to-point, or multiple participants full motion video conferencing withfar end device control; central media libraries or servers, which provide mediaretrieval and video-on-demand capability; secure on-demand gateways to nationalsites, public switched networks and the Internet; compatibility/connectivitybetween any combination of desktops, conference rooms, servers, or gateways;data and document collaboration combined with real time full motion video; andvoice over IP from any station to any station, or the world via a centralgateway.

 

The Company’s digital multimedia business alsoprovides systems design, products, integration services, installation, andoperator training for interactive voice, video, and data via fiber optictransport.  This integration of theCompany’s Broadband fiber optic transport expertise, to date, has been in thearea of educational enhancement through distance learning.

 

In addition the Company provides telecommunicationsnetwork operational support systems and services through its subsidiaryDigilog, Inc. (“Digilog”), to operating telephone companies and equipment andservices through its subsidiaries, DCX Systems, Inc. (“DCX Systems”) and DCXSystems (Australia) Pty Limited (“DCX Australia”) to operating telephonecompanies and the security industry.

 

Traditionally, the Company has derived significantrevenues from Derived Channel technology. This derived channel

 

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technology createsan inaudible frequency on an existing telephone line below the voicecommunications spectrum for data transmission (“Derived Channel”).  In November 1999, the Company sold itsDerived Channel technology to British Telecommunications plc (“BT”) for£12,500,000 (approximately $20,000,000). The terms of the transaction were negotiated between the Company and BTat arm’s length.

 

The Company determined that divesting the wirelinetechnology to BT strengthened the financial position

of the Companywhile promoting its wireless data communications strategic focus. In additionto the purchase price,

the Companyretained, in exchange for services, certain commercial interests in a telemetryventure on a revenue sharing basis and a right to continue to market itsDerived Channel technology in North, Central and South America, South****Koreaand Australia**. **The Company alsoentered into an agency agreement whereby it has the rights to market BT’sdigital services platform (“DSP”) a multi-functional gateway product forwireless and wireline including its GSM wireless product in certainterritories.

 

The sale to BTcaused a material loss of the future revenues and earnings associated with theCompany’s Derived Channel technology. The Company determined, however, that thetransition and focus to its wireless data communications strategy coupled withincreased liquidity outweighed a substantial reduction of its wireline revenuesand earnings. The Company also reduced its dependence upon BT. There can be noassurance that the Company will recover its revenues and earnings through itsremaining lines of business or successfully transition its business to afinancial model of recurring revenues.

 

In connection withthe divestiture of its Derived Channel business, the Company made certainrepresentations and warranties to BT. Although the Company is not aware of anymaterial event that could cause a material diminution of the value it receivedupon the sale of its Derived Channel business, if BT were to seek recovery withregard to the warranties, the purchase price for the technology would beadversely affected.

** **

**Background**

 

The Company’sbusiness began in July 1992 with the acquisition of the Derived Channelwireline business, including certain proprietary intellectual property rights,rights to Derived Channel technology and rights to market such technology incertain countries, including the United Kingdom. The Company expanded its businessprimarily through the acquisition of complementary businesses, product lines,and proprietary technologies, including its investments in Digilog and DCXSystems in 1994, Broadband and Uplink in 1997 and subsequent investments inUplink in 1998 and 2001.

 

In May 1998, theCompany, BellSouth Wireless and BellSouth Corporation completed a transactionwhereby Cellemetry, a joint venture between the Company and BellSouth Wireless,was formed.  Cellemetry is a Delaware limitedliability company owned 60% by the Company and 40% by BellSouth Wireless.  The parties entered into an operatingagreement (the “Operating Agreement”), which deals with, among other things,the conduct of the business of Cellemetry. In addition, the Operating Agreement provides certain restrictions as todistributions and the right to transfer ownership interests in Cellemetry.  Cellemetry is taxed as a partnership forfederal, state, and foreign income tax purposes.

 

In November 1999,the Company and BellSouth Wireless completed the restructuring of theCellemetry Operating Agreement. Under the terms of the restructuring, theOperating Agreement has been modified (“First Amendment to the OperatingAgreement”) and the Cellemetry Business Plan has been modified, revised andextended through November 1, 2004, (“Modified Business Plan”).  All respective rights under the OperatingAgreement that previously triggered on May 15, 2001, three years from the dateof the formation of Cellemetry, have been revised to trigger on November 1,2002, and all financial performance tests have been amended to reflect theModified Business Plan.  In addition,the price at which the Company may, at its sole option, elect that BellSouthWireless put its ownership interest in Cellemetry to the Company has beenrevised and set at $17,000,000.

 

The restructuringalso permits Cellemetry to seek to find a strategic investor (“Third PartyInvestment”) to invest new capital in exchange for up to 15% ofCellemetry.  In connection with any suchThird Party Investment, the Company’s ownership interest in Cellemetry will notbe diluted below 51% and BellSouth Wireless’s will not be diluted below 34%.

 

Under the FirstAmendment to the Operating Agreement, the Company, from and including May 15,1999,

 

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is no longer underan obligation to make any additional capital contributions to Cellemetry.  The Company committed to provide up to$5,500,000 in interest bearing debt financing to Cellemetry. As of December 31,2001, the Company has provided total interest bearing debt financing amountingto $15,023,000.

 

Also under theFirst Amendment to the Operating Agreement, the Company conveyed Uplink toCellemetry.  In addition, the Companyissued to BellSouth Wireless 30,000 shares of Series A Convertible RedeemablePreferred Stock of the Company (“Preferred Stock”).  The Preferred Stock is redeemable, at the Company’s option,commencing November 1, 2000, on the basis of a pre-set annual redemption priceper share. 

 

Also, the PreferredStock, at BellSouth Wireless’s option, commencing November 1, 2003, or November1, 2002, should the Company’s common stock exceed a pre-set market price for agiven period of time, is convertible into 625,000 shares of common stock of theCompany, approximately 6% of the Company’s common stock.  The Preferred Stock carries certainregistration rights for the common stock upon such conversion.

 

Also, in November1999, as referred to above, the Company sold its entire holdings in its whollyowned subsidiary, Bronzebase Limited (“Bronzebase”) to BT.  Bronzebase is an English limited liabilitycompany, which owns all of the stock of Versus Technology Limited (“VersusTechnology”).

 

## **MACHINEto MACHINE (M2M) COMMUNICATIONS (Telemetry)**

 

**Wireless Data Communications(Wireless Telemetry)**

** **

**Products and Services**

** **

**Cellemetry®**

 

Cellemetry**®**is a means of wireless data communications that taps the unused capacity of thecellular telephone network’s overhead control channels and the SS7/IS-41network protocol to deliver two-way short data messages, without affecting thevoice channels of the cellular network.

 

Using Cellemetry**®**technology, remote equipment or vehicles can be polled, time-set, orautonomously exchange information with a customer’s central locations through thecellular network’s control channels. Information gathered is relayed to and from the customer’s designatedsite for collection or for response. Based on remote conditions, control actions can be relayed as well.  That means, for example, equipment can beturned on or off remotely, switches and gates can be closed, and pumpstriggered.

 

When used incombination with low-cost Global Positioning System (GPS) applications,Cellemetry**®**radios can pinpoint the precise geographic location of trucks, automobiles,railroad cars, barges, containers, or other movable assets and signal controlactions or operator response messages.

 

Cellemetry® DataService is wireless telemetry, or remote monitoring, over the cellulartelephone network.  It provides a meansof sending short, telemetry-like messages over the cellular telephone system ina manner that is virtually transparent to the cellular operator. Cellemetry®Data Service does not use or impact voice channels, and is a patentedtechnology of Cellemetry®.  Licensingagreements have been negotiated with cellular carriers throughout NorthAmerica, Argentina, Dutch Antilles, Paraguay and Puerto Rico to makeCellemetry® services widely available. Licensing agreements have also been negotiated with application developersand radio manufacturers to provide Cellemetry**®** applications and equipmentacross urban, rural, and industrial markets.

 

Cellemetry**®**DataService enables messaging for many different businesses.  It can, for example, report alarm messages,utility meter readings, vehicle and trailer location, and vending machinestatus.  It is unique because it usesthe underutilized portion of the cellular system, the overhead controlchannels, to convey short data messages without impacting or using the voicechannels.  These control channels areused to transmit necessary information for all call initiations (both incomingand outgoing) between the cellular system and the cellular customer’sequipment.  The message handlingcapacity of these control channels is far greater than is required by theexisting cellular system, even during the busiest times of the day.

 

The Cellemetry®Data Service operates in the same manner in which roaming telephones operate inthe cellular system.  A roaming cellulartelephone is defined as a cellular telephone operating in any system other than

 

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its homesystem.  When a roaming cellulartelephone is turned on, it recognizes the fact that it is not in its homesystem and accordingly “registers” by sending its Mobile Identification Number(MIN) and its Electronic Serial Number (ESN) to the cellular system via one ofthe control channels.  The cellularsystem recognizes the roamer number and routes the MIN and ESN to the roamer’shome system for validation via a special network (SS7/IS41) which links all ofthe cellular systems together across Canada, Mexico and the U.S. and parts ofSouth and Central America.

 

Cellemetry**®**radios behave like roaming telephones except the cellular telephone switch’sdatabase is set to route the “registrations” (MIN and ESN data) to theCellemetry**®**Service Bureau, (“the Service Bureau”) connected to the same intra-cellularnetwork.  The MIN serves to identify theCellemetry**®**radio and the ESN is the data field, which contains the 32-bit telemetrymessage. In addition, Cellemetry**®**’s centralized Service Bureau adds atimestamp and the SS7/IS41 network adds point of origin data. The entireCellemetry® message, if expressed in binary, is 122 bits.

 

The centralized ServiceBureau processes, stores, and routes the Cellemetry**®**Data Service messagesaccording to customer requirements. Some applications may require immediate processing, as is the case withalarm monitoring, while an application such as vending machine status may onlyneed the messages stored and transferred in a batch once a day.

 

**UplinkTM**

 

Uplink designs,develops, markets and sells interface and routing technologies that useCellemetry® for security alarm communications applications.  Because Cellemetry® utilizes the existingcellular network and inexpensive radio transmitters, Cellemetry® applicationscan quickly and economically monitor and control equipment at remote locations.

 

Uplink marketswireless alarm communication equipment which is installed at customer premises,administers and offers air time packages on a consistent price basis, andprovides technical services that route alarm signals from the cellular networksto any Alarm Receiving Center (ARC) central station in North America withoutrequiring either modifications to the ARC’s central station’s receivingequipment or dedicated receiving equipment.

 

The Companybelieves that Uplink’s products and airtime communications charges arecompetitively priced.  As a result ofcombining Cellemetry® technology with low cost communication equipment androuting technologies, significant improvements in security communicationservices are now available to the industry.

 

The Company alsobelieves that Cellemetry® and Derived Channel technology, as security alarmcommunications platforms, may be complementary.  As a result, the technologies can be implemented independently orcollectively.

 

**Data1Source****TM**

 

Data1SourceTM, aservice offering, is a wireless means of data communications that utilizes theShort Message Service (SMS) messaging capability of digital (TDMA, CDMA andGSM) cellular telephone networks and the SS7/IS-41 network protocol to deliverdigital data packets of approximately 200 bytes each, although multiple packetscan be concatenated.

 

Data1SourceTM’sproprietary and patent pending centralized service processes, buffers, androutes the Data1SourceTM Service messages to enable a broad range of digitalservices for wireless data carriers, including web-based and e-mail-based textmessaging, SMS Touch-ToneTM paging, subscriber-customized Internet contentservices such as news headlines, ring tones, sports scores, stock quotes, andother customer-specific information.

 

# **Circuit WatchTM**

 

Circuit WatchTM, aproduct and service offering, is a wireless monitoring system for high-speeddata lines.

Utilizing the Cellemetry® data network Circuit WatchTM facilitates theremote monitoring and reporting of T-1 circuit status.

 

The Company markets the Circuit WatchTM wirelessmonitoring product, consisting of a master and upward

 

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of eight T-1 slavedevices, which is installed at customer premises, administers and offers airtime packages on a consistent price basis, and provides technical services thatroute alarm and status signals through the cellular networks to a number ofpredetermined or designated delivery points without requiring dedicatedreceiving equipment.

 

The Companybelieves that Circuit Watch’sTM products and airtime communications charges arecompetitively priced and that Circuit WatchTM offers a cost effective andefficient method for remotely monitoring or controlling equipment locatedonsite while enabling the reporting and notification of any alarm or changes incondition to T-1 circuits that can be vital to communications integrity.

 

As a result ofcombining Cellemetry® technology with cost effective communication equipmentand routing technologies, significant improvements in T-1 circuit statuscommunication services are now available to the industry.

 

# **FastTrack Wireless SolutionsTM**

 

FastTrack WirelessSolutionsTM, a product and service offering, is designed to provide users andapplication developers with a turnkey suite of interactive web-based wirelessmachine to machine (M2M) interface solutions, which monitor and controlgeographically remote systems and applications.

 

The Companymarkets FastTrack Wireless SolutionsTM as a service offering to Cellemetry®application and potential application partners as a means to reduce thedevelopment and engineering time for applications by providing the informationand resources, including generic Cellemetry® product, necessary to morespeedily bring applications to market.

 

The Companybelieves that the FastTrack Wireless SolutionsTM service offers Cellemetry®application and potential application partners a cost effective and efficientmeans of leveraging the benefits of the Cellemetry® Data Service and providingspeed to market for both fixed and mobile applications.

 

# **Sales and Marketing**

 

The Companymarkets its wireless data communications services directly to participatingcellular carriers who share in the recurring revenue generated from withintheir territories.  The services arealso marketed directly to application providers who are offered communicationscapability, and varying degrees of router services, radio development and otherongoing support services.  A CustomerTechnical Assistance Center (CTAC) provides customer support twenty-four hoursa day, seven days a week.

 

The Companycurrently offers Cellemetry® service in North America, Argentina, DutchAntilles, Paraguay, and Puerto Rico through licensing agreements with bothcellular carriers and local resellers. The Company intends to offer Cellemetry®in various international markets directly and through strategic partnerships,alliances and other channels of distribution.

 

The Companymarkets its Data1SourceTM “SMS” service offering to cellular carriers in theU.S. on the basis of a competitive subscriber-based pricing model combined witha usage fee structure, which may be content and volume related. The majorbenefit to cellular carriers of the Company’s service offering which isemphasized is the limited capital investment involved in establishing theservice within the cellular carriers territories due to the widespreadavailability of its centralized Service Bureau network connectivity.

 

# **WirelineData Communications (Wireline Telemetry)**

 

Although theCompany has sold its Derived Channel technology to BT, the Company retains theright to market this service in North, Central and South America, South Koreaand Australia.  The Company providesthis service through its DCX Systems and DCX Australia subsidiaries.

 

As a result oftechnological advances in the telecommunications industry, telephone companies (“Telecomms”)are able to broaden their product portfolios by offering enhanced services totheir customers. The Company believes that Telecomms can be attracted to nichetechnologies, such as the Company’s Derived Channel technology that offer acost effective solution for applications that typically require dedicatedlines, thereby providing a more productive use of the existing telephonenetwork.

 

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The Company’slicensed technology creates a “Derived Channel” on an existing telephone lineby using an inaudible frequency below the voice communications spectrum fordata transmission.  The Derived Channeltechnology uses this inaudible or low tone frequency to transmit monitoringinformation between a microprocessor at the user’s protected premises and amicroprocessor located at the telephone company’s central office. This createsa two-way communication system that continuously monitors the integrity of auser’s telephone line and security system. Derived Channel operates over aregular voice telephone line and dedicated lines with no interference, whetheror not the telephone is in use.  Inaddition, the low tone signal can be encrypted for additional security.

 

The Companybelieves that Derived Channel differs from most other alarm transporttechnologies in three meaningful ways: 1) Derived Channel operates overexisting telephone lines, eliminating the need for a dedicated line service tothe telephone customer; 2) Derived Channel communicates by means of anencrypted, continuous and inaudible signal and is transmitted even while thetelephone is otherwise in use; and 3) telephone line integrity and securitysystem operation are automatically monitored at frequent intervals throughpolling generated by network equipment located at the telecommunicationcompany’s central office. The continuous signaling originating at the protectedpremises provides prompt reporting of line disruptions, telephone systemoutages, or alarm conditions.

 

The Companybelieves that Derived Channel represents an improvement over the most commonmonitored alarm signaling system, such as the automatic dialer (also know as adigital communicator).  These devicesare reactive by nature.  When anintrusion is detected, an automatic dialer attempts to seize the subscriber’stelephone line and dial the number of the alarm monitoring company to reportthe intrusion.  Generally, in the eventthe telephone line is in use or has been cut, a standard automatic dialer willbe unable to report the alarm condition. Unlike the standard automatic dialer, Derived Channel is proactive. Assuch, it continuously monitors line and system integrity, and automaticallyreports any line disruption or failure to the ARC.

 

**Sales and Marketing**

 

The Company intendsto provide a level of marketing support to the Telecomms and alarm systemdistributors, in its licensed territories, and to seek more comprehensiveassociations with Telecomms, enabling the Company to market its Derived Channelsecurity alarm transport directly to the industry in an effort to capture ashare of the recurring revenue generated by the applications. The Company has apresence in the private market sector (non-publicly switched traffic), andserving customers who have control and ownership of their own telephonefacilities.  This segment of the marketneeds smaller systems and has fewer connection points than the systems, whichhave been marketed to the major telephone companies.

 

# **DIGITAL MULTIMEDIA ANDNETWORKING**

# ** **

# **Digital Multimedia**

 

**Products and Services**

 

The Companydesigns, develops, and markets complete digital multimedia system solutions forhigh quality communications networks. The Company both manufactures theproducts upon which its systems are based and incorporates third party productswhere appropriate.

 

The Company’sdigital multimedia systems permit network operators to provide a wide range ofvideo and data services, including internet access, high-speed data transfer,and interactive video conferencing and voice service. The use of fiber opticsin the broadband transmission network provides improved signal quality for longdistance transmission, increased bandwidth, immunity to interfering signals,and significant cost savings and reliability over coaxial cable-based networktechnologies.  The Company believes thatits digital multimedia systems enable the deployment of sophisticatedarchitectures generally at lower costs and with less hardware and complexitythan competing offerings.

 

The Company hasdeveloped and continues to enhance its line of software, data, and fiber optictransmission products.  In addition, theCompany has developed a new digital multimedia solution, PowerPlayTM,

 

7

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which providescapability for interactive videoconferencing over the same network platformthat carries standard data traffic.  TheCompany believes that PowerPlayTM represents a significant advance over theprior generation product****EDCOMMTM,which was targeted at the distance learning market, because of PowerPlayTM’sbroader range of potential uses.

 

*System Solution Services*.  The Company designs and implements systems utilizing in-housemanufactured products and products supplied by third parties.  It also trains the end-users as an integralaspect of providing complete system solutions. The Company believes its total system solution focus differentiates itfrom competitors while providing an additional source of revenue growth.

 

*PowerPlayTM Solution. *PowerPlayTM is the Company’s digital multimedia solutionfor high bandwidth private network applications.  PowerPlayTM is an integrated hardware-software system, whichsupports user-friendly control of all network devices including VCRs, cameras,and switches. This product permits the scheduling and conduct of videoconferencing via a desktop workstation, a roll about cart or a configuredclassroom or business environment.  ThePowerPlayTM system incorporates proprietary software, both Company and thirdparty developed hardware, and is compatible with all standards basedtransmission networks.  The Companybelieves that PowerPlayTM is unique with respect to its capability to deliverfull motion video signals while using a relatively small amount of bandwidth.

 

*Data Solution*. The Company also provides high-speed wide area network, or WAN, datasolution.  This solution is offered as adata only capability or as part of delivering the PowerPlayTM application.  The data product line consists of two maincomponents.  First is the data switchproduct, which the Company obtains from other vendors.  Second is the transport converter device,which the Company manufactures.

 

*Analog Products*. The Company also offers an analog transport product line, EDCOMMTM thatconsists of a variety of fiber optic transmitters and receivers.  The typical application is for the deliveryof video over a private network.  TheCompany manufactures all of these products and the great majority of the salesof these products are to existing customers.

 

**Sales and Marketing**

 

The Companymarkets its digital multimedia products and services through a combination ofsystem integrators and value added resellers. The Company believes it will benecessary to expand its sales and marketing efforts in the future to remaincompetitive and take advantage of market opportunities, as well as to extendinto international markets.

 

The Company hasestablished relationships with a number of multiple system cable operators, orMSOs.  MSOs have generally looked tothese private networks as a means of augmenting and extending their publicnetworks, and as a source of new revenues in the increasingly competitiveenvironment.

 

The Company hasdeveloped relationships with a number of traditional systems integrators underwhich it has provided system design services and has assisted with theinstallation.  The Company believes thatsystems integrators provide a viable avenue to the market and intends tocontinue to expand its efforts in this area.

 

**Networking**

 

**Products and Services**

 

In the last decadethe telecommunications industry has changed the implementation of its networksregarding methods used to establish, control, and track connections.  The new control network is responsible formost of the enhanced services implemented in the last few years.  Using Signaling System Seven (SS7) protocol,the new packet switched control network has added call forwarding, last numberre-dial, call blocking and many other features. In addition, Federal guidelinesnow mandate that Local Number Portability (LNP), a capability that will allowcustomers to keep the same telephone number as they change their operatingenvironment, be implemented by local carriers in an immediate time frame.

 

The Companyprovides products, which assist the carriers in the engineering, installation,and servicing of this new telecommunications control network.  These telecommunications network operationalsupport systems and

 

8

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services can bebroken down into three categories: Test Access, Interconnecting Devices, andServices including System Integration (rack and stack) and Installation.

 

*Test Access. *The DigilogTM Network Analysis and Monitoring System,or NAMS, is a network overlay

systemthat enables a user to monitor the operation of the SS7 network from a centralsite.  The system provides prompt alarmnotification of a network failure, automatic activation of backup devices, anda means to track down operational database errors.  Verizon is one of the largest users of this system in its tier Iand tier II support operations.  In thisapplication, the Company supplies the access products and the system softwarein partnership with Agilent Technologies, which supplies the remote controlledProtocol Analyzers.

 

*Interconnecting Devices.* TheDigilogTM Channel Access Unit (“CAU”) is a product used to provide the physicalinterconnection between the SS7 network and complex monitoring devices such asthe AcceSS7 system from Agilent Technologies.

 

This product wasdeveloped to meet a strong need to interconnect several applications monitoringcomputers to a single network tap point. In addition to the CAU, the Company’s interconnect products includeresistor panels, special cables, fuse panels, and the integration of otherthird-party equipment for unique connection configurations.

 

*System Integration (rack and stack)and Installation*.  The Company is an approved installer forVerizon.  As such, it providesinstallation services to Verizon both directly and indirectly through AgilentTechnologies.  The Company also providesSystem Integration services to both of these customers.  Integration Services are the assembly ofboth customer-supplied and DigilogTM manufactured components into rack andcabinet configurations for installation in the telephone central office.  Through a partnership with AgilentTechnologies, the Company assembles and tests Agilent Technologies’ equipmentprior to installing it in central offices throughout the U.S.

 

**Sales and Marketing**

 

The Company’sDigilogTM networking products are sold by highly trained, direct salespersonnel.  These individuals workwithin the telephone central office and are encouraged to develop practicalsolutions to the customer’s program managers. The Company believes that this approach has proven to be veryefficient.  In addition, the Company hasdeveloped partnerships with Agilent Technologies and other suppliers ofmonitoring equipment.  Establishingrelationships such as these facilitates access to a much broader market withoutthe additional expense of a large and specialized sales force.

 

**GENERAL**

** **

**Suppliers**

 

The Company relieson third party subcontractors, both in the USA and overseas, to manufacturesome of the equipment used to provide its Uplink security alarm communicationproduct, FastTrack Wireless Solutions suite of interactive web-based wirelesstelemetry interface product solutions, Derived Channel and networking equipmentand products.  In addition, some of theCompany’s products are obtained from sole source suppliers.  The loss of a subcontractor or suppliercould cause a disruption in the Company’s business due to the short lead-timesdemanded by certain of the Company’s customers.

** **

**Competition**

 

The Company hasone direct competitor for its wireless communications business Cellemetry®technology — Aeris.net, formerly Aeris Communication, Inc., which uses theservice name Micro Burst. Numerous indirect competitors are actively pursuingthe short message wireless data transport market, principally, two-way paging,dedicated packet radio, private radio, low earth orbit satellites, and PCS.

 

The Companybelieves that its ubiquitous North American coverage, price points, and systemperformance will enable it to effectively compete for market share.  However, many of the competitors have greaterfinancial and other resources than the Company.

 

9

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The market for theCompany’s digital multimedia high bandwidth broadband transmission equipmentand software solutions has been characterized by rapid technologicalchange.  The principle competitivefactors in this market include product performance, reliability, price, breadthof product line, sales and distribution capability, technical support andservice, customer relations, and general industry and economic conditions.  The ability to provide complete systemssolutions including system integration, network management capabilities, andthe expertise to migrate existing systems to more complete broadband networks,have also become critically important vendor selection criteria in recentyears.  Additionally, users requireapplications to make best use of these networks.

 

The Company’scompetitors for its digital multimedia products and services include a numberof companies that have developed videoconferencing technology, includingPictureTel, Polycom, Tandberg and VTEL. Other competitors include manufacturersof fiber transmission equipment, who offer comparable products but do notprovide a complete system solution, including software.  Many of the competitors have greaterfinancial and other resources than the Company.

 

Because of itsproprietary nature, the Company believes that it is the only licensed providerof Derived Channel products.  TheCompany’s principal competition in the commercial security market consists ofalternative methods of monitoring line integrity, such as dedicated telephoneline service.  Although security systemsusing a dedicated telephone line are considered reliable, they are a moreexpensive alternative to the Company’s Derived Channel.  The Company believes that Derived Channelrepresents, from a price performance perspective, the most secure and mostreliable form of primary alarm data transport.

 

The Companybelieves that its networking business is unique among vendors of supportsystems for SS7 in that it has been a long-term provider of both diagnosticequipment and testing systems.  TheCompany believes that its presence in telephone central offices on a day-to-daybasis gives its networking business a unique perspective on the needs of thecentral office project manager.

** **

**Research and Development**

 

Technology issubject to rapid change, so the introduction of new products, technologies andapplications in the Company’s markets could adversely affect the Company’s business.  The Company’s success will depend, in part,on its ability to enhance existing products and introduce new products andapplications on a timely basis. The Company plans to continue to devote asubstantial portion of its resources to the research and development function.

 

The Companycontinues to invest in improvements to Cellemetry® and its service capabilityon an ongoing basis, through development of expanded service bureaucapabilities, further communications costs reductions, and additional enhancementto application-specific capabilities.

 

In the near term,the Company will continue to enhance PowerPlayTM, expand its data productofferings to include high-speed fiber transceivers, and introduce versions ofPowerPlayTM, which will be capable of working in a relatively lower bandwidthenvironment.

 

The Company willcontinue to be reliant upon BT to conduct research and development for DerivedChannel technology.

 

**Product Warranty and Service**

** **

The Company’swireless communications business provides three-year parts and labor warrantieson all wireless radios. The Company’s Wireline Data Communications (DerivedChannel) business provides customers with limited one–year warranties onscanners and message switch software while Subscriber Terminal Units (“STUs”)are typically sold with a one- or two-year labor and materials warranty. TheCompany’s digital multimedia business provides either a one- or two-yearwarranty on parts and labor, depending on the scale and type of productprovided. The Company’s networking business provides a one-year warranty on alltelecommunications networking products. In addition, a “help desk” and trainingsupport is offered to all users of telecommunications networking products. Todate, the cost to the Company of its warranty programs have not been material.

 

**Intellectual Property**

 

The Company holdspatents covering its Cellemetry® related technology in the U.S. and variousforeign

 

10

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countries.  These patents expire between 2011 and2016.  The Company through Cellemetry licensescertain Cellemetry® related technologies under licenses with BellSouthCorporation.  The Company also ownsother intellectual property relating to its products.  The Company also holds patents through Cellemetry, whichprimarily cover the delivery of the Cellemetry**®** wireless datacommunications service.  These patentsexpire between 2010 and 2012.  It is theCompany’s practice to apply for patents as new products or processes suitablefor patent protection are developed. No assurance can be given as to the scopeof the patent protection.

 

The Companybelieves that the rapid technological developments in the telecommunicationsindustry may limit the protection afforded by patents. Accordingly, the Companybelieves that its success will also be dependent upon its manufacturing,engineering and marketing know–how and the quality and economic value ofits products.

 

The markCellemetry® is a registered trademark of the Company. The Company believes thatno individual trademark or trade name is material to the Company’s competitiveposition in the industry.

 

**Regulation**

 

The Company’sproducts are subject to a variety of standards and certification requirementsapplicable to products connected to public telephone networks in the countriesin which it conducts business.

 

The provision oftelecommunications services in the U.S. is subject to the FederalCommunications Act and regulations promulgated by the Federal CommunicationsCommission (the “FCC”), as well as to state statutes and regulations. Thesestatutes and regulations have not resulted in any significant impediments tothe provision of alarm reporting services by telephone companies using DerivedChannel technology or for the delivery of wireless data signals using theCellemetry**®**network. The Company may be subject to certain taxes and fees in connectionwith telecommunication services (including the federal universal servicecharge).

 

In addition, theCompany’s products, such as Derived Channel STUs, Uplink radios and certaindigital multimedia products, require certification from the FCC for compliancewith standards designed to prevent damage to the telephone network and torestrict radio frequency interference. The Company’s products currently used in the U.S., which are subject tothese requirements, have received all required certifications. However,anticipated design changes to products sold in the U.S. will require compliancetesting and certification.

 

In addition, inthe U.S. the Company’s products require certification from Underwriters Laboratoriesin order to serve monitoring applications with higher levels of insurancerisk.  Certain products of the Company’sdigital multimedia business also require certification from UnderwritersLaboratories. The Company has obtained all required Underwriters Laboratoriescertifications for products currently marketed in the U.S. and expects thatfuture certifications will be obtained as necessary in the ordinary course ofbusiness.

 

Regulationssimilar to the above may exist in other countries. In the event that theCompany did not comply with any such regulations, or if the Company’s currentor future products did not meet various regulatory standards or receive andmaintain all required certifications, the Company’s business could be adverselyaffected.

 

**Employees**

 

The Company, as ofMarch 26, 2002, employs 106 employees in the U.S., consisting of 6 inmanufacturing, 36 in sales, marketing and customer service, 45 in engineeringand operations and 19 in management and administration. A union represents noneof the Company’s employees. The Company believes that its relationship with itsemployees is satisfactory.

 

**Executive Officers and Key Employeesof Registrant**

 

The following setsforth the names, ages and positions of the executive officers and certain keyemployees of the Company as of March 26, 2002:

 

Geoff W. Girdler,age 41, has been an Executive Vice President of the Company since December1999.  From 1994 to 1997, Mr. Girdlerwas sales director for Digital Audio Limited, a then wholly-owned subsidiary ofthe Company.  From 1998 until 1999, Mr.Girdler served as Managing Director of Versus Technology Limited, a thenindirect, wholly owned subsidiary of the Company, with operationalresponsibility for derived channel technology worldwide.

 

11

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Michael A. Marett, age 47, has been an Executive Vice President of theCompany since February 2001. From 1999 to 2001, Mr. Marett was Vice President,Sales and Marketing of TManage, Inc. From 1997 to 1999 Mr. Marett was VicePresident, Business Development of Mitel Business Communications Systems, adivision of Mitel Corporation. Prior to this position Mr. Marett held a numberof executive positions at Bell Atlantic.

 

Stratton J. Nicolaides, age 48, has served as Chief Executive Officer ofthe Company from April 2000 having served as Chief Operating Officer from April1999 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 and providedconsulting services to Dominion Group Limited.

 

Peter J. Quinn,age 45, has been the Chief Financial Officer of the Company since December1999.  From 1987 to 1997, Mr. Quinnserved as Chief Financial Officer, Secretary, Treasurer, and Board Member ofEuroplex Holdings Limited.  From July1997 until December 1999, Mr. Quinn served as Vice President, Chief FinancialOfficer, Secretary and Treasurer of Uplink, a subsidiary of the Company.  From 1998 until December 1999, Mr. Quinnalso held the same position at Cellemetry LLC.

 

Roland W. Rice,age 42, has been an Executive Vice President of the Company since August 2001having joined in February 2001 as Vice President, Sales. From 1996 to 2001, Mr.Rice was Vice President, North American Sales, for Sonicblue, Inc. (formerly,Diamond Multimedia). From 1993 to 1996, Mr. Rice was General Manager, NorthAmerican Sales of Hayes.

 

**Item2.  Properties.**

 

All of theCompany’s facilities are leased. Set forth below is certain information withrespect to the Company’s leased facilities:

 
| **Location**                |   | **Principal Business**                                       |   | **Square  Footage** |   | **Lease Term** |   |
|-----------------------------|--------|--------------------------------------------------------------|--------|---------------------|--------|----------------|--------|
| Willow Grove,  Pennsylvania |   | Networking andWireline Data Communications                   |   | 10,000              |   | 2003           |   |
|                        |   |                                                         |   |                |   |           |   |
| State  College,             |   | Digital Multimedia                                           |   | 10,788              |   | 2002           |   |
| Pennsylvania                |   |                                                         |   |                |   |           |   |
|                        |   |                                                         |   |                |   |           |   |
| West  Conshohocken,         |   | Executive Office(1)                                          |   | 2,815               |   | 2002           |   |
| Pennsylvania                |   |                                                         |   |                |   |           |   |
|                        |   |                                                         |   |                |   |           |   |
| Atlanta,  Georgia           |   | Wireless Data  Communications and Principal Executive Office |   | 14,027              |   | 2003           |   |
|                        |   |                                                         |   |                |   |           |   |
| Atlanta,  Georgia           |   | Wireless Data  Communications                                |   | 6,946               |   | 2003           |   |
|                        |   |                                                         |   |                |   |           |   |
| Atlanta,  Georgia           |   | Wireless Data  Communications                                |   | 1,658               |   | 2005           |   |

 

(1)Executiveoffice prior to relocation to Atlanta, presently sub-leased.

 

The Companyconducts manufacturing, sales and marketing, engineering and administrativeactivities at many of these locations.****The Company believes that its existingfacilities are adequate for its current needs. As the Company grows and expandsinto new markets and develops additional products, it may require additionalspace, which the Company believes will be available at reasonable rates.

 

The Companyengages in limited manufacturing, equipment and product assembly and testingfor certain of the Company’s products. The Company also uses contract manufacturerslocated near its facilities for production, sub–assembly and finalassembly of certain products.  TheCompany believes there are other manufacturers that could perform this work oncomparable terms.

 

12

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Thesemiconductors, microprocessors and other components used in the Company’sproducts are obtained from various suppliers and manufacturers, some of whichare the sole source of such component.

 

**Item3.  Legal Proceedings.**

 

From time to time,the Company is involved in routine legal proceedings in the normal course ofits business.  The Company believes thatno currently pending legal proceeding will have a materially adverse effect onts business.  The Company believes thatno currently pending legal proceeding will have a materially adverse effect onthe financial condition or results of operations of the Company.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders.**

 

Not applicable.

 

## **PART II**

 

**Item5.  Market for the Registrant’s CommonStock and Related Shareholder Matters.**

 

The Company doesnot currently 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 theCompany’s earnings, financial condition and working capital, capitalexpenditure requirements, any restrictions contained in loan agreements andmarket factors and conditions.

 

The OperatingAgreement and the terms of the Series A Convertible Redeemable Preferred Stockheld by BellSouth Wireless provide for certain restrictions on dividends anddistributions.

 

The Company’sCommon Stock is quoted on the NASDAQ National Market and traded under thesymbol “NMRX.”

 

The followingtable sets forth, for the fiscal quarters indicated, the high and low salesprices per share for

the Common Stockon the NASDAQ National Market for the applicable periods.

 
| **Fiscal 2001**                                        |   | **High** |   | **Low** |   |
|--------------------------------------------------------|--------|----------|--------|---------|--------|
| First  Quarter (January 1, 2001 to March 31, 2001)     |   | $9.38    |   | $5.94   |   |
| Second  Quarter (April 1, 2001 to June 30, 2001)       |   | 9.60     |   | 5.10    |   |
| Third  Quarter (July 1, 2001 to September 30, 2001)    |   | 9.04     |   | 5.82    |   |
| Fourth  Quarter (October 1, 2001 to December 31, 2001) |   | 7.65     |   | 5.85    |   |

 
| **Fiscal 2000**                                        |   | **High** | ** ** | **Low** | ** ** |
|--------------------------------------------------------|--------|----------|------------|---------|------------|
| First  Quarter (January 1, 2000 to March 31, 2000)     |   | $17.00   |       | $9.38   |       |
| Second  Quarter (April 1, 2000 to June 30, 2000)       |   | 13.31    |       | 7.06    |       |
| Third  Quarter (July 1, 2000 to September 30, 2000)    |   | 13.75    |       | 9.75    |       |
| Fourth  Quarter (October 1, 2000 to December 31, 2000) |   | 12.75    |       | 7.06    |       |

 

As of March 26,2002, there were 68 shareholders of record of the Company’s Common Stock, whichinclude shares held in street name by brokers or nominees.

 

**Item6.  Selected Financial Data.**

 

Incorporated byreference from the Company’s 2001 Annual Report to Shareholders, pursuant toGeneral Instruction G (2) to Form 10-K, the relevant portions of which arefiled as Exhibit 13 hereto.

 

13

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**Item7.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

 

Incorporated byreference from the Company’s 2001 Annual Report to Shareholders pursuant toGeneral Instruction G (2) to Form 10-K, the relevant portions of which arefiled as Exhibit 13 hereto.

 

**Item 7A. Quantitative and QualitativeDisclosures about Market Risk.**

 

Not applicable.

 

**Item8.  Financial Statements andSupplementary Data.**

 

The FinancialStatements and Supplementary Data of the Company required by this Item are setforth at the pages indicated herein at Item 14(a).

 

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

 

Not applicable.

## ** **

## **PART III**

 

**Item10.  Directors and Executive Officers ofthe Registrant.**

 

Incorporated byreference from the Company’s Proxy Statement relating to the 2002 AnnualMeeting of Shareholders to be filed pursuant to General Instruction G (3) toForm 10–K.

 

**Item11.  Executive Compensation.**

 

 Incorporated by reference from the Company’sProxy Statement relating to the 2002 Annual Meeting of Shareholders to be filedpursuant to General Instruction G (3) to Form 10–K.

 

**Item12.  Security Ownership of CertainBeneficial Owners and Management.**

 

Incorporated byreference from the Company’s Proxy Statement relating to the 2002 AnnualMeeting of Shareholders to be filed pursuant to General Instruction G (3) toForm 10–K.

 

**Item13.  Certain Relationships and RelatedTransactions.**

 

Incorporated byreference from the Company’s Proxy Statement relating to the 2002 AnnualMeeting of Shareholders to be filed pursuant to General Instruction G (3) toForm 10–K.

###### ** **

###### **PART IV**

 

**Item 14****.  Exhibits, FinancialStatement Schedules and Reports on Form 8–K.**

 

(a) Documents filed as part of this report:

 
|   |   | 1.  Consolidated Financial Statements. The  following financial statements and the notes thereto of the Company are  attached hereto beginning on page F-1.                                                         |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                     |
|   |   | Index to Financial Statements of the Company                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                     |
|   |   | Report of  Independent Certified Public Accountants                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                     |
|   |   | Consolidated  Balance Sheets as of December 31, 2001, 2000 and 1999                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                     |
|   |   | Consolidated  Statements of Operations for the years ended December 31, 2001, 2000; the  two-monthperiod ended December 31, 1999 and the year ended October 31,  1999 Consolidated Statements of Shareholders’ |

 

 

14

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|     |   | Equity for the  years ended December 31, 2001, 2000; the two-month period ended December 31,  1999 and the year ended October 31, 1999                                                                                                                                                                                                                                                                                                                                   |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     |   | Consolidated  Statements of Cash Flows for the years ended December 31, 2001, 2000; the  two-monthperiod ended December 31, 1999 and the year ended October 31, 1999                                                                                                                                                                                                                                                                                                     |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     |   | Notes to  Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                              |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     |   | 2.  Financial Statement Schedules                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     |   | Schedule  I - Condensed financial information of registrant (parent company only)                                                                                                                                                                                                                                                                                                                                                                                        |
|     |   | Schedule  II - Valuation and qualifying accounts                                                                                                                                                                                                                                                                                                                                                                                                                         |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     |   | 3.  List of Exhibits  filed pursuant to Item 601 of Regulation S–K. The following exhibits  are incorporated by reference herein, or are being filed herewith:                                                                                                                                                                                                                                                                                                 |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 2.1(1)   |   | Securities Purchase  Agreement among Numerex Corp., Broadband Networks, Inc. and the Shareholders  of Broadband Networks, Inc. dated February 21, 1997                                                                                                                                                                                                                                                                                                                   |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 2.2(2)   |   | Shareholders’ Agreement  among Broadband Networks, Inc., Numerex Corp. and the Shareholders of  Broadband Networks, Inc. dated February 21, 1997                                                                                                                                                                                                                                                                                                                    |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 2.3(3)   |   | Numerex Corp. and  British Telecommunications plc, Agreement Relating to the sale and purchase  of the whole of the issued shares capital of Bronzebase Limited                                                                                                                                                                                                                                                                                                          |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 3.1(4)   |   | Amended and Restated  Articles of Incorporation of the Company, as amended                                                                                                                                                                                                                                                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 3.2(4)   |   | Bylaws of the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1(4)  |   | The Numerex Corp.  Savings and Profit Sharing Plan — Summary Plan Description (Management  Compensation Plan)                                                                                                                                                                                                                                                                                                                                                       |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2(5)  |   | Amended and Restated  1994 Employee Stock Option Plan (Management Compensation Plan)                                                                                                                                                                                                                                                                                                                                                                                     |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3(6)  |   | Amended and Restated  Stock Option Plan for Non–Employee Directors (Management Compensation  Plan)                                                                                                                                                                                                                                                                                                                                                                  |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4(7)  |   | Registration Agreement  between the Company and Dominion dated July 13, 1992                                                                                                                                                                                                                                                                                                                                                                                             |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5(6)  |   | Letter Agreement  between the Company and Dominion (now Gwynedd) dated October 25, 1994 re:  designation of director                                                                                                                                                                                                                                                                                                                                                     |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6(4)  |   | Office Space Lease  Agreement between the Company and LBA Associates dated May 31, 1995.                                                                                                                                                                                                                                                                                                                                                                                 |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7(10) |   | 1999 Long-Term  Incentive Plan.  (Management  Compensation Plan).                                                                                                                                                                                                                                                                                                                                                                                                   |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.8(8)  |   | Formation Agreement  among Numerex Corp., BellSouth Wireless, Inc. and BellSouth Corporation dated  February 25, 1998.                                                                                                                                                                                                                                                                                                                                                   |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.9(9)  |   | Operating Agreement  between Numerex Corp. and BellSouth Wireless, Inc. dated May 15, 1998.                                                                                                                                                                                                                                                                                                                                                                              |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.10(3) |   | First Amendment to  Operating Agreement of Cellemetry LLC between Numerex Corp. and BellSouth  Wireless, Inc. effective as of November 1, 1999.                                                                                                                                                                                                                                                                                                                          |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 11       |   | Computation of Earnings  Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 13       |   | Pursuant to Note 2 of Instruction G (2) to Form  10-K, in response to Item 6.  Selected  Financial Data, “Selected Consolidated Financial Data” and in response to  Item 7.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations, “Management’s  Discussion and Analysis of Financial Condition and Results of Operations” are  incorporated by reference from the Company’s 2001 Annual |

 

 

15

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|   |   | Report to Shareholders’ and are being filed in  electronic format.  No other sections  of the Company’s 2001 Annual Report to Shareholders shall be deemed “filed”  as part of this filing. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                 |
| 21     |   | Subsidiaries of Numerex  Corp.                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                 |
| 23.1   |   | Consent of Grant  Thornton LLP                                                                                                                                                                                       |

 

----

 
| (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 March 5, 1997 (File No. 0-22920)                                        |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                               |
| (2)    |   | 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 29, 2000 for the  year ended October 31, 1997 (File No. 0-22920) |
|   |   |                                                                                                                                                                                                                               |
| (3)    |   | 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)                          |
|   |   |                                                                                                                                                                                                                               |
| (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 for the year ended October  31, 1995 (File No. 0-22920)                     |
|   |   |                                                                                                                                                                                                                               |
| (5)    |   | 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) |
|   |   |                                                                                                                                                                                                                               |
| (6)    |   | 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)                                                |
| (7)    |   | 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)                                    |
|   |   |                                                                                                                                                                                                                               |
| (8)    |   | 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 26, 1998 (File  No. 0–22920)                          |
|   |   |                                                                                                                                                                                                                               |
| (9)    |   | 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 June 1, 1998 (File No. 0–22920)                                |
|   |   |                                                                                                                                                                                                                               |
| (10)   |   | 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)                         |

 

(b) Reports onForm 8–K.

 

None.

## ** **

16

----

 

## **SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this Reporton Form 10–K to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

**NUMEREX CORP**.

 
| Date: March 28, 2002 |   |   | By:                                                             | /s/Stratton J.  Nicolaides |   |
|----------------------|--------|--------|-----------------------------------------------------------------|----------------------------|--------|
|                 |   |   | Stratton J. Nicolaides,  Chairman and   Chief Executive Officer |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Report on Form 10–K has been signed below bythe following persons on behalf of the Registrant and in the capacities and onthe dates indicated.

 
| Signature                  |   |                    | Capacity                   |           | Date |   |
|----------------------------|--------|-------------------------|----------------------------|----------------|------|--------|
|                       |   |                    |                       |
| /s/Stratton J.  Nicolaides |   |                    |                       |           |
| Stratton J. Nicolaides     |   | Chairman and            | March 28, 2002             |
|                       |   | Chief Executive Officer |                       |
|                       |   |                    |                       |
| /s/ George Benson          |   |                    |                       |           |
| George Benson              |   | Director                | March 28, 2002             |
|                       |   |                    |                       |
| /s/ Matthew J. Flanigan    |   |                    |                       |           |
| Matthew J. Flanigan        |   | Director                | March 28, 2002             |
|                       |   |                    |                       |
| /s/ Allan Liu              |   |                    |                       |           |
| Allan Liu                  |   | Director                | March 28, 2002             |
|                       |   |                    |                       |
| /s/ John Raos              |   |                    |                       |           |
| John Raos                  |   | Director                | March 28, 2002             |
|                       |   |                    |                       |
| /s/ Andrew J. Ryan         |   |                    |                       |           |
| Andrew J. Ryan             |   | Director                | March 28, 2002             |
|                       |   |                    |                       |
| /s/Peter J. Quinn          |   |                    | Executive Vice  President, | March 28, 2002 |
| Peter J. Quinn             |   |                    | Chief Financial  Officer,  |           |
|                       |   |                    | Principal Financial and    |           |
|                       |   |                    | Accounting Officer         |           |
|                            |        |                         |                            |                |      |        |  |  |  |  |  |

 

** **

**17**

----

** **

**CO N T E N T S**
| Consolidated Financial  Statements of the Company: |
|----------------------------------------------------|
|                                               |   |
|                                               | Report  of Independent Certified  Public Accountants |
|                                               |   |
|                                               | Consolidated Balance Sheets  as of December 31, 2001, 2000 and 1999 |
|                                               |   |
|                                               | Consolidated  Statements of Operations and Comprehensive Income for the years ended  December 31, 2001, 2000, the two-month period ended December 31, 1999 and the  year ended October 31, 1999 |
|                                               |   |
|                                               | Consolidated  Statements of Shareholders’ Equity for the years ended December 31, 2001,  2000, the two-month period Ended December 31, 1999 and the year ended October  31, 1999 |
|                                               |   |
|                                               | Consolidated  Statements of Cash Flows for the years ended December 31, 2001, 2000, the  two-month period ended December 31, 1999 and the year ended October 31, 1999 |
|                                               |   |
|                                               | Notes to  Consolidated Financial Statements |

 

F-1

----

 

## **Report of IndependentCertified Public Accountants**

 

To the Shareholders and Boardof

Directors ofNumerex Corp. and Subsidiaries

 

We have audited theaccompanying consolidated balance sheets of Numerex Corp. and subsidiaries (the2Company2) asof December 31, 2001, 2000 and 1999, and the related consolidated statements ofoperations, shareholders’ equity and cash flows for the years ended December31, 2001 and 2000, the two-month period ended December 31, 1999 and the yearended October 31, 1999.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statements presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidatedfinancial statements referred to above, present fairly, in all materialrespects, the consolidated financial position of Numerex Corp. and subsidiariesas of December 31, 2001, and 2000, and 1999, and the results of theiroperations and their cash flows for the years ended December 31, 2001 and 2000,the two-month period ended December 31, 1999, and the year ended October 31,1999, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

/s/ Grant Thornton

Grant Thornton LLP

 

Atlanta, Georgia

February 18, 2002

 

F-2

----

 

## **NUMEREX CORP. AND SUBSIDIARIES**

 

###### **CONSOLIDATED BALANCE SHEETS**

(In Thousands,Except Number of Shares)

 

###### **ASSETS**

 
|                                                                                      |   | **December  31,** |   |
|-------------------------------------------------------------------------------------------|--------|-------------------|--------|
|                                                                                      |   | **2001**          |   | **2000** |   | **1999** |   |
| CURRENT  ASSETS                                                                           |   |              |   |   |   |   |   |
| Cash  and cash equivalents (Note A-4)                                                     |   | $                 | 5,401  |   | $ | 10,567 |   | $ | 21,490 |   |
| Accounts  receivable (net of allowances of $534, $431 and $237, respectively (Note  A-10) |   | 7,521             |   | 7,153 |   | 6,241 |   |
| Inventory  (Notes A-9 and D)                                                              |   | 5,077             |   | 4,117 |   | 3,618 |   |
| Prepaid  taxes (Notes A-8 and H)                                                          |   | 48                |   | 16 |   | — |   |
| Prepaid  expenses & interest receivable                                               |   | 1,498             |   | 450 |   | 259 |   |
|                                                                                      |   |              |   |   |   |   |   |
| Total  current assets                                                                     |   | 19,545            |   | 22,303 |   | 31,608 |   |
|                                                                                      |   |              |   |   |   |   |   |
| Property  and equipment, net (Notes A-6 and E)                                            |   | 3,107             |   | 2,917 |   | 2,899 |   |
| Goodwill,  net (Notes A-5 and F)                                                          |   | 10,983            |   | 10,789 |   | 11,404 |   |
| Intangible  assets, net (Notes A-5 and G)                                                 |   | 9,222             |   | 9,845 |   | 10,410 |   |
| Other  assets                                                                             |   | 117               |   | 88 |   | 84 |   |
|                                                                                      |   | $                 | 42,974 |   | $ | 45,942 |   | $ | 56,405 |   |

 

The accompanying notesare an integral part of these statements.

 

F-3

----

 

**NUMEREXCORP. AND SUBSIDIARIES**

 

**CONSOLIDATEDBALANCE SHEETS**

(In Thousands,Except Number of Shares)

 

## **LIABILITIES AND SHAREHOLDERS’ EQUITY**

 
|                                                                                                                     |   | **December  31,** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|
|                                                                                                                     |   | **2001**          |   | **2000** |   | **1999** |   |
| CURRENT  LIABILITIES                                                                                                     |   |              |   |   |   |   |   |
| Accounts  payable                                                                                                        |   | $                 | 4,880  |   | $ | 3,316 |   | $ | 2,823 |   |
| Income  taxes (Notes A-8 and H)                                                                                          |   | —            |   | 10 |   | 854 |   |
| Accrued  taxes, other than income                                                                                        |   | —            |   | — |   | — |   |
| Other  current liabilities                                                                                               |   |              |   |   |   |   |   |
| Deferred  revenues                                                                                                       |   | 658               |   | 425 |   | 257 |   |
| Other  accrued liabilities                                                                                               |   | 2,530             |   | 1,640 |   | 2,837 |   |
| Obligations  under capital leases, current portion (Note J)                                                              |   | 145               |   | 36 |   | 25 |   |
|                                                                                                                     |   |              |   |   |   |   |   |
| Total  current liabilities                                                                                               |   | 8,213             |   | 5,427 |   | 6,796 |   |
|                                                                                                                     |   |              |   |   |   |   |   |
| LONG-TERM  DEBT                                                                                                          |   |              |   |   |   |   |   |
| Obligations  under capital leases (Note J)                                                                               |   | 327               |   | 102 |   | 85 |   |
|                                                                                                                     |   |              |   |   |   |   |   |
| MINORITY  INTEREST (Note B)                                                                                              |   | 326               |   | 3,511 |   | 6,616 |   |
|                                                                                                                     |   |              |   |   |   |   |   |
| COMMITMENTS AND CONTINGENCIES                                                                                            |   |              |   |   |   |   |   |
| (Notes  I and J)                                                                                                         |   | —            |   | — |   | — |   |
|                                                                                                                     |   |              |   |   |   |   |   |
| SHAREHOLDERS’ EQUITY                                                                                                |   |              |   |   |   |   |   |
| Preferred  stock - no par value; authorized 3,000,000 shares; issued 30,000, 30,000 and  30,000 shares                   |   | 3,000             |   | 3,000 |   | 3,000 |   |
| Class  A common stock - no par value; authorized 30,000,000 shares; issued  12,286,419, 12,157,504 and 11,609,492 shares |   | 32,590            |   | 32,064 |   | 29,870 |   |
| Class  B common stock - no par value; authorized 5,000,000 shares; none issued                                           |   | —            |   | — |   | — |   |
| Additional  paid-in capital                                                                                              |   | 439               |   | 370 |   | 370 |   |
| Treasury  stock, at cost, 1,766,400, 1,766,400 and 1,266,400 shares                                                      |   | (9,222            | )      | (9,222 | ) | (5,222 | ) |
| Accumulated  other comprehensive income                                                                                  |   | (27               | )      | (20 | ) | (20 | ) |
| Retained  earnings                                                                                                       |   | 7,328             |   | 10,710 |   | 14,910 |   |
|                                                                                                                     |   |              |   |   |   |   |   |
| Total  shareholders’ equity                                                                                         |   | 34,108            |   | 36,902 |   | 42,908 |   |
|                                                                                                                     |   |              |   |   |   |   |   |
|                                                                                                                     |   | $                 | 42,974 |   | $ | 45,942 |   | $ | 56,405 |   |

 

The accompanying notesare an integral part of these statements.

 

F-4

----

 

###### **NUMEREX CORP. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME**

(In Thousands,Except Per Share Data)

 
|                                                         |   | **For the  years ended December 31,** |   | **For the  two-month**

**period  ended  December 31,** |       | **For the  year ended  October 31,** |       |
|--------------------------------------------------------------|--------|---------------------------------------|--------|---------------------------------------------------------|------------|--------------------------------------|------------|
|                                                         |   | **2001**                              |   | **2000**                                                | ** ** | **1999**                             | ** ** | **1999** | ** ** |
| Net  sales                                                   |   | $                                     | 24,258 |                                                    | $          | 20,290                               |       | $ | 2,301 |   | $ | 33,736 |   |
| Cost  of sales                                               |   | 14,546                                |   | 12,020                                                  |       | 1,711                                |       | 13,689 |   |
| Depreciation  and amortization                               |   | 267                                   |   | 270                                                     |       | 35                                   |       | 714 |   |
| Inventory  write-downs (Note D)                              |   | 191                                   |   | —                                                  |       | —                               |       | — |   |
| Gross  profit                                                |   | 9,254                                 |   | 8,000                                                   |       | 555                                  |       | 19,333 |   |
|                                                         |   |                                  |   |                                                    |       |                                 |       |   |   |
| Research  and development expenses                           |   | 2,755                                 |   | 3,430                                                   |       | 473                                  |       | 3,468 |   |
| Selling,  general, administrative and other expenses         |   | 10,710                                |   | 10,983                                                  |       | 2,247                                |       | 16,002 |   |
| Depreciation  and amortization                               |   | 2,701                                 |   | 2,593                                                   |       | 434                                  |       | 2,620 |   |
| Business  restructuring charges (Note C)                     |   | 418                                   |   | —                                                  |       | —                               |       | — |   |
| Operating  loss                                              |   | (7,330                                | )      | (9,006                                                  | )          | (2,599                               | )          | (2,757 | ) |
|                                                         |   |                                  |   |                                                    |       |                                 |       |   |   |
| Interest  and other income, net                              |   | 934                                   |   | 1,900                                                   |       | 100                                  |       | 404 |   |
| Gain  on disposition of assets and business (Note B)         |   | —                                |   | —                                                  |       | 12,680                               |       | — |   |
| Minority  interest                                           |   | 3,139                                 |   | 3,146                                                   |       | 591                                  |       | 2,418 |   |
| Earnings  (loss) before income taxes                         |   | (3,257                                | )      | (3,960                                                  | )          | 10,772                               |       | 65 |   |
|                                                         |   |                                  |   |                                                    |       |                                 |       |   |   |
| Income  taxes (Notes A-8 and H)                              |   | 115                                   |   | —                                                  |       | 861                                  |       | 1,682 |   |
| Net  earnings (loss)                                         |   | (3,142                                | )      | (3,960                                                  | )          | 9,911                                |       | (1,617 | ) |
|                                                         |   |                                  |   |                                                    |       |                                 |       |   |   |
| Preferred  stock dividend                                    |   | 240                                   |   | 240                                                     |       | —                               |       | — |   |
|                                                         |   |                                  |   |                                                    |       |                                 |       |   |   |
| Net  earnings (loss) applicable to common shareholders       |   | $                                     | (3,382 | )                                                       | $          | (4,200                               | )          | $ | 9,911 |   | $ | (1,617 | ) |
|                                                         |   |                                  |   |                                                    |       |                                 |       |   |   |
| Other  comprehensive income (loss), net of income taxes      |   |                                  |   |                                                    |       |                                 |       |   |   |
| Foreign  currency translation adjustment (Note A-15)         |   | $                                     | (7     | )                                                       | $          | —                               |       | $ | (24 | ) | $ | (180 | ) |
|                                                         |   |                                  |   |                                                    |       |                                 |       |   |   |
| Comprehensive  earnings (loss)                               |   | $                                     | (3,389 | )                                                       | $          | (4,200                               | )          | $ | 9,887 |   | $ | (1,797 | ) |
|                                                         |   |                                  |   |                                                    |       |                                 |       |   |   |
| Basic  earnings (loss) per share (Note A-19)                 |   | $                                     | (0.32  | )                                                       | $          | (0.40                                | )          | $ | 0.96 |   | $ | (0.16 | ) |
| Diluted  earnings (loss) per share                           |   | $                                     | (0.32  | )                                                       | $          | (0.40                                | )          | $ | 0.85 |   | $ | (0.16 | ) |
|                                                         |   |                                  |   |                                                    |       |                                 |       |   |   |
| Number  of shares used in per share calculation (Note A-19): |   |                                  |   |                                                    |       |                                 |       |   |   |
| Basic                                                        |   | 10,446                                |   | 10,512                                                  |       | 10,343                               |       | 10,378 |   |
| Diluted                                                      |   | 10,446                                |   | 10,512                                                  |       | 11,679                               |       | 10,378 |   |

 

The accompanying notesare an integral part of these statements.

 

 

F-5

----

 

**NUMEREXCORP. AND SUBSIDIARIES**

 

###### **CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**

(In Thousands)

 
|                                                                          |   |          |       |       |       |       |       |       |       |           |       |         |       | **Accumulated**   |       |         |       |      |       |
|-------------------------------------------------------------------------------|--------|---------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|--------------|------------|-----------|------------|
|                                                                          |   |          |       |       |       |       |       |       |       | **Additional** |       |         |       | **Other**         |       |         |       |      |       |
|                                                                          |   | **Preferred** |       | **Stock**  |       | **Common** |       | **Stock**  |       | **Paid-In**    |       | **Treasury** |       | **Comprehensive** |       | **Retained** |       |      |       |
|                                                                          |   | **Shares**    |       | **Amount** |       | **Shares** |       | **Amount** |       | **Capital**    |       | **Stock**    |       | **Earnings**      |       | **Earnings** |       | **Total** |       |
| Balance, October 31,  1998                                                    |   | **—**    | ** ** | **$**      | **—** |       | 11,609     |       | $          | 29,870         |       | $            | 220        |              | $          | (4,644       | )          | $         | 184        |   | $ | 6,616 |   | $ | 32,246 |   |
|                                                                          |   |          | ** ** |       | ** ** |       | ** ** |       | ** ** |           | ** ** |         | ** ** |              | ** ** |         | ** ** |      | ** ** |
| Issuance of common stock  warrants                                            |   | **—**    | ** ** | **—** |       | —     |       | —     |       | 150            |       | —       |       | —            |       | —       |       | 150       |       |
| Purchase of treasury  stock                                                   |   | **—**    | ** ** | **—** |       | —     |       | —     |       | —         |       | (578         | )          | —            |       | —       |       | (578      | )          |
| Translation adjustment                                                        |   | **—**    | ** ** | **—** |       | —     |       | —     |       | —         |       | —       |       | (180              | )          | —       |       | (180      | )          |
| Net loss                                                                      |   | **—**    | ** ** | **—** |       | —     |       | —     |       | —         |       | —       |       | —            |       | (1,617       | )          | (1,617    | )          |
|                                                                          |   |          | ** ** |       | ** ** |       | ** ** |       | ** ** |           | ** ** |         | ** ** |              | ** ** |         | ** ** |      | ** ** |
| Balance, October 31, 1999                                                     |   | —        |       | —     |       | 11,609     |       | 29,870     |       | 370            |       | (5,222       | )          | 4                 |       | 4,999        |       | 30,021    |       |
|                                                                          |   |          |       |       |       |       |       |       |       |           |       |         |       |              |       |         |       |      |       |
| Issuance of preferred stock                                                   |   | 30            |       | 3,000      |       | —     |       | —     |       | —         |       | —       |       | —            |       | —       |       | 3,000     |       |
| Translation adjustment                                                        |   | —        |       | —     |       | —     |       | —     |       | —         |       | —       |       | (24               | )          | —       |       | (24       | )          |
| Net earnings                                                                  |   | —        |       | —     |       | —     |       | —     |       | —         |       | —       |       | —            |       | 9,911        |       | 9,911     |       |
|                                                                          |   |          |       |       |       |       |       |       |       |           |       |         |       |              |       |         |       |      |       |
| Balance, December 31, 1999                                                    |   | 30            |       | 3,000      |       | 11,609     |       | 29,870     |       | 370            |       | (5,222       | )          | (20               | )          | 14,910       |       | 42,908    |       |
|                                                                          |   |          |       |       |       |       |       |       |       |           |       |         |       |              |       |         |       |      |       |
| Issuance of shares in connection with exercise of  stock options and warrants |   | —        |       | —     |       | 548        |       | 2,194      |       | —         |       | —       |       | —            |       | —       |       | 2,194     |       |
| Purchase of treasury stock                                                    |   | —        |       | —     |       | —     |       | —     |       | —         |       | (4,000       | )          | —            |       | —       |       | (4,000    | )          |
| Net loss                                                                      |   | —        |       | —     |       | —     |       | —     |       | —         |       | —       |       | —            |       | (4,200       | )          | (4,200    | )          |
|                                                                          |   |          |       |       |       |       |       |       |       |           |       |         |       |              |       |         |       |      |       |
| Balance, December 31, 2000                                                    |   | 30            |       | 3,000      |       | 12,157     |       | 32,064     |       | 370            |       | (9,222       | )          | (20               | )          | 10,710       |       | 36,902    |       |
|                                                                          |   |          |       |       |       |       |       |       |       |           |       |         |       |              |       |         |       |      |       |
| Issuance of shares in connection withexercise of  stock options               |   | —        |       | —     |       | 105        |       | 344        |       | —         |       | —       |       | —            |       | —       |       | 344       |       |
| Issuance of shares under Directors Stock Plan                                 |   | —        |       | —     |       | 1          |       | 9          |       | —         |       | —       |       | —            |       | —       |       | 9         |       |
| Issuance of shares in connection with  Stock Exchange Agreement          |   | —        |       | —     |       | 23         |       | 173        |       | —         |       | —       |       | —            |       | —       |       | 173       |       |
| Option repricing                                                              |   | —        |       | —     |       | —     |       | —     |       | 69             |       | —       |       | —            |       | —       |       | 69        |       |
| Translation adjustment                                                        |   | —        |       | —     |       | —     |       | —     |       | —         |       | —       |       | (7                | )          | —       |       | (7        | )          |
| Net Loss                                                                      |   | —        |       | —     |       | —     |       | —     |       | —         |       | —       |       | —            |       | (3,382       | )          | (3,382    | )          |
|                                                                          |   |          |       |       |       |       |       |       |       |           |       |         |       |              |       |         |       |      |       |
| Balance, December 31, 2001                                                    |   | 30            |       | $          | 3,000      |       | 12,286     |       | $          | 32,590         |       | $            | 439        |              | $          | (9,222       | )          | $         | (27        | ) | $ | (7,328 | ) | $ | 34,108 |   |

 

The accompanyingnotes are an integral part of this statement.

###### ** **

###### **F-6**

###### ****

######  

###### **NUMEREX CORP. AND SUBSIDIARIES**

 

## **CONSOLIDATED STATEMENTS OFCASH FLOWS**

(In Thousands)

 

 
|                                                                                                  |   |                     |       |              |       | **For the**      |       |        |       |   |
|-------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|-------------------|------------|------------------|------------|-------------|------------|--------|
|                                                                                                  |   |                     |       |              |       | **two-month**    |       | **For the** |       |   |
|                                                                                                  |   | **For the  years ended** |       | **period  ended** |       | **year ended**   |       |        |
|                                                                                                  |   | **December  31,**        |       | **December  31,** |       | **October  31,** |       |        |
|                                                                                                  |   | **2001**                 |       | **2000**          |       | **1999**         |       | **1999**    |       |   |
|                                                                                                  |   |                     | ** ** |              | ** ** |             | ** ** |        | ** ** |   |
| Cash  flows from operating activities:                                                                |   |                     |       |              |       |             |       |        |       |   |
| Net  earnings (loss)                                                                                  |   | $                        | (3,142     | )                 | $          | (3,960           | )          | $           | 9,911      |   | $ | (1,617 | ) |
| Adjustments  to reconcile net earnings (loss) to net cash provided by (used in) operating  activities |   |                     |       |              |       |             |       |        |       |   |
| Depreciation                                                                                          |   | 1,454                    |       | 1,374             |       | 231              |       | 1,265       |       |   |
| Amortization                                                                                          |   | 1,514                    |       | 1,488             |       | 239              |       | 2,069       |       |   |
| Compensation  expense                                                                                 |   | 12                       |       | —            |       | —           |       | —      |       |   |
| Special  charges                                                                                      |   | —                   |       | —            |       | —           |       | —      |       |   |
| Minority  interest                                                                                    |   | (3,139                   | )          | (3,146            | )          | (591             | )          | (2,418      | )          |   |
| Equity  in net losses of affiliate                                                                    |   | —                   |       | —            |       | —           |       | —      |       |   |
| Gain  on disposition of business                                                                      |   | —                   |       | —            |       | (12,605          | )          | —      |       |   |
| Gain  on disposition of other assets                                                                  |   | —                   |       | —            |       | (75              | )          | (125        | )          |   |
| Deferred  taxes                                                                                       |   | —                   |       | —            |       | 472              |       | —      |       |   |
| Changes  in assets and liabilities which provided (used) cash:                                        |   |                     |       |              |       |             |       |        |       |   |
| Accounts  receivable                                                                                  |   | (304                     | )          | (912              | )          | 1,034            |       | (5,778      | )          |   |
| Inventory                                                                                             |   | (959                     | )          | (499              | )          | (429             | )          | (272        | )          |   |
| Prepaid  expenses & interest receivable                                                           |   | (1,078                   | )          | (191              | )          | 310              |       | 368         |       |   |
| Other  assets                                                                                         |   | (33                      | )          | —            |       | —           |       | (55         | )          |   |
| Accounts  payable                                                                                     |   | 1,566                    |       | 493               |       | (701             | )          | 1,987       |       |   |
| Income  taxes                                                                                         |   | (10                      | )          | (860              | )          | 1,258            |       | 2,238       |       |   |
| Accrued  taxes other than income                                                                      |   | —                   |       | —            |       | —           |       | 273         |       |   |
| Other  accrued liabilities                                                                            |   | 1,122                    |       | (1,029            | )          | 788              |       | (625        | )          |   |
|                                                                                                  |   |                     |       |              |       |             |       |        |       |   |
| Net  cash provided by (used in) operating activities                                                  |   | (2,997                   | )          | (7,242            | )          | (158             | )          | (2,690      | )          |   |
|                                                                                                  |   |                     |       |              |       |             |       |        |       |   |
| Cash  flows from investing activities:                                                                |   |                     |       |              |       |             |       |        |       |   |
| Proceeds  from disposition of business                                                                |   | —                   |       | —            |       | 16,721           |       | —      |       |   |
| Proceeds  from disposition of other assets                                                            |   | —                   |       | —            |       | 161              |       | 500         |       |   |
| Purchase  of property and equipment                                                                   |   | (1,075                   | )          | (1,325            | )          | (209             | )          | (2,137      | )          |   |
| Purchase  of intangible and other assets                                                              |   | (345                     | )          | (245              | )          | (61              | )          | (2,148      | )          |   |
| Acquisitions  of businesses, net of cash                                                              |   | —                   |       | —            |       | —           |       | —      |       |   |
| Acquisition  of minority interest                                                                     |   | (794                     | )          | (58               | )          | (95              | )          | —      |       |   |
|                                                                                                  |   |                     |       |              |       |             |       |        |       |   |
| Net  cash provided by (used in) investing activities                                                  |   | (2,214                   | )          | (1,628            | )          | 16,517           |       | (3,785      | )          |   |
|                                                                                                       |        |                          |            |                   |            |                  |            |             |            |        |  |  |  |  |

 

The accompanying notesare an integral part of this statement.

 

F-7

----

 
|                                                 |   |                    |   |             |   | **For the**     |   |        |   |
|------------------------------------------------------|--------|-------------------------|--------|------------------|--------|-----------------|--------|-------------|--------|
|                                                 |   |                    |   |             |   | **two-month**   |   | **For the** |   |
|                                                 |   | **For the years ended** |   | **period ended** |   | **year ended**  |   |
|                                                 |   | **December 31,**        |   | **December 31,** |   | **October 31,** |   |
|                                                 |   | **2001**                |   | **2000**         |   | **1999**        |   | **1999**    |   |
|                                                 |   |                    |   |             |   |            |   |        |   |
| Cash  flows from financing activities:               |   |                    |   |             |   |            |   |        |   |
| Proceeds  from exercise of stock options             |   | 362                     |   | 2,232            |   | —          |   | —      |   |
| Principal  payment on revolving credit facility      |   | —                  |   | —           |   | —          |   | (6,000      | )      |
| Principal  payments on capital lease obligations     |   | (48                     | )      | (38              | )      | (9              | )      | (42         | )      |
| Payment  of preferred dividends                      |   | (240                    | )      | (240             | )      | —          |   | —      |   |
| Purchase  of treasury stock                          |   | —                  |   | (4,000           | )      | —          |   | (578        | )      |
|                                                 |   |                    |   |             |   |            |   |        |   |
| Net  cash provided by (used in) financing activities |   | 74                      |   | (2,046           | )      | (9              | )      | (6,620      | )      |
|                                                 |   |                    |   |             |   |            |   |        |   |
| Effect  of exchange differences on cash              |   | (29                     | )      | (7               | )      | —          |   | (14         | )      |
|                                                 |   |                    |   |             |   |            |   |        |   |
| Net  (decrease) in cash and cash equivalents         |   | (5,166)                 |   | (10,923          | )      | 16,350          |   | (13,109     | )      |
|                                                 |   |                    |   |             |   |            |   |        |   |
| Cash  and cash equivalents, beginning of year        |   |                    |   |             |   |            |   |        |   |
|                                                 |   | 10,567                  |   | 21,490           |   | 5,140           |   | 18,800      |   |
|                                                 |   |                    |   |             |   |            |   |        |   |
| Cash  and cash equivalents, end of year              |   | $                       | 5,401  |             | $      | 10,567          |   | $           | 21,490 |   | $ | 5,691 |   |
|                                                 |   |                    |   |             |   |            |   |        |   |
| Supplemental  Disclosures of Cash                    |   |                    |   |             |   |            |   |        |   |
| Flow  Information                                    |   |                    |   |             |   |            |   |        |   |
| Cash  (receipts) payments for:                       |   |                    |   |             |   |            |   |        |   |
| Interest                                             |   | $                       | 524    |             | $      | 916             |   | $           | 58     |   | $ | 85 |   |
| Income  taxes                                        |   | (115                    | )      | 536              |   | —          |   | (476        | )      |

 

The accompanyingnotes are an integral part of these statements.

 

F-8

----

 

###### **NUMEREX CORP. AND SUBSIDIARIES**

 

## **NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

Years endedDecember 31, 2001 and 2000; two-month period ended December 31, 1999

and the year endedOctober 31, 1999

 

 

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

 

A summary of thesignificant accounting policies consistently applied in the preparation of theaccompanying financial statements follows:

 

**1.      Nature of Business**

 

Numerex Corp. (the“Company”) is a technology company comprised of operating subsidiaries thatdevelop and market a wide range of communications products and services. TheCompany’s primary focus is wireless data communications utilizing proprietarynetwork technologies. The Company primarily offers products and services inwireless data communications through Cellemetry® and Data1SourceTM, and digitalmultimedia networking through PowerPlayTM. These services enable customersaround the globe to monitor and move information for a variety of applicationsfrom home and business security to distance learning. In addition, the Companyoffers wireline alarm security products and services, as well astelecommunications network operational support systems.

 

**2.      Reporting Currency**

 

The consolidatedfinancial statements are stated in U.S. Dollars.  Historically, the Company’s consolidated financial statementshave been in British Pounds Sterling. As a result of increased business activity in the U.S. resulting fromrecent U.S. acquisitions, the U.S. Dollar has become the unit of measure of themajority of the Company’s operations. Accordingly, effective November 1, 1998, the U.S. Dollar has beenadopted as the Company’s reporting currency. The consolidated financial statements and the notes thereto have beenrestated in U.S. Dollars for all periods presented.

 

**3.      Principles of Consolidation**

 

The consolidatedfinancial statements include the results of operations and financial positionof the Company and its wholly owned or controlled subsidiaries.  Significant intercompany accounts andtransactions have been eliminated in consolidation.

 

**4.      Cash and Cash Equivalents**

 

For purposes offinancial reporting, the Company considers all highly liquid investmentspurchased with original maturities of less than three months to be cashequivalents.

 

**5.      Intangible Assets**

 

Amortization isprovided on all intangible assets at rates calculated to write off the cost ofeach over its expected life as follows:

 
| • | Patents and acquired  intellectual property - straight-line over 7 to 16 years |
|--------|--------------------------------------------------------------------------------|
| • | Developed software -  straight-line over 3 to 5 years                          |
| • | Goodwill -  straight-line over 12 to 20 years                                  |

 

Goodwillrepresents the excess of the cost of net assets acquired over fair value (seeNote B).

 

The Companycapitalizes software development costs when project technical feasibility isestablished and concludes capitalization when the product is ready forrelease.  Software development costsincurred prior to the establishments of technical feasibility are expensed asincurred.

 

**6.      Property and Equipment**

 

Depreciation isprovided for in amounts sufficient to relate the cost of depreciable assets tooperations over their estimated service lives. Leased property under capital leases is amortized over the lives of therespective leases or over the service lives of the assets for those leases,whichever is shorter.  Depreciation forproperty, equipment and buildings is calculated using the straight-line methodover the following estimated lives.

 

F-9

----

 
| • | Short-term leasehold  improvements over the term of the lease | 3-10 years |
|--------|---------------------------------------------------------------|------------|
| • | Plant and machinery                                           | 4-10 years |
| • | Equipment, fixtures and  fittings                             | 3-10 years |

 

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

 

The Companyperiodically evaluates the recoverability of its long-lived assets or when aspecific event indicates that the carrying value of a long-lived asset may notbe recoverable.  Recoverability isassessed based on estimates of future cash flows expected to result from theuse and eventual disposition of the asset. If the sum of expected undiscounted cash flows is less than the carryingvalue of the asset, an impairment loss is recognized for the amount of suchdeficiency, using discounted cash methodologies.  No such impairment losses have been recognized during the yearsended December 31, 2001 and 2000, the two-month period ended December 31, 1999,and the year ended October 31, 1999, respectively.

 

**8.      Income Taxes**

 

The Companyaccounts for income taxes using the asset and liability method in accordancewith SFAS 109, Accounting for Income Taxes. Under the asset and liability method, deferred income taxes arerecognized for the tax consequences of 2temporary differences2 byapplying enacted statutory tax rates applicable to future years to differencesbetween the financial statement carrying amounts and the tax bases of existingassets and liabilities.  A valuationallowance is provided for deferred tax assets when it is more likely than notthat the assets will not be realized.

 

**9.      Inventory**

 

Inventory andwork-in progress are stated at the lower of cost (first-in, first-out method) ormarket.

 

**10.    Allowance for Doubtful Accounts**

 

The Companymaintains an allowance for doubtful accounts based upon the expectedcollectibility of the accounts receivable. When amounts are determined to be uncollectible, they will be charged tooperations when that determination is made.

 

**11.    Fair Value of Financial Instruments**

 

The Company’sfinancial instruments include cash, accounts receivable and accountspayable.  The carrying value of thefinancial instruments approximates fair value due to the relatively shortperiod to maturity.

 

**12.    Use of Estimates**

 

In preparing theCompany’s financial statements, management is required to make estimates andassumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

**13.    Concentration of Credit Risk**

 

The Companymaintains its cash balances in financial institutions, which at times mayexceed federally insured limits.  TheCompany has not experienced any losses in such accounts and believes it is notexposed to any significant credit risk on cash and cash equivalents.

 

**14.    Revenue Recognition**

 

The Company’s revenue is generatedfrom 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. |

 

F-10

----

 

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

 

The Company recognizes revenue from product sales at the timeof shipment and passage of title. The Company offers customers the right toreturn products that do not function properly within a limited time afterdelivery. The Company continuously monitors and tracks such product returns andrecords a provision for the estimated amount of such future returns, based onhistorical experience and any notification received of pending returns. Whilesuch returns have historically been within expectations and the provisionsestablished, the Company cannot guarantee that it will continue to experiencethe same return rates that it has experienced in the past. Any significantincrease in product failure rates and the resulting credit returns could have amaterial adverse impact on operating results for the period or periods in whichsuch returns materialize.

 

TheCompany recognizes revenue from the provision of services at the time of thecompletion, delivery or performance of the service. In the case of revenuederived from maintenance services the Company recognizes revenue ratably overthe contract term. In certain instances the Company may under an appropriateagreement advance charge for the service to be provided. In these instances theCompany recognizes the advance charge as deferred revenue (classified as aliability) and releases the revenue ratably over future periods in accordancewith the contract term as the service is completed, delivered or performed.

 

TheCompany also recognizes revenue from the provision of ‘multiple element serviceagreements’, which involve both the supply of product and the provision ofservices over a multi-year arrangement. Accounting principles for agreementsinvolving multiple elements require the Company to allocate earned revenue toeach element based on the relative fair value of the elements. The arrangementfee for multiple-element arrangements is allocated to each element, such asdesign, product supply, product integration, installation, maintenance, supportand warranty services, based on the relative fair values of the elements. TheCompany determines the fair value of each element in multi-element arrangementsbased on vendor-specific objective evidence (“VSOE”). VSOE for each element isbased on the price charged when the same element is sold separately or could bepurchased from an unrelated supplier. If evidence of fair value of alldelivered elements exists but evidence does not exist for one or moreundelivered elements, then revenue is recognized using the residual method.Under the residual method, the fair value of the undelivered element isdeferred and is recognized ratably over the contract term on an earned basis. Regardingthe supply of product the Company maintains title to the product and transferstitle at the completion of the contract term.

 

The Company’s arrangements do not generally includeacceptance clauses. However, arrangement involving multiple element serviceagreements include certain milestones and levels of certification, acceptanceoccurs upon the Company’s certification of its completion of each of thevarious elements.

 

TheCompany recognizes revenue from the provision of its data transportation serviceswhen the Company performs the services or processes transactions in accordancewith contractual performance standards. Revenue is earned monthly on the basisof the contracted monthly fee and an excess message fee charge, should itapply, that is volume based.  In certaininstances the Company may under an appropriate agreement advance charge for thedata transport service to be provided. In these instances the Companyrecognizes the advance charge (even if nonrefundable) as deferred revenue(classified as a liability) and releases the revenue over future periods inaccordance with the contract term as the data transport service is delivered orperformed.

 

**15.  Foreign Currency Transactions**

 

Some transactionsof the Company and its subsidiaries are made in British pounds sterling,Canadian dollars and Australian dollars. Gains and losses from these transactions are included in income as theyoccur.

 

**16.    Research and Developme**nt

 

Research anddevelopment expenses are charged to operations in the period in which they areincurred.

 

F-11

----

 

**17.    Provision for Warranty Claims**

 

Estimated warrantyexpense is charged over the warranty period of the warranted products.  Warranty expenses have not been significantto the Company.

 

**18.    Stock-Based Compensation**

 

Effective November1, 1996, the Company adopted the provisions of SFAS No. 123, Accounting forStock-Based Compensation*. *SFASNo. 123 encourages, but does not require, companies to record compensation costfor stock-based compensation plans at fair value.  The Company has elected to continue to account for stock-basedcompensation in accordance with Accounting Principles Board (2APB2)Opinion No. 25, Accounting For Stock Issued to Employees, and related interpretations,as permitted by SFAS 123.  Compensationexpense for stock options is measured as the excess, if any, of the quotedmarket price of the Company’s stock at the date of the grant over the amount anemployee must pay to acquire the stock (see Note K).

 

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

 

In February 1997,the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per Share, and SFAS No. 128,which supersedes APB No. 15, EarningsPer Share, requires a dual presentation of basic and diluted earningsper share as well as other disclosures. Basic earnings per share excludes the dilutive impact of common stockequivalents and is computed by dividing net earnings (loss) by the weightedaverage number of shares of common stock outstanding for the period.

 

Diluted earnings(loss) per share includes the effect of potential dilution from the exercise ofoutstanding common stock equivalents into common stock, using the treasurystock method at the average market price of the Company’s common stock for the period.

 

For the yearsended December 31, 2001, 2000, and October 31, 1999, the Company’s potentialcommon shares have an anti-dilutive effect on earnings (loss) per share and,therefore, have not been used in determining the total weighted average number ofcommon shares outstanding.  For thetwo-month period ended December 31, 1999, the Company’s potential common shareshave a dilutive effect on earnings (loss) per share and, therefore, have beenused in determining the total weighted average number of shares of commonshares outstanding. Potential common shares resulting from options and warrantsthat would be used to determine diluted earnings (loss) per share were1,985,455, 1,739,384, 2,289,213 and 1,739,213 for the years ended December 31,2001, and 2000, and the two-month period ended December 31, 1999, and the yearended October 31, 1999, respectively.

 

**20.    Recent Accounting Pronouncements**

 

In June 1998, theFASB issued SFAS No. 133, Accounting for Derivative Instruments and HedgingActivities.  This statement establishesaccounting and reporting standards for derivative instruments, includingcertain derivative instruments embedded in   other contracts collectively referred to as derivatives, and for hedgingactivities.  It requires that any entityrecognize all derivatives as either assets or liabilities in the statement offinancial position and measures those statements at fair value.

 

In June 1999, theFASB issued SFAS No. 137, Accounting for Derivative Instruments and HedgingActivities — Deferral of Effective Date of FASB Statement No. 133. Thisstatement amended the effective date of SFAS No. 133 for fiscal years beginningafter June 15, 2000. In June 2000, the FASB issued SFAS No. 138, Accounting forDerivative Instruments and Hedging Activities: an Amendment of FASB Statement133. This statement clarifies provisions of SFAS No. 133 based oninterpretations developed in the FASB’s Derivatives Implementation Groupprocess and cleared by the FASB.

 

The Company hasevaluated the effect that the adoption of SFAS Nos. 133 and 138 will have onits consolidated financial position or results of operation and has concludedthat there are no changes necessary to its presentation of financialinformation.

 

In July 2001, the FASB issued SFAS 141, Business Combinations,and SFAS 142, Goodwill and Intangible Assets.  SFAS 141 is effective for all business combinations completed after June30, 2001.  SFAS 142 is effective forfiscal years beginning after December 15, 2001; however, certain provisions ofthe statement apply to goodwill and other intangible assets acquired between

 

F-12

----

 

July 1, 2001, and the effective date of SFAS 142.    Major provisions of these statements andtheir effective dates for the Company

are as follows:

 
| • | all business  combinations initiated after June 30, 2001, must use the purchase method of  accounting. The pooling of interest method of accounting is prohibited except  for transactions initiated before July 1, 2001.                                                                                                                 |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                      |
| • | intangible assets  acquired in a business combination must be recorded separately from goodwill  if they arise from contractual or other legal rights or are separable from  the acquired entity and can be sold, transferred, licensed, rented or  exchanged, either individually or as part of a related contract, asset or  liability. |
|   |                                                                                                                                                                                                                                                                                                                                      |
| • | goodwill, as well as  intangible assets with indefinite lives, acquired after June 30, 2001, will  not be amortized.  Effective January  1, 2002, all previously recognized goodwill and intangible assets with  indefinite lives will no longer be subject to amortization.                                                         |
|   |                                                                                                                                                                                                                                                                                                                                      |
| • | effective January 1,  2002, goodwill and intangible assets with indefinite lives will be tested for  impairment annually and whenever there is an impairment indicator.                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                      |
| • | all acquired goodwill  must be assigned to reporting units for purposes of impairment testing and  segment reporting.                                                                                                                                                                                                                     |

 

The Company will continue to amortizegoodwill and intangible assets recognized prior to July 1, 2001, under itscurrent method until January 1, 2002, at which time annual and quarterlygoodwill amortization of $767,983 and $191,996 will no longer berecognized.  By December 31, 2002, theCompany will have completed a transitional fair value based impairment test ofgoodwill as of January 1, 2002.  ByDecember 31, 2002, the Company will have completed a transitional impairmenttest of all intangible assets with indefinite lives.  Impairment losses, if any, resulting from the transitionaltesting will be recognized in the quarter ended December 31, 2002, as acumulative effect of a change in accounting principle.

 

In July 2001, theFASB issued SFAS No. 143, Accounting for Asset Retirement Obligations.  This statement addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs. Thestatement applies to all entities. It applies to legal obligations associatedwith the retirement of long-lived assets that result from the acquisition,construction, development and (or) the normal operation of a long-lived asset,except for certain obligations of lessees. The statement is effective forfinancial statements issued for fiscal years beginning after June 15, 2002. TheCompany believes that the adoption of the statement will not have a materialeffect on its financial statements

 

In August 2001,the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal ofLong-Lived Assets.  This statementaddresses financial accounting and reporting for the impairment or disposal oflong-lived assets and supersedes FASB Statement No. 121, Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be DisposedOf.  The provisions of the statement areeffective for financial statements issued for fiscal years beginning afterDecember 15, 2001.The Company believes that the adoption of the statement will not have amaterial effect on its financial statements

 

**21.    Change in Fiscal Year End andReclassification**

 

The Company on April 28, 2000, determined to changeits fiscal year-end from a fiscal year ending October 31 to a calendar fiscalyear ending on December 31. Certain prior year amounts have been reclassifiedto conform to the current year presentation.

##### ** **

 

##### **NOTE B -INVESTMENTS AND DIVESTITURES**

 

On February 28, 1997, the Company acquired 100% of the outstanding commonstock of Broadband Networks, Inc. (“Broadband”), a Delaware corporation, for approximately $5,867,000. Inaddition, the Company invested $1,654,000 directly into Broadband for workingcapital purposes. Certain employees of Broadband continued to hold Broadbandincentive stock options, which upon exercise would have entitled them to ownapproximately 18% of Broadband’s outstanding common shares. Such options, ifnot previously exercised, became exercisable in 2001 and, upon exercise theCompany had certain rights, but was not

 

F-13

----

 

obligated to purchase the shares.

 

On July 6, 2001,the Company completed (i) the acquisition of all of the shares held by theminority shareholders of Broadband and (ii) the exchange of all outstandingoptions held by employees of Broadband to acquire shares in Broadband foroptions to acquire shares in the Company.

 

In connection withthe acquisition of all of the shares held by the minority shareholders inBroadband the Company issued 23,050 shares of restricted Class A Common Stockof the Company.

 

The transactionwas accounted for using the purchase method of accounting.

 

On July 17, 1997, the Company invested$1,000,000 in return for 19.5% of the common stock of Uplink Security, Inc.(“Uplink”), a Georgia corporation. Various options contained in the agreementsprovided the Company a means of acquiring a controlling interest in Uplink. OnMay 18, 1998, the Company acquired an additional 78,795 shares of Uplink fromcertain existing shareholders for approximately $1,444,000 including 89,763Numerex common stock warrants with a strike price of $6.00. This stock purchaseincreased the Company’s ownership interest in Uplink to 85%.

 

As a result of the acquisition of a controlling interest in Uplink, theCompany under generally accepted accounting principles restated its investmentin Uplink from the cost method to the equity method of accounting for the firstand second quarters of the fiscal year ending October 31, 1998. The effect ofthe restatement, which is included in the line item ‘Equity in net losses ofaffiliate’ in the consolidated statements of operations for the fiscal yearending October 31, 1998, was $422,000. The financial statement effect of thechange in method on periods prior to fiscal 1998 was not significant.

 

On December 1, 1998, the Company subscribed for and was issued anadditional 56,468 shares of Uplink common stock. This stock  purchaseincreased the Company’s ownership interest in Uplink to in excess of 90%.

 

On December 30, 1998, under a ‘Plan of Merger’ Uplink merged with andinto US Acquisition, Inc., a corporation organized under the laws of the Stateof Georgia. Subsequently the surviving entity was renamed Uplink. Thecompletion of the transaction increased the Company’s ownership interest inUplink to 100% of the common stock of Uplink.

 

On May 15, 1998, the Company, Bellsouth Wireless LLC (“BellSouthWireless”), formerly BellSouth Wireless, Inc., and Bellsouth Corporationcompleted a transaction whereby Cellemetry LLC (2Cellemetry2) a joint venturebetween the Company and BellSouth Wireless, was formed.  Cellemetry, a Delaware limited liabilitycompany, is owned 60% by the Company and 40% by BellSouth Wireless.  The parties entered into an operatingagreement (the 2Operating Agreement2), which dealswith, among other things, the conduct of the business of Cellemetry.

 

Pursuant to the Operating Agreement, the Company wasscheduled to make cash contributions of up to $15,500,000 during the first twoyears of Cellemetry’s operations. According to the Operating Agreement, at the end of three years ifCellemetry had met certain revenue targets no additional contribution from the Company would be required.  However, if, at the end of three years, therevenue targets had not been met, the Company would be required to make anadditional $3,750,000 cash contribution or contribute certain equity interestsit had in Uplink.  Also, according to theOperating Agreement, Cellemetry must achieve certain specific cumulativerevenue and operating goals by the third anniversary of the formationdate.  If these performance goals werenot met, the Company may, at its sole option, elect that BellSouth Wireless putits ownership interest in Cellemetry to the Company for $15,330,000, plusinterest at a 13% annual compound rate or begin a process to dissolveCellemetry which would include a transfer of the initially contributedintellectual property to BellSouth Wireless. In addition, the Operating Agreement provides certain restrictions as todistributions and the right to transfer ownership interest in Cellemetry.  Cellemetry has elected to be taxed as apartnership for income tax purposes.

 

The Company’s subsidiaryrecorded the assets contributed to Cellemetry by BellSouth Wireless at fairvalue on the date of contribution. The fair value of the patents contributedwas $10,603,000, which is being amortized over their remaining life of 16years. In addition, BellSouth Wireless contributed property and equipmentvalued at $285,000. The results of operations and

 

F-14

----

 

financial positionof Cellemetry were consolidated with the Company effective May 15, 1998, sincethe Company controls the operations of Cellemetry.

 

On November 18, 1999, effective as of November 1, 1999,the Company and BellSouth Wireless completed the restructuring of theCellemetry Operating Agreement.

 

Under the terms ofthe restructuring, the operating agreement of Cellemetry has been modified(“First Amendment to the Operating Agreement”) and the Cellemetry Business Planhas been modified, revised and extended through November 1, 2004, (“ModifiedBusiness Plan”). All respective rights under the Operating Agreement thattriggered on May 15, 2001, three years from the date of the formation ofCellemetry, have been revised to trigger on November 1, 2002, and all financialperformance tests have been amended to reflect the Modified Business Plan. In addition,the price at which the Company may, at its sole option, elect that BellSouthWireless put its ownership interest in Cellemetry to the Company has beenrevised and set at $17,000,000. Additionally, the agreement provided for the cancellation of theCellemetry Share Option Plan with the intent that the Company exchanges alloutstanding options for options to acquire shares of the capital stock of theCompany.

 

The restructuringalso provided for Cellemetry to seek to find either a foreign carrier orstrategic investor (“Third Party Investment”) to invest new capital in exchangefor up to 15% of Cellemetry. In connection with any such Third PartyInvestment, the Company’s ownership interest in Cellemetry will not be dilutedbelow 51% and BellSouth Wireless’s will not be diluted below 34%.

 

Pursuant to theFirst Amendment to the Operating Agreement, the Company, from and including May15, 1999, is no longer under an obligation to make any additional capitalcontributions to Cellemetry. The Company committed to provide up to $5,500,000in interest bearing debt financing to Cellemetry. As of December 31, 2001, theCompany has provided total interest bearing debt-financing amounting to$15,023,000.

 

Also, pursuant tothe First Amendment to the Operating Agreement, the Company conveyed 100% ofthe capital stock of its wholly owned subsidiary Uplink to Cellemetry. Inaddition, the Company issued to BellSouth Wireless 30,000 Series A ConvertibleRedeemable Preferred Stock of the Company (“Preferred Stock”).  The preferred stock is redeemable, at theCompany’s option, commencing November 1, 2000, on the basis of a pre-set annualredemption price per share. Also, the Preferred Stock, at BellSouth Wireless’soption, commencing November 1, 2003, or November 1, 2002, should the Company’scommon stock exceed a pre-set market price for a given period of time, isconvertible into 625,000 shares of common stock of the Company, approximately6% of the Company’s common stock. The Preferred Stock carries certain registrationrights for the common stock upon such conversion.

 

On November 12,1999, the Company sold its entire holdings in its wholly owned subsidiary,Bronzebase Limited (“Bronzebase”),

to BritishTelecommunications plc (“BT”). Bronzebase is an English limited liability company, which owns all ofthe stock of Versus Technology Limited. The consideration for the sale was £12,500,000 British pounds(approximately $20,000,000), payable in cash at closing.  The terms of the transaction were negotiatedbetween the Company and BT at arm’s length. As part of the transaction theCompany retains the right to market derived channel technology in North,Central and South America, South Korea and Australia. Derived channeltechnology creates an inaudible frequency on an existing telephone line belowthe voice communications spectrum for data transmission (“Derived Channel”).

 

 

**NOTE C - BUSINESS-RESTRUCTURING CHARGES**

 

During the yearended December 31, 2001, the Company recorded a pre tax charge of $418,000 tocover employee separation costs.

 

F-15

----

 

**NOTE  D - INVENTORY**

 
| Inventory consisted of the following: |   | **December 31,**    |   |
|---------------------------------------|--------|---------------------|--------|
|                                  |   | **2001**            |   | **2000** |   | **1999** |   |
|                                  |   | **(In  thousands)** |   |
| Raw materials                         |   | $                   | 2,404  |   | $ | 1,275 |   | $ | 1,978 |   |
| Work in progress                      |   | 186                 |   | 174 |   | 70 |   |
| Finished goods                        |   | 2,487               |   | 2,668 |   | 1,570 |   |
|                                  |   |                |   |   |   |   |   |
| Inventory, net                        |   | $                   | 5,077  |   | $ | 4,117 |   | $ | 3,618 |   |

 

The inventory write-downs of $191,000 for the year ended December 31,2001, were the result of determining  excess and obsolete Digital Multimediaanalog product inventory.

 

**NOTE E - PROPERTY AND EQUIPMENT**

 
| Property  and equipment consisted of the following: |   |                |   |
|-----------------------------------------------------|--------|---------------------|--------|
|                                                |   | **December 31,**    |   |
|                                                |   | **2001**            |   | **2000** |   | **1999** |   |
|                                                |   | **(In  thousands)** |   |
| Leasehold improvements                              |   | $                   | 415    |   | $ | 416 |   | $ | 235 |   |
| Plant and machinery                                 |   | 6,691               |   | 5,324 |   | 4,816 |   |
| Equipment, fixtures and fittings                    |   | 790                 |   | 699 |   | 695 |   |
| Total property and equipment                        |   | 7,896               |   | 6,439 |   | 5,746 |   |
| Accumulated depreciation                            |   | (4,789              | )      | (3,522 | ) | (2,847 | ) |
|                                                |   |                |   |   |   |   |   |
| Property and equipment, net                         |   | $                   | 3,107  |   | $ | 2,917 |   | $ | 2,899 |   |

 

**NOTE F — GOODWILL**

 
|                     |   | **December 31,**    |   |
|--------------------------|--------|---------------------|--------|
|                     |   | **2001**            |   | **2000** |   | **1999** |   |
|                     |   | **(In  thousands)** |   |
| Goodwill                 |   | $                   | 13,600 |   | $ | 12,693 |   | $ | 12,635 |   |
| Accumulated amortization |   | (2,617              | )      | (1,904 | ) | (1,231 | ) |
|                     |   |                |   |   |   |   |   |
| Goodwill, net            |   | $                   | 10,983 |   | $ | 10,789 |   | $ | 11,404 |   |

 

##### **NOTE G - INTANGIBLE ASSETS**

 
| Intangible assets consisted of the following: |   |                |   |
|-----------------------------------------------|--------|---------------------|--------|
|                                          |   | **December 31,**    |   |
|                                          |   | **2001**            |   | **2000** |   | **1999** |   |
|                                          |   | **(In  thousands)** |   |
| Developed software                            |   | $                   | 854    |   | $ | 686 |   | $ | 634 |   |
| Patents, trade and service marks              |   | 11,079              |   | 10,865 |   | 10,724 |   |
| Intangible and other assets                   |   | 283                 |   | 320 |   | 267 |   |
| Total intangible assets                       |   | 12,216              |   | 11,871 |   | 11,625 |   |
| Accumulated amortization                      |   | (2,994              | )      | (2,026 | ) | (1,215 | ) |
|                                          |   |                |   |   |   |   |   |
| Intangible assets, net                        |   | $                   | 9,222  |   | $ | 9,845 |   | $ | 10,410 |   |

 

F-16

----

 

**NOTE H - INCOME TAXES**

 

For the periods noted below, the provision for income taxes consists ofthe following:

 
|     |   |                     |       |              |   | **For the**      |   |        |   |
|----------|--------|--------------------------|------------|-------------------|--------|------------------|--------|-------------|--------|
|     |   |                     |       |              |   | **two-month**    |   | **For the** |   |
|     |   | **For the  years ended** |       | **period  ended** |   | **year ended**   |   |
|     |   | **December  31,**        |       | **December  31,** |   | **October  31,** |   |
|     |   | **2001**                 |       | **2000**          |   | **1999**         |   | **1999**    |   |
|     |   | **(In  thousands)**      | ** ** |
| Current  |   |                     |       |              |   |             |   |        |   |
| Federal  |   | $                        | (115       | )                 | $      | —           |   | $           | 389    |   | $ | — |   |
| State    |   |                     |       | —            |   | —           |   | —      |   |
| Foreign  |   |                     |       | —            |   | —           |   | 1,682       |   |
| Deferred |   |                     |       |              |   |             |   |        |   |
| Federal  |   |                     |       | —            |   | 472              |   | —      |   |
| Foreign  |   |                     |       | —            |   | —           |   | —      |   |
|     |   |                     |       |              |   |             |   |        |   |
|     |   | $                        | (115       | )                 | $      | —           |   | $           | 861    |   | $ | 1,682 |   |

 

Income taxesrecorded by the Company differ from the amounts computed by applying thestatutory U.S. federal income tax rate to income before income taxes. Thefollowing schedule reconciles income tax expense (benefit) at the statutoryrate and the actual income tax expense as reflected in the consolidatedstatements of operations for the respective periods:

 

 
|                                                                |   | **December  31,**   |   | **October  31,** |   |
|---------------------------------------------------------------------|--------|---------------------|--------|------------------|--------|
|                                                                |   | **2001**            |   | **2000**         |   | **1999** |   | **1999** |   |
|                                                                |   | **(In  thousands)** |   |
| Income tax (benefit) computed at  U.S.  corporate tax rate of 34%   |   | $                   | (1,107 | )                | $      | (1,346 | ) | $ | 3,662 |   | $ | 22 |   |
| Adjustments attributable to                                         |   |                |   |             |   |   |   |   |   |
| Valuation allowance                                                 |   | (1,107              | )      | 1,346            |   | 861 |   | 2,751 |   |
| State tax benefit                                                   |   |                |   | —           |   | — |   | (910 | ) |
| ACT refund                                                          |   |                |   | —           |   | — |   | — |   |
| Non deductible expenses                                             |   |                |   | —           |   | 5 |   | 21 |   |
| Recovery of previously paid tax                                     |   | (115                | )      |             |   |   |   |   |   |
| Foreign income taxed in the U.S.                                    |   |                |   | —           |   | — |   | — |   |
| Income tax rate differential betweenthe U.S. and the United Kingdom |   |                |   | —           |   | — |   | (202 | ) |
| Utilization of foreign tax credits                                  |   |                |   | —           |   | (3,667 | ) | — |   |
|                                                                |   |                |   |             |   |   |   |   |   |
| Total                                                               |   | $                   | (115   | )                | $      | — |   | $ | 861 |   | $ | 1,682 |   |

 

F-17

----

 

The components of the Company’s netdeferred tax assets and (liabilities) are as follows:

 
|                                                               |   | **December 31,**   |       |
|--------------------------------------------------------------------|--------|--------------------|------------|
|                                                               |   | **2001**           |       | **2000** |   | **1999** |   |
|                                                               |   | **(In thousands)** | ** ** |
| Deferred tax liability:                                            |   |               |       |   |   |   |   |
| Differences between book and tax  basis  of property and equipment |   | $                  | (124       | ) | $ | (88 | ) | $ | (111 | ) |
| Other                                                              |   | —             |       | — |   | — |   |
|                                                               |   | (124               | )          | (88 | ) | (111 | ) |
| Deferred tax asset:                                                |   |               |       |   |   |   |   |
| Intangibles                                                        |   | 441                |       | 292 |   | 126 |   |
| Net operating loss carry forward                                   |   | 5,806              |       | 3,932 |   | 3,736 |   |
| Tax credit carry forwards                                          |   | 1,755              |       | 4,123 |   | 4,123 |   |
| Other                                                              |   | 259                |       | 28 |   | 88 |   |
| Inventories                                                        |   | 368                |       | 414 |   | 897 |   |
| Accruals                                                           |   | 53                 |       | 28 |   | 229 |   |
|                                                               |   | 8,682              |       |  | 9,071 |   | 9,199 |   |
| Net deferred tax asset                                             |   | 8,558              |       |   | 8,983 |   | 9,088 |   |
|                                                               |   |               |       |   |   |   |   |
| Valuation allowance                                                |   | 8,558              |       |   | (8,983 | ) | (9,088 | ) |
| Total                                                              |   | $                  |       |   | $ | — |   | $ | — |   |
|                                                                    |        |                    |            |  |  |  |  |  |  |  |  |

 

Net operating loss carry forwards for federal and state income taxesavailable at December 31, 2001, expire as follows:

 

 
|                     |   | **Amount** |   | **Years of Expiration** |      |
|--------------------------|--------|------------|--------|-------------------------|-----------|
| Federal operating losses |   | $          | 6,966  |                    | 2021      |   |
| State operating losses   |   | $          | 41,403 |                    | 2006-2021 |   |

 

 

**NOTE I - SIGNIFICANT CUSTOMER, CONCENTRATION OF CREDIT RISKAND RELATED PARTIES**

 

Approximately 27% of sales in theyear ended October 31, 1999, were to BT. The accounts receivable from BT was$2,958,000 as of October 31, 1999. There were no such concentrations for theyears ended December 31, 2001, and 2000, and the two-month period endedDecember 31, 1999.  See Note B —Investments and Divestitures.

 

F-18

----

 

##### **NOTE J - COMMITMENTS AND CONTINGENCIES**

 

**CapitalLeases**

 

The Companyconducts a portion of its operations with leased equipment. For financialreporting purposes, minimum lease rentals  relating to the equipment have been capitalized.

 

The related assetsand obligations have been recorded using the Company’s incremental borrowingrate at the inception of the lease.  Theleases expire at various dates through 2004. The following is a schedule byyears of future minimum lease payments under capital leases together with thepresent value of the net minimum lease payments as of December 31, 2001, (inthousands).

 
| 2002                                         |   | $      | 228    |   |
|----------------------------------------------|--------|--------|--------|--------|
| 2003                                         |   | 211    |   |
| 2004                                         |   | 147    |   |
| 2005                                         |   | 0      |   |
| 2006                                         |   | 0      |   |
| Thereafter                                   |   | 0      |   |
|                                         |   |   |   |
| Total minimum lease payments                 |   | 586    |   |
| Less  amount representing interest           |   | (114   | )      |
|                                         |   |   |   |
| Present  value of net minimum lease payments |   | $      | 472    |   |
|                                         |   |   |   |
| Current  portion                             |   | $      | 145    |   |
| Non-current  portion                         |   | 327    |   |
|                                         |   |   |   |
| Total                                        |   | $      | 472    |   |

 

**Operating Leases**

 

The Company leases certain propertyand equipment under noncancelable operating leases with initial terms in excessof one year. Future minimum lease payments under such noncancelable operatingleases subsequent to December 31, 2001, (in thousands) are as    follows:

 
| 2002       |   | $      | 783    |   |
|------------|--------|--------|--------|--------|
| 2003       |   | 421    |   |
| 2004       |   | 28     |   |
| 2005       |   | 23     |   |
| 2006       |   | 6      |   |
| Thereafter |   | 0      |   |
|       |   |   |   |
| Total      |   | $      | 1,261  |   |

 

Rent expense,including short-term leases, amounted to approximately $794,000, $759,000,$156,000 and $992,000 in the years ended December 31, 2001, and 2000, thetwo-month period ended December 31, 1999, and the year ended October 31, 1999,respectively.

 

 

##### **NOTE K - STOCK OPTION PLANS**

 

The Company has a Long-Term Incentive Plan (the “1999 Plan”), whichprovides for the granting of incentive stock options and nonqualified stockoptions to employees, officers, directors and consultants of the Company andits subsidiaries at prices which represent the closing market price at thegrant dates. The aggregate number of shares, which may be issued upon theexercise of options under the 1999 Plan, is 1,500,000 shares of Class A CommonStock. The 1999 Plan replaced the Amended and Restated

 

F-19

----

 

1994 Employee Stock Option Plan (the “1994 Plan”)effective for options granted as and from October 25, 1999.

 

Options issued under the 1999 Plantypically vest ratably over a four-year period.

 

Options issued under the 1994 Plantypically vest over a five-year period. Certain options issued under the 1994Plan have cliff-vesting terms at the end of a five-year period and terms whichprovide for the acceleration of vesting upon the attainment of specified marketprices for the Company’s common stock for a period of 60 days.

 

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

 

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

 

  At December 31, 2001, 2000, and 1999, andOctober 31, 1999, 1,587,201, 1,200,500, 989,500 and 964,500, respectively,ratably vesting common   share optionsunder the 1999 and 1994 Plans, respectively, have been granted at pricesranging between $3.50 and $10.25. Of these options 261,798 have been exercised,567,398 have either expired and been cancelled or been cancelled, 241,680 arecurrently exercisable, and the remaining options will become exercisable in2002 through 2005.

 

At December 31,2001, 2000, and 1999, and October 31, 1999, 685,000, 685,000, 685,000 and685,000, respectively, cliff-vesting options under the1994 Plan have beengranted at prices ranging between $4.44 and $7.13. Of these options 225,000have been exercised, 210,000 have either expired and been cancelled or beencancelled, 60,000 are currently exercisable and the remaining options willbecome exercisable beginning in 2002 or earlier if the accelerated vestingconditions are met.

 

The Company has a Non-EmployeeDirector Stock Option Plan (the “Director Plan”), which provides for thegranting of stock options to non-employee members of the Company’s Board ofDirectors at the closing market price at the grant dates. On April 1, 1996, andeach anniversary date thereafter, each non-employee director, who has served asa director for at least one year, will receive an option to purchase 2,500shares of the Company’s common stock. On December 5, 1997, the Director Planwas amended, and on February 26, 1998, shareholders approved an increase to4,000 the annual number of shares that each director would receive. Theaggregate number of shares, which may be issued upon the exercise of optionsgranted under the Director Plan, is 62,500 shares of common stock. Optionsissued under the Director Plan fully vest one year after the grant date.

 

In the event of a “change in control” as defined in the Director Plan,all outstanding options become fully vested and are subject to exercise.Options granted under the Director Plan expire 10 years after the grant date,unless an option holder ceases to be a director of the Company. Under suchcircumstances, the options expire three months from the date that the optionholder ceases to be a director.

 

At December 31, 2001, 2000, and 1999, and October 31, 1999, 60,700,52,700, 36,700 and 36,700, respectively, options under the Director Plan havebeen granted to directors of the Company at prices ranging between $3.38 and$12.94. Of these options 9,000 have been exercised, 43,700 are currentlyexercisable and the remaining options will become exercisable in 2002.

 

At December 31, 2001, 2000, and 1999, and October 31, 1999, options topurchase 193,750, 143,750, 143,750 and 143,750 shares, respectively, of Class ACommon Stock at prices ranging from $3.50 to $10.00 were granted asnonqualified stock options in connection with services rendered to theCompany.   Of these options 143,750 arecurrently exercisable and the remaining options will become exercisable in 2002through 2005.

 

The fair value of each option on thedate of grant for 2001, 2000 and 1999 was estimated using the Black-Scholesoptions pricing model with the following weighted average assumptions: nodividend yield for all years; expected volatility of 121% for 2001, 130% for2000 and 83% for 1999; risk-free interest rate of 4.86% for 2001, 5.28% for2000 and 6.33% for 1999; and expected option lives of 7.5 years for 2001 and 7years for 2000 and 1999.

 

F-20

----

 

The exercise price for 489,130 options outstanding at December 31, 2001,is between $1.00 and $12.94. Such options will expire on average in 7.5 years.The weighted average fair value of options granted during 2001, 2000 and 1999was $5.76, $12.70 and $2.97, respectively, on the date of grant.

 

The following table summarizes the activity of the stock option plans asof and for the years ended December 31, 2001, and 2000, the two-month period ended December 31,1999, and for the year ended October 31, 1999.

 

 
|                           |   |              |   |              |   |             |      |          |   | **For the** |   |          |   |       |   |
|--------------------------------|--------|-------------------|--------|-------------------|--------|------------------|-----------|---------------|--------|-------------|--------|---------------|--------|------------|--------|
|                           |   | **For the**       |   | **two-month**     |   | **For the**      |      |
|                           |   | **years ended**   |   | **period ended**  |   | **year ended**   |      |
|                           |   | **December  31,** |   | **December  31,** |   | **October  31,** |      |
|                           |   | **2001**          |   | **2000**          |   | **1999**         |      | **1999**      |   |
|                           |   |              |   |              |   |             |      |          |   |        |   |          |   |       |   |   |   |
|                           |   |              |   | **Weighted**      |   |             |      | **Weighted**  |   |        |   | **Weighted**  |   |       |   | **Weighted** |   |
|                           |   |              |   | **Average**       |   |             |      | **Average**   |   |        |   | **Average**   |   |       |   | **Average** |   |
|                           |   | **Shares**        |   | **Ex. Price**     |   | **Shares**       |      | **Ex. Price** |   | **Shares**  |   | **Ex. Price** |   | **Shares** |   | **Ex. Price** |   |
| Outstanding, beginning of year |   | 1,007,384         |   | $                 | 5.66   |             | 1,364,450 |          | $      | 4.48        |   | 1,439,450     |   | $          | 4.31   |   | 966,950 |   | $ | 5.12 |   |
| Options granted                |   | 444,701           |   | 6.27              |   | 124,500          |      | 13.47         |   | 25,000      |   | 8.53          |   | 658,000    |   | 3.79 |   |
| Options exercised              |   | (104,601          | )      | 3.30              |   | (379,197         | )         | 4.34          |   | —      |   | —        |   | —     |   | — |   |
| Options cancelled              |   | (94,029           | )      | 7.78              |   | (102,369         | )         | 4.32          |   | (100,000    | )      | 3.06          |   | (185,500   | )      | 6.71 |   |
|                           |   |              |   |              |   |             |      |          |   |        |   |          |   |       |   |   |   |
| Outstanding, end of year       |   | 1,253,455         |   | $                 | 5.91   |             | 1,007,384 |          | $      | 5.66        |   | 1,364,450     |   | $          | 4.48   |   | 1,439,450 |   | $ | 4.31 |   |
|                           |   |              |   |              |   |             |      |          |   |        |   |          |   |       |   |   |   |
| Exercisable, end of year       |   | 489,130           |   | $                 | 4.86   |             | 342,872   |          | $      | 4.32        |   | 376,550       |   | $          | 4.13   |   | 214,250 |   | $ | 4.90 |   |

 

 

The Company’s subsidiary, Cellemetry, adopted a Share Option Plan on June1, 1998, which provided for the granting of nonqualified stock options toofficers and employees of Cellemetry at a pre-determined price. The aggregate numberof shares, which may have been issued upon the exercise of options under theShare Option Plan, is 1,000,000 shares of Class III Common Stock.

 

Options issued under the Share OptionPlan vested ratably over a five-year period. In the event of a “change incontrol” as defined in the Share Option Plan, all outstanding options becamefully vested and were subject to exercise. The options expired 10 years afterthe grant date unless an option holder’s employment was terminated. Under suchcircumstances, the options expire from three months to one year from the dateof employment termination.

 

OnJune 1, 1998, 612,000 options under the Share Option Plan were granted toemployees of Cellemetry at $4.00 per share.

 

At October 31, 1999, and 1998, 612,000 and 612,000, respectively, optionsunder Share Option Plan had been granted. Of these options none had beenexercised, 308,000 had been forfeited and cancelled and the remaining optionswould have become exercisable the beginning June of 2000.

 

As part of the restructuringof the Cellemetry Operation Agreement between the Company and BellSouthWireless the agreement provided for the cancellation of the Cellemetry ShareOption Plan with the intent that the Company exchange all outstanding optionsfor options to acquire shares of the capital stock of the Company. EffectiveNovember 1, 1999, all options granted under the Cellemetry Share Option Planwere cancelled and exchanged for options under the Company’s 1999 Plan. SeeNote B — Investments and Divestitures.

 

F-21

----

 

Had compensationexpense for the Company’s aforementioned stock option plans been determinedbased on the fair value at the

grant dates forawards under those plans under the provisions of SFAS No. 123, the Company’snet earnings (loss) and earnings (loss) per share would have been changed tothe following pro forma amounts:

 

 
|                                             |   |                     |   | **For the**       |   |            |   |
|--------------------------------------------------|--------|--------------------------|--------|-------------------|--------|-----------------|--------|
|                                             |   |                     |   | **two-month**     |   | **For the**     |   |
|                                             |   | **For the  years ended** |   | **period  ended** |   | **year ended**  |   |
|                                             |   | **December  31,**        |   | **December  31,** |   | **October 31,** |   |
|                                             |   | **2001**                 |   | **2000**          |   | **1999**        |   | **1999** |   |
| Net earnings (loss) — as reported           |   | $                        | (3,382 | )                 | $      | (4,200          | )      | $ | 9,911 |   | $ | (1,617 | ) |
| Net earnings (loss) —   pro forma      |   | (4,503                   | )      | (5,096            | )      | 9,818           |   | (2,362 | ) |
| Earnings (loss) per share — as reported     |   | (0.32                    | )      | (0.40             | )      | 0.96            |   | (0.16 | ) |
| Earnings (loss) per share —  pro forma |   | (0.43                    | )      | (0.48             | )      | 0.95            |   | (0.23 | ) |
|                                                  |        |                          |        |                   |        |                 |        |  |  |  |  |  |  |

 

 

The pro forma effect on net earnings (loss) and earnings (loss) per sharefor the years ended December 31, 2001, and 2000, the two-month period endedDecember 31, 1999, and the year ended October 31, 1999, respectively, byapplying SFAS No. 123, may not be indicative of the pro forma effect on netearnings (loss) in future years since SFAS No. 123 does not take intoconsideration pro forma compensation expense related to awards made prior toNovember 1, 1995, and since additional awards in future years are anticipated.

 

 

**NOTE L - GEOGRAPHIC INFORMATION**

 

The Companyoperates in a single industry segment. Information about the Company’soperations in different geographic areas for the years ended December 31, 2001and 2000, the two-month period ended December 31, 1999 and the year endedOctober 31, 1999, respectively, are as follows:

 
|                         |   |               |       | **United Kingdom/** |   |            |   |             |   |
|------------------------------|--------|--------------------|------------|---------------------|--------|-----------------|--------|------------------|--------|
|                         |   | **U.S.**           |       | **Australia**       |   | **Elimination** |   | **Consolidated** |   |
|                         |   | **(In thousands)** | ** ** |
| Net sales:                   |   |               |       |                |   |            |   |             |   |
| 2001 — year             |   | $                  | 23,907     |                | $      | 351             |   | $                | — |   | $ | 24,258 |   |
| 2000 — year             |   | 18,795             |       | 1,495               |   | —          |   | 20,290           |   |
| 1999 — two-month period |   | 2,268              |       | 33                  |   | —          |   | 2,301            |   |
| 1999 — year             |   | 19,848             |       | 13,888              |   | —          |   | 33,736           |   |
|                         |   |               |       |                |   |            |   |             |   |
| Operating profit (loss):     |   |               |       |                |   |            |   |             |   |
| 2001 — year             |   | $                  | (7,353     | )                   | $      | 23              |   | $                | — |   | $ | (7,330 | ) |
| 2000 — year             |   | (9,040             | )          | 34                  |   | —          |   | (9,006           | )      |
| 1999 — two-month period |   | (2,627             | )          | 28                  |   | —          |   | (2,599           | )      |
| 1999  — year            |   | (8,279             | )          | 5,522               |   | —          |   | (2,757           | )      |
|                         |   |               |       |                |   |            |   |             |   |
| Identifiable assets:         |   |               |       |                |   |            |   |             |   |
| 2001 — year             |   | $                  | 42,613     |                | $      | 361             |   | $                | — |   | $ | 42,974 |   |
| 2000 — year             |   | 45,702             |       | 240                 |   | —          |   | 45,942           |   |
| 1999 — two-month period |   | 56,267             |       | 138                 |   | —          |   | 56,405           |   |

 

F-22

----

 

## **Condensed Financial Information of Registrant**

## **Condensed Balance Sheet**

**(Parent Company Only)**

(inthousands, except share amounts)                                                          **SCHEDULE 1**

 

 
|                                                                                                                          |   | **December 31** |       |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|------------|
|                                                                                                                          |   | **2001**        |       | **2000** |   | **1999** |   |
| **ASSETS**                                                                                                                    |   |            | ** ** |   | ** ** |   | ** ** |
| Current  assets                                                                                                               |   | $               | 1,022      |   | $ | 10,541 |   | $ | 21,279 |   |
| Other  assets                                                                                                                 |   | 206             |       | 171 |   | 170 |   |
| Intercompany  receivables                                                                                                     |   | 30,001          |       | 25,308 |   | 16,890 |   |
| Investment  in equity of subsidiaries                                                                                         |   | 30,470          |       | 29,102 |   | 29,044 |   |
|                                                                                                                          |   |            |       |   |   |   |   |
| Total  Assets                                                                                                                 |   | $               | 61,699     |   | $ | 65,122 |   | $ | 67,383 |   |
|                                                                                                                          |   |            | ** ** |   | ** ** |   | ** ** |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                |   |            | ** ** |   | ** ** |   | ** ** |
|                                                                                                                          |   |            | ** ** |   | ** ** |   | ** ** |
| CURRENT  LIABILITIES                                                                                                          |   |            |       |   |   |   |   |
| Intercompany  loan and payables                                                                                               |   | $               | 60,588     |   | $ | 6 |   | $ | 25 |   |
| Other  liabilities                                                                                                            |   | 1,737           |       | 750 |   | 2,555 |   |
|                                                                                                                          |   |            |       |   |   |   |   |
| Total  Current Liabilities                                                                                                    |   | $               | 62,325     |   | $ | 756 |   | $ | 2,580 |   |
|                                                                                                                          |   |            |       |   |   |   |   |
| LONG-TERM  LIABILITIES                                                                                                        |   | —          |       | — |   | — |   |
|                                                                                                                          |   |            |       |   |   |   |   |
| Preferred  stock — no par value; authorized 3,000,000 shares; issued 30,000, 30,000 and  30,000 shares                   |   | 3,000           |       | 3,000 |   | 3,000 |   |
| Class  A common stock — no par value; authorized 30,000,000 shares; issued  12,286,419, 12,157,504 and 11,609,492 shares |   | 32,590          |       | 32,064 |   | 29,870 |   |
| Additional  paid-in capital                                                                                                   |   | 439             |       | 370 |   | 370 |   |
| Treasury  stock, at cost, 1,766,400, 1,766,400 and 1,266,400 shares                                                           |   | (9,222          | )          | (9,222 | ) | (5,222 | ) |
| Retained  earnings                                                                                                            |   | (26,982         | )          | 38,308 |   | 37,235 |   |
| Other                                                                                                                         |   | (451            | )          | (154 | ) | (450 | ) |
|                                                                                                                          |   |            |       |   |   |   |   |
| Total  shareholders’ equity                                                                                              |   | $               | (626       | ) | $ | 64,366 |   | $ | 64,803 |   |
|                                                                                                                          |   |            |       |   |   |   |   |
| Total  liabilities and shareholders’ equity                                                                              |   | $               | 61,699     |   | $ | 65,122 |   | $ | 67,383 |   |

 

 

S-1

----

 

 

## **Condensed Financial Information of Registrant**

**Condensed Statements of Operations**

**(Parent Company Only)**

(in thousands)                                                                                                                                                  **SCHEDULE 1**

 

 
|                                 |   |                     |       |              |       | **For the**      |       |        |       |
|--------------------------------------|--------|--------------------------|------------|-------------------|------------|------------------|------------|-------------|------------|
|                                 |   |                     |       |              |       | **two-month**    |       | **For the** |       |
|                                 |   | **For the  years ended** |       | **period  ended** |       | **year ended**   |       |
|                                 |   | **December  31,**        |       | **December  31,** |       | **October  31,** |       |
|                                 |   | **2001**                 |       | **2000**          |       | **1999**         |       | **1999**    |       |
|                                 |   |                     | ** ** |              | ** ** |             | ** ** |        | ** ** |
| Equity  in net loss of subsidiaries  |   | $                        | (1,408     | )                 | $          | (5,274           | )          | $           | (1,803     | ) | $ | (668 | ) |
|                                 |   |                     |       |              |       |             |       |        |       |
| Operating  expenses                  |   | (2,815                   | )          | (2,582            | )          | (358             | )          | (1,077      | )          |
| Gain  on sale of subsidiary          |   | —                   |       | —            |       | 12,605           |       | —      |       |
| Interest  and other income, net      |   | (1,504                   | )          | 3,896             |       | 328              |       | 128         |       |
|                                 |   |                     |       |              |       |             |       |        |       |
| Earnings  (loss) before income taxes |   | (5,727                   | )          | (3,960            | )          | 10,772           |       | (1,617      | )          |
|                                 |   |                     |       |              |       |             |       |        |       |
| Income  tax benefit (expense)        |   | 2,585                    |       | —            |       | (861             | )     | —      |       |
|                                 |   |                     |       |              |       |             |       |        |       |
| Preferred  stock dividend            |   | (240                     | )          | (240              | )          | —           |       | —      |       |
|                                 |   |                     |       |              |       |             |       |        |       |
| Net  earnings (loss)                 |   | $                        | (3,382     | )                 | $          | (4,200           | )          | $           | 9,911      |   | $ | (1,617 | ) |

 

S-2

----

 

## **Condensed Financial Information of Registrant**

# **Condensed Statements of Cash Flows**

**(Parent Company Only)**
| (In thousands) | **SCHEDULE 1** |   |
|----------------|----------------|--------|

 
|                                                 |   |                     |       |              |       | **For the**      |       |        |       |
|------------------------------------------------------|--------|--------------------------|------------|-------------------|------------|------------------|------------|-------------|------------|
|                                                 |   |                     |       |              |       | **two-month**    |       | **For the** |       |
|                                                 |   | **For the  years ended** |       | **period  ended** |       | **year ended**   |       |
|                                                 |   | **December  31,**        |       | **December  31,** |       | **October  31,** |       |
|                                                 |   | **2001**                 |       | **2000**          |       | **1999**         |       | **1999**    |       |
|                                                 |   |                     | ** ** |              | ** ** |             | ** ** |        | ** ** |
| Operating  activities:                               |   |                     |       |              |       |             |       |        |       |
| Equity  in net earnings (loss) of subsidiaries       |   | $                        | (1,408     | )                 | $          | (5,274           | )          | $           | (1,803     | ) | $ | (668 | ) |
| Other  adjustments, net                              |   | (7,286                   | )          | (3,666            | )          | 4,095            |       | 13,746      |       |
|                                                 |   |                     |       |              |       |             |       |        |       |
| Net  cash provided by (used in) operating activities |   | (8,694                   | )          | (8,940            | )          | 2,292            |       | 13,078      |       |
|                                                 |   |                     |       |              |       |             |       |        |       |
| Investing  activities:                               |   |                     |       |              |       |             |       |        |       |
| Purchase  of property and equipment                  |   | (52                      | )          | —            |       | —           |       | —      |       |
| Purchase  of intangible and other assets             |   | (41                      | )          | —            |       | —           |       | —      |       |
| Proceeds  from sale of subsidiary                    |   | —                   |       | —            |       | 16,721           |       | —      |       |
| Contribution  to capital of subsidiaries, net        |   | (794                     | )          | (58               | )          | (2,106           | )          | (4,615      | )          |
|                                                 |   |                     |       |              |       |             |       |        |       |
| Net  cash provided by (used in) investing activities |   | (887                     | )          | (58               | )          | 14,615           |       | (4,615      | )          |
|                                                 |   |                     |       |              |       |             |       |        |       |
| Financing  activities:                               |   |                     |       |              |       |             |       |        |       |
| Proceeds  from exercise of stock options             |   | 353                      |       | 2,232             |       | —           |       | —      |       |
| Principal  payment on revolving credit facilty       |   | —                   |       | —            |       | —           |       | (6,000      | )          |
| Payment  of preferred dividends                      |   | (240                     | )          | (240              | )          | —           |       | —      |       |
| Purchase  of treasury stock                          |   | —                   |       | (4,000            | )          | —           |       | (578        | )          |
|                                                 |   |                     |       |              |       |             |       |        |       |
| Net  cash provided by (used in) financing activities |   | 113                      |       | (2,008            | )          | —           |       | (6,578      | )          |
|                                                 |   |                     |       |              |       |             |       |        |       |
| Net  change in cash                                  |   | (9,468                   | )          | (11,006           | )          | 16,907           |       | 1,885       |       |
| Cash,  beginning of year                             |   | 10,227                   |       | 21,233            |       | 4,326            |       | 2,441       |       |
|                                                 |   |                     |       |              |       |             |       |        |       |
| Cash,  end of year                                   |   | $                        | 759        |              | $          | 10,227           |       | $           | 21,233     |   | $ | 4,326 |   |

 

S-3

----

 

# **NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT**

**(Parent Company Only)**

 

 

**1.     BASISOF PRESENTATION**

 

The accompanyingcondensed financial statements include the accounts of Numerex Corp. (the “Parent”)and on an equity basis its subsidiaries and should be read in conjunction withthe consolidated financial statements of Numerex Corp. and its subsidiaries(the “Company”) and the notes thereto.

 

**2.     INCOMETAXES**

 

The Parent and its whollyowned subsidiaries file a consolidated tax return.  The Parent participates in a tax sharing agreement with theconsolidated group whereby consolidated income tax expense or benefit isallocated to the Parent.

 

 

S-4

----

 

**VALUATION AND QUALIFYING ACCOUNTS**
| (In thousands) | **SCHEDULE 11** |   |
|----------------|-----------------|--------|

 

 
|                                       |   | **Balance at**   |   | **Additions**  |   |           |   | **Balance at** |   |
|--------------------------------------------|--------|------------------|--------|----------------|--------|----------------|--------|----------------|--------|
|                                       |   | **beginning of** |   |           |   | **Charges**    |   |           |   | **end of** |   |
| Description                                |   | **Period**       |   | **Provisions** |   | **to expense** |   | **Deductions** |   | **Period** |   |
| Year  ended October 31, 1999:              |   |             |   |           |   |           |   |           |   |   |   |
| Accounts  receivable                       |   |             |   |           |   |           |   |           |   |   |   |
| Allowance  for uncollectible accounts      |   | 323              |   | 83             |   | 0              |   | (239           | )      | 167 |   |
| Inventory                                  |   |             |   |           |   |           |   |           |   |   |   |
| Allowance  for obsolescence                |   | 3,540            |   | 0              |   | 0              |   | (1,187         | )      | 2,353 |   |
| Other  liabilities                         |   |             |   |           |   |           |   |           |   |   |   |
| Accrued  severance                         |   | 447              |   | 0              |   | 0              |   | (309           | )      | 138 |   |
|                                       |   |             |   |           |   |           |   |           |   |   |   |
| Two-month  period ended December 31, 1999: |   |             |   |           |   |           |   |           |   |   |   |
| Accounts  receivable                       |   |             |   |           |   |           |   |           |   |   |   |
| Allowance  for uncollectible accounts      |   | 167              |   | 88             |   | 0              |   | (18            | )      | 237 |   |
| Inventory                                  |   |             |   |           |   |           |   |           |   |   |   |
| Allowance  for obsolescence                |   | 2,353            |   | 0              |   | 0              |   | (143           | )      | 2,210 |   |
| Other  liabilities                         |   |             |   |           |   |           |   |           |   |   |   |
| Accrued  severance                         |   | 138              |   | 0              |   | 0              |   | (31            | )      | 107 |   |
|                                       |   |             |   |           |   |           |   |           |   |   |   |
| Year  ended December 31, 2000:             |   |             |   |           |   |           |   |           |   |   |   |
| Accounts  receivable                       |   |             |   |           |   |           |   |           |   |   |   |
| Allowance  for uncollectible accounts      |   | 237              |   | 194            |   | 105            |   | (105           | )      | 431 |   |
| Inventory                                  |   |             |   |           |   |           |   |           |   |   |   |
| Allowance  for obsolescence                |   | 2,210            |   | 30             |   | 0              |   | (1,220         | )      | 1,020 |   |
| Other  liabilities                         |   |             |   |           |   |           |   |           |   |   |   |
| Accrued  severance                         |   | 108              |   | 0              |   | 0              |   | (108           | )      | 0 |   |
|                                       |   |             |   |           |   |           |   |           |   |   |   |
| Year  ended December 31, 2001:             |   |             |   |           |   |           |   |           |   |   |   |
| Accounts  receivable                       |   |             |   |           |   |           |   |           |   |   |   |
| Allowance  for uncollectible accounts      |   | 431              |   | 158            |   | (55            | )      | 0              |   | 534 |   |
| Inventory                                  |   |             |   |           |   |           |   |           |   |   |   |
| Allowance  for obsolescence                |   | 1,020            |   | 0              |   | 0              |   | (89            | )      | 931 |   |
| Other  liabilities                         |   |             |   |           |   |           |   |           |   |   |   |
| Accrued  severance                         |   | 0                |   | 0              |   | 0              |   | 0              |   | 0 |   |

 

** **

S-5

----