UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

     For the Fiscal Year ended December 31, 2004

     For the transition period from                                          to                                         

Commission File No. 0-22920

NUMEREX CORP.

Registrant’s Telephone Number, Including Area Code: (770) 693-5950

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

Securities Registered Pursuant to Section 12(g) of the Act:

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

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

Indicate by check mark whether the registration is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes o                    No þ

The aggregate market value of voting and non-voting stock held by non-affiliates of the Registrant as of June 30, 2004 is $34,835,502.¹

The number of shares outstanding of the issuer’s Class A Common Stock, no par value as of March 15, 2005: 10,850,041

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Company’s Annual Report to Shareholders for the year ended December 31, 2004, are incorporated by reference in Part I and Part II of this Report and certain provisions of the Company’s Proxy Statement to be filed in connection with its 2004 Annual Meeting of Shareholders are incorporated by reference in Part III of this Report.

Other documents incorporated by reference are listed in the Exhibit Index.

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TABLE OF CONTENTS

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Forward-Looking Statements

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

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

PART I

Item 1.	Business

Overview

Numerex Corp.is a solutions provider of wireless machine-to-machine (M2M) communications, delivering comprehensive wireless solutions over the company’s proprietary wireless data network, CellemetryXG™. Our wireless data network is dedicated to the delivery of M2M communications throughout the United States, Canada, Mexico, the Caribbean and much of Latin America.

M2M is defined as electronic data communications between people, devices, and systems that turn data into information that companies can act upon. Whether it is called machine-to-machine, man-to-machine, mobile-to-machine or machine-to-mobile, the meaning is the same. Beginning in the mid-1990s, when the M2M market was beginning to take shape, it was known by a variety of terms, such as pervasive Internet, telemetry, telematics, device-relationship management, and remote monitoring. Regardless of the terminology, however, the objective of M2M is to facilitate communication among people, devices, and systems.

We develop, operate, market, and sell products and services in wireless data communications through CellemetryXG™, Cellemetry®, Uplink™, MobileGuardian®, and VendView™ brands, as well as distribution through Value Added Resellers (VARs) who have integrated the CellemetryXG Network and components into their own offerings. In addition, we develop and market products and services for video and data collaboration under the PowerPlay™ and IPContact® brands; we also develop and market telecommunications networking support and wireline alarm security products and services through its Digilog® and DCX™ brands.

These products and services enable customers around the globe to monitor, move, and act on information through a variety of applications—from home and business security to “smart” vending machines to distance learning.

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

	•	Providing best-in-class solutions to the M2M communications market primarily serving security needs across all industries.
	•	Creating a culture of excellence in customer service and product integrity through innovation and vigilance.
	•	Delivering quality products and services that meet and anticipate the evolving needs of our customers.
	•	Enhancing shareholder value through a financial model of sustainable growth based on long-term recurring service revenues.

Background

Our business began in July 1992 with the acquisition of technology referred to as “Derived Channel”, which enables data

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

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

We operate in three segments, Wireless Data Communications, Digital Multimedia and Networking and Wireline. Our Wireless Data Communications segment is made up of all our wireless machine-to-machine communications products and services. Our Digital Multimedia and Networking segment includes the Company’s networking products and services and video conferencing products. Our Wireline segment is our wire-line security detection products and services division.

Our primary business focus is the design, development, and delivery of M2M solutions that combine our wireless data network with remote management and monitoring applications that allow organizations to acquire, monitor, and control data from their extended enterprise.

SEGMENT 1 — WIRELESS DATA COMMUNICATIONS)

Machine to Machine Communications(M2M)

Our M2M solutions are comprised of four categories: Networks, Network Services, Network Access Technology, and End-To-End Solutions. End-to-End solutions are typically delivered under their own distinct brands, including Uplink, MobileGuardian, and VendView; all non End-to-End solutions are delivered under the Cellemetry or CellemetryXG brand.

Products and Services

CellemetryXG™

CellemetryXG is the umbrella M2M offering that provides our network product strategy and an array of solution components that support the M2M value chain. These components include Cellemetry, our wireless data network dedicated to M2M communications, and CellemetryXG Network Services, comprised of application engineering and development, customized billing, GPS mapping for mobile applications, network and application implementation management, back-end message delivery management, application and network support, and interactive voice and Web services.

The CellemetryXG offering also includes network access technology. This technology typically consists of network access modules that provide wireless network access and remote wireless management of assets and activities. These modules are capable of supporting a variety of remote applications that are either fixed or mobile.

Another component of CellemetryXG is Xgpert^TM Support, a premium, 24/7/365 network support service providing customers with online voice, video, and data collaboration with the Numerex Network Operations Center.

The CellemetryXG Network strategy supports continued expansive coverage, legacy network interoperability, and expanded gateway capabilities for higher bandwidth M2M applications in the future.

The CellemetryXG Network: Cellemetry®

The term “Cellemetry” is an acronym that stands for cellular telemetry and is used when referring to the technology developed and offered by Cellemetry LLC. It is a means of wireless data communications that taps the unused capacity of the cellular telephone network’s overhead control channels and the SS7/IS41/IS95 network protocols to deliver two-way short data messages, without affecting the voice channels of the cellular network. In other words, Cellemetry utilizes the existing cellular telephone network without affecting cellular telephone calls or voice operation.

Using Cellemetry technology, remote equipment or vehicles can (i) be contacted, (ii) be scheduled to perform a task at a preprogrammed time, and/or (iii) autonomously exchange information with a customer’s central location. Information gathered is relayed to and from the customer’s designated site for collection or for response. Based on remote conditions, control actions can be relayed as well. This means, for example, that equipment can be turned on or off remotely, switches and gates can be closed, and pumps triggered.

When used in combination 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 control actions or operator-response messages.

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The phrase “Cellemetry Data Service” refers to wireless M2M communications and remote monitoring over the cellular network. It provides a means of sending short data messages over the cellular telephone system in a manner that is virtually transparent to the cellular operator. Cellemetry Data Service does not use or affect voice channels, and is a patented technology of Cellemetry LLC. We have negotiated licensing agreements with cellular carriers throughout the United States, Canada, Mexico, Argentina, Colombia, the Dutch Antilles, Paraguay, and Puerto Rico to make Cellemetry Data Services widely available. We have also negotiated licensing agreements with application developers and radio manufacturers to provide applications and equipment across urban, rural, and industrial markets that are compatible with Cellemetry.

Cellemetry Data Service enables messaging for many different business applications. It can, for example, report alarm messages, read utility meters, identify vehicle and trailer location, and report a number of items regarding vending machine status. It is unique because it uses the underused portion of the cellular system, the overhead control channels, to convey short data messages without affecting or using the voice channels. These control channels are used to transmit necessary information for all call initiations (both incoming and outgoing) between the cellular system and the cellular customer’s equipment. The message-handling capacity of these control channels is far greater than what is required by the existing cellular system to handle its voice traffic, even during the busiest times of the day.

Cellemetry Data Service operates in the same manner in which roaming telephones operate in the cellular system. A roaming cellular telephone is defined as a cellular telephone operating in any system other than its home system. When a roaming cellular telephone is turned on, it recognizes the fact that it is not in its home system and accordingly “registers” by sending its Mobile Identification Number (MIN) and its Electronic Serial Number (ESN) to the cellular system via one of the control channels. The cellular system recognizes the roamer number and routes the MIN and ESN to the roamer’s home system for validation via a special network (SS7/IS41/IS95), which links all of the cellular systems together across Canada, Mexico, and the United States, and parts of South and Central America.

Cellemetry radios behave like roaming cell phones, except that the cellular telephone switch’s database is set to route the “registrations” (MIN and ESN data) to the Cellemetry centralized Service Bureau (“the Service Bureau”), connected to the same intracellular network. The MIN serves to identify the Cellemetry radio and the ESN is the data field that contains the telemetry message. In addition, the Service Bureau adds a time stamp and the SS7/IS41/IS95 network adds point-of-origin data.

The Service Bureau processes, stores, and routes the Cellemetry Data Service messages according to customer requirements. Some applications may require immediate processing, as is the case with alarm monitoring, while an application such as vending machine status may only need the messages stored and transferred in a single batch once a day.

CellemetryXG Network Services

We market Cellemetry Network Services as an inclusive service to our network offerings or as an optional support service.

Application Engineering and Development Services helps reduce the development and engineering time for applications by providing most of the information and resources, including generic Cellemetry products, necessary to more rapidly bring applications to market. As a result, we can offer application developers an interactive Web-based wireless M2M interface product and/or service, which monitors and controls geographically remote systems and applications.

Other CellemetryXG Network Services available include custom Web services, network and application implementation management, back-end data message delivery, interactive voice response services, GPS mapping, and customized billing plans and administration. All CellemetryXG customers receive 7/24/365 network support from our Network Operations Center in Atlanta, Georgia.

CellemetryXG Network Access Technology

We design, develop, manufacture, and market a suite of network access modules that provide the physical and electrical interface between the customer’s application and the CellemetryXG Network. Examples of the various modules include the DigiCell 1500, a cellular unit designed to signal a designated central monitoring station if telephone lines have been cut or damaged. Because the transceiver auto-acquires the network, connection is automatic upon installation. The EV-501 is a self-contained, pre-wired, assembled, and packaged unit designed to monitor virtually any critical-event condition in any setting. The MMP™ Network Access Module, scheduled for release in 2005, is comprised of single radio modules supporting multiple analog and digital radio technologies. Supported technologies will include GSM, CDMA, AMPS, and SMS for either GSM or CDMA. Support is also provided for future expansion to broadband wireless. In addition, the MMP can be optionally configured with an integrated IP communications module, providing encrypted 10/100 Ethernet network connectivity.

The Network Modules are configured as generic product offerings for VAR application development, as fully configured modules for OEM integration, or as a component of the Company’s end-to-end solutions.

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End-to-End Solutions
Uplink™: Wireless Security Communications

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

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

Uplink service is sold and installed by certified Uplink dealers in both residential and commercial premises. The Uplink Network Operations Center in Atlanta activates and manages the service through the dealers.

We believe that Uplink’s products and communications charges are competitively priced. As a result of combining CellemetryXG M2M technology with low-cost communication equipment and routing technologies, significant improvements in security communication services are now available to the industry.

MobileGuardian®™: Wireless Vehicle Location and Recovery

MobileGuardian, a product and service offering, is a Web-based vehicle location and recovery solution that combines the accuracy of the GPS (Global Positioning System) and CellemetryXG wireless communications technology. MobileGuardian customers can accesses the secure MobileGuardian Web site using their selected login and password to locate their vehicle and prevent restarting of the vehicle by temporarily disabling it.

If the car’s alarm system is triggered, a message is sent to the MobileGuardian device located in the vehicle, which then wirelessly transmits a theft alert notification over the CellemetryXG M2M network to the vehicle’s owner via the owner’s wireless phone, email, or pager. The owner may log on to the secure MobileGuardian Web site to send an immediate locate request to the vehicle; the owner may then remotely disable the vehicle at the touch of a button and prevent it from being restarted while he or she calls the authorities to report the theft and give them the location of the vehicle. This improves the prospect of vehicle recovery and the timeframes in which the recovery occurs. In addition, the vehicle’s owner can use the MobileGuardian system to simply track the vehicle, without the alarm system triggering. The owner can purchase, via the Web site, additional “locates,” or messaging, beyond those allotted at the time of purchase in order to track or disable his or her vehicle at any time.

Our distribution strategy for MobileGuardian involves multiple sales channels that service auto dealerships. Currently, Southwest Dealer Services is the primary MobileGuardian product sales channel. The MobileGuardian product is typically installed at the auto dealership location by the dealer/distributor. Application and network support is provided to dealers by the CTAC and Network Operations Center in Atlanta. MobileGuardian is competitively priced and offers value-added features, such as extensive network coverage, immediate notification of a breach and/or activation of the vehicle's alarm system and vehicle tracking. We believe MobileGuardian is competitively well positioned in the established vehicle location and recovery markets.

VendView™ Wireless Vending Solution

VendView, a product and service offering, is a dedicated wireless vending machine monitoring solution that combines our wireless network access modules, monitoring devices, and the CellemetryXG wireless data network.

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

Sales and Marketing

We utilize multiple distribution channels to market and sell our M2M network, components, and solutions. CellemetryXG is licensed and marketed directly to end user organizations for internal application development. Cellemetry is also licensed to VARs to develop and market VAR-branded solutions incorporating CellemetryXG components. CellemetryXG network and services are bundled and distributed as a network product and service offering through solution-provider companies like Geologix and GE Transportation.

Uplink is distributed through a network of over 200 alarm security distributors and 4,500 alarm security dealers in North America for both commercial and residential alarm security markets.

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MobileGuardian is distributed in the United States under a comprehensive distribution agreement with Southwest Dealer Services, who supply and install auto security systems at several hundred dealership locations nationwide.

VendView is marketed and sold directly to bottlers in the United States, Mexico, and the Caribbean.

We currently offer the CellemetryXG network and services in the United States, Canada, Mexico, Argentina, Colombia, the Dutch Antilles, Paraguay, and Puerto Rico through licensing agreements with both cellular carriers and local resellers. We intend to offer CellemetryXG, Uplink, and VendView in various international markets directly and through strategic partnerships, alliances, and other channels of distribution.

SEGMENT 2 — DIGITAL MULTIMEDIA AND NETWORKING

Digital Multimedia

Products and Services

We design, develop, and market complete video conferencing and digital multimedia system products and services for high-quality communications networks. We manufacture both the products upon which the systems are based and incorporate third-party products where appropriate.

Our digital multimedia systems permit network operators to provide a wide range of video and data services, including Internet access, high-speed data transfer, and interactive video conferencing and voice service. The use of fiber optics in the broadband transmission network provides improved signal quality for long-distance transmission, increased bandwidth, immunity to interfering signals, and significant cost savings and reliability over coaxial cable-based network technologies. We believe that our digital multimedia systems enable the deployment of sophisticated architectures at generally lower costs and with less hardware and complexity than competing offerings.

We have developed and continue to enhance our line of software, data, and fiber optic transmission products. In addition, we have developed a digital multimedia solution, PowerPlay™, which provides capability for interactive videoconferencing over the same network platform that carries standard data traffic.

PowerPlay™ Solution. PowerPlay, our digital multimedia solution for high-bandwidth private network applications, is an integrated hardware-software system that supports user-friendly control of all network devices, including VCRs, cameras, and switches. This product permits the scheduling and conduct of video conferencing via a desktop workstation, a roll-about cart, or a configured classroom or business environment. The PowerPlay system incorporates proprietary software and both Company and third-party-developed hardware, and is compatible with all standards-based transmission networks. We believe that PowerPlay is unique in its capability to deliver full-motion video signals while using a relatively small amount of bandwidth.

IPContact® In December 2003, we supplemented PowerPlay by announcing the release of IPContact, a desktop videoconferencing software package that boasts high-quality and high-performance video. The product is also used as a customer support tool within the CellemetryXG offering.

Data Solution. We also provide high-speed wide area networks (WAN) data solutions. This solution is offered as a data-only capability or as part of delivering the PowerPlay application. The data product line consists of two main components: the data switch product, which we obtain from other vendors, and the transport converter device, which we manufacture.

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

Sales and Marketing

We market our digital multimedia products and services through a combination of system integrators and VARs.

We have established relationships with a number of multiple system cable operators (MSOs). MSOs have generally looked to these private networks as a means of augmenting and extending their public networks, and as a source of new revenues in the increasingly competitive environment.

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

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Networking

Products and Services

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

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

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

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

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

Sales and Marketing

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

SEGMENT 3 — WIRELINE DATA COMMUNICATIONS

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

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

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

Sales and Marketing

We are not actively marketing the Derived Channel in the United States or in any of our licensed territories other than Australia, where we are expanding our relationship with a major telecom company.

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GENERAL

Suppliers

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

Competition

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

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

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

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

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

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

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

Research and Development

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

We continue to invest in improvements to various Numerex technologies, including Cellemetry and its service capabilities on an

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ongoing basis, focused primarily on the development of expanded service bureau capabilities, further communications costs reductions, and additional enhancement to application-specific capabilities.

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

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

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

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

Product Warranty and Service

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

Intellectual Property

We hold patents covering its technology related to Cellemetry in the United States and various other countries. These patents expire between 2011 and 2016. Through Cellemetry, we license certain technologies related to Cellemetry under licenses with BellSouth Corporation. We also own other intellectual property relating to our products. We hold patents through Cellemetry LLC, which primarily cover the delivery of the Cellemetry wireless data communications service. These patents expire between 2010 and 2012. It is our practice to apply for patents as new products or processes suitable for patent protection are developed. No assurance can be given about the scope of the patent protection.

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

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

Regulation

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

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

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

In the United States, our products require certification from Underwriters Laboratories in order to serve monitoring applications with higher levels of insurance risk. Certain products of our digital multimedia business also require certification from Underwriters Laboratories. We expect to obtain required Underwriters Laboratories certifications for products currently marketed in the United States.

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

Employees

As of March 15, 2005, we employed 83 employees in the U.S., consisting of 4 in manufacturing, 30 in sales, marketing and customer service, 30 in engineering and operations and 19 in management and administration. We have experienced no work stoppages and no employees are represented under collective bargaining arrangements. We believe our relationship with our employees is good.

Available Information

We make available free of charge through our website at www.nmrx.com our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto filed or furnished pursuant to 13(a) or 15(d) of the Securities and Exchange act of 1934, as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission. Our filings are also available through the Securities and Exchange Commission via their website, http://www.sec.gov. The information contained on our website is not incorporated by reference in this annual report on form 10-K and should not be considered a part of this report.

Risk Factors

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

Risks Related to Our Financial Condition

We have a history of losses and are uncertain as to our future profitability.

We may not achieve or sustain operating income, net income or positive cash flow from operations in the future. In 2002, we had a net loss of $7,450,000 and a net loss applicable to common stockholders of $7,690,000. In 2003, we had a net loss applicable to common stockholders of $1,404,000. For the year ended December 31, 2004, we had a net loss applicable to common stockholders of $2,079,000.

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

We have debt obligations that may adversely affect our financial and operating flexibility.

We currently have indebtedness and may incur additional indebtedness in the future. As of December 31, 2004, our total debt (including obligations under capital leases and equipment financings) was $6.2 million. The terms of our outstanding debt limits us, but does not prohibit us, from incurring additional debt.

As a result of this debt and debt that we may incur in the future, we will need to devote a portion of our available cash towards debt service payments. In addition, our ability to borrow additional money is restricted by our current debt arrangements.

Some of our debt is convertible into common stock. The principal amount and any interest that has accrued on some of our debt may be converted at any time by the holder into common stock at a predetermined fixed price. The conversion of our debt into common stock, or payment of principal and interest by us using common stock, would dilute stockholders, possibly

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substantially.

Substantially all of our property and assets are subject to a lien to secure our debt. If we default on our debt, we would be subject to foreclosure on substantially all of our assets to the extent necessary to repay any amounts due. Any such default and resulting foreclosure would have a material adverse effect on us.

Our ability to repay or refinance our debt depends on our successful financial and operating performance and on our ability to implement our business strategy successfully. We cannot assure you that our future cash flows and capital resources will be sufficient to repay our existing indebtedness and any indebtedness we may incur in the future, or that we will be successful in obtaining alternative financing, if deemed necessary. Further, our borrowings are secured by substantially all of our assets and guaranteed by most of our subsidiaries. In the event that we are unable to repay our debts, we may be forced to reduce or delay the completion or expansion of our business strategy, sell some of our assets, obtain additional equity capital or refinance or restructure our debt. If we are unable to meet our debt service obligations, we would be in default under our existing arrangements.

We may seek to sell assets to pay off some of our debt.

One of our strategies to pay off some of our debt is to sell assets. These assets may currently generate revenue for us and contribute to our net income and cash flow. If we sell assets that do generate revenue and contribute to our net income and cash flow, this could adversely affect our profitability and our results from operations. A sale of some of our assets could also adversely affect our business strategy, by either delaying or slowing its implementation.

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

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

	•	the earnings of our subsidiaries;
	•	covenants contained in other agreements to which we or our subsidiaries are or may become subject;
	•	business and tax considerations; and
	•	applicable law, including laws regarding the payment of dividends and distributions.

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

Risks Related to Our Business

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

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

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

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

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

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

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

To the extent that we are successful in implementing our business strategy, we may experience periods of rapid expansion in the future. In order to manage growth effectively, we will need to maintain and improve our operating systems and expand, train and manage our employees. In addition, we must carefully manage product inventory levels to meet demand. Inaccuracies in expected

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demand could result in insufficient or excessive inventories and unexpected additional expenses. We must also expand the capacity of our sales, distribution and installation networks in order to achieve continued growth in our existing and future markets. The failure to manage growth effectively in any of these areas could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

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

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

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

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

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

We primarily sell our products through distributors. Our sales could be affected by disruptions in the relationships between our distributors or between our distributors and end users of our products or services. Also, distributors may choose not to emphasize our products and services to their customers. Any of these actions or results could lead to decreased sales.

Certain Factors May Inhibit Changes in Control of the Company.

The concentration of ownership of our common stock may have the effect of delaying, deferring or preventing a change in control, merger, consolidation or tender offer that could involve a premium over the price of our common stock. Currently, our executive officers, directors and greater-than-five percent stockholders and their affiliates, in the aggregate, beneficially own approximately 47.6% of our outstanding common stock. These stockholders, if they vote together, are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions and matters.

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

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

Changing regulations could affect us.

By 2008, cellular carriers will no longer be required by the FCC to provide analog service compatible with Advanced Mobile Phone Service (AMPS). It is likely that many cellular carriers may stop offering analog AMPS cellular service. Cellemetry, which currently operates using AMPS cellular service, would have to begin operating on other wireless service channels, and customers that use services that involve Cellemetry would have to replace incompatible equipment. Other products and services that we make and that

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depend on Cellemetry, such as Mobile Guardian, would be similarly affected. While we are currently developing a digital standard, we might not be successful in such development.

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

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

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

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

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

The failure of any equipment on our network, or those of our customers, could result in the interruption of that customer’s service until necessary repairs are made or replacement equipment is installed. Network failures, delays and errors may result from natural disasters, power losses, security breaches, viruses or terrorist acts. These failures or faults cause delays, service interruptions, expose us to customer liability or require expensive modifications that could have a material adverse effect on our business and operating results.

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

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

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

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

	•	imposition of government controls,
	•	political instability,
	•	export license requirements,
	•	restrictions on the export of critical technology,
	•	currency exchange rate fluctuations,
	•	generally longer receivables collection periods and difficulty in collecting accounts receivable,
	•	trade restrictions and changes in tariffs,
	•	difficulties in staffing and managing international operations, and
	•	potential insolvency of international dealers.

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

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

Our future success and competitive position depend upon our ability to obtain and maintain intellectual property protection, especially with regard to patents on the technology used in our core business. Loss of such protection could compromise any advantage obtained and, therefore, impact our sales, market share and results. Furthermore, our future or pending patent applications may not be issued with the scope of the claims sought by us, if at all. In addition, others may develop technologies that are similar or superior to our

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technology, duplicate our technology or design around the patents owned or licensed by us. Effective patent, trademark, copyright and trade secret protection may be unavailable or limited in foreign countries where we may need protection. We cannot be sure that steps taken by us to protect our technology will prevent misappropriation of the technology.

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

Our competitors may obtain patents that could restrict our ability to offer our products and services, or subject us to additional costs, which in either case could adversely affect us.

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

Furthermore, a third party may claim that we are using inventions claimed by their patents and may go to court to stop us from engaging in our normal operations and activities, such as research and development and the sale of any of our products. These lawsuits are expensive and would consume time and other resources. There is a risk that the court will decide that we are infringing the third party’s patents and would order us to stop the activities claimed by the patent. In addition, there is a risk that a court will order us to pay the other party damages for having infringed their patents. There is no guarantee that the prevailing patent owner would offer us a license so that we could continue to engage in activities claimed by the patent, or that such a license, if made available to us, could be acquired on commercially acceptable terms. Some licenses may be nonexclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be unable to sell some of our products, and there can be no assurance that we would be able to design and incorporate alternative technologies, without a material adverse effect on our business, financial condition and results of operations.

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

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

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

Our products are subject to certification requirements.

Some of our products are subject to certification requirements from the Federal Communications Commission, or Underwriters Laboratories. Failure to obtain such certifications for new products could have a material adverse effect on us.

Our services are indirectly subject to regulation.

In providing our services, we rely on carriers who are subject to government regulation. The FCC regulates interstate and international telecommunications, while state commissions regulate telecommunications that originate and terminate within the same state. While such regulations have not significantly impeded us in providing services to our customers, such regulations could change, and such changes could have an effect on our carriers, possibly resulting in a material adverse affect on us.

Additional Expenses may be incurred due to compliance with changing regulation of corporate governance and public disclosure.

Changing laws, regulations and standards relating to the corporate governance and public disclosure, including the Sarbanes-Oxley

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Act of 2002, new SEC regulations and NASDAQ National Market rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Due to our commitment to maintain high standards of corporate governance and public disclosure, our efforts to comply with evolving laws, regulations and standards have resulted in and are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of that assessment has required the commitment of significant financial and managerial resources.

Item 2.	Properties.

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

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

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

The semiconductors, microprocessors and other components used in our products are obtained from various suppliers and manufacturers, some of which are the sole source of such components.

Item 3.	Legal Proceedings.

As previously disclosed, on May 5, 2003 Hawkeye Switching LLC and an affiliated entity, RSA No. 2 (collectively “Hawkeye”), sued Numerex Solutions LLC (“Numerex”) a wholly owned subsidiary of the Company in Iowa District Court for Mills County, alleging breach of contract and fraudulent inducement related to a Data1Source contract for over-the-air activation and SMS text messaging. Hawkeye settled this matter, which included a full release of Numerex, on April 20, 2004. The settlement did not have a material impact on our financial statements.

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

Not applicable.

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Executive Officers of the Registrant

Our executive officers, and all persons chosen to become executive officers, and their ages and positions as of March 15, 2005, are as follows:

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

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

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

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PART II

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

We currently do not pay any cash dividends. In deciding whether or not to declare or pay dividends in the future, the Board of Directors will consider all relevant factors, including our earnings, financial condition and working capital, capital expenditure requirements, any restrictions contained in loan agreements and market factors and conditions.

Our Common Stock is quoted on the NASDAQ National Market and traded under the symbol “NMRX.”

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

As of March 15, 2005, there were 63 shareholders of record of our Common Stock, which include shares held in street name by brokers or nominees.

On January 28, 2005, we completed a private placement to Laurus Master Fund, Ltd. (“Laurus”) of (i) a Convertible Term Note in the aggregate principal amount of $1,500,000 and (ii) a Common Stock Purchase Warrant to purchase up to 100,000 shares of our common stock. The principal amount of the note may be converted into our common stock at a price equal to $5.31 per share. In addition, if conditions are met, we may pay principal on the note in either cash or in Common Stock. The Warrant is exercisable by Laurus until January 28, 2012, and has two separate pricing tranches. The first pricing tranche is exercisable for up to 50,000 shares of common stock at a price of $5.51 per share. The second pricing tranche is exercisable for up to 50,000 shares of common stock at a price of $5.72 per share. We are required to register these Securities and have the registration declared effective by August 28, 2005. If the Registration Statement has not been declared effective by August 28, 2005, then for each 30 day period thereafter (or portion thereof), the number of shares of Common Stock represented shall be increased by 5,000 shares (at an exercise price of $5.99), until the earlier number of (i) the day on which the Registration Statement is declared effective, and (ii) January 28, 2006.

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

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Equity Compensation Plan Information

Item 6.	Selected Financial Data.

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

The following financial information was derived using the consolidated financial statements of Numerex Corp. at and for each of the fiscal years in the five-year period ended December 31, 2004.

2 - Includes purchase of treasury stock of $1.0 million

3 - Includes costs of non-recurring acquisition activity of $1.9 million

4 - Includes purchase of treasury stock of $4.0 million

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Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Numerex Corp. is a technology company comprised of operating subsidiaries that develop and market a wide range of communications products and services. Our primary focus is wireless data communications utilizing proprietary network technologies.

The year 2004 marked a milestone year for Numerex in which our products and services gained significant traction and heightened visibility. We continued the development of our network strategy to support continued expansive coverage, legacy network interoperability and expanded digital capabilities for higher bandwidth applications. For example, we announced a joint development agreement to deliver multi-mode digital radios with new features that increase our network and solution capabilities as well as provide a technology migration path for analog only customers.

Excluding the impact of Data 1Source LLC, which was sold in September of 2003, total revenues in 2004 grew to $22.8 million, a $4 million increase compared to 2003. Wireless data revenues contributed over 75% of this growth, increasing over $3.1 million compared to the prior year. Most of this growth came from service revenues which are not only recurring in nature but are also profitable. Digital Multimedia also grew in 2004 compared to 2003 as a result of both increased shipments of video-conferencing equipment and stronger integration and installation service revenues.

Gross margins slightly declined in 2004 compared to the prior year; however, again excluding the impact of Data1Source, gross margins grew in all segments of the business, particularly in wireless data where there was an increase in recurring service revenues.

Overheads, which include both SG&A as well as R&D, increased nominally in 2004 compared to the prior year. This increase occurred in the first part of 2004 prior to the distribution agreement with South West Dealer Services, by virtue of which they now assume the sales costs of selling directly to auto dealerships.

As a result of these many improvements, Numerex recorded significantly reduced operating losses in 2004 compared to 2003.

Numerex has a stronger cash position at the end of 2004 than it had a year ago. At the end of 2004 our cash balance was more than twice the cash balance compared to the end of 2003. Current assets now exceed current liabilities. In 2004, we generated cash flows from operating activities of over $1.5 million compared to an operating account deficit in 2003. In addition, our financial position was further strengthened at the end of January 2005 with the sale of a $1.5 million convertible term note to the Laurus Master Fund, Ltd. The net proceeds from the financing will be used primarily to provide additional working capital.

The following is a discussion of the consolidated financial condition and results of operations of the Company for the fiscal years ended December 31, 2004 and 2003 and 2002. This discussion should be read in conjunction with our consolidated financial statements, the related notes thereto, and other financial information included elsewhere in this report.

Critical Accounting Policies

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

General

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenue recognition, accounts receivable and allowance for doubtful accounts, inventories and the adequacy of reserves for excess and obsolete inventories, accounting for income taxes and valuation of goodwill and other intangible assets. Actual amounts could differ significantly from these estimates.

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Revenue Recognition

     We primarily sell products, recurring services (most billed on a monthly basis) and on-demand services.

     Product revenues are recognized at the time title passes to the customer, which in most cases is at the time of shipment. However, we did have one significant product shipment in 2003 where we did not recognize revenue at the passage of title. In May 2003, we shipped $583,000 of wire-line security detection equipment to a customer in Australia. This equipment has been installed at several sites based on an equipment supply agreement (the “Agreement”) with this customer. The Agreement allows the customer to generate additional revenues by providing additional services to its customers. We will share in these revenues as payment for the equipment. While this customer retains title to this equipment from acceptance (which occurred May 2003), it must meet certain obligations under the Agreement or pay amounts specified in the Agreement. Since the actual revenue that will be generated by the sale of the equipment is uncertain at this time, we are recognizing revenue on the sale of the equipment equal to the payments received from this customer from this revenue share. We also recognized cost of sales equal to the payments received from the customer and reduced the value of this asset. While we only received our first payment from this customer in September 2004, we and our customer in Australia continue to promote the new service now that the installation has been completed and tested. Currently we expect to receive at least the full value of the equipment from this revenue share, however, as more information becomes available, we will reassess the accounting treatment for the project. In May 2003, the value of the wire-line equipment was transferred from inventory to other assets.

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

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

     We do occasionally have multiple element service agreements, which involve both the supply of product and the provision of services over a multi-year arrangement. Accounting principles for agreements involving multiple elements require us to allocate earned revenue to each element based on the relative fair value of the elements. The arrangement fee for multiple-element arrangements is allocated to each element, such as design, product supply, product integration, installation, maintenance, support and warranty services, based on the relative fair values of the elements. We determine the fair value of each element in multi-element arrangements based on vendor-specific objective evidence (“VSOE”). VSOE for each element is based on the price charged when the same element is sold separately or could be purchased from an unrelated supplier. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the fair value method. Under these methods, the fair value of the undelivered element is deferred and is recognized ratably over the contract term on an as earned basis. In the case of the supply of product we maintain title to the product and transfer title at the completion of the contract term.

Accounts Receivable and Allowance for Doubtful Accounts

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

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

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

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Valuation of Goodwill and Other Intangible Assets

     We assess the impairment of goodwill and identifiable intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which could trigger an impairment review include the following:

	•	significant underperformance relative to expected historical or projected future operating results;
	•	significant changes in the manner of use of the acquired assets or the strategy for the overall business; and
	•	significant negative industry or economic trends.

     When determined that the carrying value of goodwill and other intangible assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in our current business model. Net goodwill and intangible assets amounted to $22,825,000 as of December 31, 2004.

Recent Accounting Pronouncements

     In 2002, SFAS No. 142, Goodwill and Other Intangible Assets, became effective and as a result, we ceased to amortize $10,983,000 of goodwill. On March 28, 2003 we purchased the 40% share Cingular owned in Cellemetry LLC. This gave us 100% ownership of Cellemetry LLC and increased total goodwill to $15,014,000 at December 31, 2003. We had recorded $733,000 of amortization during 2001 and would have recorded approximately $768,000 of amortization during 2002 and approximately $918,000 in 2003. In lieu of amortization, we are required to perform an annual impairment review of goodwill. Based on this initial review at January 1, 2002 and the annual review at December 31, 2002, 2003 and 2004, we did not record an impairment charge.

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

     We expect to adopt the provisions of SFAS No. 123(R) effective July 1, 2005, as required, and plan to use the modified prospective transition method for our existing stock-based compensation plans. Under the modified prospective transition method, the fair value-based accounting method will be used for all employee awards granted, modified, or settled after the adoption date. Compensation cost related to the nonvested portion of awards outstanding as of that date will be based on the grant-date fair value of those awards as calculated under the original provisions of SFAS No. 123. Under this method, it is estimated that the adoption of SFAS No. 123(R) will result in approximately $150,000 of stock-based compensation expense in the second half of 2005 related to non-vested employee options issued prior to the adoption date.

     In November 2004, the FASB released revised SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43” (“SFAS No. 151”). The new standard requires abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) to be recognized as current-period charges. It also requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The requirements of the standard will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Although we are still evaluating the impact that the adoption of SFAS No. 151 will have on our Consolidated Financial Statements, we currently do not believe it will have a material impact as we have not historically had any abnormally low levels of production, unplanned downtime, labor or material shortages.

     The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United Sates of America, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements and notes which begin on page 43 of this Annual Report on Form 10-K which contain accounting policies and other disclosures required by generally accepted accounting principles.

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Result of Operations

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

See notes to consolidated financial statements

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

     Net sales increased 14.1% to $22,993,000 for the year ended December 31, 2004 as compared to $20,157,000 for the year ended December 31, 2003. The increase in total net sales for the year ended December 31, 2004 is attributable to a 22.2% increase in total product sales and an 8.8% increase in sales of services. Most of the product and service sales increase for the year ended December 31, 2004, compared to the same period in 2003, was in Digital Multimedia and Networking and Wireless Data Communications in the amount of $3,150,000. These increases were partially offset by a decrease in Wireline Security product and service sales of $314,000.

     Cost of product sales increased 26.2% to $7,626,000 for the year ended December 31, 2004 as compared to $6,043,000 for the year ended December 31, 2003. The increase in cost of sales was primarily the result of higher product sales volume in the Wireless Data Communications and Digital Multimedia & Networking, which were partially offset by lower Wireline product sales. We also experienced an increase in the cost of our Wireless Services products during the year ended December 31, 2004 versus the same periods in 2003. We have identified alternative sources of these products that we

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believe should defray some of these increases in future periods.

     Cost of services increased 11.2% to $4,943,000 for the year ended December 31, 2004 as compared to $4,443,000 for the year ended December 31, 2003. The increase in cost of services for the twelve months ended December 31, 2004 versus the same period in 2003 was primarily the result of higher service sales volume in Wireless Data Communications and higher service sales volume in Digital Multimedia and Networking. Additionally, we received a one-time credit against network service provider costs that occurred in quarter ended June 30, 2003 that did not occur in 2004.

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

     Gross profit, as a percentage of net sales, was 43.7% for the year ended December 31, 2004 as compared to 44.8% for the year ended December 31, 2003. The total gross profit as a percentage of sales decreased for the twelve month period ended December 31, 2004 compared to the same period in 2003 because product sales were 33.2% of total sales for the year ended December 31, 2004 versus 30.0% for the year ended December 31, 2003. Since, gross profit as a percentage of sales is generally less on product sales than for service sales, the increase in product sales versus service sales decreased the total gross profit as a percentage of sales. The decreases in gross profit as a percentage of sales for the twelve months period ended December 31, 2004 versus the same period in 2003 were partially offset by a reduction of depreciation expense due to the sale of the assets relating of Data1Source.

     Selling, general, administrative and other expenses increased 4.4% to $8,743,000 for the year ended December 31, 2004 as compared to $8,371,000 for the year ended December 31, 2003. As a percentage of sales, selling, general, administrative and other expenses decreased to 38.0% for the year ended December 31, 2004 as compared to 41.5% for the year ended December 31, 2003. Selling, general, administrative and other expenses decreased as a percentage of revenue for the year primarily due to reductions in personnel in our Mobile Guardian division.

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

     Bad debt expense decreased 35.2% to $357,000 for the year ended December 31, 2004 as compared to $551,000 for the year ended December 31, 2003. Bad debt decreased during the period as a result of the implementation of more stringent credit policies and collections processes as well as an improvement in general economic conditions.

     Operating expense depreciation and amortization expense decreased 13.7% to $1,664,000 for the year ended December 31, 2004 as compared to $1,928,000 for the year ended December 31, 2003. This was due to some older assets becoming fully depreciated while we have had a limited requirement for the purchase of new equipment.

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

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

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

     More likely than not, we will not utilize the deferred tax items so we have not recorded a federal tax benefit for the year ended December 31, 2004. The $9,000 for the twelve-month period ended December 31, 2004 is related to certain state and foreign income taxes. The $92,000 in income tax expense for the twelve-month period ended December 31, 2003 is related to our operations in Australia and certain state income taxes. We recorded a net loss of $2,079,000 for the year ended December 31, 2004 compared to a net loss of $1,404,000 for the year ended December 31, 2003.

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

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

Fiscal Years Ended December 31, 2003 and December 31, 2002

     Net sales decreased 17.7% to $20,157,000 for the year ended December 31, 2003 as compared to $24,501,000 for the year ended December 31, 2002. This decrease in sales was due to a decrease in Digital Multimedia, Networking sales and in Wireless Data Communication. These decreases were partially offset by an increase in Wireless Data Communication services revenues and an increase in Wireline Security sales. As a percentage of total net sales, services revenues of the Company increased to 60.6% for the year ended December 31, 2003 which comprised of a 16.3% increase in Wireless Data Communication service revenues partially offset by decrease in Digital Multimedia and Networking services of 4.6%.

     Cost of product sales decreased 38.6% to $6,043,000 for the year ended December 31, 2003 as compared to $9,836,000 for the year ended December 31, 2002. This decrease was primarily due to the lower volume of product sales in Wireless Data Communications and Digital Multimedia and Networking.

     Cost of services increased 7.9% to $4,443,000 for the year ended December 31, 2003 as compared to $4,116,000 for the year ended December 31, 2002. This increase was primarily due to the increased service revenue volume in Wireless Data Communications.

     Cost of sales depreciation and amortization expense increased 95.7% to $642,000 for the year ended December 31, 2003 as compared to $328,000 for the year ended December 31, 2002. This increase was primarily due to the purchase of software and hardware for the Data1Source™ service line (that was sold on September 5, 2003), the capitalization of software developed internally in both 2002 and 2003 and the purchase of a license agreement in 2003 for our wireline business in Australia.

     Gross profit, as a percentage of net sales, was 44.8% for the year ended December 31, 2003 as compared to 41.7% for the year ended December 31, 2002. The reason for the increase in the gross profit for the year was primarily attributable to service revenues being a higher portion of total revenues in 2003 versus 2002. Service revenues were 60.6% of total revenues in 2003 versus 45.5% for 2002 and we generally achieve higher margin than product sales. Service revenues were also up 9.7% in total, which allowed us to make up some of the gross profit dollars lost from the decline in product sales. The sale of a gateway software license recorded in the second quarter of 2002 had a significant positive impact on margin percentage for the year ended in December 31, 2002, since this software was originally developed for Cellemetry’s internal use, there was little additional costs associated with this sale to an external customer. This added approximately 1.2% to the margin percentage for 2002. The twelve-month period ended December 31, 2003 did not include such a gateway software license sale, thus the margin did not receive such a benefit.

     Selling, general, administrative and other expenses decreased 21.6% to $8,371,000 for the year ended December 31, 2003 as compared to $10,672,000 for the year ended December 31, 2002. As a percentage of sales, selling, general, administrative and other expenses decreased to 41.5% for the year ended December 31, 2003 as compared to 43.6% for the year ended December 31, 2002. Selling, general, administrative and other expenses decreased primarily due to reductions in personnel.

     Research and development expenses decreased 17.5% to $905,000 for the year ended December 31, 2003 as compared to $1,097,000 for the year ended December 31, 2002. This was primarily the result of reductions in research and development personnel that was partially offset by lower capitalization than in the prior year. Most of the research and development was more general in 2003, as opposed to the major projects in 2002. We expense research and development costs and expect it to continue at current levels.

     Bad debt expense decreased 70.0% to $551,000 for the year ended December 31, 2003 as compared to $1,837,000 for the year ended December 31, 2002. Bad debt expense was unusually high in 2002 due to an increase in customers not being able to pay as a result of a decline in the general economic conditions in the telecommunications industry and severely curtailed access to additional sources of capital and credit facilities. This led us to tighten our credit policy beginning in the latter part of 2002. The $1,837,000 bad debt expense in 2002 included $361,000 written off for a specific customer. We accepted product in lieu of payment for the goods and services billed to the customer. The sales value of the goods and services sold to this customer totaled $1,735,000; $1,102,000 was invoiced in the forth quarter ended December 31, 2001 and the balance of $633,000 was invoiced in the first quarter of 2002. The $361,000 written off to bad debt expense represents the margin earned on the sale. The balance, $1,374,000, represented the expected net realizable value (in this case at cost) of the product repossessed and placed in inventory.

     Operating expense depreciation and amortization expense decreased 11.7% to $1,928,000 for the year ended December 31, 2003 as compared to $2,184,000 for the year ended December 31, 2002. This was due to some older assets becoming fully depreciated while we had a limited requirement for the purchase of new equipment.

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     Costs related to non-recurring acquisition activity were $1,899,000 for the year ended December 31, 2002. This write-off was the result of us reaching an impasse in the second quarter of 2002 in its negotiations with BT Group plc to acquire their RedCARE division, its security products and service business. These costs were primarily related to legal and accounting expenses incurred during diligence and negotiations.

     Interest expense (net) increased to $354,000 in 2003 compared to $199,000 for the prior year. This increase in net interest expense was primarily the result of increased interest expense on the $5,000,000 note payable incurred on March 28, 2003 to Cingular for the purchase of their interest in Cellemetry (see explanation under “Liquidity and Capital Resources”). There was also additional interest expense in the year ended December 31, 2003 versus the same period in 2002 on our revolving line of credit.

     Gain on sale of business of $1,712,000 for the year ended December 31, 2003 was due to the sale of our Data1Source mobile messaging service through an entity Data1Source LLC. The selling price was approximately $3,400,000 with $3,200,000 paid in cash at closing and $200,000 due in six months on March 15, 2004, if certain criteria are met. Currently it has not been determined if these criteria have been met. Costs associated with the transaction included the net book value of the assets sold, including software and computer hardware, and transaction costs including finders’ fees and legal costs. While the sale of Data1Source LLC did not meet the requirements to be considered a significant disposition, its sale will have a negative impact on future revenues, gross margins and cash flow because of the profitable nature of the business.

     Foreign currency gain of $56,000 for the year ended December 31, 2003 versus a loss of $13,000 was mostly the result of foreign currency gains on sales to Canadian customers due to the weakening of the U.S. dollar versus the Canadian dollar.

     Minority interest for the year ended December 31, 2003 was $0 compared to $326,000 for the year ended December 31, 2002. The principle reason for the decrease in Minority interest was the depletion of Minority Interest on the Company’s balance sheet related to a joint venture. We purchased the minority parties interest on March 28, 2003.

     Due to its net loss from operations, we did not record a federal tax provision in the years ended December 31, 2003 and 2002, respectively. The $92,000 in income tax expense recorded for 2003 relates to our operations in Australia and certain state income taxes. We are entitled to the benefits of certain net operating loss carry forwards, however, net operating loss carry forwards of approximately $2,900,000 and $8,500,000 for the years ended December 31, 2001 and 2002 respectively may not be available in future years. We have not classified our net operating loss carry forwards as an asset in our financial statements and thus a loss of net operating loss carry forwards does not impact current operating results.

     We recorded a net loss of $1,404,000 for the year ended December 31, 2003 compared to a net loss of $7,450,000 for the year ended December 31, 2002.

     Preferred stock dividend for the year ended December 31, 2003 was $0 as compared to $240,000 for the year ended December 31, 2002. This decrease was due to the conversion of the preferred stock to our common stock in December 2002.

     We recorded a net loss applicable to common shareholders of $1,404,000 for the year ended December 31, 2003 as compared to net loss applicable to common shareholders of $7,690,000 for the year ended December 31, 2002.

     Basic and diluted loss per common share decreased to $(0.13) for year ended December 31, 2003 as compared to $(0.71) for the year ended December 31, 2002.

     The weighted average and diluted shares outstanding increased to 10,934,000 for the year ended December 31, 2003 as compared to 10,766,000 for the year ended December 31, 2002. The increase in weighted average basic and diluted shares outstanding was primarily due to the conversion of preferred stock to 625,000 shares of our common stock in December 2002, the exercise of stock options, and share issued under the employee stock purchase plan. The 625,000 shares of common stock were repurchased on March 28, 2003 (see explanation under “Liquidity and Capital Resources”).

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Segment Information

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

     Net sales from Wireless Data Communications increased 15.1% to $14,600,000 for the year ended December 31, 2004 as compared to $12,687,000 for the year ended December 31, 2003. The increase in net sales for the twelve–month period ended December 31, 2004 was the result of an increase in product sales (up 22.2% from the same period last year) and an increase in service sales (up 10.7% versus the same period last year). The increase in Wireless Data Communications product sales of $1,074,000 for the year ended December 31, 2004 versus the same period in 2003 was primarily the result of increased sales of its new wireless vending machine monitoring product (VendView™) and an increase in vehicle security products and tracking services, MobileGuardian® The VendView product was only introduced in the fourth quarter of 2003. We expect VendView to continue to supplement the sales of our other wireless products. Product sales also increased due to higher demand for Uplink Security devices used for wireless communications between alarm installations and central monitoring stations. The increase in the Wireless Data Communication services was primarily due to an increase in the number of connections to our Cellemetry wireless network. These increases were achieved even though we sold our short messaging service Data1Source in September 2003. Connection increases were generated by sales of our security products as well as those generated by value added resellers who utilize the Cellemetry network to provide customer solutions. We also anticipate that VendView will continue to add additional connections in subsequent periods. We continue to focus on increasing connections to our network due to the recurring nature of service revenues.

     Net sales from Digital Multimedia and Networking increased 20.1% to $7,402,000 for the year ended December 31, 2004 as compared to $6,165,000 for the year ended December 31, 2003. The increase in revenues compared to the 2003 was due to a 29.7% increase in product revenues to $3,434,000 primarily due to increased sales of our interactive videoconferencing products (PowerPlay™) directly or indirectly (as a subcontractor) to distance-learning customers.

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Capital spending by targeted distance learning customers is largely funded by government entities and, as a result, is difficult to predict and can fluctuate significantly from period to period, however we continue to see signs of increased activity in this area. Digital Multimedia and Networking service sales increased 12.8% to $3,968,000 for the year ended December 31, 2004 over the same period in 2003. Most of this was from integration and installation services, which increased substantially compared to the same period in the prior year. Installation and integration services are primarily, either directly or indirectly, provided to large wireline and wireless telecommunication companies. Demand for these services from the wireline carriers has declined as they have reduced capital spending. Wireless carrier demand for these services can fluctuate dramatically in response to an environment of increasing customer demand for their services while at the same time they attempt to control their own capital expenditures. There was a significant increase of installation and integration services by the wireless carriers in the second and third quarter of 2004 as a result of government mandated provision of emergency 911 services by the end of this year. While service revenues have increased for the year, we cannot predict whether telecommunications customers will maintain their current level of capital expenditures.

     Net sales from Wireline Security decreased 24.1% to $991,000 for the year ended December 31, 2004 as compared to $1,305,000 for the year ended December 31, 2003. Most of the Wireline product sales in 2003 were the sales of maintenance parts to a customer in Australia with which we have an equipment supply agreement (the “Agreement”). Pursuant to the Agreement, in May 2003, we shipped $583,000 of wireline security detection equipment to the customer, in exchange for a share of the customer’s future revenues. Although, under the Agreement, the customer retains title to this equipment following its acceptance, it must meet certain obligations under the Agreement, or pay amounts specified in the Agreement. Since the actual revenue that will be generated by the sale of the equipment is uncertain at this time, we did not recognize revenue on the equipment sale as of December 31, 2004. During the twelve–month period ended December 31, 2004 there were sales of maintenance parts to the customer that were not made pursuant to the Agreement. The sale price was fixed and payable in accordance with our normal terms and conditions. Accordingly, we recognized revenues from the sales of the maintenance parts to the customer in the twelve month period ended December 31, 2004 and 2003. The customer completed installation of the wireline security detection equipment in December 2003. Currently, the customer and Numerex are promoting the new expanded service. We received our first share of revenues from the services in the third quarter of 2004. Currently, we expect to receive at least the full value of the equipment from this revenue share, however, as more information becomes available, we will reassess the accounting treatment for the project. (In May 2003, the value of the wire-line equipment was transferred from inventory to other assets.) We expect to continue to sell maintenance parts and perform services for this customer for the term of the Agreement.

Fiscal Years Ended December 31, 2003 and December 31, 2002

     Net sales from Wireless Data Communications decreased 10.7% to $12,687,000 for the year ended December 31, 2003 as compared to $14,209,000 for the year ended December 31, 2002. Wireless Data Communications product sale decreased by 35.1%, which was partially offset by an increase of service revenues of 16.3%. The decrease in product sales was primarily the result of changes made to our distribution strategy for wireless mobile telemetry product lines, which resulted in a decline in unit sales while new markets were developed during 2003. This included exiting the radio distribution market because of intense competition and slim margins as well as a revised focus with regard to mobile tracking. With regard to mobile tracking we launched our MobileGuardian product line, which provides vehicle security and tracking services, early in 2003. We continue to develop our automotive dealer distribution network for this product line and anticipate that the decline in product sales of mobile tracking units is temporary. The 16.3% increase in service revenues was primarily due to increased connections on our Cellemetry network, mainly related to security monitoring. The second quarter of 2002 net service revenues included a sale of a license of our Cellemetry gateway software to a customer in Colombia, South America for $500,000. Excluding this sale, service revenue derived from connections to Cellemetry network increased 25.6% in 2003 versus the same period in 2002. In addition there was an increase in digital subscribers utilizing our Data1Source mobile messaging service prior to being sold on September 15, 2003 (see comments on “Gain on sale of business” ).

     Net sales from Digital Multimedia and Networking decreased 34.1% to $6,165,000 for the year ended December 31, 2003 as compared to $9,354,000 for the year ended December 31, 2002. The decrease was primarily in product sales in both Digital Multimedia and Networking. The decrease in Digital Multimedia product sales was largely due to a decrease in PowerPlay purchases by distance learning customers. The decline in Network monitoring equipment sales was due to a reduction in capital spending by telecommunications customers for the year ended December 31, 2003 versus the same period in 2002. The reduction in Network monitoring equipment also translated into a decline in installation service revenues of 4.6%. While a reversal in the decline in capital spending for distance learning and telecommunications customers remains uncertain, we introduced IPContact in December of 2003. This high performance desktop videoconferencing software package is expected to supplement PowerPlay sales in 2004.

     Net sales from Wireline Security increased 39.1% to $1,305,000 for the year ended December 31, 2003 as compared to $938,000 for the year ended December 31, 2002. This increase was primarily due to an increase in product sales, which is due to additional sales of maintenance parts to a customer in Australia with which we have an equipment supply agreement (the “Agreement”). Pursuant to the Agreement, in May 2003, the Company shipped $583,000 of wireline security detection equipment to the customer, in exchange for a share of the customer’s future revenues. Although the customer retains title to this equipment from acceptance, it must meet certain obligations under the Agreement, or pay amounts specified in the

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Agreement. Since the actual revenue that will be generated by the sale of the equipment is uncertain at this time, we did not recognize revenue on the equipment sale as of December 31, 2003. The sales of maintenance parts to the customer, however, was not pursuant to the Agreement and therefore we recognized revenues from those sales in the period ended December 31, 2003 since the sales price was a fixed amount and payable upon our normal terms. Installation of the equipment was completed by December 31, 2003.

Selected Quarterly Financial Data

     The following tables detail certain unaudited financial data of Numerex for each quarter of the last two fiscal years ended December 31, 2004, and 2003, respectively.

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

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

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Selected Quarterly Financial Data (Unaudited)

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Selected Quarterly Financial Data (Unaudited)

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Liquidity and Capital Resources

     We had working capital of $1,228,000 as of December 31, 2004 compared to a working capital deficit of $455,000 at December 31, 2003. We had cash balances of $1,684,000 and $734,000, respectively, as of December 31, 2004 and December 31, 2003.

     The majority of the increase in working capital reflects the repayment of $3,500,000 in short-term debt payable to Cingular. We repaid Cingular using a portion of the net proceeds from our Company Note with Laurus, $1,637,000 of which is classified as current and $2,178,000 of which is classified as long term. This Company Note also provided additional working capital.

     Net cash provided by operating activities was $1,520,000 for the year ended December 31, 2004 as compared to $706,000 for the year ended December 31, 2003. This $814,000 improvement was due to decreased net operating by $1,095,000 to $1,631,000 in 2004 as compared to $2,726,000 for the same period in 2003.

     Net cash used in investing activities was $570,000 for the year ended December 31, 2004 as compared to a source of cash of $518,000 for the year ended December 31, 2003. The increase in cash used in investing activities as opposed to a source of cash from investing activities was primarily due to the addition of tangible and intangible assets as well as a reduction to long-term receivables. This was partially offset by additional proceeds received from the sale of Data1Source of $250,000. These proceeds were contingent on certain criteria being met within six months following the original sale. We received this payment during the quarter ended March 31, 2004 since the contingency was satisfied. The cash provided by investing activities for the year of 2003 was primarily due to the sale of Data1Source LLC. The selling price was approximately $3,400,000 with $3,200,000 paid in cash at closing and $200,000 due in six months, if certain criteria are met.

     Net cash provided by financing activities was $84,000 for the twelve months ended December 31, 2004 as compared to net cash used in financing activities of $2,701,000 for the twelve months ended December 31, 2003. The increase in cash provided by financing activities was primarily due to proceeds from the Company Note partially offset by principal payments on this note of $468,000 and principal payments on capital lease obligations of $309,000. The cash used in financing activities during the year ended December 31, 2003 was primarily due to the purchase of the treasury stock from Cingular in the amount of $975,000 and to payoff the lease payable of $605,000 for the software sold with Data1Source LLC and the regular payments on capital lease obligations. The cash usage also included the payments of preferred stock dividends and the payoff of the entire outstanding balance of $400,000 on our revolving line of credit that offset cash provided by the line of credit during the year ended December 31, 2003.

     Our business has traditionally not been capital intensive; accordingly, capital expenditures have not been material. To date, we have funded all capital expenditures from working capital, capital leases and other long-term obligations, proceeds from the public offering, from the sale of its derived channel technology in November 1999 and the proceeds from the sale of Data1Source LLC.

     While our operations provided cash during the twelve-month period ended December 31, 2004, we continue to generate operating losses. Even though we continue to launch new products and establish new distribution channels for our products and services, our longer-term success will depend upon further reductions in operating losses and further increases in positive cash flow. We paid principal and interest of approximately $468,000 on our note in the year ended December 31, 2004, and will be required to pay principal and interest of approximately $1,900,000 in the calendar year 2005. However, if our common stock price exceeds $5.02 within the appropriate time frames, we will consider using shares of common stock to repay amounts due on the Company Note and reduce cash expenditures. Laurus could also convert the principle amount of the Company Note into company stock at a price of $4.56 per share.

     In order to further enhance our liquidity position, we closed a second round of financing with the Laurus Master Fund at the end of January 2005. The financing consists of a $1.5 million Secured Convertible Term Note and is convertible into shares of Numerex common stock at a conversion price of $5.31 per share. The note bears a fixed interest rate of 8% with principal repayments beginning in July 2005.

     As a result of the transactions with the Laurus Master Fund, stockholders may experience dilution, or the equity securities may have rights, preferences or privileges senior to those of the common stockholders. In addition, as a result of issuing debt, those securities have rights, preferences and privileges senior to those of the common stock holders. If we are unable to repay the Company Note, Laurus could take action on its security interests, Laurus has the right to demand full payment of all outstanding principal and interest due under the Company Note and invoke its right to the collateral under a related security agreement.

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Contractual Obligations

Off-Balance Sheet Arrangements

     As of December 31, 2004, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC regulation S-K.

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

Effect of Inflation

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

Foreign Currency

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

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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NUMEREX CORP. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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NUMEREX CORP. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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NUMEREX CORP. AND SUBSIDIARIES