Forward-Looking Statements

Statements in the following discussion and throughout this report that are not historical in nature are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify forward-looking statements by the use of words such as the words "expect," "anticipate," "estimate," "may," "will," "should," "intend," "believe," and similar expressions. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond our control. These factors include, without limitation, those described below under the heading "Risk Factors." We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.

The following discussion should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this report.

Overview

We design, develop, market and manufacture fixed wireless voice and broadband data products for the worldwide telecommunications market. Our product portfolio includes fixed wireless desktop phones, public call office (PCO) phones, voice/data terminals, broadband modems, and 3G gateway devices for access to voice calling and high-speed data services.

Our products have similar functionality to phones and modems that use the traditional landline telecommunications network; however, they are wireless devices and can be substituted for wired phones and modems. Most of our products sold to date have been based on CDMA (3G Code Division Multiple Access) technology developed by Qualcomm Incorporated. We are increasing our focus on new products based on GSM (Global System for Mobile Communications) and GPRS (General Packet Radio Service) technologies to enhance our product offering and expand our market. In addition to the introduction of GSM and GPRS based products, we have increased our focus on the development of data products, including broadband modems and 3G gateway devices, which represent an increasing percentage of our overall revenues

We currently sell our products to telecommunications operators in developing countries where large segments of the population do not have telephone or internet service. To date our largest markets have been in Asia, Europe Middle East and Africa (EMEA), and Latin America, with our largest customers located in India and Venezuela.

History

We were founded in July 2000. In late 2002 we began performing original design manufacturing and product engineering and development for major international telecommunications companies. In December 2002, we acquired Entatel, Ltd., a South Korean company, in order to meet the engineering requirements of these projects, and changed its name to Axesstel R & D Center Co., Ltd. This name was later changed to Axesstel Korea Inc. and continues as our operating research and development subsidiary located in Korea.

Our primary business in 2003 was focused on contract research and development and we engaged in only limited manufacturing and product sales on behalf of third parties. In late 2003 and early 2004, we believed that changing market factors would result in increasing demand for fixed wireless phones. In response, we refocused our business to concentrate exclusively on developing, manufacturing and selling our own branded and co-branded fixed wireless products.

In 2004, we commenced large scale product manufacturing with Wistron NeWeb Corporation, or WNC. WNC presently has two high speed production lines in mainland China dedicated to high volume production, and the ability to add additional lines to match future capacity needs. We continue to work with WNC in sourcing components for our products in an effort to reduce costs, ensure the quality of the components we purchase and mitigate against the risk that components are not available at the time we need the components to fulfill our customer orders. We believe WNC provides flexibility and scalability to our manufacturing operations.

Recent Developments

We began 2008 with four key strategic goals:

• stabilize revenues through customer and product diversity;

• increase sales through localized sales teams,

• expand our offerings of higher margin data products; and

• achieve profitability.

As of March 30, 2008, we have a total of 68 customers in 57 countries and we expect continued expansion of our customer base in future periods. In mid February at the GSM Mobile World Congress, we introduced five newly redesigned GSM products, including dual band and quad band phones and terminals, which are available for purchase. These include basic models that deliver reliable, low cost solutions; cordless models which appeal to the growing number of consumers looking for a more convenient product; and our quad-band models which enable operators to buy one solution and use it in all of their GSM markets or redirect inventory as appropriate.

Our efforts to localize sales in EMEA produced significant results with record revenues in the first quarter of 2008 of $8.5 million. We continued to experience strong sales in Latin America with revenues for that region of $15.9 million in the first three months of 2008. We are in the process of expanding a localized sales team in Asia, and expect improved results from this region in the second half of 2008. In addition, we experienced continued growth in our revenue from data products.

Revenues from data products increased from $5.1 million in the three months ended April 1, 2007 to a record $13.6 million in the three months ended March 30, 2008. As a percentage of revenues, we expect data products to represent approximately 60% in 2008 compared to 42% in 2007.

We believe the operating challenges we experienced in 2007, specifically with the delayed Venezuela collections creating a working capital shortfall which impacted our ability to timely pay our principal manufacturer, WNC, are behind us. We continue to experience significant collection activity and have resumed normal production levels. We completed the first quarter of 2008 with revenues of $24.6 million and net income of approximately $257,000.

Outlook

As we enter 2008, we will continue our focus on our core strategic goals:

Customer diversity is critical to mitigating the risk of quarter to quarter volatility. We will continue to diversify our customer base and add new accounts. The addition of our GSM product line is opening new markets, particularly in Central and South America, where operators are predominantly on the GSM standard. We are also looking to supply our current customers with higher end data products as they roll out upgrades to their network infrastructure.

Our sales strategy concentrating on localized sales teams has been successful in EMEA and we expect to continue that strategy. We are looking at establishing additional sales offices in that region. We have also placed a regional sales manager in Asia in an effort to increase sales in that region.

We expect to launch over a dozen new products in 2008. In addition to our GSM phones launched in February 2008, we will be introducing advanced EVDO hi-speed data phones. We are expanding our broadband data lines to include EDGE, HSDPA and HSUPA modems, which we anticipate will be available in the second half of 2008.

We are addressing operating profitability in 2008 from both the revenue and expense side. On the revenue side, based on current backlog and anticipated growth in the wireless markets we serve, we expect revenues to return to, and exceed the levels reached in 2005 and 2006. The migration to higher margin data products is expected to accelerate, thereby increasing our gross margin. Finally at the end of 2007 we implemented a number of measures to reduce our operating expenses. We transitioned research and development of our lower margin phones to an outsourced design and manufacturing model. That is allowing us to reduce our internal engineering and support resources as well as lease expenses. We expect these changes to reduce operating expenses in 2008 by approximately $3 million.

Increasing our working capital will also be a key goal for 2008. The operating losses we experienced from 2004 to 2007 have reduced our working capital position. At the outset of 2008, we entered into a distributor agreement that will enable us to secure financing on our orders to Venezuela. We have also established new working capital lines of credit with Wells Fargo that will allow us to borrow against backed letters of credit and credit insured accounts receivable. We expect these facilities, along with the reduction in operating expenses described above, to provide sufficient working capital to continue operations in accordance with our current business plan. However, we do not have sufficient working capital resources to offset extraordinary expenses or a substantial decline in operating income. For that reason we do anticipate seeking additional debt or equity financing during 2008. See "Liquidity and Capital Resources" below.

Overall, we expect revenue in 2008 to exceed $100 million, up from $82.4 million in 2007. We expect data products will contribute more than $60 million in revenues in 2008, up from $34.9 million in 2007, and will exceed phone revenues for the first time on an annualized basis. We continue to strive towards profitability based on an increase in revenues, adjustment in product mix, and streamlining of operating expenses that was implemented at the end of 2007. Although we realize profitability is highly dependent on product and customer mix, and anticipate we may not be profitable every quarter, we are committed to achieving profitability for the year.

Revenues

Our product portfolio consists of fixed wireless products in five categories:
desktop phones, PCO phones, voice/data terminals, broadband modems, and 3G gateway devices. We believe that an increasing portion of our anticipated growth will come from sales of our next generation data products, such as our fixed wireless broadband modem and 3G gateway devices, into developing and industrialized countries as demand grows for broadband data services.

We sell our products to telecommunications service providers on a fixed price-per-unit basis. Our customers in turn resell our products to end users as part of the end users' service activation. For the three months ended March 30, 2008, approximately 58% of our revenues were derived from two customers, whose orders represented 33% and 25% of revenues, respectively.

All of our sales are based on purchase orders or other short-term arrangements. We negotiate the pricing of our products based on the quantity and the length of the time for which deliveries are to be made. For orders involving a significant number of units, or which involve deliveries over a long period of time, we typically receive rolling forecasts or a predetermined quantity for a fixed period of time from our customers, which in turn allows us to forecast internal volume and component requirements for manufacturing. In order to minimize our collection risks, we attempt to sell to our international customers under guaranteed letters of credit or open terms secured by credit insurance. At times, we extend credit based on evaluation of the customer's financial condition. To date, substantially all of our product sales have been to customers outside of the United States. In order to minimize foreign exchange risk, we have made all sales to date in U.S. dollars.

We supply our principal manufacturer WNC with rolling forecasts. In addition, we receive forecasts from our customers, and in turn, place orders with WNC for near-term production. Based upon our purchase orders and forecasts, WNC procures components in amounts intended to meet the near-term demand. Following receipt of our orders, WNC generally manufactures our products and delivers the finished goods to the customer's freight forwarder in China, transferring title at that point. We generally recognize revenue upon the transfer of title to the freight forwarder.

Cost of Goods Sold

Cost of goods sold consists of direct materials, manufacturing expense, freight expense, warranty expense, and royalty fees. Pricing for fixed wireless products has declined since we've entered into this business. We believe our ability to increase sales of our products and achieve profitability will depend in part on our ability to reduce cost of goods sold. We continue our cost reduction efforts through the following initiatives: increasing our purchasing power through increased volume; ordering standardized parts used across our product lines; looking for additional manufacturing partners in low cost regions; reengineering our products with new technologies and expertise to decrease the number of components; relying more on application and software development than hardware; and improving our manufacturing processes.

Research and Development

Research and development expenses consist primarily of salaries and related expenses for engineering personnel, facility expenses, employee travel, fees for outside service providers, test fees and depreciation of developmental test equipment. The majority of this activity is for software, mechanical and hardware product development. We are increasingly focusing our research and development on data products, seeking areas where product differentiation will provide value to our customers and provide protection on pricing. We expense research and development costs as they are incurred.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of salaries and related expenses for executive and operational management, finance, human resources, information technology, sales and marketing, program management and administrative personnel. Other costs include facility expenses, employee travel, bank and financing fees, insurance, legal expense, commissions and collection fees, accounting, professional service providers, board of director expense, stockholder relations, amortization of intangible assets, and depreciation expense of software and other fixed assets.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. In consultation with our board of directors, we have identified the following accounting policies that we believe are key to an understanding of our financial statements. These accounting policies require management's subjective judgments.

Revenue Recognition and Warranty Reserve

Revenues from product sales are recognized when the risks of ownership and title are transferred to the customer as specified in the respective sales agreements and other revenue recognition criterion as prescribed by Staff Accounting Bulletin, or SAB, No. 101 "Revenue Recognition in Financial Statements," as amended by SAB No. 104. Generally, the risks of ownership and title pass when product is received by the customer's freight forwarder. If and when products are returned, we normally exchange them or provide credits to the customer. The returned products in turn are shipped back to the third party manufacturer and we are issued a credit or exchange from the manufacturer. At March 30, 2008, management concluded that a sales return allowance of $1,040,000 was needed.

On certain contracts, we provide warranty replacement units ranging from 1-2 percent of total units shipped. The cost related to the warranty replacement unit is included in the cost of goods sold and recorded when revenue is recognized. On other contracts, we do not provide warranty replacement units. In these cases, we provide third party service centers to the customer for any warranty performance. Costs for these service centers are recorded to cost of goods sold. During the three months ended March 30, 2008, we did not record significant warranty costs and, as of March 30, 2008, we established a warranty reserve of $460,000 to cover additional service costs over the life of the warranty. All products are tested by quality inspection prior to shipment and we have historically experienced a minimum level of defective units.

Sales Returns and Accounts Receivable Allowance

We extend credit based on evaluation of the customer's financial condition and payment history. At times, obligations for our foreign customers are secured either by letters of credit or by credit insurance. Significant management judgment is required to determine the allowance for sales returns and doubtful accounts. Management determines the adequacy of the allowance based on historical write-off percentages and information collected from individual customers. Accounts receivable are charged off against the allowance when collectibility is determined to be permanently impaired. At March 30, 2008, management determined that an allowance of $1,040,000 was necessary.

Capitalized Software Costs

Software development costs for products sold, which consist primarily of firmware embedded in our products, incurred after technological feasibility is established are capitalized in accordance with SFAS No. 86 "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed." Amortization of these costs begins when the products are ready for sale. SFAS No. 86 and other authoritative literature, interpretations and industry practices prescribe that technological feasibility is reached when both the software and other components of the product's research and development activities are completed. We begin capitalizing software development costs upon attainment of both requirements. Our engineering processes demonstrate that the research and development activities of our products are completed simultaneously with the commencement of the manufacturing process. As such, we expense all research and development activities performed up to the commencement of the manufacturing process.

Valuation of Long-Lived Assets, Intangible Assets and Goodwill

We assess the impairment of long-lived assets, intangible assets and goodwill at least annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include:

• significant underperformance relative to expected historical or projected future operating results;

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

• significant negative industry or economic trends.

When we determine that the carrying value of intangibles, long-lived assets and goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. During the year ended December 31, 2007, we determined that our goodwill was impaired and wrote off the carrying value of approximately $386,000. During the three months ended March 30, 2008, management concluded that no long-lived assets were impaired.

Our intangible assets consist mainly of our license fee agreements, which we amortize over a three to ten year life.

Deferred Tax Assets

We periodically and at least annually evaluate the realizability of the net deferred tax assets, taking into consideration prior earnings history, actual revenue and operations, projected operating results and the reversal of temporary differences.

Stock-Based Compensation

We have adopted SFAS No. 123R (revised 2004), Share-Based Payment, (SFAS 123R) which establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on accounting for transactions where an entity obtains employee services in share-based payment transactions. SFAS 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period. SFAS 123R supersedes our previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and SFAS 123, Accounting for Stock Based Compensation, for periods beginning January 1, 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123R. We have applied the provisions of SAB 107 in our adoption of SFAS 123R.

Quarterly Results of Operations

The following table sets forth, for the periods indicated, the consolidated
statements of operations data (in thousands) and the percentages of total
revenues thereto.



                                         Three months ended          Three months ended
 ($ in thousands)                          March 30, 2008              April 1, 2007
 Revenues                              $    24,637     100.00 %    $    25,189     100.00 %
 Cost of goods sold                         18,035      73.20 %         20,618      81.85 %

 Gross margin                                6,602      26.80 %          4,571      18.15 %

 Operating expenses:
 Research and development                    1,101       4.47 %          1,892       7.51 %
 Selling, general and administrative         4,706      19.10 %          3,894      15.46 %

 Total operating expenses                    5,807      23.57 %          5,786      22.97 %

 Operating income (loss)                       795       3.23 %         (1,215 )    (4.82 )%
 Other income (expense), net                  (538 )    (2.19 )%           (34 )    (0.14 )%

 Loss before income taxes                      257       1.04 %         (1,249 )    (4.96 )%
 Income tax provision (benefit)                 -          -  %             -          -  %

 Net loss                              $       257       1.04 %    $    (1,249 )    (4.96 )%

Comparison of the Three Months Ended March 30, 2008 to the Three Months Ended April 1, 2007

General.

We recorded revenues of $24.6 million in the three months ended March 30, 2008 and recorded net income of approximately $257,000. We established record revenue from our data products of $13.6 million which led to record gross margin as a percentage of revenue of 27%. Regionally, we experienced strong revenue from Latin America of $15.9 million, record revenue from EMEA of $8.5 million, and weak revenue from Asia due to reduced phone business from this region and delays on the rollout of high speed data networks. We expect continued strength from the Latin America and EMEA regions in 2008, and expect Asia to improve in the second half of 2008.

Revenues.

For the three months ended March 30, 2008, which we refer to as Q1 2008, revenues were $24.6 million compared to $25.2 million for the three months ended April 1, 2007, which we refer to as Q1 2007, representing a 2% decrease. Revenues from data products were $13.6 million for Q1 2008, compared to $5.1 million for Q1 2007. In Q1 2008, our revenues were derived principally from two customers, which two customers individually represented 33% and 25% of revenues. In Q1 2007, our revenues were derived principally from two customers, which two customers individually represented 43% and 26% of revenues.

Our objective is to expand our product portfolio for broadband modem products in 2008, as well as to expand our customer base to reach new customers and new regions. We continue to expect that most of our sales will be to foreign customers or for products to be used in foreign countries. As we grow, we expect to become less dependent on a limited concentration of customers.

Cost of Goods Sold.

For Q1 2008, cost of goods sold was $18.0 million compared to $20.6 million for Q1 2007, a decrease of 13%. This decrease to cost of goods sold is largely attributable to the favorable product mix of data product revenue over the comparative periods. Our cost of materials declined on a per unit basis in 2008 as we were able to re-engineer our products to take advantage of cost efficient alternate parts, and reduce prices with our suppliers. In 2007 and continuing into 2008, most of our products were manufactured by one vendor.

We continue to work toward reduced manufacturing costs on a unit basis. We anticipate we will be able to further decrease unit cost as our purchase volume increases. We are also evaluating additional manufacturing vendors and other vendors to produce specific hardware and other components used in the manufacturing process in an effort to further reduce cost of goods sold.

Gross Margin.

For Q1 2008, gross margin as a percentage of revenues was a record 27% compared to 18% for Q1 2007. The gross margin percentage increase was mainly the result of favorable product mix from our data product revenue during the comparative periods, as we typically experience higher margins from our data products than from our phone products. We additionally experienced favorable regional mix from our revenue, as we typically experience higher margins from our Latin America and EMEA regions as compared to our Asia region.

We expect demand for our data products to remain strong in 2008, and expect the annual gross margins as a percentage of revenue to be in the low twenties. However, margins may fluctuate on an individual quarterly basis due to customer, regional, and product mix, as well as other factors.

Research and Development.

For Q1 2008, research and development was $1.1 million, compared to $1.9 million for Q1 2007, a decrease of 42%. This decrease was mainly attributable to decreases in the development of our phone products and decreased expense in outside certification test fees and outside development of prototype products in Q1 2008. As a percentage of revenues, research and development for Q1 2008 decreased to 4% from 8% in Q1 2007.

We are presently spending much of our research and development funds on the development of our next generation data products. In addition, significant modifications to current products are required for each customer and each geographical location where the end user is located. As we continue the development focus for our data products, we will enact cost reduction programs to lower the cost in the development of our phone products, including a strategy . . .