Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

Our 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 our financial statements requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

Management believes that judgments and estimates related to our critical accounting policies could materially affect its consolidated financial statements. Our most critical accounting policies, which were discussed in our Annual Report on Form 10-K for the year ended December 31, 2007, pertain to accounts receivable, inventories and income taxes. These policies continue to be our most critical accounting policies for the period covered by this report and there were no significant changes in the application of those policies during this reporting period.

Liquidity and Capital Resources

Cash and cash equivalents amounted to $10,413,000 at September 28, 2008, an increase of $412,000 over the December 31, 2007 balance. During this period, our operations provided cash of $541,000, investing activities used cash of $166,000 and financing activities provided cash of $37,000.

Cash provided by continuing operations amounted to $606,000 and resulted mainly from net earnings of $613,000, increased by net adjustments of $489,000 for the non-cash effects of depreciation, deferred income taxes and stock compensation expense and offset by a $496,000 net increase in working capital. Discontinued operations used cash of $65,000. The primary reasons for the net increase in working capital were an increase in inventory and a decrease in accrued expenses partially offset by an increase in accounts payable. The inventory increase of $353,000 is mainly necessary to support the current level of shipments and backlog and to meet customer delivery requirements. The $335,000 decrease in accrued liabilities is mainly due to a net reduction of $273,000 in the key employee bonus plan resulting from a $500,000 payment of the 2007 bonus accrual. The increase of $144,000 in accounts payable is mainly due to the timing of inventory and equipment purchases.

Capital expenditures during the nine months ended September 28, 2008 amounted to $156,000.

During the nine months ended September 28, 2008, we purchased 7,805 shares of our common stock in the open market at an average price of $4.14.

On August 7, 2008, the Company's Board of Directors approved a special one-time cash dividend in the amount of $1.50 per share payable (total amount $6,447,000) on October 17, 2008 to shareholders of record on October 6, 2008.

We believe that based on our current working capital and the expected cash flow from operations, our resources are sufficient to meet our financial needs and to fund our capital expenditures for the projected levels of business during the next twelve months.

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet financing arrangements.

Contractual Obligations

During the normal course of business, we incur certain commitments to make future payments for the purchase of inventory, equipment, and production supplies based on projected requirements. At September 28, 2008, we had outstanding purchase commitments totaling approximately $927,000, all of which are expected to be fulfilled in next 6 months.

Results of Operations for the Three and Nine Months Ended September 28, 2008 Compared to the Three and Nine Months Ended September 30, 2007

During the quarter ended September 28, 2008, net sales decreased $40,000 (1%) from the comparable quarter in 2007. This sales decrease was mainly due to sales reductions in our standard product line of $281,000 (17%) and our transducer product line of $14,000 (7%) partially offset by a $255,000 (17%) sales increase in our high precision and high reliability product lines. During the nine months ended September 28, 2008, net sales increased $10,000 from the comparable period in 2007. Sales increases in our high precision and high reliability product lines of $726,000 (24%) and $72,000 (6%), respectively, were offset by sales decreases in our standard product line of $661,000 (13%) and our transducer product line of $127,000 (19%). We continue to pursue sales of our more value-added, higher performance and higher average selling price products included in our high precision product line. Bookings for the three months ended September 28, 2008 amounted to $3,369,000 versus $3,333,000 in the 2007 quarter. During the nine months ended September 28, 2008, bookings totaled $10,245,000 compared to $10,195,000 in the same period of 2007. Our backlog amounted to $2,363,000 at September 28, 2008 versus $2,244,000 at September 30, 2007.

During the quarter ended September 28, 2008, gross profit as a percentage of sales was 40% compared to 41% in the comparable quarter in 2007. The slight decrease in gross profit is mainly due to minor increases in raw material and overhead costs as a percentage of sales. Year-to-date gross profit as a percentage of sales was 41% during both periods as a 4% increase in total raw material costs was offset by a 3% reduction in overall overhead costs.

Selling and advertising expenses increased $10,000 or 2% during the quarter ended September 28, 2008 compared to the 2007 quarter. The increase was primarily due to increased advertising expense ($15,000) and commission expense to outside sales representatives ($13,000) partially offset by a decrease in employee compensation and benefits ($22,000). Year-to-date selling and advertising expenses in 2008 were mainly equal to the 2007 amount as increased commission expense to outside sales representatives ($17,000) was partially offset by decreases in employee compensation and benefits ($6,000) and travel and entertainment ($6,000).

General and administrative expenses decreased $51,000 or 11% during the quarter ended September 28, 2008 as compared to the 2007 quarter. This expense decrease was primarily the result of decreases of $42,000 in employee compensation and benefits, $20,000 in stock based compensation expense and $12,000 in restricted stock expense partially offset by a $11,000 increase in professional fees mainly related to our decision to consider possible strategic alternatives to increase shareholder value and a $5,000 increase in travel expenses. Year-to-date general and administrative expenses decreased $109,000 or 8% from the 2007 period. The expense decrease was primarily the result of decreases of $88,000 in employee compensation and benefits, $56,000 in stock based compensation expense and $41,000 in restricted stock expense partially offset by a $51,000 increase in professional fees mainly related to our decision to consider possible strategic alternatives to increase shareholder value and a $10,000 increase in travel and entertainment expenses.

During the quarter and nine months ended September 28, 2008, research and development expenses increased $35,000 or 30% and $118,000 or 34%, respectively, over the 2007 periods primarily as a result of increased personnel expenses to support new product development.

While the average invested cash balance was approximately $900,000 and $1 million higher during the quarter and nine months ended September 28, 2008 periods, respectively, over the comparable 2007 periods, interest income decreased in the 2008 periods as a result of interest rates being approximately 2 percentage points lower during 2008.

The estimated annual combined federal and state income tax rate for 2008 is 47% compared to 26% in 2007. The 2007 estimated rate includes a reduction in the valuation allowance for deferred income taxes which amounts to approximately a 10% point reduction in the 2007 rate. The effect of this valuation adjustment was to reduce income tax expense by $33,000 and $136,000 during the quarter and nine months ended September 30, 2007, respectively. The 2008 tax rate includes a provision for state income taxes, whereas, there is no estimated state income tax provision for 2007 as we had state income tax NOL carryforwards available. The 2008 and 2007 projected rates were increased by approximately 2% points and 3% points, respectively, as a result of the effect of nondeductible stock option expense resulting from the adoption of SFAS No. 123R. The majority of the stock option expense results from incentive stock options and under SFAS No. 123R, the expense does not generate a tax deduction and related tax benefit.

For the quarter ended September 28, 2008, we reported an operating profit of $339,000 compared to an operating profit of $383,000 in comparable quarter of 2007. Interest income amounted to $55,000 in 2008, compared to $105,000 in 2007. As a result, we reported a pre-tax profit of $394,000 during the quarter ended September 28, 2008 compared to a pre-tax profit of $488,000 in the comparable 2007 quarter. For the quarter ended September 28, 2008, we reported net earnings of $197,000 versus net earnings of $343,000 in 2007.

We reported an operating profit of $974,000 during the nine months ended September 28, 2008, compared to an operating profit of $1,000,000 in comparable period of 2007. Interest income amounted to $173,000 in 2008, compared to $303,000 in 2007. As a result, we reported a pre-tax profit of $1,147,000 during the nine ended September 28, 2008 compared to a pre-tax profit $1,303,000 in comparable 2007 period. For the nine months ended September 28, 2008, we reported net earnings of $613,000 versus net earnings of $959,000 in 2007.

Forward-Looking Statements

Certain statements made herein contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Words such as "expects", "believes", "estimates", "plans" or similar expressions are intended to identify such forward-looking statements. The forward-looking statements are based on our current views and assumptions and involve risks and uncertainties that include, but not limited to: our ability to continue to achieve profitability, the current production over-capacity within the suppliers of frequency control devices, the ability to develop, market and manufacture new innovative products competitively, the fluctuations in product demand of the telecommunications industry, the ability of us and our suppliers to produce and deliver materials and products competitively, the ability to limit the amount of the negative effect on operating results caused by pricing pressure and our ability to comply with Section 404 of the Sarbanes-Oxley Act.