The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation, the disclosures made under "Item 1A. Risk Factors" included in Part II of this report, and in the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2007, previously filed with the SEC.

Overview

General

We design, develop, manufacture and market fixed wireless voice and broadband data products for the worldwide telecommunications market. Our product portfolio includes fixed wireless desktop 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, our products are wireless 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 offerings and expand our addressable market. In addition to the introduction of GSM and GPRS based products, we have released our initial 3G devices using High-Speed Packet Access (HSPA). We are continuing 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. We recently commenced sales of our GSM products in Mexico and entered into a distribution agreement to distribute our products in North America.

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. We changed this entity's name to Axesstel R & D Center Co., Ltd. and then subsequently to Axesstel Korea Inc. This entity continues as our operating research and development subsidiary located in Korea.

In 2004, we refocused our business to concentrate exclusively on developing, manufacturing and selling our own branded and co-branded fixed wireless products. We commenced large scale product manufacturing with Wistron NeWeb Corporation (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.

In 2004 and 2005, our revenues were derived from the sale of primarily fixed wireless telephones to the Asian market, especially India. In 2006 and 2007, we worked to expand our geographic reach to customers in developing countries in Europe, Middle East and Africa (the EMEA region) as well as Latin America. In addition, we have worked to expand our product offerings to include a portfolio of higher margin data products-wireless modems and gateways-which we sell to network operators as they upgrade their infrastructure to support broadband data applications.

We began 2008 with four key strategic goals:

1. stabilize revenues through customer and product diversity;

2. increase sales through localized sales teams;

3. expand our offerings of higher margin data products; and

4. achieve profitability.

We made substantial progress on each of these goals during the third quarter.

Third quarter revenues were $30.1 million, nearly twice the year ago quarter revenues of $15.4 million. Our revenues for the nine month period ended September 28, 2008 were $86.3 million, surpassing our total 2007 revenue of $82.4 million. We also continue to expand the diversity of our customer base. During this quarter, we won a competitive bid for our GSM phones from a large operator in Mexico. Also during the quarter we entered into an agreement to distribute our products in North America and received an initial purchase order for our MV440 EV-DO Rev. A Gateway with Wi-Fi router under that agreement.

We are continuing our investment in localized sales teams, adding additional representatives in our EMEA and Latin America regions, as well as a North America distributor. We also added a regional sales manager for our Asia region. We intend to expand our local sales team in Asia, and expect improved results from that region during 2009.

We recently completed development of products that support the Arabic language, which appears to be driving increased interest for our products in the Middle East. The launch of our GSM phone products earlier this year, led to winning a competitive bid during the quarter for a large phone order into Mexico. In August 2008, we released our EU230 Mini ExpressCard/34 wireless modem for HSPA networks. The EU230 enables mobile broadband access to advanced HSUPA networks from any device with an ExpressCard/34 slot, USB connector, or Wi-Fi capability (using an additional Smart kit), and allows speeds of up to 7.2 megabits per second (Mbps). For the year, we expect that sales of data products will account for more than 50% of our revenues.

During the quarter ended September 28, 2008, we achieved net income of $433,000. Earnings per share were $0.02 for the third quarter. For the first time in our history, we have experienced three consecutive profitable quarters. For the nine months ended September 28, 2008, net income was $1,887,765 or $0.08 for per share. This compares to a net loss of $3,979,820 or $0.17 per share for the same period last year.

Outlook

We continue to 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. We expect that we will be profitable for the year.

Revenues

Our product portfolio consists of fixed wireless products in four categories:
desktop 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 nine months ended September 28, 2008, approximately 61% of our revenues were derived from three customers, whose orders represented 30%, 21% and 10% 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 United States 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

The preparation of financial statements in conformity with United States generally accepted accounting principles, or "GAAP," requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

Management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgments become even more subjective and complex. Please see "Note 1 - Basis of Presentation" to our financial statements set forth in Item 1 of this report for a discussion regarding the accounting policies we have identified as the most important to an understanding of our current financial condition and results of operations.

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             Nine months ended             Nine months ended
($ in thousands)                    September 28, 2008            September 30, 2007             September 28, 2008            September 30, 2007
Revenues                         $ 30,051,128      100.00 %    $ 15,433,041      100.00 %     $ 86,317,041      100.00 %    $ 68,648,768      100.00 %
Cost of goods sold                 23,598,449       78.53        11,919,325       77.23         65,215,447       75.55        53,984,206       78.64

Gross margin                        6,452,679       21.47         3,513,716       22.77         21,101,594       24.45        14,664,562       21.36

Operating expenses:
Research and development            1,206,418        4.02         1,677,174       10.87          3,659,484        4.24         5,355,302        7.80
Selling, general and
administrative                      4,613,804       15.35         4,681,329       30.33         14,146,693       16.39        13,016,018       18.96

Total operating expenses            5,820,222       19.37         6,358,503       41.20         17,806,177       20.63        18,371,320       26.76

Operating income (loss)               632,457        2.10        (2,844,787 )    (18.43 )        3,295,417        3.82        (3,706,758 )     (5.40 )
Other income (expense), net          (138,452 )     (0.46 )        (158,932 )     (1.03 )       (1,346,724 )     (1.56 )        (273,062 )     (0.40 )

Profit (loss) before income
taxes                                 494,005        1.64        (3,003,719 )    (19.46 )        1,948,693        2.26        (3,979,820 )     (5.80 )
Income tax provision
(benefit)                              60,928        0.20                -           -              60,928        0.07                -           -

Net income (loss)                $    433,077        1.44 %    $ (3,003,719 )    (19.46 )%    $  1,887,765        2.19 %    $ (3,979,820 )     (5.80 )%

Three and Nine Months Ended September 28, 2008 Compared to Three and Nine Months Ended September 30, 2007

General.

We recorded revenues of $30.1 million in the three months ended September 28, 2008, nearly twice the year ago quarter revenues of $15.4 million. We recorded revenues for the nine months ended September 28, 2008 of $86.3 million, surpassing our total 2007 revenue of $82.4 million. In addition, for the first nine months of 2008, revenue from data products was $48.3 million of our total revenue, compared to $26.9 million for the same period last year, representing an 80 percent year over year increase. We posted year-to-date earnings per share of $0.08, far improved over the $0.17 loss for the same period last year.

Revenues.

For the three months ended September 28, 2008, which we refer to as Q3 2008, revenues were $30.1 million compared to $15.4 million for the three months ended September 30, 2007, which we refer to as Q3 2007, representing a 95% increase. Revenues from data products were $11.2 million for Q3 2008, compared to $9.9 million for Q3 2007. In Q3 2008, our revenues were derived principally from three customers, which three customers individually represented 39%, 11%, and 11% of revenues. In Q3 2007, our revenues were derived principally from two customers, which two customers individually represented 37% and 20% of revenues.

For the nine months ended September 28, 2008, revenues were $86.3 million compared to $68.6 million for the nine months ended September 30, 2007, representing a 26% increase. Revenues from data products were $48.3 million for the nine months ended September 28, 2008, compared to $26.9 million for nine months ended September 30, 2007. In the first nine months of 2008, our revenues were derived principally from three customers, which individually represented 30%, 21% and 10% of revenues. In the first nine months of 2007, our revenues were derived principally from three customers, which three customers individually represented 37%, 19% and 19% of revenues.

Our objective is to expand our product portfolio for fixed wireless phone and 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 Q3 2008, cost of goods sold was $23.6 million compared to $11.9 million for Q3 2007, an increase of 98%. The increase to cost of goods sold is largely attributable to the increase in revenues for the comparative periods. For the nine months ended September 28, 2008, cost of goods sold was $65.2 million compared to $54.0 million for the nine months ended September 30, 2007, an increase of 21%. This increase to cost of goods sold is largely attributable to the 26% increase in revenues for the comparative periods offset by a 5% decrease to cost of goods sold 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 alternative 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 Q3 2008, gross margin as a percentage of revenues was 21% compared to 23% for Q3 2007. For the nine months ended September 28, 2008, gross margin as a percentage of revenues was 24% compared to 21% for the nine months ended September 30, 2007. We typically experience higher margins from our data products than from our phone products. Although our Q3 2008 phone revenues as a percent of total revenues had a higher concentration when compared to Q3 2007, data products on a yearly basis have accounted for an increasing percentage of our sales in 2008. 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 for the foreseeable future. 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 Q3 2008, research and development expense was $1.2 million, compared to $1.7 million for Q3 2007, a decrease of 28%. This decrease was mainly attributable to decreases in the internal development of our phone products and decreased expense in outside certification test fees and outside development of prototype products in Q3 2008. As a percentage of revenues, research and development for Q3 2008 decreased to 4% from 11% in Q3 2007. For the nine months ended September 28, 2008, research and development was $3.7 million, compared to $5.4 million for the nine months ended September 30, 2007, a decrease of 32%. As a percentage of revenues, research and development for the first nine months of 2008 were 4% compared to 8% in the first nine months of 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 to outsource most of the future development for these products. We expect our expenditures to increase for the development of our data products in the remainder of 2008, but be offset by cost reductions in the development of our phone products. Accordingly, we expect our research and development expenditures to remain stable for the balance of 2008.

Selling, General and Administrative.

For Q3 2008, selling, general and administration expenses were $4.6 million, compared to $4.7 million for Q3 2007, a decrease of 1%. As a percentage of revenue, selling, general and administration expenses for Q3 2008 decreased to 15% from 30% in Q3 2007. For the nine months ended September 28, 2008, selling, general and administration expenses were $14.1 million, compared to $13.0 million for the nine months ended September 30, 2007, an increase of 9%. This increase was mainly attributable to increased selling

expense from the higher revenues experienced in the comparable periods and increased fees from collection efforts in Latin America. As a percentage of revenue, selling, general and administration expenses for the first nine months of 2008 were 16% compared to 19% in the first nine months of 2007.

As our revenues increase, we expect our selling, general and administrative expenses to increase, but decrease as a percentage of revenues.

Other Income (Expense).

For Q3 2008, other income (expense) was a net expense of approximately $138,000 compared to a net expense of approximately $159,000 for Q3 2007. The majority of Q3 2008's net expense was incurred for interest expense related to various loan transactions entered in 2008. For the nine months ended September 28, 2008, other income (expense) was a net expense of $1.3 million compared to a net expense of approximately $273,000 for the nine months ended September 30, 2007. The majority of 2008's net expense was incurred for interest expense related to various loan transactions entered in 2008; and approximately $319,000 of interest paid to our principal contract manufacturer to settle late payment fees.

Provision for Income Taxes.

For the nine months ended September 28, 2008 income tax provisions were approximately $61,000 for estimated Alternative Minimum Tax (AMT) payable for 2008 income. In 2007, no income tax provisions were recorded. We have not been recording tax benefits against net losses and have established a full reserve against all deferred tax assets. In addition, according to Internal Revenue Code regulations, we were deemed in October 2004 and March 2005 to have experienced two 50% changes in ownership during the prior three years. These changes in ownership limit the use of our net operating loss carry-forwards to a specific amount each year. We may in the future experience further ownership change events, which would similarly limit use of any net operating loss carry-forwards that might otherwise be available subsequent to the date of the most recent 50% ownership changes.

Net Income (Loss).

For Q3 2008, net income was approximately $433,000 compared to net loss of $3.0 million for Q3 2007. For the nine months ended September 28, 2008, net income was $1.9 million compared to a net loss of $4.0 million for the nine months ended September 30, 2007.

Liquidity and Capital Resources

At September 28, 2008, we had cash and cash equivalents of $3.0 million and accounts receivable of $31.1 million. At September 28, 2008, we had working capital of approximately $155,000.

For the nine months ended September 28, 2008, our operations provided approximately $398,000 of cash, which was mainly derived from the net income of approximately $1.9 million increased by non-cash compensation, depreciation and amortization and increases in accounts payable and accrued expense, offset by significant increases in accounts receivable commensurate with our increasing sales.

Investment activities provided approximately $138,000 of cash during the nine months ended September 28, 2008, primarily as a result of payments made on a note receivable offset by expenditures for software and equipment. As of September 28, 2008, we did not have any significant commitments for capital expenditures.

During the nine months ended September 28, 2008, cash provided by financing activities amounted to $2.4 million, which was the net proceeds from bank financing. These financings are due upon receipt of the account receivable that secures the respective borrowing, and bear interest at Bank Prime plus 2%.

From 2004 through 2007, we experienced losses from operations. The proceeds from our 2005 secondary public offering provided the working capital necessary to fund the operating losses through 2007. We also structured our supply and customer relationships to minimize our working capital requirements. Under the terms of our manufacturing agreements, our contract manufacturers acquire components and manufacture finished goods to our specifications, minimizing our investment in inventory. Where possible, we require our customers to provide a letter of credit to secure their purchase orders. We then finance those accounts receivables through commercial banking arrangements.

Commencing in 2007 our sales shifted from predominantly Asian countries, where commercial practices use letters of credit, to Latin American countries, where standard commercial terms are open accounts. Our largest account in 2007 was a customer in Venezuela, which does not provide letters of credit and for which we could not obtain credit insurance or secure accounts receivable financing. Accordingly, we could not borrow against our accounts receivable from this customer to pay our contract manufacturer for costs of goods sold. This problem was compounded when the Venezuelan government's exchange control arm, CADIVI, substantially delayed payments in 2007. The delay in payment caused us to fall behind in payments to our contract manufacturer, who imposed shipment delays and stopped ordering long lead time parts in the fourth quarter of 2007. We have subsequently collected the delayed payments from 2007, made payments to the contract manufacturer, and resumed normal production levels. In January 2008, we . . .