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

Results of Continuing Operations for the Three Months Ended September 30, 2008 and 2007

Total revenues were $2,284,000 and $1,986,000 for the three month periods ended September 30, 2008 and September 30, 2007, respectively. The $298,000 increase in revenues during the three months ended September 30, 2008 compared to the three months ended September 30, 2007 is attributable to a $294,000 increase in revenues from our Wireless Communications Solutions Division and an increase of $4,000 in revenues from our Starworks subsidiary. The 15% increase in revenue from the Wireless Communications Solutions Division is primarily attributable to an increase in new customers.

Gross profit margins were 35% for the three months ended September 30, 2008 and 31% for the three months ended September 30, 2007. The increase in the gross margin is primarily the result of lower operating costs resulting from our efforts in successfully transitioning most of our production to China through our Hong Kong subsidiary, ARCHK, as well as reducing overhead from our U.S. operations.

Selling, general and administrative expenses (SG&A) decreased by $155,000 for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. Most of the decrease is attributable to the write off of old trade payables of approximately $100,000. While bad debt expense increased $18,000 and director compensation increased $9,000 in 2008 compared to 2007, this was offset by decreases in outside services, $48,000, and group medical, $5,000. SG&A as a percent of total revenues decreased from 51% for the three months ended September 30, 2007 to 38% for the three months ended September 30, 2008, primarily due to a 15% increase in sales and a reduction in SG&A of $155,000. Salaries and wages, including commissions, remains the largest component of SG&A costs, constituting 62% and 50% of the total SG&A costs for the three months ended September 30, 2008 and September 30, 2007, respectively.

Net interest expense was $10,000 for the three months ended September 30, 2008 compared to $5,000 for the three months ended September 30, 2007, primarily related to capital lease obligations which increased $239,000 from September 30, 2007.

Other income in 2008 and 2007 represents interest income on funds invested from the sale of Winncom. The decline in interest income from 2007 to 2008 is due primarily to a decline in the interest rates from 5% in 2007 to 2.68% in 2008.

There is no provision for income taxes for the three months ended September 30, 2008 despite net income of $11,000 because of net losses in the first two quarters of 2008 offsetting that net income. There is no provision for income taxes for the three months ended September 30, 2007 due to net losses. The Company had net income of $11,000 for the three months ended September 30, 2008 as compared to a net loss of $173,000 for the three months ended September 30, 2007. The change from net loss in 2007 to net income in 2008 was primarily due to a 15% increase in revenues, an increase in gross profit, and a decrease in SG&A of $155,000, partially offset by a decrease of $141,000 in interest income.

Results of Continuing Operations for the Nine Months Ended September 30, 2008 and 2007

Total revenues were $5,905,000 and $5,656,000 for the nine month periods ended September 30, 2008 and September 30, 2007, respectively. The 4% increase in revenues during the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 is attributable our Wireless Communications Solutions Division partially offset by a decrease of $70,000 in revenues from our Starworks subsidiary. The increase in revenues in 2008 is attributable to both increased sales to existing customers and sales to new customers.

Gross profit margins were 37% and 32% for the nine months ended September 30, 2008 and September 30, 2007, respectively. The increase in gross margin is primarily the result of lower operating costs resulting from our efforts in successfully transitioning most of our production to China through our Hong Kong subsidiary, ARCHK, as well as reducing overhead from our U.S. operations.

Selling, general and administrative expenses (SG&A) decreased by $40,000 for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, primarily due to a write-off of old trade payables of approximately $100,000, and decreases in employee benefits $18,000, and in outside services of $73,000, all of which are partially by increases in salaries and wages $83,000, and bad debt expense, $55,000. SG&A as a percent of total revenues decreased from 49% for the nine months ended September 30, 2007 to 46% for the nine months ended September 30, 2008. Salaries and wages, including commissions, remains the largest component of SG&A costs, constituting 55% of the total SG&A costs for the nine months ended September 30, 2008 and 51% for the nine months ended September 30, 2007.

Net interest expense was $41,000 for the nine months ended September 30, 2008 compared to $16,000 for the nine months ended September 30, 2007, primarily related to capital lease obligations which increased $239,000 from June 30, 2007.

Other income in 2008 and 2007 represents interest income on funds invested from the sale of Winncom. The decline in interest income from 2007 to 2008 is primarily due to a decline in the interest rates from 5% in 2007 to 2.68% in 2008.

There is no provision for income taxes for the nine months ended September 30, 2008 and 2007, due to net losses.

The Company had a net loss of $292,000 for the nine months ended September 30, 2008 as compared to a net loss of $365,000 for the nine months ended September 30, 2007. The decrease in the net loss, $73,000, from 2007 to 2008, is primarily due to an increase in revenues, and an increase in gross margin, $341,000, partially offset by a reduction in interest income, $283,000.

Financial Condition

The net cash provided by operating activities was $228,000 for the nine months ended September 30, 2008 compared to net cash used in operating activities of $1,042,000 for the nine months ended September 30, 2007.

The primary reasons for the change is a $73,000 reduction in the net loss comparing 2008 to 2007, a reduction in accounts receivable, trade and inventory of $269,000, an increase in non cash expenses of $81,000 partially offset by a decrease in accounts payable and accrued expenses of $10,000. In 2007, there were substantial increases in inventory, $490,000, trade accounts receivable, $379,000, prepaid expenses, $136,000, partially offset by increases in accounts payable and accrued expense of $182,000, which were primarily due to increased sales in 2007 and an increase in open customer purchase orders which would be fulfilled by December 31, 2007

The net cash used in investing activities from was $113,000 for the nine months ended September 30, 2008 compared to $95,000 for the nine months ended September 30, 2007, primarily the result of expenditures for patents and equipment.

Net cash used in financing activities for the nine months ended September 30, 2008 was $331,000 compared to net cash provided by financing activities of $489,000 for the nine months ended September 30, 2007. This change is primarily the result of repayments on the Company's line of credit.

The Company's working capital at September 30, 2008 was $14,673,000 compared to $14,993,000 at December 31, 2007. The decrease as of September 30, 2008 is due primarily to the funding of the net loss.

On May 10, 2005, the Company entered into a $1.5 million revolving line-of-credit agreement (the "Credit Facility") with Citywide Banks. The Credit Facility has an annual maturity and is currently due May 1, 2009, with interest at 1.5% over prime (6.5% at September 30, 2008), contains covenants to maintain certain financial statement ratios, and is collateralized by essentially all of the assets of ARC and its wholly-owned subsidiary, Starworks, but excluding ARC Hong Kong. The borrowing base is calculated on a percentage of trade receivables and inventory for ARC combined. The balance outstanding on the revolving line of credit at September 30, 2008 and December 31, 2007 was $1,170,000 and $1,436,000, respectively

Effective October 31, 2006, the Company completed the sale of Winncom. In connection with the sale, we received $17,000,000 in cash on November 1, 2006. Management believes that the remaining proceeds from the sale of Winncom, current working capital and available borrowings on existing bank lines of credit will be sufficient to allow the Company to maintain its operations through December 31, 2008 and into the foreseeable future.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes "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. All statements other than statements of historical fact included in this Quarterly Report, including "Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations", regarding our financial position, business strategy, plans and objectives of our management for future operations and capital expenditures, and other matters, other than historical facts, are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements and the assumptions upon which the forward-looking statements are based are reasonable, we can give no assurance that such expectations will prove to have been correct.

Additional statements concerning important factors that could cause actual results to differ materially from our expectations were disclosed in Item 1A, "Risk Factors" on our Annual Report on Form 10-K for the year ended December 31, 2007. There have been no material changes to the Company's risk factors from those disclosed in the Company's 2007 Annual Report on Form 10-K. The words "believe", "may", "will", "when", "estimate", "continue", "anticipate", "intend", "expect" and similar expressions, as they relate to ARC, our business or our management, are intended to identify forward-looking statements. All written and oral forward-looking statements attributable to us or persons acting on our behalf subsequent to the date of this Quarterly Report are expressly qualified in their entirety by the Risk Factors set forth in our Form 10-K.