The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Form 10-Q, as well as the Company's 2007 Annual Report, including Management's Discussion and Analysis of Financial Condition and Results of Operations, on Form 10-K filed with the Securities and Exchange Commission. The 10-K provides a more thorough discussion of the Company's products and services, industry outlook, and business trends.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2007

Our international operations include the impact from foreign currency translation in the quarter. On average, the Dollar was weaker in the third quarter when compared to 2007. However, this trend began to reverse late in the quarter and has continued after quarter-end. The result of a strengthening Dollar as it relates to the consolidated Company would translate Euro and Pound Sterling sales and related expenses at proportionally lower U.S. Dollar equivalents in its financials.

REVENUE

Revenue for the third quarter of 2008 was $11.5 million, an increase of 1% compared to the third quarter of 2007. Information regarding the Company's U.S. and international based operations is included in the following table. For the purposes of this table and the following discussion, revenue classified as U.S. based includes Canada, Mexico and South America.

                                            2008                                         2007
(Dollars in thousands)      U.S.        International       Total        U.S.        International       Total
Revenue                   $   3,778    $         7,763    $  11,541    $   4,548    $         6,916    $  11,464
Less: Cost of Goods
Sold                          1,657              2,675        4,332        1,759              2,682        4,441
Gross Profit              $   2,121    $         5,088    $   7,209    $   2,789    $         4,234    $   7,023
Less: Operating
Expenses                      2,634              3,696        6,330        2,421              3,071        5,492
(Loss) Income from
Operations                $    (513 )  $         1,392    $     879    $     368    $         1,163    $   1,531

Third quarter 2008 revenue increased in our international operations which represented 67% of the Company's total revenue. Our international based operations had income from operations of $1.4 million for the third quarter of 2008 compared to income from operations of $1.2 million in 2007. International revenue growth includes the positive impact from foreign currency exchange rates of approximately $670 thousand in the third quarter of 2008 as the U.S. Dollar continued to weaken against the Euro prior to quarter-end. While the Company had an overall increase of 1% in 2008 revenue when compared to 2007, after considering the impact of foreign exchange rates, revenue would have declined 5%.

Our U.S. based sales declined $770 thousand or 17% in the current quarter. The decline is from a reduction of $932 thousand in fiber optic based products and a decline of $173 thousand in the Company's Electro-Optics business. These decreases were somewhat offset by an increase in Internet Protocol (IP) Video product revenue of $334 thousand. The U.S. business had a loss from operations of $513 thousand in the third quarter of 2008 compared to a profit of $368 thousand in 2007. The decline in U.S. profitability is from the revenue decline combined with a reduction in the gross profit margin from 61% to 56%, and a $213 thousand increase in costs. The decline in our U.S. gross profit margin was caused by excess capacity in our Germantown, Maryland manufacturing facility due to lower than expected sales volume in the third quarter. We expect the manufacturing utilization rate to improve if sales levels rise.

Information regarding the Company's revenue by product category is included in the following table:

                          Three Months Ending     Three Months Ending
(Dollars in thousands)    September 30, 2008      September 30, 2007
Fiber Optic              $               7,933   $               9,206
IP Video                                 3,489                   1,966
Electro Optics                             119                     292

Total Revenue            $              11,541   $              11,464

In the third quarter of 2008, sales of Fiber Optic products were down 14% to $7.9 million while IP Video revenue increased 78% to $3.5 million. The Company has planned for a market shift toward IP Video products as it invested in the development of IP Video products in the current and prior periods. The increase in IP Video revenue of $1.5 million in the third quarter of 2008 offset the $1.3 million decline in Fiber Optic sales during the period. The IP Video revenue improvement is due to a $1.2 million increase in our international business and a $334 thousand increase in the U.S. IP sales. The Company continues introducing new IP products in 2008 to address this market shift.

GROSS PROFIT

Consolidated gross profit was $7.2 million or 62% of revenues for the quarter ended September 30, 2008, compared to $7.0 million or 61% of revenues in 2007. The gross profit was relatively stable with an increase of $200 thousand or 3% primarily from increased revenue and a higher margin in our international business. The gross profit margins in our domestic and international businesses were 56% and 66%, respectively, in the third quarter 2008. The U.S. gross profit margin declined in the current quarter from excess capacity in the U.S. manufacturing facility due to lower than expected sales volume in the quarter. Additional revenue in international operations results in relatively lower costs of goods sold on a per unit basis as the employee compensation and benefits for personnel in direct labor positions and other fixed costs are spread over a larger revenue base in our European manufacturing facility.

OPERATING EXPENSE

Consolidated operating expenses were $6.3 million for the quarter ended September 30, 2008, compared to $5.5 million in 2007. The overall increase of $838 thousand included $213 thousand in our U.S. operations and $625 thousand in our international based business. The increase in operating expense is primarily due to:

† A $278 thousand increase from changes in foreign exchange rates as the U.S. Dollar weakened against the Euro prior to September 30, 2008.

† $271 thousand of additional engineering costs, excluding foreign exchange, as we continued our IP product development effort.

† $161 thousand of additional sales and marketing costs, excluding foreign exchange, primarily from participation in additional trade shows during the third quarter of 2008.

OTHER INCOME (EXPENSE), NET

Other income (expense), net improved to $12 thousand of income in the current quarter compared to an expense of $(315) thousand in the third quarter of 2007. The improvement is the result of several factors, including a decline in the overall interest rate environment, reduced debt levels from payments on our bank senior term loan and line of credit which resulted in $87 thousand savings, and foreign exchange gains in our European subsidiaries of approximately $181 thousand from their Dollar based transactions. Additionally the Company had a net $62 thousand foreign exchange gain resulting from the translation of the Euro-based note that resides on the parent company's books and the Dollar based bank note payable and intercompany note payable that reside on the foreign holding company's books.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008, COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2007

REVENUE

Revenue for the nine months ended September 30, 2008, increased 13% to $33.4 million compared to revenue of $29.5 million reported in 2007. Information regarding the Company's U.S. and international based operations is included in the following table:

                                            2008                                         2007
(Dollars in thousands)      U.S.        International       Total        U.S.        International       Total
Revenue                   $  10,754    $        22,660    $  33,414    $  11,169    $        18,321    $  29,490
Less: Cost of Goods
Sold                          4,657              8,419       13,076        4,662              7,344       12,006
Gross Profit              $   6,097    $        14,241    $  20,338    $   6,507    $        10,977    $  17,484
Less: Operating
Expenses                      8,038             11,021       19,059        6,810              9,220       16,030
(Loss) Income from
Operations                $  (1,941 )  $         3,220    $   1,279    $    (303 )  $         1,757    $   1,454

Revenue for the first nine months of 2008 was strong in our international operations. The international business represents 68% of the Company's total revenue in 2008. Our international operations had income from operations of $3.2 million for the nine months ended September 30, 2008, compared to $1.8 million in 2007. International revenue growth includes the positive impact from foreign currency exchange rates of approximately $2.4 million in the first nine months of 2008 as the U.S. Dollar weakened against the Euro. The Company had an overall increase of 13% in 2008 revenue when compared to 2007, however, after considering the impact of foreign exchange rates this increase would have been 5%.

Our U.S. based sales decreased $415 thousand and 4% during the first nine months of 2008. The decrease results from declining sales in the Fiber Optic and Electro Optics product lines totaling $1.8 million, somewhat offset by improved sales in the Company's line of IP Video products of $1.4 million. The U.S. business had a loss from operations of $1.9 million in the first nine months of 2008 compared to a loss of $303 thousand in 2007. The decline in U.S. profitability is due to the reduction in revenue combined with an increase in operating costs.

Information regarding the Company's revenue by product category is included in the following table:

                          Nine Months Ending     Nine Months Ending
(Dollars in thousands)    September 30, 2008     September 30, 2007
Fiber Optic              $             22,539   $             22,225
IP Video                               10,407                  6,324
Electro Optics                            468                    941

Total Revenue            $             33,414   $             29,490

Sales of Fiber Optic products in the nine months of 2008 were $22.5 million representing a 1% increase from 2007. The Company continues to plan for a market shift away from Fiber Optic and toward IP Video products as it develops new IP Video products. As a result, the increase in IP Video revenue was 65% or $4.1 million in the first nine months of 2008.

GROSS PROFIT

Consolidated gross profit was $20.3 million or 61% of revenues for the nine months ended September 30, 2008, compared to $17.5 million or 59% of revenues in 2007. The increase was $2.8 million or 16% and is primarily due to the following:

† An increase of 8% or $1.4 million in revenue excluding the impact of foreign exchange. Additional revenue in our international operations resulted in relatively lower costs of goods sold on a per unit basis as the employee compensation and benefits for personnel in direct labor positions and other fixed costs are spread over a larger revenue base.

† A $1.4 million impact from changes in foreign exchange rates as the U.S. Dollar weakened against the Euro in the current period.

OPERATING EXPENSE

Consolidated operating expenses were $19.0 million for the nine months ended September 30, 2008, compared to $16.0 million in 2007. The Company's operating expenses have increased in certain areas as we develop and deliver new IP Video products to the marketplace. The Company had an overall increase of $3.0 million, of which $1.2 million was in our U.S. operations and $1.8 million was in our international based business. The increase in operating expense is primarily due to:

†          A $1.2 million impact from changes in foreign exchange rates.



†          $1.1 million of additional sales and engineering costs, excluding
foreign exchange, as we enhanced our sales and IP product capabilities in recent
periods.

† $769 thousand of additional general and administrative costs, excluding foreign exchange, resulting from a financial restructuring in 2008, higher legal, tax and audit expense in the current year and a higher retirement benefit for the CEO.

OTHER EXPENSE, NET

Other expense, net improved to $485 thousand of expense in the current year-to-date compared to an expense of $918 thousand in 2007. The improvement is the result of several factors including a decline in the overall interest rate environment, reduced debt levels from payments on our bank senior term loan and line of credit which resulted in $223 thousand savings, approximately $67 thousand additional interest income on a larger cash balance, and foreign exchange gains of $27 thousand compared to a $50 thousand loss in 2007 in our European subsidiaries from their Dollar based transactions. Additionally the Company had a net $62 thousand foreign exchange gain resulting from the translation of the Euro-based note payable that resides on the parent company's books and the Dollar-based bank note payable and intercompany note payable that reside on the foreign holding company's books.

INCOME TAXES

The June 2008 restructuring discussed in the "Notes Payable" footnote resulted in an elimination of the Company's U.S. net operating loss carryforwards and the creation of nearly an equivalent amount of foreign tax credits in the United States.

As of September 30, 2008, the Company had deferred tax assets related to foreign tax credit, research and development tax credit and alternative minimum tax credit carryforwards in the amount of $2.1 million, $621 thousand and $52 thousand, respectively. The foreign tax credit and research and development tax credit carryforwards are in the U.S. operation and begin to expire in the year 2018 and 2019, respectively. Additionally, there is a deferred tax asset of $261 thousand related to state net operating losses which will begin to expire in 2011. The deferred tax assets related to net operating losses and business tax credit carryforwards increased by approximately $1.3 million from December 31, 2007.

As of December 31, 2007, the Company had deferred tax assets related to net operating losses and business tax credit carryforwards totaling $1.7 million. The deferred tax assets related to net operating losses were eliminated in the second quarter of 2008 as part of our restructuring and refinancing.

In evaluating the Company's ability to recover its deferred tax assets, we considered all available positive and negative evidence, including past operating results, the reversal of temporary differences, the forecasts of future taxable income and future foreign tax credits and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with estimates being used to manage the business. Based on the weight of the positive and negative evidence and the information available, the Company believes that it is more likely than not that the deferred tax assets will be realized.

FINANCIAL CONDITION

The Company's stockholders' equity increased from $23.1 million at December 31, 2007 to $25.0 million at September 30, 2008. The increase in overall stockholders' equity resulted from:

† Net income in the first nine months of 2008 of $1.2 million

† An increase in additional paid in capital of $740 thousand primarily from the grant of stock and stock options to employees and directors.

† A $273 thousand increase in accumulated other comprehensive income primarily from the impact of foreign exchange rates.

The total assets of the Company were $50.4 million at September 30, 2008, compared to $50.0 million at December 31, 2007, a change of less than 1%. The Company had a decline in accounts receivable and intangible assets offset by increases in cash, inventory, and non-current deferred tax assets.

The Company's total liabilities decreased almost $1.8 million from $26.9 million at December 31, 2007 to $25.1 million at September 30, 2008. This decrease is primarily from a decline in our bank line of credit subsequent to our financial restructuring at June 30, 2008 and a decrease in our notes payable from recurring monthly payments.

The Company provides reserves for accounts receivable, inventory obsolescence and warranty against product defects. For the nine months ended September 30, 2008, the Company had $83 thousand of additional expense related to the accounts receivable reserve, no expense related to the inventory obsolescence reserve and added expense of $18 thousand related to the warranty reserve.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities was $3.4 million for the first nine months of 2008 compared to cash provided of $1.1 million in the same period for 2007. Our cash from operations is the result of our net income, adjusted for depreciation, amortization and other non-cash items, and changes in our operating assets and liabilities.

Cash used in investing activities was $533 thousand for the nine months ended September 30, 2008, and $875 thousand for the same period in 2007. The decline in cash used in investing activities is entirely from reduced capital expenditures in the current year compared to 2007.

Cash used in financing activities was $2.2 million during the first nine months of 2008 compared to $281 thousand used during 2007. The current year increase is due to a $1.0 million payment on our line of credit during 2008 and payments made during the year on notes payable. The Company has a line of credit facility which allows us to borrow in either U.S. Dollars or Euros with a maximum amount not to exceed $5 million U.S. Dollars. As of September 30, 2008, the Company had $3.0 million available on its bank line of credit with no outstanding balance.

FORWARD LOOKING INFORMATION

Statements in this Form 10-Q that are in the future tense, and all statements accompanied by terms such as "believe," "project," "expect," "estimate," "assume," "intend," "anticipate," and variations or similar terms are intended to be "forward-looking statements" as defined by federal securities law. Forward-looking statements are based upon assumptions, expectations, plans and projections that are believed valid when made, but that are subject to the risks and uncertainties identified under Risk Factors in the company's annual report on Form 10-K for the year ended December 31, 2007, as amended or supplemented by the information in Part II, Item 1A of this report, that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. The Company intends that all forward-looking statements made will be subject to safe harbor protection of the federal securities laws pursuant to Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based upon, among other things, the company's assumptions with respect to:

†                      future revenue;
†                      expected sales levels and cash flows;
†                      acquisitions or divestitures of businesses;
†                      debt payments and related interest rates;
†                      fluctuations in foreign currency amounts and rates;
†                      performance issues with key suppliers;
†                      product performance and the successful execution of
internal plans;
†                      successful negotiation of major contracts;
†                      effective tax rates and timing and amounts of tax
payments;
†                      the results of any audit or appeal process with the

You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. As noted above, these forward-looking statements speak only as of the date when they are made. The Company does not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those statements. Moreover, in the future, the Company, through senior management, may make forward-looking statements that involve the risk factors and other matters described in this Form 10-Q as well as other risk factors subsequently identified. This includes those identified in the Company's filings with the Securities and Exchange Commission on Form 10-K, Form 10-Q and Form 8-K.