Business

For a description of our business, products and markets, see the section in Part I entitled Business.

Executive Summary

The market place profiles in which our two business groups operate are materially distinct from one another. The Wireless Components business is characterized by a very competitive environment that has declining average selling prices and frequent product innovation. This market includes several large competitors who have superior financial and other resources. We have competed successfully for over 25 years by cultivating close customer relationships with a diverse group of customers who offer varied applications, and serve diverse markets and geographic locations. In contrast, our Wireless Solutions business is characterized as a developing market with only a generalized definition of products, services, markets and applications. Competition is not well defined and typically consists of much smaller competitors, many of whom are similar in size and resources to us, or even smaller.

Our strengths benefitting us in both markets include: (a) our ability to identify and capitalize on trends in a rapidly growing wireless marketplace;
(b) our capability to develop products that have superior technical characteristics; (c) our expertise to assist our customers in incorporating our products into their applications; and (d) our demonstrated ability to manufacture high quality cost-effective products in volume with short lead times. Our manufacturing capabilities are greatly enhanced by our relationships with several domestic and offshore contractors.

Our Wireless Components business, which historically was our core business, has declined in sales due to decreased average selling prices in several intensely competitive markets and due to our loss of market share to competing technologies. As a result, we have focused our product and market development efforts on products for our Wireless Solutions business, which we feel offers a technical edge and generates a greater gross margin.

A key factor in our combined sales performance is successfully developing and selling new products in volumes adequate to offset the decline in selling price and unit volume of our older products. A key factor in our combined gross margin performance is reducing our costs (through innovation, assisting our contractors identify lower costs of manufacture, and increased volume) and improving our product mix towards higher margin products to offset expected declines in average selling prices. The Cirronet acquisition in fiscal year 2007 was a key part of our strategy to grow sales with new products that have higher margin potential.

Despite increased operating expenses, we have generally generated positive operating cash flows in recent periods, including our current quarter and our fiscal year. See the section below entitled Liquidity for discussion of cash flows for the current period. Our ability to maintain positive cash flows is dependent on our success in "right sizing" our expense levels in relation to sales. See the section below entitled "Fourth Quarter Business Conditions & Our Response" for discussion of our "right sizing" program. In any case, the amount of positive cash flow may decrease or occasionally turn negative due to fluctuating revenues, declining margins, escalating operating costs, the need for increased working capital to support increased sales, or increased spending to support growth programs. We feel we currently have the financial resources necessary to execute our business plans.

Fourth Quarter Business Conditions and Our Response

Overall economic conditions in the electronics industry, which have historically experienced extreme fluctuations in demand within short time periods, is a key factor that influences our sales performance. We believe our markets are definitely in a period of decreasing overall demand, particularly in the automotive, consumer and telecommunications markets that we serve. Current uncertain economic conditions materially reduce our ability to predict future sales, so we have suspended our practice of providing guidance.

As may not be apparent from our consolidated results, we have had two distinct offerings. The first is a sizable, profitable hardware products offering, with positive cash flow which we know well. This includes our Wireless Components Group and the bulk of our Wireless Solutions Group, including our Virtual Wire™ Short-range Radio products and Cirronet modules. The second offering, a part of our Wireless Solutions Group, consisted of software and services, for emerging markets, and included our Aleier business, which has been discontinued.

For several years, we have systematically increased our operating expenses to support our Wireless Solutions initiative, which has increased our sales breakeven point. This expense increase included support for the hardware and particularly for the software and services portion of our Wireless Solutions business. While our Wireless Solutions strategy has resulted in an increase in sales of those products and had a favorable effect on our gross profit margins, we have not seen the increase in sales we expected. While we entered the year with a potential for a large increase in sales for our software and services business, the anticipated potential did not occur. Economic conditions and other factors have caused some customers to delay or cancel programs in many of our targeted solutions markets. We note that other companies in the M2M space have encountered similar delays in the development of the market. Since we have aggressively built our capabilities to support an anticipated sales increase, in our fourth quarter we faced an excess of expenses at current sales levels.

The software and services business required, and would likely have continued to require, a very large ongoing investment, and was not yet profitable. As we stated in our prior quarterly report on Form 10-Q, we would monitor several near-term indicators to determine our course of action. We determined that the costs of supporting the business were greatly in excess of our near-term revenue potential for software and services. Therefore, we have taken a number of actions to eliminate this excess cost. Included was a decision to discontinue the activities of our Aleier subsidiary.

We have taken several major steps towards reducing expense levels over the past two fiscal years. In fiscal year 2007, we converted our manufacturing operations (primarily for our Wireless Components Group) to a fabless business model, which reduced annual costs by approximately $5 million and is the major reason for this fiscal year's improvement in gross margins. In our prior report, we announced both a consolidation of our organization including centralizing many of our back-office functions and a plan to reduce our space costs by consolidating activities into the Company-owned Dallas facility. Together, these two measures are expected to save approximately $1.4 million annually. While we saw a considerable portion of these savings in our fourth quarter, they will not be totally realized until our second quarter of fiscal 2009. Finally, we announced in the fourth quarter cost savings measures that include the discontinuation of our software and services business which are expected to result in $2.8 million annual cost savings. Limited amounts of the last round of cost savings were in effect for our fourth quarter, but most will be in effect for the first quarter of fiscal year 2009.

Since we retain a profitable hardware business offering, we believe we have the ability to match expense levels with expected revenue. We believe we have taken the actions required to "right-size" our business to return to overall profitability and to produce significant positive operating cash flow when economic conditions permit. We believe our core hardware business has been profitable and generated positive operating cash flow. In fact, except for a number of largely non-cash unusual charges and the results of

operations related to our discontinued operation, we believe our fourth quarter and annual results for fiscal year 2008 reflect these improvements. While our cost reductions have resulted in a much lower cost business model, current economic conditions make forecasting future profitability very difficult.

Unusual Charges in our Fourth Quarter

Our fourth quarter results were materially impacted by three categories of expense. The total impact of these charges was $19.4 million in recorded expense in our fourth quarter and $21.2 million for the fiscal year for such charges. These charges were the primary reasons why total assets and stockholder's equity decreased by approximately $19.5 million from our previous third quarter:

1. Impairment expense - $15.7 million. In our fourth quarter we incurred $10.4 million in charges for a goodwill impairment related to our acquired Cirronet subsidiary as a result of year end testing as required by Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". A portion of this testing involved a comparison of our market capitalization compared to the carrying value of our equity. We also incurred $5.3 million in charges for an impairment of other intangible assets related to our Cirronet subsidiary as a result of year end testing according to SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". As a result of this latter impairment and charge off, our amortization expense for acquired intangible assets previously acquired will be much lower in future fiscal years. The balance of our intangible assets on our balance sheet was reduced as a result of these charges by $15.7 million to less than $2.6 million as of the end of the fiscal year. See the foot notes to our financial statements and the sections entitled "Goodwill and Other Intangible Assets" and "Restructuring Expenses" below for further discussion of these charges.

2. Discontinued Operations - $3.2 million. Our Board of Directors approved a plan to exit our software and services business in our fourth quarter, as explained in the previous section entitled "Fourth Quarter Business Conditions and Our Response." Under the exit plan, Aleier has ceased to market its Computerized Maintenance Management Systems (CMMS) software, while continuing to provide service and support of its software products as required under existing contracts. We are treating the Aleier subsidiary as a discontinued operation in the financial statements included in this report. This classification is in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".

In our fourth quarter, the results of operations for our discontinued operation were a loss of $3.2 million. For the year, we incurred a loss of $4.7 million. Both periods included $1.9 million in impairment of intangible assets that were written off when we decided to discontinue this business. See Note 6 in Appendix A of this report for details regarding the Aleier goodwill and intangibles. Also included in both periods' results were restructuring expenses of $243,000 related to severance costs. Termination of a majority (10) of the Aleier employees occurred on August 29, 2008. The remainder (5) will assist in winding down the business and are expected to be terminated by the end of the 2008 calendar year. The cash impact of these costs will be experienced throughout fiscal year 2009. We do not expect the results of these discontinued operations to have a material impact on future periods.

3. Restructuring expense - $538,000. In our fourth quarter, we incurred $538,000 in charges for restructuring expense related to severance costs and facility clean up expenses. Restructuring expenses were $858,000 for the current fiscal year. These expenses were necessary to carry out our plan to "right size" the business and to achieve a much lower cost model for our company. See the footnotes to our financial statements and the section below entitled "Restructuring Expenses" for additional discussion of these charges.

Critical Accounting Policies and Estimates

Financial Statement Preparation is in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the periods presented. We have listed below our most significant accounting policies and estimates, which we think are the most critical to fully understanding and evaluating our reported financial results. Please keep the following policies and estimates in mind when reading the accompanying financial statements and related footnotes.

Revenue is recognized for the most part when we ship the product to the customer. The exceptions are revenue from service projects from our discontinued Aleier subsidiary and consignment programs for several customers. Together, these account for less than 5% of the current fiscal year sales. Revenue from Aleier service projects was recognized on a percentage of completion basis. We recognize sales from consigned products when the customer pulls the product for use from the consigned inventory.

In all cases, we recognize product sales at the point at which legal title passes to the customer. Our standard terms and conditions are FOB our factory (or in the case of our contract manufacturers, their factory). We permit the return of defective products and accept limited amounts of product returns in other instances on a case-by-case basis. Accordingly, we provide allowances for the estimated amounts of these returns based on historical experience when we recognize revenue. A small portion of our revenue is derived from engineering design services performed for customers.

Cash Equivalents represent liquid investments with maturities at the date of purchase of three months or less.

Trade Receivables consist primarily of amounts due from customers for products shipped to them. We perform credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current creditworthiness. We continuously monitor collections and payments from customers and maintain an allowance for doubtful accounts based upon historical experience and specific customer information. If events occur causing collectibility of outstanding trade receivables to become unlikely, we record an increase to our allowance for doubtful accounts. When all collection attempts (including a collection agency) have proven unsuccessful, the customer's account is written off to the allowance for doubtful accounts. We maintain credit insurance on major foreign customer balances and have a relatively diversified customer base.

Inventories are valued at the lower of: (i) the actual cost to purchase or manufacture the inventory (on a first-in, first-out basis) or (ii) the current estimated market value of the inventory. We use a standard cost system to estimate the actual costs of inventory and regularly review actual costs and the estimated market value of inventory to standard costs. Significant changes to our purchasing or manufacturing costs (either an increase or a decrease) could cause material changes to the valuation of our inventory when we adjust standard costs to reflect the change.

We estimate the market value of inventory based upon existing and forecasted demand for end products for the next twelve months and estimated amounts of inventory that would be consumed. We reduce the valuation of inventory items that are in excess supply compared to demand, items that have had limited usage over time, items that may no longer be usable due to product obsolescence and items that we decide to discontinue selling. We have a product rationalization process that involves key management personnel to identify and evaluate products and related inventory that fall into one or more of these categories.

In recent years, we have written off significant amounts of inventory. In the current year, we provided $488,000 in inventory loss provisions. In the prior fiscal year, we provided a total of $1.6 million in inventory losses, including $1.2 million in inventory related to our transition to a fabless business model. Inventory write-downs in the other years presented were much smaller.

If the facts and circumstances require it, we may have to write down inventory again in future periods. The electronics industry is characterized by rapid technological change, frequent new product development and rapid product obsolescence that could make such write-downs necessary. Also, estimates of future product demand may prove to be inaccurate, in which case the valuation adjustments for obsolete and slow moving inventory may be understated or overstated. If we change our estimate of future demand, we may have to increase or decrease our inventory valuation reserves for excess inventory, with a corresponding impact on cost of sales. We continually review our inventory valuations for all of these factors. However, significant changes in manufacturing costs, unanticipated changes in product demand or technological developments could have a significant impact on the value of inventory and reported operating results.

Property and Equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives:

     Description                                    Life (Years)
     Machinery & equipment                             5 to 7
     Tooling                                             3
     Furniture & fixtures                                5
     Leasehold improvements            Lesser of useful life or life of lease
     Computer software and equipment                   3 to 5
     Land improvements                                   5
     Building                                            10
     Building improvements                             3 to 5

Goodwill and Other Intangible Assets with indefinite lives are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS) No. 142, "Goodwill and Other Intangible Assets". We assess the impairment of acquisition goodwill and intangibles on an annual basis or whenever events or changes in circumstances indicate that the fair value is less than its carrying value. Factors that we consider important which could trigger an impairment review include a reduction in our market capitalization in relation to our net worth, poor economic performance relative to historical or projected future operating results, significant negative industry, economic or company specific trends, and changes in the manner of our use of the assets or the plans for our business.

SFAS 142 requires a two-step goodwill impairment test whereby the first step, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount including goodwill. The fair value of each reporting unit is estimated using a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur, and determination of our weighted cost of capital. If the fair value of a reporting unit is below its carrying amount, goodwill of the reporting unit is considered impaired and the second test is performed. The second step of the impairment test is performed when required and compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an amount equal to that excess.

Based on the goodwill tests for impairment performed during the quarter ended August 31, 2008, management determined that there was a material impairment of goodwill and intangibles with indefinite lives. In addition, goodwill for our Aleier subsidiary was written off when we discontinued this business. See Notes 2, 6 and 17 in Appendix A of this report regarding charges for impairment on our Cirronet and Aleier subsidiaries for goodwill and trademarks.

Impairment of Long-lived Assets is evaluated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which requires an entity to review long-lived tangible and amortizable intangible assets for impairment and recognize a loss if expected future undiscounted cash flows are less than the carrying amount of the assets. Such losses are measured as the difference between the carrying value and the estimated fair value of the assets. The estimated fair values of our tangible fixed assets that are subject to impairment are determined by using an annually updated appraisal. The estimated fair value of our amortizable intangible assets that were set up from acquisitions is determined annually based on expected discounted future cash flows to assess any impairment. Conditions that would necessitate an impairment assessment include material adverse changes in operations, significant adverse differences in actual results in comparison with initial valuation forecasts prepared at the time of acquisition, a decision to abandon acquired products, services or technologies, or other significant adverse changes that would indicate the carrying amount of the recorded asset might not be recoverable.

Based on the measurements for impairment performed during the quarter ended August 31, 2008, management determined that there was a material impairment of the net carrying amount of intangibles being amortized over estimated lives. See Notes 6 and 17 in Appendix A of this report regarding charges related to impairment of amortizable intangible assets of our Cirronet business unit and other tangible assets. Also, see Notes 2 and 6 in Appendix A of this report regarding the discontinued operations status of our Aleier business unit and the associated write-off of assets including acquisition goodwill and intangibles.

Other Assets include patent and product certification with governmental agency costs that are amortized over the estimated useful lives of the patents and certifications, which are generally five and three years respectively. Costs for patent applications denied are written off in the period in which the denial is received.

Financial Instruments that potentially subject us to an interest and credit risk consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and debt instruments, the carrying value of which are a reasonable estimate of their fair values due to their short maturities or variable interest rates.

Accrued Medical Benefits - We largely self-insure the payment of medical benefits to our employees. Consequently, we regularly estimate the value of unpaid benefits based upon historical trends and use that information to record our liability for benefits that have been incurred but not yet paid. We have stop loss insurance protection to cover the costs of medical claims over certain deductible amounts for any given plan year for an individual claimant or in the aggregate for all our covered employees. However, medical claims may significantly and unexpectedly increase or decrease over a short period of time, in which case our reserve for unpaid claims may no longer be accurate. This could cause us to either increase or decrease medical expense and the corresponding reserve in a material way in the period in which the change occurred.

Research and Development Costs are expensed as incurred. These costs do not include nonrecurring engineering costs related to contract technology development sales, which are included in cost of sales.

Income Taxes - Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Due to historical losses and a limited history of taxable income, we maintain a significant valuation allowance on our deferred tax assets. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment. Reported net deferred tax liabilities of $0.2 million are the result of our acquisition of Cirronet in fiscal 2007 and subsequent impairment of trademarks in fiscal 2008.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of any benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits are classified as other expense in the statement of income. There was no interest or penalties during the current year on the federal or state tax level.

Earnings per Share is computed by dividing the net earnings by the weighted average shares of our common stock outstanding during the period. Diluted earnings per share is computed by dividing net earnings by the weighted average number of common and potentially dilutive shares, from dilutive stock options, restricted stock units and warrants to purchase common stock outstanding during each year. The dilutive effect of the options, restricted stock units and warrants to purchase common stock are excluded from the computation of diluted net loss per share if their effect is antidilutive. The number of common stock equivalents excluded from the diluted net loss per share computation at August 31, 2008, 2007 and 2006 because they were antidilutive were options, restricted stock units and warrants in the amount of 2,318,055 and 2,859,687 and . . .