Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. All statements other than statements of historical information provided herein are forward-looking statements and may contain projections related to financial results, economic conditions, trends and known uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements as a result of a number of factors, which include those discussed in this section and in Part II, Item 1A, Risk Factors, of this report and the risks discussed in our other filings with the Securities and Exchange Commission (the "SEC"). Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. We undertake no obligation to publicly reissue these forward-looking statements to reflect events or circumstances that arise after the date hereof.

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended September 30, 2008 filed by us with the SEC.

Overview

We develop and manufacture application platform solutions that enable leading original equipment manufacturers, or OEMs, independent software vendors, or ISVs, and service providers to deliver their software applications in the form of a network-ready device. Application platforms are pre-configured network infrastructure devices designed to optimally deliver specific software application functionality, ease deployment, improve integration and manageability, accelerate time to market and increase the security of that software application in a customer's network. We offer application platform customers an extensive suite of services associated with the design, development, manufacturing, brand fulfillment and post-sale support of these devices. We produce, brand and fulfill devices branded for our customers, and derive our revenues primarily from the sale of value-added hardware platforms to these customers. Our customers subsequently resell and support the platforms under their own brands to their customer bases.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing these financial statements, we have made estimates and judgments in determining certain amounts included in the financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to our critical accounting policies since September 30, 2008.

Results of Operations

Three months ended December 31, 2008 compared to the three months ended December 31, 2007

The following table summarizes financial data for the periods indicated, in thousands and as a percentage of net revenues, and provides the changes in thousands and percentages:

                                              Three months ended December 31,
                                  2008                    2007              Increase (Decrease)
                                      % of Net                % of Net
                          Dollars     Revenues    Dollars     Revenues     Dollars     Percentage
Net revenues              $ 37,235       100.0 %  $ 54,340       100.0 %  $ (17,105 )       (31.5 )%
Gross profit                 5,608        15.1 %     9,740        17.9 %     (4,132 )       (42.4 )%
Operating expenses           6,133        16.5 %     8,552        15.7 %     (2,419 )       (28.3 )%
(Loss) income from
operations                    (525 )      (1.4 )%    1,188         2.2 %     (1,713 )           -
Net (loss) income         $   (466 )      (1.3 )% $  1,241         2.3 %  $  (1,707 )           -

Net Revenues

Our revenues are derived primarily from sales of application platform solutions and related maintenance services to our OEM, ISV and service provider customers.

Our net revenues decreased for the three months ended December 31, 2008, as compared to the three months ended December 31, 2007, primarily due to decreases in sales volumes, which were significantly impacted by negative global economic conditions. In addition, two customers who have reduced or ceased their purchases from us, one because it was acquired by a larger company and one because it changed its business model, accounted for approximately $3.7 million of the decrease in net revenues. Also contributing to the decrease was the fact that the three month period ended December 31, 2007 included the results of operations of the former German subsidiary of Alliance Systems, which we sold in February 2008. Furthermore, we ceased sales of military and government products during the three month period ended June 30, 2008. Net revenues from the German subsidiary and from sales of military and government products totaled approximately $1.9 million during the three month period ended December 31, 2007.

Gross Profit

Gross profit represents net revenues recognized less the cost of revenues. Cost of revenues includes cost of materials, warranty costs, inventory write-downs, shipping and handling costs, customer support costs and manufacturing costs. Manufacturing costs are primarily comprised of compensation, contract labor costs and, when applicable, contract manufacturing costs.

Gross profit as a percentage of net revenue decreased for the three months ended December 31, 2008, as compared to the three months ended December 31, 2007. The decrease from the prior year was primarily due to an increase in inventory write-downs, and the fact that manufacturing costs remained relatively constant from the prior year relative to the decrease in net revenues. These factors were partially offset by decreases in cost of materials and warranty costs as a percentage of net revenues.

Gross profit is affected by customer and product mix, component material costs, pricing and the volume of orders as well as by the mix of product manufactured internally compared to product manufactured by a contract manufacturer, which carries higher manufacturing costs.

Operating Expenses



The following table presents operating expenses during the periods indicated, in
thousands and as a percentage of net revenues, and provides the changes in
thousands and percentages:



                                               Three months ended December 31,
                                  2008                     2007               Increase (Decrease)
                                       % of Net                 % of Net
                           Dollars     Revenues     Dollars     Revenues     Dollars     Percentage
Operating expenses:
Research and
development               $   1,442         3.9 %  $   2,370         4.3 %  $    (928 )       (39.2 )%
Selling and marketing         2,177         5.8 %      3,117         5.7 %       (940 )       (30.2 )%
General and
administrative                2,075         5.6 %      2,645         4.9 %       (570 )       (21.6 )%
Amortization of
intangible asset                439         1.2 %        420         0.8 %         19           4.5 %

Total operating
expenses                  $   6,133        16.5 %  $   8,552        15.7 %  $  (2,419 )       (28.3 )%

Research and Development

Research and development expenses consist primarily of salaries and related expenses for personnel engaged in research and development, fees paid to consultants and outside service providers, material costs for prototype and test units and other expenses related to the design, development, testing and enhancements of our application platform solutions. We expense all of our research and development costs as they are incurred. The following table summarizes the most significant components of research and development expense for the periods indicated, in thousands and as a percentage of total research and development expense, and provides the changes in thousands and percentages:

                                               Three months ended December 31,
                                  2008                     2007               Increase (Decrease)
                                         % of                     % of
                                       Expense                  Expense
                           Dollars     Category     Dollars     Category     Dollars     Percentage
Research and
development:
Compensation and
related expenses          $     970        67.3 %  $   1,521        64.2 %  $    (551 )       (36.2 )%
Stock-based
compensation                     84         5.8 %        250        10.6 %       (166 )       (66.4 )%
Prototype                       140         9.7 %        122         5.1 %         18          14.8 %
Consulting and
professional services            92         6.4 %        265        11.2 %       (173 )       (65.3 )%
Other                           156        10.8 %        212         8.9 %        (56 )       (26.4 )%

Total research and
development               $   1,442         100 %  $   2,370         100 %  $    (928 )       (39.2 )%

Research and development expenses decreased in the three months ended December 31, 2008, as compared to the three months ended December 31, 2007, primarily due to decreases in compensation and related expenses, stock-based compensation and consulting and professional services expenses. Compensation and related expenses and stock-based compensation expenses decreased primarily due to a decrease in research and development headcount from 45 at December 31, 2007 to 34 at December 31, 2008. Because our consulting and professional services expenses relating to research and development are project driven, the timing of these expenditures can vary.

Our application platform development strategy emphasizes the utilization of standard component technologies, which utilize off-the-shelf components. However, we expect that in some cases, significant development efforts will be required to fulfill our current and potential customers' needs using customized platforms. We expect that prototype and consulting and professional services costs will be variable and could fluctuate depending on the timing and magnitude of our development projects.

Selling and Marketing

Selling and marketing expenses consist primarily of salaries and commissions for personnel engaged in sales and marketing, and costs associated with our marketing programs, which include costs associated with our attendance at trade shows, public relations, product literature costs, web site enhancements, and travel. The following table summarizes the most significant components of selling and marketing expense for the periods indicated, in thousands and as a percentage of total selling and marketing expense, and provides the changes in thousands and percentages:

                                               Three months ended December 31,
                                  2008                     2007               Increase (Decrease)
                                         % of                     % of
                                       Expense                  Expense
                           Dollars     Category     Dollars     Category     Dollars     Percentage
Selling and marketing:
Compensation and
related expenses          $   1,565        71.9 %  $   2,336        74.9 %  $    (771 )       (33.0 )%
Stock-based
compensation                     61         2.8 %         95         3.1 %        (34 )       (35.8 )%
Marketing programs              171         7.8 %        112         3.6 %         59          52.7 %
Travel                          109         5.0 %        197         6.3 %        (88 )       (44.7 )%
Consulting and
professional services            34         1.6 %         68         2.2 %        (34 )       (50.0 )%
Other                           237        10.9 %        309         9.9 %        (72 )       (23.3 )%

Total selling and
marketing                 $   2,177         100 %  $   3,117         100 %  $    (940 )       (30.2 )%

Selling and marketing expenses decreased in the three months ended December 31, 2008, as compared to the three months ended December 31, 2007, primarily due to decreases in compensation and related expenses. Compensation and related expenses decreased primarily due to a decrease in selling and marketing headcount from 62 as of December 31, 2007, to 46 as of December 31, 2008, and due to lower variable compensation, which was directly related to the decreases in net revenues and net income (loss).

We believe that we must target our selling and marketing efforts on OEMs, ISVs and service providers in order to enhance our position as a leading provider of application platform solutions.

General and Administrative

General and administrative expenses consist primarily of salaries and other related costs for executive, finance, information technology and human resources personnel; professional services, which include legal, accounting, audit and tax fees; and director and officer insurance. The following table summarizes the most significant components of general and administrative expense for the periods indicated, in thousands and as a percentage of total general and administrative expense, and provides the changes in thousands and percentages:

                                               Three months ended December 31,
                                  2008                     2007               Increase (Decrease)
                                         % of                     % of
                                       Expense                  Expense
                           Dollars     Category     Dollars     Category     Dollars     Percentage
General and
administrative:
Compensation and
related expenses          $   1,062        51.2 %  $   1,319        49.9 %  $    (257 )       (19.5 )%
Stock-based
compensation                    159         7.7 %        188         7.1 %        (29 )       (15.4 )%
Consulting and
professional services           465        22.4 %        655        24.8 %       (190 )       (29.0 )%
Director and officer
insurance                        55         2.6 %         64         2.4 %         (9 )       (14.1 )%
Other                           334        16.1 %        419        15.8 %        (85 )       (20.3 )%

Total general and
administrative            $   2,075         100 %  $   2,645         100 %  $    (570 )       (21.6 )%

General and administrative expenses decreased in the three months ended December 31, 2008, as compared to the three months ended December 31, 2007, primarily due to decreases in compensation and related expenses and consulting and professional services expenses. Compensation and related expenses decreased primarily due to a decrease in general and administrative headcount from 44 as of December 31, 2007, to 39 as of December 31, 2008,

and due to lower variable compensation, which was directly related to the decreases in net revenues and net income (loss). The decrease in consulting and professional services expenses was primarily due to costs related to the acquisition and integration of Alliance Systems incurred during the three months ended December 31, 2007, which did not recur during the three months ended December 31, 2008.

Amortization of Intangible Asset

Amortization of the intangible asset increased by $19,000 for the three months ended December 31, 2008, as compared to the three months ended December 31, 2007. The increase was primarily due to the fact that amortization of the intangible asset, which was recorded as the result of the acquisition of Alliance Systems on October 11, 2007, began during the quarter ended December 31, 2007, while the three month period ended December 31, 2008 included one full quarter of amortization expense.

Interest and Other Income, net

Interest and other income, net, decreased to $59,000 for the three months ended December 31, 2008 from $124,000 for the three months ended December 31, 2007. This decrease was primarily due to lower interest income, attributable to lower interest rates on the cash balances held by us during the three months ended December 31, 2008, as compared to the three months ended December 31, 2007.

Liquidity and Capital Resources



The following table summarizes cash flow activities, in thousands, for the
periods indicated:



                                                     Three months ended
                                                        December 31,
                                                      2008          2007

Net (loss) income                                  $      (466 )  $  1,241
Non-cash adjustments to net (loss) income                1,036       1,449
Changes in working capital                               2,850      (5,433 )

Cash provided by (used in) operating activities          3,420      (2,743 )

Cash used in investing activities                         (178 )   (33,555 )
Cash (used in) provided by financing activities            (85 )       110
Effect of exchange rate differences on cash                  -         (29 )

Increase (decrease) in cash and cash equivalents         3,157     (36,217 )
Beginning cash and cash equivalents                     10,003      44,403

Ending cash and cash equivalents                   $    13,160    $  8,186

Operating Activities

Cash provided by operating activities during the three months ended December 31, 2008 was primarily the result of net cash provided by changes in working capital and the impact of non-cash adjustments to net loss, partially offset by the net loss for the period. Changes in working capital were primarily driven by differences in the timing and magnitude of cash receipts, cash disbursements, inventory receipts and invoicing to customers. The change in accounts receivable was also related to collections of payments from customers, as well as the fact that revenues for the three months ended December 31, 2008 were lower than revenues for the three months ended September 30, 2008. The change in inventories was also related to the depletion of inventories on hand and lower purchases during the three months ended December 31, 2008 compared to the three months ended September 30, 2008, which was also related to the downward trend in revenues. Changes in working capital during the three months ended December 31, 2008 also included the receipt of $1.9 million of income tax refunds related to taxes paid by Alliance Systems in prior years.

Cash used in operating activities of $2.7 million for the three months ended December 31, 2007 was the result of net cash used by changes in working capital, primarily related to increased purchases of inventory and the use of cash to settle accounts payable and accrued expenses, partially offset by the impact of net income and non-cash adjustments to net income.

Investing Activities

Cash used in investing activities during the three months ended December 31, 2008 related to the use of approximately $178,000 of cash for purchases of property and equipment. Cash used in investing activities during the three months ended December 31, 2007 primarily related to the use of $33.6 million of cash for the acquisition of Alliance Systems.

Financing Activities

Cash used in financing activities during the three months ended December 31, 2008 consisted primarily of $166,000 used to repurchase shares of our common stock, partially offset by the receipt of $89,000 as the result of purchases under the Employee Stock Purchase Plan. Cash provided by financing activities during the three months ended December 31, 2007 consisted primarily of the receipt of $115,000 as the result of stock option exercises and purchases under the Employee Stock Purchase Plan.

Cash inflows from purchases under the Employee Stock Purchase Plan and from stock option exercises may also occur in the remainder of fiscal year 2009; however, we cannot predict the magnitude of the cash inflows, given the volatility of capital markets.

On June 12, 2008, our Board of Directors authorized the repurchase of up to $5 million of our common stock through a share repurchase program. As authorized by the program, shares may be purchased in the open market or through privately negotiated transactions, in a manner consistent with applicable securities laws and regulations. This stock repurchase program does not obligate us to acquire any specific number of shares and may be terminated at any time. All repurchases are expected to be funded from our current cash balances or from cash generated from operations. To facilitate repurchases of shares under this program, we established a Rule 10b5-1 plan intended to comply with the requirements of Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934. A Rule 10b5-1 plan permits the repurchase of shares by a company at times when it otherwise might be prevented from doing so under insider trading laws or because of company blackout periods, provided that the plan is adopted when the company is not aware of material non-public information. Pursuant to the plan, a broker designated by us has the authority to repurchase shares, in accordance with the terms of the plan, without further direction from us. The amount and timing of specific repurchases are subject to the terms of the plan and market conditions. During the three months ended December 31, 2008, we repurchased 350,000 shares of our common stock at an average cost of $0.47 per share. From the inception of the share repurchase program through December 31, 2008, we had repurchased 1,256,801 shares of our common stock at an average cost of $0.88 per share. Upon the expiration of the 10b5-1 plan on November 7, 2008, we suspended repurchases of our common stock. We may resume repurchases under the program at any time at the discretion of management. As of December 31, 2008, the maximum dollar value that may yet be used for purchases under the program was $3,900,000.

Our future liquidity and capital requirements will depend upon numerous factors, including:

† the timing and size of orders from our customers;

†          the timeliness of receipts of payments from our customers;



†          our ability to enter into partnerships with OEMs, ISVs and service
providers;

† the level of success of our customers in selling systems that include our application platform solutions;

† the costs and timing of product engineering efforts and the success of these efforts; and

† market developments.

We believe that our available cash resources and cash that we expect to generate from sales of our products and services will be sufficient to meet our operating and capital requirements through at least the next twelve months.

In the event that our available cash resources and the Silicon Valley Bank line of credit are not sufficient, or if an event of default occurs, such as failure to achieve certain financial covenants, that limits our ability to borrow under the line of credit, we may need to raise additional funds. We may in the future seek to raise additional funds through borrowings, public or private equity financings or from other sources. There can be no assurance that additional financing will be available at all or, if available, will be on terms acceptable to us. Additional equity financings could result in dilution to our shareholders. If additional financing is needed and is not available on acceptable terms, we may need to reduce our operating expenses and scale back our operations.

Contractual Obligations and Commitments

During the three months ended December 31, 2008, there were no material changes to our contractual obligations and commitments as disclosed in our annual report on Form 10-K for the year ended September 30, 2008.

Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. We have not entered into any transactions with unconsolidated entities whereby the Company has subordinated retained interests, derivative instruments or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 157, "Fair Value Measurements" ("FAS 157"). This statement addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under accounting principles generally accepted in the United States of America. In February 2008, the FASB issued FASB Staff Position No. 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13" ("FSP 157-1"). FSP 157-1 amends FAS 157 to remove certain leasing transactions from its scope. In February 2008, the FASB issued FASB Staff Position No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2"). FSP 157-2 defers the effective date of FAS 157 for non-financial assets and liabilities which are recognized or disclosed at fair value on a non-recurring basis to the beginning of our fiscal year that begins after November 15, 2008. In October 2008, the FASB issued FASB Staff Position No. 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active" ("FSP 157-3"). FSP 157-3 clarifies the application of FAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active.

. . .