The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report, as well as the information set forth in the "Risk Factors" section of this report. In addition to historical consolidated financial information, this discussion contains forward-looking statements that involve known and unknown risks and uncertainties, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those discussed in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements. In the past, our operating results have fluctuated and are likely to continue to fluctuate in the future.

Overview

We design, manufacture and market radio frequency, or RF, modules that enable the transmission, reception and processing of high frequency signals in telecommunication network, defense electronics, homeland security and other systems.

Markets and Diversification Strategy

Telecommunications market. Most of our RF modules are deployed in telecommunication networks, carrier class trunking networks and point-to-point transmission networks. Our target customers for these applications are telecommunication network original equipment manufacturers and systems integrators, collectively referred to in this report as telecom OEMs. Telecom OEMs provide the equipment used by service providers to deliver voice, data and video services to businesses and consumers. Telecom OEMs that purchased our products accounted for 66% of our total revenues during 2008 and included Nera ASA and Nokia Siemens Networks.

From 2007 to 2008, we experienced a decrease of 13% in our telecommunications-related revenues. This decline in revenues was due primarily to decreased demand, particularly during the fourth quarter of 2008, from our telecommunications customers and lower average sales prices of our modules.

Non-telecommunication markets. Our RF modules are also designed into various applications outside of the telecommunication network market, including defense electronics, homeland security and other systems. Our target customers in the defense electronics market include defense systems integrators and their subcontractors that design aerospace systems, defense systems and weapons and electronics platforms for both domestic and foreign defense customers. Our target customers in the homeland security market include those utilizing the properties of high-frequency RF energy to create new systems designed to detect and identify security threats. We also sell modules to customers addressing other applications such as semiconductor testing. In this report, we refer to our target customers in the defense electronics and homeland security markets as defense and homeland security systems integrators. Revenues from our customers in the defense electronics, homeland security and other systems markets include BAE Systems, L-3 SafeView Inc., Lockheed Martin Corporation and Teradyne and accounted for 34% of our total revenues in 2008.

From 2007 to 2008, we experienced growth of 61% in our non-telecommunication related revenues. We continue to seek growth through enhancing our position as a leading merchant supplier of RF modules, continuing our expansion into the defense electronics, homeland security and other systems markets and pursuing strategic acquisitions.

Current market outlook. Over the past several months, the global economic conditions have continued to deteriorate. For example, credit has become severely restricted. This restriction in credit has materially impacted our customers and vendors, which could have a negative effect on our business. We expect the restriction in credit will continue to impact our customers and vendors for the foreseeable future. The installation and enhancement of telecommunication networks integrating our products and the rollout of certain security and other systems, often rely on the availability of credit. With the current restriction in credit markets, capital may not be available for the build-out of these networks or systems. Without appropriate capital, our customers may have difficulty funding their on-going operations and may reduce their orders for our products. As a result, we currently estimate revenues for 2009 to be below revenues in 2008. In addition to a reduction in revenue, we have experienced a negative impact to our operations and financial results through an increase in our bad debt expense related to a note receivable, increased write-offs of excess inventory and the write-down of our goodwill and intangible assets. We expect these risks to continue for the foreseeable future.

Additionally, our vendors may rely on credit markets to finance their operations. With the current restriction in credit markets, capital may not be available to our vendors or may only be available at unfavorable terms. Without appropriate capital, our vendors may have difficulty funding their on-going operations and may not be able to fulfill orders for their products. This could significantly impact our operations and financial results.

Seasonality

Although we have experienced significant quarterly fluctuations in revenue at times over the past several years, we do not believe that volatility was primarily attributable to seasonality in our business.

Critical Accounting Policies and Estimates

General

Management's discussion and analysis of its financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, warranty obligations, inventories, stock-based compensation, income taxes, asset impairments and other commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions. We discuss these policies further, as well as the estimates and judgments involved, below.

Revenue Recognition

Our primary customers are telecom OEMs, defense electronics, homeland security and other systems integrators that incorporate our products into their systems. We recognize product revenues at the time title passes, which is generally upon product shipment or when withdrawn from a consignment location, coupled with persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, our price to the buyer is fixed or determinable and collectibility is reasonably assured. Revenues under development contracts are generally recorded on a percentage of completion basis, using project hours as the basis to measure progress toward completing the contract and recognizing revenues. Alternatively, where a development contract specifies defined progress gates or milestones tied to payments, revenue is recognized on a pro rata basis matching the milestones. Revenues attributable to development fees accounted for 2.0% of our total revenues in 2006, 1.5% of our total revenues in 2007 and 1.2% of our total revenues in 2008. The costs incurred under these development agreements are included in research and development expenses.

Allowance for Doubtful Accounts

We make ongoing assumptions relating to the collectibility of our accounts receivable in our calculation of the allowance for doubtful accounts. In determining the amount of the allowance, we make judgments about the creditworthiness of customers based on ongoing credit evaluations and assess current economic trends affecting our customers that might impact the level of credit losses in the future and result in different rates of bad debts than previously seen. We also consider our historical level of credit losses. Our reserves were $67,000 at December 31, 2007 and $64,000 at December 31, 2008. If actual credit losses were to be significantly greater than the reserves we have established, our selling, general and administrative expenses would increase.

Warranty Reserves

We generally offer a twelve to thirty month warranty on all of our products. We record a liability based on estimates of the costs that may be incurred under our warranty obligations and charge to cost of product revenues the amount of such costs at the time revenues are recognized. Our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Our estimates of anticipated rates of warranty claims and costs per claim are primarily based on historical information and future forecasts. At December 31, 2007 and 2008 our warranty reserves were $2.7 million and $2.4 million, respectively. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. If actual warranty claims are significantly higher than forecast, or if the actual costs incurred to provide the warranty is greater than the forecast, our gross margins could be adversely affected.

Inventory Valuation

We evaluate our ending inventories for excess quantities and obsolescence at each balance sheet date. This evaluation includes review of materials usage, market conditions and product life cycles and an analysis of sales

levels by product and projections of future demand and market conditions. We adjust inventory balances to approximate the lower of our manufacturing cost or market value. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required, and would be reflected in cost of product revenues in the period the revision is made. This would have a negative impact on our gross margins in that period. At the time of write down, a new, lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. If in any period we are able to sell inventories that were not valued or that had been written off in a previous period, related revenues would be recorded without any offsetting charge to cost of product revenues, resulting in a net benefit to our gross margin in that period. To the extent these factors materially affect our gross margins, we would disclose them.

Stock-Based Compensation

We recognize stock-based compensation in accordance with Statement of Financial Accounting Standards, or SFAS, No. 123 (revised 2004), "Share-Based Payment", or SFAS No. 123(R) which establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. All of our stock compensation is accounted for as an equity instrument.

We estimate the fair value of stock options and shares under our stock purchase plan using the Black-Scholes valuation model, consistent with the provisions of SFAS No. 123(R) and Securities and Exchange Commission Staff Accounting Bulletin No. 107. The fair value of each option grant and the shares under our stock purchase plan are estimated on the date of grant using the Black-Scholes option valuation model and the graded-vesting method with assumptions concerning expected dividend yield, stock price volatility, risk free interest rate and expected life of the award.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. As our stock option awards have characteristics that differ significantly from traded options, and as changes in the subjective assumptions can materially affect the estimated value, our estimate of fair value may not accurately represent the value assigned by a third party in an arms-length transaction. There currently is no market-based mechanism to verify the reliability and accuracy of the estimates derived from the Black-Scholes option valuation model or other allowable valuation models, nor is there a means to compare and adjust the estimates to actual values. While our estimate of fair value and the associated charge to earnings materially affects our results of operations, it has no impact on our cash position.

Deferred Taxes

We currently have significant deferred tax assets, which are subject to periodic recoverability assessments. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe to be more likely than not realizable. We have recorded a valuation allowance in an amount equal to the net deferred tax assets to reflect uncertainty regarding future realization of these assets based on past performance and the likelihood of realization of our deferred tax assets.

Long-Lived Assets

We periodically review our property and equipment and identifiable intangible assets for possible impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges. Significant assumptions and estimates include the projected cash flows based upon estimated revenues and expense growth rates, the estimated royalty rates used for the valuation of acquired tradenames, and the discount rate applied to expected cash flows. In addition, our depreciation and amortization policies reflect judgments on the estimated useful lives of assets.

During the fourth quarter of 2008, we reviewed our long-lived assets for indicators of impairment in accordance with SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." Based on reduced estimates of future revenues and future negative cash flow, we identified potential indicators of impairment.

As a result, we compared the fair value of our long-lived assets to their carrying value. Based on our discounted future cash flow and revenue projections, we recorded non-cash impairment charges of $2.1 million for intangible assets with a defined useful life. The impairment charges represent the excess of the carrying value of these assets over their fair value.

These impairment charges are not expected to result in any future cash expenditures.

Goodwill and Intangible Assets with an Indefinite Life

We are required to assess the carrying value of goodwill and other intangible assets with an indefinite life annually or whenever circumstances indicate that a decline in value may have occurred. Based on the fair value of our common stock relative to our book value, revised estimates for our future revenues and the continued worsening of the global economy, we determined that indicators of potential impairment were present during the fourth quarter of 2008. As a result, we assessed the carrying value of acquired goodwill and intangible assets with an indefinite life for impairment, in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Based on the fair market value of the business and our discounted future cash flow and revenue projections, we recorded non-cash impairment charges of $3.0 million for goodwill and $1.1 million for intangible assets with an indefinite life.

These impairment charges are not expected to result in any future cash expenditures.

Fair Value Measurement

On January 1, 2008, we adopted SFAS No. 157, "Fair Value Measurements" or SFAS No. 157 which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. SFAS No. 157 applies whenever other statements require or permit assets or liabilities to be measured at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, except for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, for which application has been deferred for one year. Our financial assets that require recognition under SFAS No. 157 include certain cash equivalents and short-term investments.

Our financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily-available pricing sources for comparable instruments. As of December 31, 2008, we did not have any assets or liabilities without observable market values that would require a high level of judgment to determine fair value (Level 3).

Business Combinations

In accordance with the provisions of SFAS No. 141, "Business Combinations," the purchase price of an acquired company is allocated between the intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. The valuation of intangible assets is based on an income approach methodology that values the intangible assets based on the future cash flows that could potentially be generated by the asset over its estimated remaining life discounted to its present value utilizing an appropriate weighted average cost of capital. As a result of business acquisitions, the allocation of the purchase price to goodwill and intangible assets could have a significant impact on our future operating results.

Results of Operations

The following tables set forth selected consolidated statements of operations data for each of the periods indicated in dollars and as a percentage of total revenues.

                                                                     Year Ended December 31,
                                                                2008           2007          2006
                                                                         (In thousands)

Revenues:
Product revenues                                              $  57,559      $ 55,611      $ 60,956
Development fees                                                    696           865         1,270

Total revenues                                                   58,255        56,476        62,226

Costs and expenses:
Cost of product revenues                                         41,495        41,216        43,771
Cost of product revenues, amortization of intangible assets         596           548           449
Research and development                                         11,878        10,707         8,856
Selling, general and administrative                              13,474        12,463        12,689
Transaction costs                                                     -             -           200
Amortization of intangible assets                                   716           531           156
Impairment of goodwill and intangible assets                      6,161             -             -

Total costs and expenses                                         74,320        65,465        66,121

Loss from operations                                            (16,065 )      (8,989 )      (3,895 )
Interest and other income, net                                    1,248         3,590         2,648

Loss before provision for income tax expense (benefit)          (14,817 )      (5,399 )      (1,247 )
Income tax expense (benefit)                                        (66 )           2            97

Net loss                                                      $ (14,751 )    $ (5,401 )    $ (1,344 )

                                                                           Year Ended December 31,
                                                                   2008               2007             2006
                                                                     (As a percentage of total revenues)

Revenues:
Product revenues                                                       98.8 %             98.5 %         98.0 %
Development fees                                                        1.2                1.5            2.0

Total revenues                                                        100.0              100.0          100.0

Costs and expenses:
Cost of product revenues                                               71.2               73.0           70.3
Cost of product revenues, amortization of intangible assets             1.0                1.0            0.7
Research and development                                               20.4               19.0           14.2
Selling, general and administrative                                    23.1               22.1           20.4
Transaction costs                                                         -                  -            0.3
Amortization of intangible assets                                       1.2                0.9            0.3
Impairment of goodwill and intangible assets                           10.6                  -              -

Total costs and expenses                                              127.5              116.0          106.3

Loss from operations                                                  (27.5 )            (16.0 )         (6.3 )
Interest and other income, net                                          2.1                6.4            4.3

Loss before provision for income tax expense (benefit)                (25.4 )             (9.6 )         (2.0 )
Income tax expense (benefit)                                           (0.1 )                -            0.2

Net loss                                                              (25.3 )%            (9.6 )%        (2.2 )%

Results of Operations

Year ended December 31, 2008 compared to year ended December 31, 2007

Total revenues


                                  Year Ended December 31,
                                    2008             2007         % Change
                                       (In thousands)

             Total revenues     $     58,255       $  56,476            3.2 %
             Product revenues   $     57,559       $  55,611            3.5 %
             Development fees   $        696       $     865          (19.5 )%

Total revenues consist of product revenues and development fees. Product revenues are attributable to sales of our RF products. Development fees are attributable to the development of product prototypes and custom products pursuant to development agreements that provide for payment of a portion of our research and development or other expenses. We expect to enter into more development contracts in the future as we seek to further penetrate the defense electronics market, where development contracts are customary, but we do not expect development fees to represent a significant percentage of our total revenues for the foreseeable future.

Product revenues increased 3.5% from 2007 to 2008 as a result of increased demand from our non-telecommunication customers. We experienced a $7.4 million increase in revenues from our non-telecommunication customers which was offset in part by a $5.6 million decrease in revenues from our telecommunication customers. During 2008, revenues from our non-telecommunication customers comprised 34% of our total revenues, compared with 21% in 2007. During 2008, revenues from our telecommunication customers comprised 66% of our total revenues, compared with 79% in 2007.

Due to the current economic downturn, we currently expect revenues in 2009 to be lower than in 2008, primarily due to a decrease in our telecommunication related revenues that we believe will be partially offset by an increase in our non-telecommunication related revenues.

Cost of product revenues

                                       Year Ended December 31,
                                         2008             2007        % Change
                                            (In thousands)

          Cost of product revenues   $     41,495       $  41,216           0.7 %
          Percentage of revenues             71.2 %          73.0 %

Cost of product revenues consists primarily of: costs of direct materials and labor utilized to assemble and test our products; equipment depreciation; costs associated with procurement, production control, quality assurance and manufacturing engineering; costs associated with maintaining our manufacturing facilities; fees paid to our offshore manufacturing vendor; reserves for potential excess or obsolete material; costs related to stock-based compensation; and accrued costs associated with potential warranty returns offset by the benefit of usage of materials that were previously written off.

During 2008, the cost of product revenues as a percentage of revenues decreased due primarily to the increased absorption of our overhead costs resulting from increased production and to a change in product mix favoring certain higher margin products, partially offset by increased inventory reserves associated with a customer of ours that filed for bankruptcy protection during the fourth quarter of 2008. The cost of product revenues in both periods was favorably impacted by the utilization of inventory that was previously written off, amounting to $283,000 during 2008 and $572,000 during 2007.

We continue to focus on reducing the cost of product revenues as a percentage of total revenues through the introduction of new designs and technology and further improvements to our manufacturing processes. In addition, our product costs are impacted by the mix and volume of products sold and will continue to fluctuate as a result.

Research and development expenses

                                           Year Ended December 31,
                                             2008             2007         % Change
                                                (In thousands)

     Research and development expenses   $     11,878       $  10,707           10.9 %
     Percentage of revenues                      20.4 %          19.0 %
. . .