The following discussion and analysis should be read in conjunction with Item 8 "Financial Statements and Supplementary Data" and notes thereto included elsewhere in this Report. Historical operating results are not necessarily indicative of results that may occur in future periods. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those presented under "Forward-Looking Statements" preceding Item 1, in Item 1A, "Risk Factors" and elsewhere in this Report. We undertake no obligation to update any forward-looking statement to reflect events after the date of this Report.

Overview

Business

We design, manufacture and sell products to the service providers in the communications industry for use in their networks. Our products are typically found outdoors in the service provider's distribution network, at the interface where the service provider's network connects to the user's network, and inside the user's home or apartment, and are critical to the successful delivery of voice and broadband communication services.

We sell our products through a network of sales channels, principally to telephone operating companies ("Telcos"), multi-system operators ("MSOs") of communications services, including cable and satellite service providers, and original equipment manufacturers ("OEMs").

Results of Operations

The following tables set forth certain operating information in thousands of dollars and as a percentage of net sales for the periods indicated (except "Income tax provision (benefit)," which is stated as a percentage of "Income before income taxes"):

                                      Years ended December 31,

                                   2008                      2007
                                                                                 Dollar
                                          % of                      % of        increase      % increase
                            Amount     Net sales      Amount     Net sales     (decrease)     (decrease)

Net sales                 $ 35,190        100.0 %   $ 46,846        100.0 %   $  (11,656 )       -24.9 %
Cost of sales               23,178         65.9 %     32,204         68.7 %       (9,026 )       -28.0 %

Gross profit                12,012         34.1 %     14,642         31.3 %       (2,630 )       -18.0 %


Operating expenses:
Selling, general and
administrative               8,610         24.5 %     10,926         23.3 %       (2,316 )       -21.2 %
Research and
development                  2,040          5.8 %      2,214          4.7 %         (174 )        -7.9 %

Total operating
expenses                    10,650         30.3 %     13,140         28.0 %       (2,490 )       -18.9 %


Operating income             1,362          3.9 %      1,502          3.2 %         (140 )        -9.3 %

Interest expense                (8 )        0.0 %        (12 )        0.0 %            4         -33.3 %
Interest income                 39          0.1 %        172          0.4 %         (133 )       -77.3 %
Other income                    (5 )        0.0 %          9          0.0 %          (14 )      -155.6 %


Income before income
taxes                        1,388          3.9 %      1,671          3.6 %         (283 )       -16.9 %
Income tax provision
(benefit)                      810         58.4 %     (4,769 )     -285.4 %        5,579        -117.0 %

Net income                     578          1.6 %      6,440         13.7 %       (5,862 )       -91.0 %

                                      Years ended December 31,

                                   2007                      2006
                                                                                 Dollar
                                          % of                      % of        increase       % increase
                            Amount     Net sales      Amount     Net sales     (decrease)      (decrease)

Net sales                 $ 46,846        100.0 %   $ 39,104        100.0 %   $     7,742          19.8 %
Cost of sales               32,204         68.7 %     25,730         65.8 %         6,474          25.2 %

Gross profit                14,642         31.3 %     13,374         34.2 %         1,268           9.5 %


Operating expenses:
Selling, general and
administrative              10,926         23.3 %      9,721         24.9 %         1,205          12.4 %
Research and
development                  2,214          4.7 %      1,899          4.9 %           315          16.6 %

Total operating
expenses                    13,140         28.0 %     11,620         29.7 %         1,520          13.1 %


Operating income             1,502          3.2 %      1,754          4.5 %          (252 )       -14.4 %

Interest expense               (12 )        0.0 %         (7 )        0.0 %            (5 )        71.4 %
Interest income                172          0.4 %        226          0.6 %           (54 )       -23.9 %
Other income                     9          0.0 %         (2 )        0.0 %            11        -550.0 %


Income before income
taxes                        1,671          3.6 %      1,971          5.0 %          (300 )       -15.2 %
Income tax benefit          (4,769 )     -285.4 %       (710 )      -36.0 %        (4,059 )       571.7 %

Net income                   6,440         13.7 %      2,681          6.9 %         3,759         140.2 %

Year Ended December 31, 2008 compared to Year Ended December 31, 2007

Net sales in 2008 were $35.2 million compared to $46.8 million in 2007, a decrease of $11.7 million or 24.9% due to the sharp downturn in economic activity which has negatively impacted the markets for the Company's products and, during the fourth quarter of 2008 the absence of, and during the year ended December 31, 2008 lower sales of, the Company's HomePlug® products.

Gross profit in 2008 was $12.0 million compared to $14.6 million in 2007, a decrease of approximately $2.6 million or 18% resulting from a decrease in sales, while the gross profit margin improved from 31.3% in 2007 to 34.1% in 2008. The improvement in gross profit margin is primarily attributable to (i) cost savings of $1.1 million related to the closing of our Puerto Rico facility, and its consolidation into our facility in Edgewood, New York, recorded during 2007 (consisting of severance charges of $489,000, accelerated depreciation of $245,000 and other closing expenses of $342,000), which is included in cost of sales in 2007, and (ii) improved product mix due to a reduction in sales of certain lower margin home networking products.

Selling, general and administrative expenses in 2008 decreased $2.3 million or 21.2% to $8.6 million from $10.9 million in 2007. The decrease over the prior year was primarily due to:

• lower salary and related employee benefits of $1.2 million resulting from reduced headcount in 2008;

• a decrease in professional and consulting fees of $417,000 primarily related to implementation of Section 404 of the Sarbanes-Oxley Act of 2002 in 2007, a decrease in audit fees, a decrease in costs associated with the implementation of our new enterprise resource planning computer software system in 2007, and the absence of legal fees incurred in 2007 with respect to the shutdown of the Puerto Rico facility;

• a decrease in share-based compensation expense of $280,000 as a result of stock options becoming fully vested during 2007 and the beginning of 2008, thereby completing the period during which the share-based compensation expense was recorded for these options, and the reversal of expense recognized for options forfeited by an executive;

• the absence of rent expense of $104,000 due to the fact that we no longer lease space as a result of the move to our new corporate headquarters which we purchased in June 2007.

Research and development expense was $2.0 million in 2008 compared to $2.2 million in 2007, a decrease of $174,000 or 7.9%. This decrease is attributable to a decrease in salary and related employee benefits of $85,000 as a result of a decrease in headcount in 2008 and a decrease in consulting expenses of $107,000, partially offset by an increase in share-based compensation expense of $15,000 as a result of stock options granted in 2008.

Interest expense was $8,000 in 2008 compared to $12,000 in 2007, a decrease of approximately $4,000 or 33.3%. The decrease is primarily the result of the absence of interest on financed insurance premiums primarily covering our facility in Puerto Rico, which we closed in 2007.

Interest income was $39,000 in 2008 compared to $172,000 in 2007, a decrease of approximately $133,000, or 77.3%, which was primarily attributable to lower average cash balances on hand during the first half of 2008 and the decline in interest rates in late 2008.

We recorded a provision for income taxes of $810,000 in 2008 compared to a tax benefit of $4.8 million in 2007. The provision in 2008 was 58.4% of our pre-tax income for financial reporting purposes. This rate exceeded the 34.0% U.S. Federal statutory rate, primarily due to state and local income taxes, including an increase in the combined state tax rate, which increased our effective tax rate for financial reporting purposes by 10.2 percentage points and certain share-based compensation expense recorded for financial reporting purposes that was not deductible for income tax purposes, which increased our effective tax rate for financial reporting purposes by 12.1 percentage points. The benefit in 2007 resulted primarily from a $5.7 million reduction in our deferred tax asset valuation allowance during 2007, net of Federal and state taxes provided on pretax income. This reduction in the valuation allowance was based on our projections for taxable income, considering, among other things, historical results of operations and our experience in projecting the timing and extent of taxable income in the future. As a result, our effective tax rate for financial reporting purposes in 2007 was a negative 285.4%, despite having pre-tax income. Neither the provision for taxes in 2008 nor the tax benefit in 2007 represents the actual cash tax payable or cash tax benefit receivable by us in the ensuing year.

As of December 31, 2008, we had available Federal net operating loss carryforwards of approximately $25 million and tax credits of approximately $264,000 to offset taxable income in the future. We also have $144,000 in tax credits for which we have provided a full valuation allowance as we believe these credits will expire unutilized.

Net income in 2008 was $578,000 or $0.04 per diluted share, compared to net income of $6.4 million or $0.48 per diluted share in 2007. Net income amounts include income tax expense of $810,000 ($0.06 per diluted share) in 2008 and income tax benefit of $4.8 million ($0.36 per diluted share) in 2007.

Year Ended December 31, 2007 compared to Year Ended December 31, 2006

Net sales in 2007 were $46.8 million compared to $39.1 million in 2006, an increase of $7.7 million or 19.8% due to increased sales of home networking products and connectivity products, offset, in part, by a decline in sales of our NIDs.

Gross profit in 2007 was $14.6 million compared to $13.4 million in 2006, an increase of approximately $1.3 million or 9.5%, while the gross profit margin for those years were 31.3% and 34.2%, respectively. The decrease in gross profit margin is primarily attributable to (i) charges of $1.1 million related to the closing of our Puerto Rico facility (consisting of severance charges of $489,000, accelerated depreciation of $245,000 and other closing expenses of $342,000 recorded during the year ended December 31, 2007), which is included in cost of sales, and (ii) sales of certain lower margin home networking products.

Selling, general and administrative expenses for the year ended December 31, 2007 increased $1.2 million or 12.4% to $10.9 million from $9.7 million in the similar prior year period. The increase over the prior year was primarily due to:

• an increase in professional and consulting fees of $269,000 primarily related to implementation of Section 404 of the Sarbanes-Oxley Act of 2002, and an increase in audit fees and costs associated with the implementation of a new enterprise resource planning computer software system in 2007;

• an increase in share-based compensation expense of $264,000 as a result of stock option grants during 2007 and the fourth quarter of 2006; and

• charges recorded in 2007 for severance benefits of $273,000 associated with the departure of an executive, partially offset for comparative purposes by severance benefits charges in 2006 related to the departure of two executives.

The balance of the increase is related to miscellaneous items, no one of which is individually material.

Research and development expense was $2.2 million in 2007 compared to $1.9 million in 2006, an increase of $315,000 or 16.6%. This increase is attributable to an increase in personnel and related employee benefits of $212,000, consulting expenses of $75,000 and share-based compensation expense of $52,000, partially offset by a decrease of $73,000 in amounts incurred in the development of certain products completed during 2007. The largest portion of our development efforts is focused on new products for the growth segments of the Telco and MSO markets, primarily broadband deployment.

Interest expense was $12,000 in 2007 compared to $7,000 in 2006, an increase of approximately $5,000 or 71.4%.

Interest income was $172,000 in 2007 compared to $226,000 in 2006, a decrease of approximately $54,000, or 23.9%, which was primarily attributable to lower average cash and cash equivalent balances on hand throughout 2007 than in 2006 due to capital expenditures during the course of 2006 and 2007 for our new facility in Edgewood, New York.

We recorded a benefit from income taxes for the years ended December 31, 2007 and 2006 of $4,769,000 and $710,000, respectively. These benefits primarily resulted from a $5.7 million and a $1.6 million reduction in our deferred tax asset valuation allowance during 2007 and 2006, respectively, net of Federal and state taxes provided on pretax income. These reductions in the valuation allowance were based on our current projections for taxable income, considering, among other things, historical results of operations, a trending decline in our dependence on one customer for a significant portion of our total sales and our experience in projecting the timing and extent of taxable income in the future.

As of December 31, 2007, we had available Federal net operating loss carryforwards of approximately $27.0 million and tax credits of approximately $222,000 to offset taxable income in the future. We also have $144,000 in tax credits for which we have provided a full valuation allowance as we believe these credits will expire unutilized.

Net income in 2007 was $6.4 million or $0.48 per diluted share compared to net income of $2.7 million or $0.20 per diluted share in 2006, including the income tax benefit of $4.8 million ($0.36 per diluted share) and $710,000 ($0.05 per diluted share) for 2007 and 2006, respectively.

Impact of Inflation

We do not believe our business is affected by inflation to a greater extent than the general economy. Our products contain a significant amount of plastic that is petroleum based. We import most of our products from contract manufacturers, principally in Malaysia and China, and fuel costs are, therefore, a significant component of transportation costs to obtain delivery of products. Accordingly, an increase in petroleum prices can potentially increase the cost of our products. Increased labor costs in the countries in which our contract manufacturers produce products for us and a continuing increase in the cost of precious metals could also increase the cost of our products. We monitor the impact of inflation and attempt to adjust prices where market conditions permit, except that we may not increase prices under our general supply agreement with Verizon Services Corp. Inflation has not had a significant effect on our operations during any of the reported periods.

Liquidity and Capital Resources

As of December 31, 2008, we had $19.3 million of working capital, which included $8.3 million of cash and cash equivalents, and our current ratio was 8.1 to 1. Our cash and cash equivalents increased during 2008 by $5.0 million to $8.3 million at December 31, 2008, from $3.3 million at December 31, 2007, primarily from net income of $578,000 plus non-cash expenses for (i) depreciation and amortization expense of $1.6 million, (ii) net loss on disposal of capital assets of $32,000, (iii) non-cash share based compensation of $807,000, and (iv) deferred income taxes of $736,000 and a decrease in accounts receivable $3.1 million. The generation of cash was offset, in part, by a decrease in accounts payable and accrued liabilities of $1.4 million.

Investing activities in 2008 used cash of $780,000 for capital expenditures, primarily for machinery and equipment used to manufacture products. Investing activities in 2007 used cash of $4.3 million for capital expenditures, primarily for building improvements ($2.7 million) and furniture and fixtures ($632,000) for our then new facility in Edgewood, New York and machinery and equipment used to manufacture products ($1.3 million). Financing activities provided $100,000 of cash in 2008 compared to $1.2 million in 2007 as a result of the exercise of stock options.

We believe that existing cash, coupled with internally generated funds and our available line of credit, will be sufficient for our working capital requirements and capital expenditure needs for at least the next twelve months.

In December 2008, we entered into an amended credit agreement with JP Morgan Chase Bank, N.A. which replaced a $5.0 million credit facility that was expiring. Under the amended credit agreement, we are entitled to borrow from the bank up to $5.0 million in the aggregate at any one time outstanding, but limited to a borrowing base, in general, equal to 80% of eligible accounts receivable (as defined), plus the lesser of 30% of eligible inventory (as defined, generally to include, with certain exceptions, inventories at the Company's continental United States warehouse), after certain reserves, or $1.5 million. At December 31, 2008, our borrowing base was $4.6 million. Loans under the credit agreement mature on December 31, 2010. We had no borrowings outstanding under the credit agreement during 2008.

Outstanding loans under the credit agreement bear interest, at our option, at either (a) the bank's prime rate plus 2.75% per annum, provided that the prime rate shall not be less than an adjusted one-month LIBOR rate (as defined in the amended credit agreement), or (b) under a formula based on LIBOR plus 4.5% per annum. We also pay a commitment fee equal to 0.25% per annum on the average daily unused portion of the credit facility.

Our obligations under the credit agreement are collateralized by all of our accounts receivable and inventory, and are guaranteed by one of our subsidiaries.

The credit agreement contains various covenants, including financial covenants and covenants that prohibit or limit a variety of actions without the bank's consent. These include, among other things, covenants that prohibit the payment of dividends and limit our ability to repurchase our stock, incur or guarantee indebtedness, create liens, purchase all or a substantial part of the assets or stock of another entity, other than certain permitted acquisitions, create or acquire any subsidiary, or substantially change our business. The credit agreement requires us to maintain, as of the end of each fiscal quarter, tangible net worth and subordinated debt of at least $35.3 million, a ratio of net income before interest expense and taxes for the 12-month period ending with that fiscal quarter to interest expense for the same period of at least 2.25 to 1.00, and a ratio of total liabilities, excluding accounts payable in the ordinary course of business, accrued expenses or losses and deferred revenues or gains, to net income before interest expense, income taxes, depreciation and amortization for the 12-month period ending with that fiscal quarter of not greater than 2.5 to 1.0. As of December 31, 2008, we were in compliance with all covenants in the credit agreement.

Off-Balance Sheet Arrangements

We have no off-balance sheet contractual arrangements, as defined in Item 303(a)(4) of Regulation S-K.

Critical Accounting Policies, Estimates and Judgments

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments. We believe that the determination of the carrying value of our inventories and long-lived assets, the valuation of accounts receivable, the valuation of deferred tax assets and the valuation of share-based payment compensation are the most critical areas where management's judgments and estimates most affect our reported results. While we believe our estimates are reasonable, misinterpretation of the conditions that affect the valuation of these assets could result in actual results varying from reported results, which are based on our estimates, assumptions and judgments as of the balance sheet date.

Inventories are required to be stated at net realizable value at the lower of cost or market. In establishing the appropriate inventory write-downs, management assesses the ultimate recoverability of the inventory, considering such factors as technological advancements in products as required by our customers, average selling prices for finished goods inventory, changes within the marketplace, quantities of inventory items on hand, historical usage or sales of each inventory item, forecasted usage or sales of inventory and general economic conditions.

We review long-lived assets, such as fixed assets to be held and used or disposed of, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows undiscounted and without interest is less than the carrying amount of the asset, an impairment loss is recognized in the amount by which the carrying amount of the asset exceeds its fair value.

Accounts receivable are presented net of allowances for doubtful accounts and sales returns based upon facts and circumstances and our estimate of expected trends.

Consistent with the provisions of Statement of Financial Accounting Standard ("SFAS") No. 109 ("SFAS No. 109") and Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), we regularly estimate our ability to recover deferred tax assets, and report these assets at the amount that is determined to be "more-likely-than-not" recoverable. This evaluation considers several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods over which temporary differences reverse, the expected reversal of deferred tax liabilities, past and projected taxable income and available tax planning strategies. In 2008, we recorded a valuation allowance of $31,000 for deferred tax assets that will not be recoverable based on our estimate of state net operating losses that will expire unused after December 31, 2009. In 2007 and 2006, in response to favorable developments in our projections for taxable income in the future, and based primarily upon positive evidence derived from our sustained levels of historical profitability and our projections for taxable income in the future, we reduced our valuation allowance against deferred tax assets to reflect the amount of deferred tax assets determined to be more-likely than not recoverable. In the event that evidence becomes available in the future to indicate that the valuation of our deferred tax assets should be adjusted (for example, significant changes in our projections for future taxable income), our estimate of the recoverability of deferred taxes may change, resulting in an associated adjustment to earnings in that period.

In accordance with the requirements of SFAS 123(R), we record the fair value of share-based compensation awards as an expense. In order to determine the fair value of stock options on the date of grant, we apply the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and expected term assumptions require a greater level of judgment. We estimate expected stock-price volatility based primarily on historical volatility of the underlying stock using daily price observations over a period equal to the expected term of the option, but also consider whether other factors are present that indicate that exclusive reliance on historical volatility may not be a reliable indicator of expected volatility. With regard to our estimate of expected term, we use historical share option exercise experience, along with the vesting term and original contractual term of options granted.

Recently Adopted Accounting Pronouncements

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). This Statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. SFAS 162 makes the GAAP hierarchy explicitly and directly applicable to preparers of financial statements because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS 162 became effective for us as of November 15, 2008. The adoption of SFAS 162 did not impact our financial position or results of operations.

In December 2007, the Securities Exchange Commission ("SEC") published Staff Accounting Bulletin ("SAB") No. 110, which amends SAB No. 107 to allow for the continued use, under certain circumstances, of the "simplified" method in developing an estimate of the expected term of so-called "plain vanilla" stock options accounted for under SFAS 123(R) beyond December 31, 2007. Companies can use the simplified method if they conclude that their stock option exercise experience does not provide a reasonable basis upon which to estimate expected term. We have concluded that our stock option exercise experience provides a reasonable basis upon which to estimate expected term; therefore we have refined our method to calculate estimates of the expected term of stock options. The adoption of SAB 110 did not have a material impact on our financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for . . .