The following discussion is intended to assist you in understanding our business and the results of our operations. It should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this report. Certain statements made in our discussion may be forward looking. Forward-looking statements involve risks and uncertainties and a number of factors could cause actual results or outcomes to differ materially from our expectations. See "Cautionary Statements" at the beginning of this report on Form 10-K for additional discussion of some of these risks and uncertainties. Unless the context requires otherwise, when we refer to "we," "us" and "our," we are describing ARC Wireless Solutions, Inc. and its consolidated subsidiaries on a consolidated basis.

Business Overview

The Company focuses on wireless broadband technology related to propagation and optimization. Through our Wireless Communications Solutions Division, we design and develop antennas that extend the reach of broadband and other wireless networks and that simplify the implementation of those networks. We supply our products to public and private carriers, wireless infrastructure providers, wireless equipment distributors, value added resellers and other original equipment manufacturers. Our strategy is focused on enhancing value for our stockholders by increasing revenues of our Wireless Communications Solutions Division while at the same time reducing our overhead. Growth in product revenue is dependent both on gaining further traction with current and new customers for the existing product portfolio as well as further acquisitions to support our wireless initiatives. Revenue growth for antenna products is correlated to overall global wireless market growth and this market growth has slowed due to the current global economic conditions. Specific growth areas are last mile wireless broadband Internet delivered over standards-based solutions such as Worldwide Interoperability for Microwave Access (WiMAX) or vendor specific proprietary solutions; traditional LMR/PMR solutions supporting public safety, commercial (2-way and trunked systems), and industrial automation markets; GPS and Mobile SATCOM solutions for network timing, fleet and asset tracking; and in-building solutions to extend traditional cellular network technologies. In addition, management is actively involved in evaluating investment alternatives for our excess cash and cash equivalents of approximately $12.9 million at December 31, 2008.

Financial Condition

At December 31, 2008, we had approximately $13.2 million in working capital, which is a decrease of approximately $1.7 million from working capital at December 31, 2007 of $14.9 million.

We had total assets of $15,520,000 as of December 31, 2008 as compared with $17,912,000 as of December 31, 2007. The decrease is mostly attributable to paying off the $1.4 million line of credit and cash to fund operating losses in 2008.

Liabilities decreased from $2,409,000 at December 31, 2007 to $1,827,000 at December 31, 2008 primarily as a result of a decrease in our line of credit borrowing from $1,430,000 at December 31, 2007 to $0 at December 31, 2008 offset by an increase in accounts payable and accrued expenses of $824,000.

While the Company has seen a decline in orders from customers, both domestically and internationally, as a result of the current economic environment, a trend we do not expect to reverse in 2009, we continue our efforts to acquire new customers and to reduce costs for an expected decrease in revenues.

Management believes that current working capital will be sufficient to allow the Company to maintain its operations through December 31, 2009 and into the foreseeable future.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements. Contractual Obligations as of
December 31, 2008 are as follows:

                                                                Payments Due By Period
                                                                                                   More than 5
                          Total        Less than 1 Year       1-3 Years          3-5 Years            Years
Lines of credit                  -                     -                -                   -                 -
Long-term debt                   -                     -                -                   -                 -
Capital lease
obligations (1)        $   180,000     $          99,000     $     81,000                   -                 -
Operating leases       $   434,000     $         271,000     $    163,000                   -                 -
Purchase obligations
(2)                    $   327,000     $         327,000                -                   -                 -

(1) Obligation includes future payments of both principal and interest.

(2) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty and intercompany purchase obligations.

Results of Continuing Operations for the Year Ended December 31, 2008 compared to the Year Ended December 31, 2007

Total revenues were $7,257,000 and $7,931,000 for the years ended December 31, 2008 and 2007, respectively. The 10% decrease in revenues during the year ended December 31, 2008 compared to the year ended December 31, 2007 is attributable to a decrease in revenues from our Wireless Communications Solutions Division. Despite the addition of new customers in 2008, the decline in revenues for the Wireless Communications Solutions Division in 2008 is primarily the result of the loss of a significant customer that filed for bankruptcy in November 2007.

Gross profit margins were 31.9% and 34.5% for the years ended December 31, 2008 and 2007, respectively. The decrease in gross profit margin is primarily the result of lower revenues. While we have significantly reduced our overhead by transitioning most of our production to China through our Hong Kong subsidiary, ARC Wireless Hong Kong Limited ("ARCHK"), we still had significant fixed overhead at our production facility in Wheat Ridge, Co that are a component of cost of goods sold. Sales in the fourth quarter of 2008 were only $1.38 million which resulted in a gross profit margin of only 8% for the quarter due to these fixed costs. Late in the fourth quarter of 2008, approximately 15 manufacturing positions were eliminated in the Wheat Ridge, Co location.

Selling, general and administrative expenses (SG&A) increased by $235,000 for the year ended December 31, 2008 compared to the year ended December 31, 2007. Salaries and wages increased by approximately $530,000 of which $450,000 represents accrued severance to certain executive officers who resigned in November 2008. The remainder of the increase in 2008 represents the addition of one engineer and one purchasing support person. SG&A as a percent of total revenues increased from 52% for the year ended December 31, 2007 to 60% for the year ended December 31, 2008, primarily due to accrued severance. Salaries and wages, including commissions, remains the largest component of SG&A, constituting 56% and 46% of the total SG&A for the years ended December 31, 2008 and 2007, respectively. Outside service costs increased in 2008 by approximately $250,000 and this represents fees to Quadrant Management, a related party, for financial advisory services. The increase in outside services in 2008 was offset by a decrease in bad debt expense of approximately $340,000 and legal fees of approximately $84,000 due to a write off of certain legal fees that had been accrued in prior years and it was determined that these fees were no longer payable.

Net interest expense was $45,000 for the year ended December 31, 2008 compared to $24,000 for the year ended December 31, 2007. The increase in interest expense is due to increases in new capitalized leases in 2008 of $103,000 and in 2007 of $135,000.

Other income for the years ended December 31, 2008 and 2007 primarily represents interest income on cash and short term investments. Interest rates declined by nearly 50% from 2007 to 2008.
There were no income tax expense or benefit in 2008 due to our operating losses. The benefit for income taxes in 2007 represents a refund of state income taxes.

The Company had a net loss from continuing operations of approximately $1.75 million for the year ended December 31, 2008 compared to a net loss from continuing operations of $743,000 for the year ended December 31, 2007. The primary reasons for the increase in the net loss in 2008 are; 1) a decrease in sales of $674,000 resulting in lower gross profit margins of $425,000, 2) the increase in SG&A of $234,000, 3) the decrease in interest income of $322,000 all of which are discussed above.

Results of Discontinued Operations for the Year Ended December 31, 2008 compared to the Year Ended December 31, 2007(See Note 2, Discontinued Operations for the detailed operating results of the discontinued operations)

Discontinued operations for the years ended December 31, 2008 and 2007 represent the operations of our subsidiary, Starworks Wireless. In 2008, management decided to suspend its efforts to sell cable through its Starworks subsidiary so that it can focus on higher margin products through its Wireless Communications Solutions Division. Revenues for the year ended December 31, 2008 were only $25,000 compared to revenues of $117,000 for the year ended December 31, 2007 resulting in a loss from discontinued operations in 2008 of $91,000 compared to income from discontinued operations of $40,000 for 2007.

Results of Continuing Operations for the Year Ended December 31, 2007 compared to the Year Ended December 31, 2006

Total revenues were $7,931,000 and $6,087,000 for the years ended December 31, 2007 and 2006, respectively. The 30% increase in revenues during the year ended December 31, 2007 compared to the year ended December 31, 2006 is attributable to increased revenues from our Wireless Communications Solutions Division

Gross profit margins were 34.5% and 24.2% for the years ended December 31, 2007 and 2006, respectively. The 42% increase in gross profit margin is primarily the result of lower operating costs resulting from our efforts in successfully transitioning most of our production to China through our Hong Kong subsidiary, ARC Wireless Hong Kong Limited ("ARCHK"), as well as reducing overhead from our U.S. operations.

Selling, general and administrative expenses (SG&A) increased by $1,065,000 for the year ended December 31, 2007 compared to the year ended December 31, 2006. Approximately $132,000 of the increase was related to costs (salaries, outside services and rent) associated with operating our ARCHK subsidiary, and $83,000 represents the addition of previously allocated overhead to Winncom due to the sale of Winncom in 2006, whereby those costs were not allocated in 2007. Other increases in SG&A costs comparing 2007 to 2006, except for those of ARCHK, include; the increase in the allowance for bad debts ($395,000) salaries and benefits ($329,000), outside consulting services ($72,000), the 401(k) employer contribution ($68,000) and stock listing and shareholder meeting costs ($69,000). The significant increase in bad debt expense in 2007 was due to the filing of bankruptcy protection by a significant customer. Based on information available to us, we elected to reserve the entire amount pending settlement of the matter in 2008. SG&A as a percent of total revenues increased from 48% for the year ended December 31, 2006 to 52% for the year ended December 31, 2007. Salaries and wages, including commissions, remains the largest component of SG&A, constituting 46% and 52% of the total SG&A for the years ended December 31, 2007 and 2006, respectively. The increase in salaries and wages in 2007 are primarily due to increased sales and engineering personnel to support the increases in revenue over 2006.

Net interest expense was $24,000 for the year ended December 31, 2007 compared to $124,000 for the year ended December 31, 2006. The decrease is due to the Company significantly reducing the need to use our available line of credit as a result of cash proceeds from the sale of Winncom in 2006. Most of the interest expense for 2007 is related to capitalized leases.

Other income for the year ended December 31, 2007 primarily represents interest income on funds invested from the sale of Winncom of $675,000, and gain on debt settlements of $30,000. Interest income on funds invested from the sale of Winncom for 2006 was $100,000.

The benefit for income taxes in 2006 represents an increase in deferred income taxes, whereas the benefit for income taxes in 2007 represents a refund of state income taxes.

The Company had a net loss from continuing operations of $743,000 for the year ended December 31, 2007 compared to a net loss from continuing operations of $1,575,000 for the year ended December 31, 2006. The primary reasons for the reduction in the net loss are; 1) the increase in sales of $1,844,000, 2) the increase in gross profit margin of $1,267,000, 3) the increase in interest income of $570,000 from the proceeds from the sale of Winncom, and 4) the increase of $30,000 gain on debt settlements, partially offset by an increase on SG&A of $1,065,000 as discussed above.

Results of Discontinued Operations for the Year Ended December 31, 2007 compared to the Year Ended December 31, 2006(See Note 2, Discontinued Operations for the detailed operating results of the discontinued operations)

Discontinued operations for the year ended December 31, 2007 included the operations of Starworks compared to the year ended December 31, 2006, which included the operations of Winncom for ten months and the operations of Starworks for the entire year.

Critical Accounting Policies and Estimates

The Company's significant accounting policies are summarized in Note 1 of our consolidated financial statements set forth in this Annual Report on Form 10-K. The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein, including estimates about the effects of matters or future events that are inherently uncertain. Policies determined to be critical are those that have the most significant impact on the Company's financial statements and require management to use a greater degree of judgment and/or estimates. Actual results may differ from these estimates under different assumptions or conditions.

Allowance for doubtful accounts: We continuously monitor payments from our customers and maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. When we evaluate the adequacy of our allowances for doubtful accounts, we take into account various factors including our accounts receivable aging, customer credit-worthiness, historical bad debts, and geographic risk. If the financial condition of our customers was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. As of December 31, 2008, our net accounts receivable balance was $867,000.

Inventory: Inventory is stated at the lower of cost or net realizable value. Cost is based on a first-in, first-out basis. We review net realizable value of inventory in detail on an on-going basis, with consideration given to deterioration, obsolescence, and other factors. If actual market conditions are less favorable than those projected by management, and our estimates prove to be inaccurate, additional write-downs or adjustments to recognize additional cost of sales may be required. As of December 31, 2008, our inventory balance was $1,107,000.

Goodwill and other long-lived assets: We review the value of our long-lived assets, including goodwill, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. As of December 31, 2008, we had $124,000 of intangible assets remaining on the balance sheet, the value of which we believe is realizable based on market capitalization and estimated future cash flows.

Income Taxes: The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109) which utilizes the asset and liability method of computing deferred income taxes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The current and deferred tax provision is allocated among members of the consolidated group of the separate income tax return basis. As of December 31, 2008 the Company recorded a valuation allowance against deferred taxes of $1,381,000.In July 2006, the FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes, or FIN 48, which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the de-recognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. Only tax positions that meet the more likely than not recognition threshold at the effective date may be recognized upon adoption of FIN 48. We adopted FIN 48 as of January 1, 2007. The adoption of FIN 48 did not impact our consolidated financial condition, consolidated results of operations or consolidated cash flows.

On an on-going basis, management evaluates its estimates and judgments, including those related to allowance for doubtful accounts, inventory valuations, and recoverability of intangible assets, including goodwill. Management bases its estimates and judgments on historical experience and on various other factors that are also believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. However, future events are subject to change and the best estimates and assumptions routinely require adjustment. Our major operating assets are trade and vendor accounts receivable, inventory, property and equipment and intangible assets. Our reserve for doubtful accounts of $460,000 should be adequate for any exposure to loss in our accounts receivable as of December 31, 2008. In late 2008, we disposed of all slow moving and obsolete inventories and believe a reserve is not necessary at December 31, 2008. We depreciate our property and equipment over their estimated useful lives and we have not identified any items that are impaired.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS 158"), which requires the recognition of the funded status of benefit plans in the balance sheet. SFAS 158 also requires certain gains and losses that are deferred under current pension accounting rules to be recognized in accumulated other comprehensive income, net of tax effects. These deferred costs (or income) will continue to be recognized as a component of net periodic pension cost, consistent with current recognition rules. For entities with no publicly traded equity securities, the effective date for the recognition of the funded status is for fiscal years ending after June 15, 2007. In addition, the ability to measure the plans' benefit obligations, assets, and net period cost at a date prior to the fiscal year-end date is eliminated for fiscal years ending after December 15, 2008. The adoption of the recognition element of SFAS 158 had no effect on the Company's financial statements. The adoption of the measurement date element of SFAS 158 is not expected to have a material impact on the Company's financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"), which replaces SFAS 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired in connection with a business combination. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effect of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of an entity's first fiscal year that begins after December 15, 2008. The adoption of SFAS 141R is not expected to have a material impact on the Company's financial condition or results of operations.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 requires that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This Statement is effective as of the beginning of an entity's first fiscal year beginning after December 15, 2008. The adoption of SFAS 160 is not expected to have a material impact on the Company's financial condition or results of operations.

On March 19, 2008, The Financial Accounting Standards Board (FASB) issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company has not yet determined the impact, if any, that SFAS 161 will have on its financial statements.

In June 2008, the FASB issued FASB Staff Position EITF 03-6-1 "Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share ("EPS") under the two-class method described in paragraphs 60 and 61 of SFAS No. 128, "Earnings Per Share". FSP EITF 03-6-1 is effective for fiscal years and interim periods beginning after December 15, 2008 and requires retrospective adjustment for all comparable prior periods presented. The Company does not expect adoption of FSP EITF 03-6-1 to have a material effect on our EPS calculations or disclosures.

In April 2008, the FASB issued FSP FAS No. 142-3, "Determination of the Useful Life of Intangible Assets" (FSP FAS 142-3). This pronouncement amends SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), regarding the factors that should be considered in developing the useful lives for intangible assets with renewal or extension provisions. FSP FAS 142-3 requires an entity to consider its own historical experience in renewing or extending similar arrangements, regardless of whether those arrangements have explicit renewal or extension provisions, when determining the useful life of an intangible asset. In the absence of such experience, an entity shall consider the assumptions that market participants would use about renewal or extension, adjusted for entity-specific factors. FSP FAS 142-3 also requires an entity to disclose information regarding the extent to which the expected future cash flows associated with an intangible asset are affected by the entity's intent and/or ability to renew or extend the arrangement. FSP FAS 142-3 will be effective for qualifying intangible assets acquired by the Company on or after January 1, 2009. The application of FSP FAS 142-3 is not expected to have a material impact on the Company's results of operations, cash flows or financial positions; however, it could impact future transactions entered into by the Company.

In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, "Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities," (FSP FAS 140-4 and FIN 46(R)-8). This pronouncement amends FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" to require public entities to provide additional disclosures about the transfers of financial assets. The pronouncement also amends FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities," to require public enterprises to provide additional disclosures about their involvement with variable interest entities and qualifying special purpose entities. FSP FAS 140-4 and FIN 46(R)-8 were effective for the Company for the year ended December 31, 2008. As this FSP provides only disclosure requirements, the adoption of this standard did not have a material impact on the Company's results of operations, cash flows or financial positions.

In December 2008, the FASB issued FSP FAS No. 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets" (FSP FAS 132(R)-1), which requires additional disclosures for employers' pension and other postretirement benefit plan assets. As pension and other postretirement benefit plan assets were not included within the scope of SFAS No. 157, FSP FAS 132(R)-1 requires employers to disclose information about fair value measurements of plan assets similar to the disclosures required under SFAS No. 157, the investment policies and strategies for the major categories of plan assets, and significant concentrations of risk within plan assets. FSP FAS 132(R)-1 will be effective for the Company as of December 31, 2009. As FSP FAS 132(R)-1 provides only disclosure requirements, the adoption of this standard will not have a material impact on the Company's results of operations, cash flows or financial positions.

In January 2009, the FASB issued FSP EITF No. 99-20-1, "Amendments to the Impairment Guidance of EITF Issue No. 99-20" (FSP EITF 99-20-1). This pronouncement amends EITF 99-20, "Recognition of Interest Income and Impairment . . .