The following discussion should be read in conjunction with the consolidated financial statements, including the related notes, appearing in Item 8 of this report. Also, several of the matters discussed in this document contain forward-looking statements that involve risks and uncertainties. Forward-looking statements usually are denoted by words or phrases such as "believes," "expects," "projects," "estimates," "anticipates," "will likely result" or similar expressions. We wish to caution readers that all forward-looking statements are necessarily speculative and not to place undue reliance on forward-looking statements, which speak only as of the date made, and to advise readers that actual results could vary due to a variety of risks and uncertainties. Factors associated with the forward-looking statements that could cause the forward-looking statements to be inaccurate and could otherwise impact our future results are set forth in detail in this report.

Critical Accounting Policies and Estimates

Use of Estimates - We have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare our financial statements included in Item 8 of this report in accordance with generally accepted accounting principles. These estimates have a significant impact on our valuation and reserve accounts relating to the allowance for sales returns, doubtful accounts, inventory reserves and deferred income taxes. Actual results could differ from these estimates.

Revenue Recognition - We recognize revenue when we have evidence of an arrangement, a determinable fee, and when collection is considered to be probable and products are delivered, This occurs upon shipment of the merchandise, which is when legal transfer of title occurs. Reserves for sales allowances and customer returns are established based upon historical experience and our estimates of future returns. Sales returns for the years ended December 31, 2008 and 2007 aggregated $148,000 and $183,000, respectively. The allowance for sales returns and doubtful accounts at December 31, 2008 aggregated $74,000. We review the actual sales returns and bad debts for our customers and establish an estimate of future returns and allowance for doubtful accounts.

Inventory - Inventory, consisting principally of products held for resale, is recorded at the lower of cost (determined using the first in-first out method) or estimated market value. We had inventory balances in the amount of $13,926,000 at December 31, 2008, which is presented net of valuation allowances of $3,127,000. We evaluate inventories to identify excess, high-cost, slow-moving or other factors rendering inventories as unmarketable at normal profit margins. Due to the large number of transactions and the complexity of managing and maintaining a large inventory of product offerings, estimates are made regarding adjustments to the cost of inventories. If our assumptions about future demand change, or market conditions are less favorable than those projected, additional write-downs of inventories may be required. In any case, actual amounts could be different from those estimated.

Our worldwide operations are subject to local laws and regulations. As such, of particular interest is the European Union ("EU") directive relating to the Restriction of Certain Hazardous Substance ("RoHS"). On July 1, 2006, this directive restricted the distribution of products within the EU containing certain substances, including lead. At the present time, much of our inventory contains substances prohibited by the RoHS directive. Further, many of our suppliers are not yet supplying RoHS compliant products. The legislation is effective and some of our inventory has become obsolete. Management has estimated the impact of the legislation and have written down or reserved for related inventories based on amounts expected to be realized given all available current information. Actual amounts realized from the ultimate disposition of related inventories could be different from those estimated.

Deferred Taxes - We review the nature of each component of our deferred income taxes for reasonableness. If determined that it is more likely than not that we will not realize all or part of our net deferred tax assets in the future, we record a valuation allowance against the deferred tax assets, which allowance will be charged to income tax expense in the period of such determination. We also consider the scheduled reversal of deferred tax liabilities, tax planning strategies and future taxable income in assessing the realizability of deferred tax assets. We also consider the weight of both positive and negative evidence in determining whether a valuation allowance is needed. However, due to the continued net losses, we have fully reserved a $1,491,000 allowance against our net deferred tax assets.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109 ("FIN 48"), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. We adopted the provisions of FIN 48 as of January 1, 2007, and have analyzed filing positions in each of the federal and state jurisdictions where required to file income tax returns, as well as all open tax years in these jurisdictions. We have identified the U.S. federal and California as our "major" tax jurisdictions. Generally, we remain subject to Internal Revenue Service examination of our 2005 through 2007 U.S. federal income tax returns, and remain subject to California Franchise Tax Board examination of our 2004 through 2007 California Franchise Tax Returns. However, we have certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.

We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48. In addition, we did not record a cumulative effect adjustment related to the adoption of FIN 48. Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes.

Recent Accounting Policies

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. This statement does not require any new fair value measurements. This statement was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. However, on December 14, 2007 the FASB issued proposed FASB Staff Position (FSP) SFAS 157-b (FSP 157-b), which partially delays the effective dates of SFAS 157 to fiscal years beginning after November 15, 2008 and interim periods within those years. Management does not expect this statement will have a material impact on its financial statements upon adoption.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements", which is an amendment of Accounting Research Bulletin (ARB) No. 51. This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest. This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Management is currently assessing the impact that SFAS No. 160 will have on its financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations." This statement replaces FASB Statement No. 141, "Business Combinations." This statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Management does not expect the adoption of SFAS 141R to have a significant impact on its financial statements.

In November 2008, the FASB ratified the Emerging Issues Task Force (EITF) consensus on Issue No. 08-6, "Equity Method Investment Accounting Considerations" (EITF 08-6) which addresses certain effects of SFAS Nos. 141R and 160 on an entity's accounting for equity method investments. The consensus indicates, among other things, that transaction costs for an investment should be included in the cost of the equity-method investment (and not expensed) and shares subsequently issued by the equity-method investee that reduce the investor's ownership percentage should be accounted for as if the investor had sold a proportionate share of its investment, with gains or losses recorded through earnings. EITF 08-6 is effective for us on transactions occurring after December 31, 2008. We do not expect this standard will have a material impact on our financial statements upon adoption.

Overview

We distribute discrete semiconductors, optoelectronic devices and passive components to other electronic distributors, CEMs and OEMs, who incorporate them in their products and supply ODM products for our customer's multi-year turn-key projects.

We continue to be impacted by the severe decline in demand for discrete semiconductors from the U.S. market, which began in late 2000. As a result, we have experienced declining sales is such components since early 2001. In response to this declining demand, we placed emphasis on increasing our sales to existing customers through further expansion of the number of different types of discrete components and other integrated circuits in our inventory and by attracting additional contract electronic manufacturers (CEMs), original equipment manufacturers (OEMs) and electronics distributor customers. In addition, over the last three years we have developed our ODM service capabilities and added products developed through partnership agreements with offshore solution providers (OEMs and CEMs). We now offer commodity Integrated Circuits (ICs) as an extension of current discrete semiconductor lines in 2007.

Our core strategy still includes maintaining a substantial inventory of electronic components that allows us to fill customer orders immediately from stock held in inventory. However, since demand remained weak throughout 2008, we continue to focus on lowering our inventory balances and changing our product
mix. As a result, net inventory levels decreased throughout the year by $296,000, including a non-cash provision of approximately $600,000 during 2008 to increase our inventory reserves for price declines, non-RoHS compliant components and slow-moving inventory. This provision is mainly used to increase our inventory reserve to account for slow moving and excess inventory.

In accordance with generally accepted accounting principles, we have classified inventory as a current asset in our December 31, 2008, consolidated financial statements representing approximately 83% of current assets and 61% of total assets. However, if all or a substantial portion of the inventory was required to be immediately liquidated, the inventory would not be as readily marketable or liquid as other items included or classified as a current asset, such as cash. We cannot assure you that demand in the discrete semiconductor market will increase and that market conditions will improve. Therefore, it is possible that further declines in our carrying values of inventory may result.

Our gross profit margins are subject to a number of factors, including product demand, the relative strength of the U.S. dollar, provisions for inventory reserves, our ability to purchase inventory at favorable prices and our sales product mix.

Results of Operations

The Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

Net sales were $7,197,000 and $7,539,000 in 2008 and 2007, respectively, representing a decrease of $342,000 or 4.5%. The decrease in net sales was primarily due to a domestic decline in demand for our electronic discrete, passive and opto component products which overall declined by $940,000 as compared to 2007, partially offset primarily by increase in sales for our ICs and ODM products which combined increased by $580,000 as compared with 2007.

Gross margins were $1,901,000 and $1,333,000 in 2008 and 2007, respectively, which represented 26.4% and 17.7% of net sales for those periods. The increase of $568,000 was primarily attributed to the decrease of our provision for inventory reserves by $750,000, when comparing $600,000 or 8.3% of net sales in 2008 with $1,350,000 or 17.9% of net sales in the 2007.

Selling, general and administrative expenses were $2,712,000 and $2,811,000 in 2008 and 2007, respectively, which represented 37.7% and 37.3% of net sales for those periods. The decrease of $99,000 was primarily due to decreases in salaries and benefits expenses by $49,000 and rent expenses by $21,000.

Operating losses were $811,000 and $1,478,000 in 2008 and 2007, respectively, which represented 11.3% and 19.6% of net sales for those periods. Operating losses decreased primarily as a result of higher gross margins discussed above related to declines in our provision for inventory reserves.

Net interest expense was $1,000 and $41,000 income for 2008 and 2007, respectively. The decrease was due to lower cash on hand levels during the year.

Income tax provision was $3,000 and $1,000 in 2008 and 2007, respectively. Our tax provision is primarily based upon our state income tax liabilities.

We incurred net losses of $786,000 and $1,406,000 in 2008 and 2007, respectively, which represented 10.9% and 18.7% of net sales for those periods. The losses are primarily due lower margins discussed above and related to provisions for our inventory reserves.

Liquidity and Capital Resources

We historically have satisfied our liquidity requirements through cash generated from operations, short-term commercial loans, subordinated promissory notes and issuance of equity securities. A summary of our cash flows resulting from our operating, investing and financing activities for the years ended December 31, 2008 and 2007 were as follows:

                         Year Ended December 31,
                           2008             2007
Operating activities   $    499,000      $ (278,000 )
Investing activities        (32,000 )      (786,000 )
Financing activities        136,000        (576,000 )

Cash flows provided by operating activities increased to $499,000 during 2008, as compared to $278,000 used in the prior year. The increase in cash provided by operations was primarily attributed to accounts receivable and inventory decreasing by $338,000 and $296,000, respectively, during 2008, as compared to increasing by $401,000 and $479,000, respectively, during 2007.

Cash flows used in investing activities decreased to $32,000 during 2008, as compared to $786,000 in the prior year. Our 2008 investing outflows of $32,000 came from acquisitions of property and equipment, compared with $78,000 in 2007. Our remaining 2007 outflows of $708,000 primarily came from investments in marketable securities, real estate construction expenses and joint ventures.

Cash flows provided by financing activities were $136,000 in 2008 as compared to $576,000 used in the prior year. The increase in cash provided by financing was primarily attributed to reducing our cash dividend of $277,000 in 2008, compared with $552,000 in the prior year and the borrowing of $500,000 in notes payable during 2008.

We believe that funds generated from operations, existing cash balances and short-term loans, are likely to be sufficient to finance our working capital and capital expenditure requirements for the foreseeable future. If these funds are not sufficient, we may secure new sources of asset-based lending on accounts receivables or issue debt or equity securities. Otherwise, we may need to liquidate assets to generate the necessary working capital.

Inventory is included and classified as a current asset. As of December 31, 2008, inventory represented approximately 81% of current assets and 61% of total assets. However, it is likely to take over one year for the inventory to turn and therefore is likely not to be saleable within a one-year time frame. Hence, inventory would not be as readily marketable or liquid as other items included in current assets, such as cash.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements that have, or are likely to have, a current or future material effect on our operations.