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 Condensed Financial Statements and the related notes that appear elsewhere in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2008. 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. These risks, uncertainties, and other factors include, among others, the risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the Securities and Exchange Commission, as well as other risks described in this Quarterly Report. 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

Unfavorable changes in domestic and global economic conditions resulted in an adverse effect on our sales revenue in the first six months of 2009 as compared to the prior year period. Many of our large customers experienced surplus inventories from weakened sales of their products in late 2008, thereby reducing orders for our products in first half of 2009. If economic conditions decline again in the future, our revenue could continue to be adversely affected. But, we continue to focus on cutting our operational and general costs in order to improve our gross margins until demand rebounds. We have no debt outstanding, and we have a cash balance of approximately $11.9 million at June 30, 2009.

Results of Continuing Operations for the Three Months Ended June 30, 2009 and 2008

Total revenues were approximately $1.2 million and $1.7 million for the three month periods ended June 30, 2009 and June 30, 2008, respectively. The decrease in revenues during the three months ended June 30, 2009 compared to the three months ended June 30, 2008 is primarily attributable to decreased sales of our
3.5 GHz and our Global Positioning Systems (GPS) antennas in our Wireless Communications Solutions. We expect sales of our Broadband and GPS products to closely trend with future economic global conditions.

Gross profit margins were 42% and 39% for the three and six months ended June 30, 2009 and June 30, 2008, respectively. The 3% increase in gross margin is primarily due to lower operating costs resulting from our efforts in successfully transitioning most of our production to China through our Hong Kong subsidiary, ARCHK, as well as reducing overhead from our U.S. plant operations. We expect gross margins to continue to improve as we fully complete our manufacturing transition to our ARCHK facilities.

Selling, general and administrative expenses (SG&A) decreased 43% to $531 thousand in the second quarter 2009 as compared to $941 thousand in the prior year period. SG&A as a percent of total revenues also decreased from 54% for the three months ended June 30, 2008 to 43% for the three months ended June 30, 2009. Salaries and wages, including commissions, remains the largest component of SG&A costs, constituting 35% of the total SG&A costs for the three months ended June 30, 2009 and 53% for the three months ended June 30, 2008. The majority of the overall decrease in SG&A is related to decreased personnel and salary costs as compared to the prior year period, but we are continuing our efforts to streamline our operations and reduce our office costs, public company and other administrative expenses.

Net interest expense decreased from $22 thousand for the three months ended June 30, 2008 to approximately $6 thousand for the current quarterly period primarily related to decreased amounts outstanding during the period under our Credit Facility with Citywide Bank. At June 30, 2009, we had no debt outstanding. Our Credit Facility expired on May 1, 2009 and is no longer outstanding.

There is no provision for income taxes for both the three months ended June 30, 2009 and 2008, due to our net losses for both periods.

Results of Discontinued Operations for the Three Months Ended June 30, 2009 and 2008 (See Note 2, Discontinued Operations for the detailed operating results of the discontinued operations)

Discontinued operations for the three months ended June 30, 2009 and 2008 represent the operations of our subsidiary, Starworks Wireless. There were no revenues for the both three months ended June 30, 2009 and 2008 resulting in a loss from discontinued operations in the second quarter 2009 of $2 thousand compared to a loss from discontinued operations of $8 thousand for the same period in 2008.

Results of Continuing Operations for the Six Months Ended June 30, 2009 and 2008

Total revenues were approximately $2.3 million and $3.6 million for the six month periods ended June 30, 2009 and June 30, 2008, respectively. The decrease in revenues during the six months ended June 30, 2009 compared to the six months ended June 30, 2008 is primarily attributable to decreased sales of our 3.5 GHz and our Global Positioning Systems (GPS) antennas in our Wireless Communications Solutions. We expect sales of our Broadband and GPS products to closely trend with future economic global conditions.

Gross profit margins were 41% and 38% for the six months ended June 30, 2009 and June 30, 2008, respectively. The 3% increase in gross margin is primarily due to lower operating costs resulting from our efforts in successfully transitioning most of our production to China through our Hong Kong subsidiary, ARCHK, as well as reducing overhead from our U.S. plant operations. We expect gross margins to continue to improve as we fully complete our manufacturing transition to our ARCHK facilities.

Selling, general and administrative expenses (SG&A) decreased 31% to $1.3 million in the first half of 2009 as compared to $1.9 million in the prior year period. But, SG&A as a percent of total revenues increased slightly from 51% for the six months ended June 30, 2008 to 55% for the six months ended June 30, 2009. Salaries and wages, including commissions, remains the largest component of SG&A costs, constituting 34% of the total SG&A costs for the six months ended June 30, 2009 and 52% for the six months ended June 30, 2008. The majority of the overall decrease in SG&A is related to decreased personnel and salary costs as compared to the prior year period, but we are continuing our efforts to streamline our operations and reduce our office costs, public company and other administrative expenses.

Net interest expense decreased from $31 thousand for the six months ended June 30, 2008 to approximately $9 thousand for the current year period primarily related to decreased amounts outstanding during the period under our Credit Facility with Citywide Bank. At June 30, 2009, we had no debt outstanding. Our Credit Facility expired on May 1, 2009 and is no longer outstanding.

Other income decreased during the first half 2009 to approximately $48 thousand as compared to $222 thousand in first half of 2008. The decline in interest income is primarily due to a decline in our cash balances along with a decline in interest rates on money market funds where a significant portion of the funds are invested.

Results of Discontinued Operations for the Six Months Ended June 30, 2009 and 2008 (See Note 2, Discontinued Operations for the detailed operating results of the discontinued operations)

Discontinued operations for the six months ended June 30, 2009 and 2008 represent the operations of our subsidiary, Starworks Wireless. Revenues for the six months ended June 30, 2009 were only $1 thousand compared to revenues of $14 thousand for the six months ended June 30, 2008 resulting in a loss from discontinued operations in 2009 of $14 thousand compared to a loss from discontinued operations of $15 thousand for 2008.

Financial Condition

                                            June 30,        December 31,
            (Thousands of dollars)            2009              2008

            Current ratio (1)               15.75 to 1          8.20 to 1

            Working capital (2)           $     12,821     $       13,155

            Total debt                    $          -     $            -

            Total cash less debt          $     11,892     $       12,943

            Stockholders' equity          $     13,340     $       13,616

            Total liabilities to equity      0.06 to 1          0.14 to 1

(1) Current ratio is calculated as current assets divided by current liabilities.
(2) Working capital is the difference between current assets and current liabilities.

We have a cash balance of $11.9 million at June 30, 2009 and hold no debt outstanding. We believe that we have the ability to provide for our remaining 2009 operational needs through projected operating cash flow and cash on hand.

The net cash used by operating activities from continuing operations was $941 thousand for the six months ended June 30, 2009 compared to net cash used by operating activities from continuing operations of $8 thousand for the six months ended June 30, 2008. The primary reason for the change is the decrease in accounts payable and accrued expenses of $764 thousand over the prior period.

The net cash used in investing activities from continuing operations was $86 thousand for the six months ended June 30, 2009 compared to $55 thousand for the six months ended June 30, 2008, primarily the result of expenditures for patents and equipment.

Net cash used in financing activities from continuing operations for the six months ended June 30, 2009 was $24 thousand compared to $348 thousand for the six months ended June 30, 2008. The decrease in the net cash used is primarily the result of the expiration of the Company's line of credit in May 2009.