The following discussion and analysis should be read in conjunction with the foregoing unaudited Condensed Consolidated Financial Statements and related notes thereto appearing elsewhere in this Report.

Overview

Business

We design, manufacture and market network interface devices ("NIDs"), intelligent NIDs ("iNIDs"), gateways and home networking products, overvoltage surge protection and connectivity solutions for the communications industry.

Results of Operations

The following table sets forth certain statement of operations information as a
percentage of net sales for the periods indicated (except "Income tax (benefit)
provision," which is stated as a percentage of "Income (loss) before income
taxes"):

                                          Three months ended September 30,
(dollars in thousands)                   2009                          2008
                                                                                               Dollar        Percent
                                                  % of                          % of          increase       increase
                                  Amount        Net sales       Amount        Net sales      (decrease)     (decrease)
Net sales                     $       7,460         100.0 % $       8,521         100.0 %  $     (1,061 )        -12.5 %
Cost of sales                         5,237          70.2 %         5,648          66.3 %          (411 )         -7.3 %
Gross profit                          2,223          29.8 %         2,873          33.7 %          (650 )        -22.6 %

Operating expenses:
Selling, general and
administrative                        1,767          23.7 %         2,067          24.3 %          (300 )        -14.5 %
Research and
development                             366           4.9 %           495           5.8 %          (129 )        -26.1 %
Total operating
expenses                              2,133          28.6 %         2,562          30.1 %          (429 )        -16.7 %

Operating income                         90           1.2 %           311           3.6 %          (221 )        -71.1 %

Interest expense                         (3 )         0.0 %            (2 )         0.0 %             1           50.0 %
Interest income                           4           0.1 %             9           0.1 %            (5 )        -55.6 %

Income before income
taxes                                    91           1.2 %           318           3.7 %          (227 )        -71.4 %
Income tax (benefit)
provision                               (13 )       -14.3 %           192          60.4 %          (205 )       -106.8 %
Net income                    $         104           1.4 % $         126           1.5 %  $       (22)          -17.5 %

                                                       Nine months ended September 30,
(dollars in thousands)                              2009                            2008
                                                                                                             Dollar        Percent
                                                            % of                             % of           increase       increase
                                            Amount        Net sales        Amount         Net sales        (decrease)     (decrease)
Net sales                               $       19,703         100.0 %  $      27,248           100.0 %   $     (7,545 )        -27.7 %
Cost of sales                                   13,110          66.5 %         17,569            64.5 %         (4,459 )        -25.4 %
Gross profit                                     6,593          33.5 %          9,679            35.5 %         (3,086 )        -31.9 %

Operating expenses:
Selling, general and administrative              5,417          27.5 %          6,854            25.2 %         (1,437 )        -21.0 %
Research and development                         1,200           6.1 %          1,618             5.9 %           (418 )        -25.8 %
Total operating expenses                         6,617          33.6 %          8,472            31.1 %         (1,855 )        -21.9 %

Operating (loss) income                            (24 )        -0.1 %          1,207             4.4 %         (1,231 )       -102.0 %

Interest expense                                    (5 )         0.0 %             (6 )           0.0 %              1          -16.7 %
Interest income                                     10           0.1 %             36             0.1 %            (26 )        -72.2 %

Income (loss) before income taxes                  (19 )        -0.1 %          1,237             4.5 %         (1,256 )       -101.5 %
Income tax provision                                62        -326.3 %            591            47.8 %           (529 )        -89.5 %
Net (loss) income                       $          (81 )        -0.4 %  $         646             2.4 %   $       (727 )       -112.5 %

Net sales for the three months ended September 30, 2009 were $7,460,000 compared to $8,521,000 in the comparable prior year period, a decrease of $1,061,000 or 12.5%. Net sales for the nine months ended September 30, 2009 were $19,703,000 compared to $27,248,000 in the comparable prior year period, a decrease of $7,545,000 or 27.7%. The decrease in the 2009 periods was primarily due to the economic downturn, which has negatively impacted sales of our connectivity and network interface device products, and the loss of landlines by the service providers which has negatively impacted sales of our network interface device products. Additionally, in the three months ended September 30, 2009, the decrease in sales was partially offset by an increase in sales of our broadband products into the growing broadband market and to new customers.

Gross profit for the three months ended September 30, 2009 was $2,223,000 compared to $2,873,000 in the prior year period, a decrease of $650,000 or 22.6%, while our gross profit margin decreased to 29.8% from 33.7%. Gross profit for the nine months ended September 30, 2009 was $6,593,000 compared to $9,679,000 in the prior year period, a decrease of $3,086,000 or 31.9%, while our gross profit margin decreased to 33.5% from 35.5%. The decrease in gross profit margin in the 2009 periods was primarily due to air freight and expediting costs incurred to satisfy an increase in demand for products with contracted delivery requirements. We had previously reduced the production of these products due to the sharp reduction in demand from our customers in the prior quarters as a result of the impact of the global recession.

Selling, general and administrative expenses for the three months ended September 30, 2009 were $1,767,000 compared to $2,067,000 in the comparable prior year period, a decrease of $300,000 or 14.5%. Selling, general and administrative expenses for the nine months ended September 30, 2009 were $5,417,000 compared to $6,854,000 in the comparable prior year period, a decrease of $1,437,000 or 21.0%. The decrease in the 2009 periods was primarily due to cost reduction measures implemented in 2008 and early 2009 (the largest being a decrease in salary and related benefits resulting from a decrease in headcount), a decrease in commission expense resulting from the decrease in sales and, in the 2009 nine month period, there was a decrease in professional and consulting fees.

Research and development expenses for the three months ended September 30, 2009 were $366,000 compared to $495,000 for the comparable prior year period, a decrease of $129,000 or 26.1%. Research and development expenses for the nine months ended September 30, 2009 were $1,200,000 compared to $1,618,000 in the comparable prior year period, a decrease of $418,000 or 25.8%. These decreases were primarily attributable to greater costs incurred in the 2008 periods for third-party testing fees not necessary in the 2009 periods. Additional savings resulted from lower salaries and related benefits from a reduction in headcount in 2008.

During the three months ended September 30, 2009, we recorded a benefit for income taxes of $13,000 as compared to a provision for income taxes of $192,000 in the comparable prior year period. During the nine months ended September 30, 2009 and 2008, we recorded a provision for income taxes of $62,000 and $591,000, respectively. Our income tax provision for each period consists of amounts necessary to align our year-to-date tax provision with the effective tax rate we expect to achieve for the full year. That rate differs from the U.S. statutory rate primarily as a result of the non-deductibility of certain share-based compensation expense for income tax purposes that has been recognized for financial statement purposes, state taxes and, additionally, in 2009, an increase in the valuation allowance against deferred tax assets for our estimate of state net operating losses that will likely expire unutilized.

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, where possible, to adjust prices where market conditions permit, except that we may not increase prices under our general supply agreement with Verizon Services Corp. Inflation did not have a significant effect on our operations during any of the reported periods.

Liquidity and Capital Resources

As of September 30, 2009, we had $20,405,000 of working capital, which included $12,279,000 of cash and cash equivalents, and our current ratio was 9.2 to 1.

The primary reason for the $4,804,000 of cash provided by operating activities in the nine months of 2009 compared to the $2,836,000 cash provided by operating activities in the nine months of 2008 was a $1,584,000 reduction in inventories in the 2009 period compared to a $2,010,000 temporary build-up of inventories in the 2008 period to fulfill anticipated sales. This increase was partially offset by a net loss of $81,000 in the 2009 nine month period compared to net income of $646,000 in the same 2008 period; a $474,000 decrease in the change in deferred income taxes to $47,000 in the nine months of 2009 from $521,000 in the comparable prior year period due to the decrease in pretax income in the 2009 period from the 2008 period; and a $434,000 decrease in the change in accounts receivable to $1,781,000 in the nine months of 2009 from $2,215,000 in the comparable year period due to a lower accounts receivable balance at January 1, 2009 ($3,906,000) than at January 1, 2008 ($6,994,000) resulting from the decrease in sales volume.

Investing activities in the first nine months of 2009 used cash of $565,000 for capital expenditures, primarily for machinery and equipment used in the development of new products, compared to $674,000 used for this purpose in the similar 2008 period.

Financing activities in the first nine months of 2009 used cash of $242,000 for repayments of insurance premiums financed with short term debt, while the exercise of stock options provided $100,000 of cash in the similar period of 2008.

In December 2008, we entered into an amended credit agreement with JP Morgan Chase Bank, N.A. (the "amended agreement") which replaced a $5,000,000 credit facility that was expiring. Under the amended agreement, we are entitled to borrow from the bank up to $5,000,000 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 $1,500,000. As of September 30, 2009, our borrowing base was $3,120,000. Loans under the amended agreement mature on December 31, 2010. We had no borrowings outstanding under the credit agreement as of September 30, 2009.

Seasonality

Our operations are subject to seasonal variations primarily due to the fact that our principal products, NIDs, are typically installed on the side of homes. During the hurricane season, sales may increase depending upon the severity and location of hurricanes and the number of NIDs that are damaged and need replacement. Conversely, during winter months when severe weather hinders or delays the Telco's installation and maintenance of their outside plant network, NID sales have been adversely affected until replacements can be installed (at which time sales increase).

Off Balance Sheet Financing

We have no off-balance sheet contractual arrangements, as that term is 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. A summary of our most critical accounting policies can be found in the Management's Discussion and Analysis of Financial Condition and Results of Operation section of our Annual Report on Form 10-K for year ended December 31, 2008. We regularly evaluate items which may impact our critical accounting estimates and judgments. During the nine months ended September 30, 2009, we did not update our critical accounting policies.

In July 2009, the Financial Accounting Standards Board ("FASB") issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162" ("SFAS 168"). SFAS 168 establishes the FASB Accounting Standards Codification ("ASC") or ("the Codification") to become the source of authoritative U.S. Generally Accepted Accounting Principles ("GAAP") recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification supercedes all then-existing non-SEC accounting and reporting standards. All other nongrandfathered, non-SEC accounting literature not included in the Codification is nonauthoritative. SFAS 168, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. The adoption of SFAS 168 did not materially impact our financial statements or results of operations.

Effective this quarter, the Company adopted ASC 855, "Subsequent Events" (formerly SFAS No. 165, "Subsequent Events"). This standard establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of this standard did not impact the Company's financial position or results of operations. The Company evaluated all events or transactions that occurred after September 30, 2009 up through November 9, 2009, the date the Company issued these financial statements. No recognized or non-recognized subsequent events were noted.

In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements"), as codified in ASC 820 "Fair Value Measurements and Disclosures" ("ASC 820"), which defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. ASC 820 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. ASC 820 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. ASC 820 defines fair value based upon an exit price model. In February 2008, the FASB removed leasing transactions from the scope of ASC 820 and deferred the effective date of ASC 820 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. It did not defer recognition and disclosure requirements for financial assets and financial liabilities or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. Effective January 1, 2008, we adopted ASC 820, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities, which we adopted effective January 1, 2009. The adoption of ASC 820 did not impact our financial position or results of operations.

In November 2007, the FASB Emerging Issues Task Force ("EITF") issued EITF 07-5, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock"), as codified in ASC 815, "Derivatives and Hedging" ("ASC 815"). As a result of ASC 815, freestanding warrants containing protective features, which provide for adjustments to the exercise or conversion price if the entity subsequently issues shares or other equity-related contracts to a new investor with more favorable pricing, will no longer be eligible to be recorded in equity. ASC 815 became effective for us on January 1, 2009. ASC 815 has not impacted us to date as we have no outstanding instruments that contain these protective features. We will assess the impact of ASC 815 if and when we issue instruments that contain these protective features.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements"), as codified in ASC 810 "Consolidation" ("ASC 810"), which will require noncontrolling interests, previously referred to as minority interests, to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. ASC 810 became effective for us on January 1, 2009. ASC 810 has not impacted us to date as there are no such controlling interests. We will assess the impact of ASC 810 if and when any noncontrolling interests should arise.

Recently Issued Accounting Standards Not Yet Adopted

In October 2009 the FASB published "FASB Accounting Standards Update 2009-13, Revenue Recognition (Topic 605)-Multiple Deliverable Revenue Arrangements" ("Update 2009-13"), which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria in Subtopic 605-25, "Revenue Recognition-Multiple-Element Arrangements", for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on:
(a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. The amended guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and also requires expanded disclosures. Update 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our financial statements or results of operations.

In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("SFAS 167"). SFAS 167 eliminates exceptions in FASB Interpretation No. 46(R) to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also contains a new requirement that any term, transaction or arrangement that does not have a substantive effect on an entity's status as a variable interest entity, a company's power over a variable interest entity or a company's obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying FASB Interpretation No. 46(R). The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments. SFAS 167 will be effective January 1, 2010. We do not expect the adoption of SFAS 167 to have any impact on our financial statements or results of operations.

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Report, words such as "may," "should," "seek," "believe," "expect," "anticipate," "estimate," "project," "intend," "strategy" and similar expressions are intended to identify forward-looking statements regarding events, conditions and financial trends that may affect our future plans, operations, business strategies, operating results and financial position. Forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those

• general economic and business conditions, especially as they pertain to the telecommunications industry;

• potential changes in customers' spending and purchasing policies and practices, which are effected by customers' internal budgetary allotments that may be impacted by the current economic climate, particularly in the United States;

• pressure from customers to reduce pricing without achieving a commensurate reduction in costs;

• the ability to market and sell products to new markets beyond our principal copper-based telephone operating company ("Telco") market which has been declining over the last several years due principally to the impact of alternate technologies;

• exposure to increases in the cost of our products, including increases in the cost of our petroleum-based plastic products and precious metals;

• the ability to timely develop products and adapt our existing products to address technological changes, including changes in our principal market;

• competition in our traditional Telco market and new markets into which we have been seeking to Ex;

• dependence on, and ability to retain, our "as-ordered" general supply agreements with our largest customer and our ability to win new contracts;

• dependence on third parties for certain product development;

• dependence for products and product components from Pacific Rim contract manufacturers, including on-time delivery that could be interrupted as a result of third party labor disputes, political factors or shipping disruptions, quality control and exposure to changes in costs and changes in the valuation of the Chinese Yuan;

• weather and similar conditions, including the effect of typhoons on our assembly facilities in the Pacific Rim which can disrupt product production, the effect of hurricanes in the United States which can increase the demand for our products and harsh winter conditions which can temporarily disrupt the installation of certain of our products by Telcos;

• the ability to attract and retain technologically qualified personnel; and

• the availability of financing on satisfactory terms.