Table of Contents





UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  
  FORM
10 - K
  
  (MARK
ONE)
 [X]
              ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
                For the Fiscal Year Ended
      December 31, 2008.
  OR
  [  ]
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934
                FOR
      THE TRANSITION PERIOD FROM _______ TO
_______.
 
 ARC
Wireless Solutions, Inc.
 (Exact
name of registrant as specified in its charter)
 
 Utah
 (State
or other jurisdiction of incorporation or organization)
  000-18122
                  87-0454148(Commission File
      Number)
                  (IRS
      Employer Identification
Number)
  10601
West 48th
Avenue
 Wheat
Ridge, Colorado, 80033-2660
 (Address of principal executive
offices including zip code)
  (303)
421-4063
 (Registrant’s telephone number,
including area code)
 
 Securities
registered pursuant to Section 12(b) of the Exchange Act:
 (None)
 
 Securities
registered pursuant to Section 12(g) of the Exchange Act:
 $.0005
par value common stock
 
 Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
 Yes           No
_X_
 
 Indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or Section 13(d) of the
Act.
 Yes           No
_X_
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
 Yes X   No
___
 
 1
 Table of Contents
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this form, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. To the best of registrants’ knowledge, there are no disclosures of
delinquent filers required in response to Item 405 of Regulation
S-K.
 Yes X    No
___
 
 Indicate
by check mark whether the registrant is
a large accelerated filer,an accelerated
filer, a non-accelerated filer or a smaller
reporting company. See the definitions of “large accelerated filer”,
“accelerated filer”  and “small reporting company” in Rule 12b-2 of
the Exchange Act. (Check
one):
  Large accelerated filer
[  ]                 Accelerated filer
[  ]                  Non-accelerated filer [  ]
 Smaller reporting company [ X ]
  Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Act).
 Yes____     No  X
 
 As of
June 30, 2008, the last business day of the Registrant’s most recently completed
second quarter, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $8,399,000. This calculation
is based upon the average of the bid and ask price of $4.60 of the stock on June
30, 2008 as reported by NASDAQ. Without asserting that any director or executive
officer of the registrant, or the beneficial owner of more than five percent of
the registrant’s common stock, is an affiliate, the shares of which they are the
beneficial owners have been deemed to be owned by affiliates solely for this
calculation.
 
 Issuer's
revenues for its most recent fiscal year: $7,257,000
 
 The
number of shares of the registrant’s $.0005 par value common stock outstanding
as of January 31, 2009 was 3,091,350
   
 2
  ARCWireless Solutions, Inc.
 Form
10-K for the Year Ended December 31, 2008
 
 Table
of Contents
  Page
      No.PART
      IItem 1.
                                            Business
                                            4Item 1A.
                                            Risk Factors
                                            10Item 1B.
                                            Unresolved Staff Comments
                                            13Item 2.
                                            Properties
                                            13Item 3.
                                            Legal Proceedings
                                            13Item 4.
                                            Submission of Matters to a Vote of Security
      Holders
                                            14PART
      IIItem 5.
                                            Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                                            14Item 6.
                                            Selected Consolidated Financial Data
                                            17Item 7.
                                            Management’s Discussion and Analysis of Financial Condition
      and Results of Operation
                                            19Item 7A.
                                            Quantitative and Qualitative Disclosures About Market
      Risk
                                            26Item 8.
                                            Financial Statements and Supplementary
    Data
                                            26Item 9.
                                            Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
                                            26Item 9A.
                                            Controls and Procedures
                                            26Item 9B.
                                            Other Information
                                            27PART
      IIIItem 10.
                                            Directors and Executive Officers of the
      Registrant
                                            28Item 11.
                                            Executive Compensation
                                            33Item 12.
                                            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder
      Matters
                                            44Item 13.
                                            Certain Relationships and Related
      Transactions
                                            46Item 14.
                                            Principal Accountant Fees and Services
                                            47Part
      IVItem 15.
                                            Exhibits, Financial Statement Schedules
                                            48Signatures
                                            
                                            50
  3
 Table of Contents
 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. 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.
 
 PART
I
 
 Item1.  Business
 
 Overview
 
 Our
Company
 
 ARC Wireless Solutions, Inc. (referred to as “ARC
Wireless,” the “Company,” “we,” “us” and “our”) is a provider of high
quality, timely, cost effective wireless network component and wireless network
solutions. Our Wireless Communications Solutions Division designs, develops,
manufactures, markets and sells a diversified line of antennas and related
wireless communication systems, including cellular base station, mobile,
cellular, conformal and flat panel antennas. Winncom Technologies Corp, our
prior wholly-owned subsidiary ("Winncom"), which was sold effective October 31,
2006, specialized in marketing, distribution, and service of wireless component
and network solutions in support of both voice and data applications, both
domestically and internationally. Starworks Wireless Inc., our wholly-owned
subsidiary ("Starworks"), specialized in the design, marketing, and distribution
of cable in the United States, primarily through original equipment
manufacturing (OEMs) and third-party distributors, retailers and the Internet.
In 2008 management determined it was no longer profitable to operate Starworks
and operations were terminated. We negotiate and manage our contract
manufacturing relationships through our wholly-owned subsidiary, ARC Wireless
Hong Kong Limited (“ARCHK”).
 
 Principal
Products
 
 Principal
products of our Wireless Communications Solutions Division include the
following:
 
 Cellular Base Station
Antennas
 
 Included
in the acquisition of certain commercial assets from Ball Aerospace &
Technology Corp. ("BATC") in 2001 was the right to use BATC's technology in the
manufacturing of the line of base station antennas, which consists of various
models, used in several frequency bands for cellular systems. These cellular
systems include several protocols and technologies such as AMPS, GSM, PCS, GPRS,
2.5G and 3G. Our base station antennas have been deployed in some of the
Cingular (now AT&T), Telefonica and Qwest mobile phone carrier networks, as
well as other carrier networks across the United States and Latin America. We
have supplied our base station antenna products both directly to the carriers
and through other channels, such as OEMs and distributors. Our base station
antenna products have been supplied to Alcatel, Bechtel, General Dynamics,
Tessco, Domital and Sprint North Supply.
 
 Portable
Antennas
 
 Our
portable antennas are unique, yet flexible antenna systems that are used to
increase the antenna gain and product performance for a variety of wireless
devices. Typically, the product can be connected to a radio or cellular phone or
can be installed either directly in or on a computer or other device. We market
two primary portable antenna designs, the Freedom Antenna® and the “Blade”
antenna. The Freedom Antenna® is a unique broadband, patented antenna designed
to work with cellular phones and other mobile wireless devices in a frequency
range of 800 MHz to 3 GHz. The “Blade” Antenna is a smaller more compact design
that uses the same patented technology as the Freedom Antenna®. It is a
passive device that attaches to cell phones, PDA’s, laptop air cards and other
devices in the 800 MHz to 3 GHz frequency range and can be used at home or while
working or traveling that boosts wireless signals. The main design parameter of
our mobile antennas is flexibility, creating an antenna that will function in
several wireless applications or installations without requiring modification of
the fundamental design of the antenna. We market the portable antenna systems
along with our existing commercial wireless products to existing and new
customers.
 
 4
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 Conformal
Antennas
 
 A
conformal antenna is one that is constructed so that it conforms technically and
physically to its product environment. We first introduced and patented the
disguised decal conformal antenna. This product, first introduced in 1989, has
been expanded as an alternative to many conventional wire type antennas and has
been expanded to be used for numerous mobile applications, including domestic
and international cellular and law enforcement frequencies, passive repeaters,
vehicle tracking and GPS. The antenna is approximately 3 1⁄2”x 3 1⁄2”x 1/10” and
typically installs on the inside of the vehicle so that it is not detectable
from the outside of the vehicle. Several derivative products of this antenna
design have been developed for OEMs and other special applications.
 
 Global Positioning System
(GPS) Antennas
 
 We have
developed proprietary, flat GPS antenna systems that integrate with a GPS
receiver. GPS receivers communicate with a constellation of globe-orbiting
satellites that will identify longitude and latitude coordinates of a location.
These satellite systems have been used for years by the military, civilian and
commercial boats, planes, for surveying, recreational hikers, and more recently
in vehicle tracking and asset management. Accurate to within several feet, there
are several types of GPS systems, some of which are the size of a cellular phone
and are very easy to use. We are currently marketing our GPS antenna products on
an OEM basis for the purposes of fleet management, asset management, and vehicle
tracking systems.
 
 We have
also developed a proprietary, patented, amplified GPS/Cellular combination
antenna that integrates with a GPS receiver. We currently are selling this
product to fleet and asset management companies on a worldwide basis.
Conventional GPS antenna systems are mounted on the exterior of a vehicle or
other asset; however our product can be mounted on the interior of an automobile
or truck, protecting the antenna from weather, theft, and
vandalism.
 
 Flat Panel
Antennas
 
 Our flat
panel antennas are flat antennas that are used for Wi-Fi® and WiMAXTM and related
technologies. The antenna design typically incorporates a group of constituent
antennas, all of which are equidistant from the center point. These types of
antennas are used to receive and/or transmit data, voice and, in some cases,
video from radio transmitters. We have developed, patented, and sold various
versions of these antennas to private, commercial and governmental entities. We
have added several flat panel antenna designs including, 3.5 GHz, 4.9 GHz and
5.8 GHz.
 
 Other
Antennas
 
 We are
pursuing many new business opportunities for our antennas by continuing to
broaden and adapt existing technologies. We have designed and currently
manufacture antennas varying in frequencies up to 6GHz. These antennas use our
newly developed antenna designs to provide inconspicuous installation. In most
cases, our antennas are designed to be manufactured using our proprietary design
footprints. This allows us to better utilize our engineering, technical and
production staff, as well as existing tools, dies and radomes for more than one
product.
 
 5
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 Test
Range
 
 The
Company has an antenna test range for the purpose of testing RF antennas with a
frequency range up to 6GHz. The antennas test range consists of a Scientific
Atlanta Model 2095 Microwave Measurement System and 40 foot indoor anechoic test
chamber. From time to time, the Company may rent the test range to other
companies interested in testing the performance of their finished wireless
product.
 
 Principal
products of our former Winncom subsidiary included the following:
 
 Unlicensed
wireless products using frequencies that require a license to manufacture, but
not a license to use, licensed wireless products requiring a Federal
Communication Commission (“FCC”) license to operate on a specific frequency in a
geographic area, VoIP solutions for enterprise and residential markets, customer
premise equipment (CPE) and base station antenna solutions as well as a full
range of antennas for point-to-point and point-to-multi-point applications, a
complete line of high-performance voice and data infrastructure and security
products, and a wide range of copper, coaxial and fiber cables and cable
assembly products as well as lightning arrestors that are used in the
installation, extension and protection of wireless end-to-end
systems.
 
 Principal
products of our Starworks subsidiary included the following:
 
 Cable and Related
Components
 
 We
designed and marketed coaxial cable and related components through our Starworks
subsidiary. Starworks originally provided pre-packaged components, primarily
using cable, to the direct-to-home satellite dish industry. To increase sales
and customer satisfaction, the satellite programming industry began offering
professional installation with the purchase of a home satellite dish, limiting
the sales of pre-packaged components. Starworks transformed its business to
provide installers and other OEM customers with components for various wireless
installations. Starworks' primary focus is no longer specific to just the
satellite industry but to the wireless industry in general, having offered bulk
cable, jumper cables consisting of certain lengths of cable with connectors
pre-installed and related components. For the foreseeable future, management has
determined to cease efforts to sell cable through its Starworks subsidiary so
that it can focus on higher margin products through its Wireless Communications
Solutions Division.
 
 Foreign
Sales:
 
 Direct
export sales by the Company to customers outside North America were
approximately 20% of Company’s sales for the fiscal year ended December 31,
2008. Only one customer located outside of North America accounted for sales of
more than 5% and that customer accounted for 5.6% of sales. The Company does not
own, or directly operate any manufacturing operations in foreign
countries.
 
 Marketing and
Distribution
 
 Our Wireless Communications Solutions
Division markets its commercial line of antennas directly to distributors,
installers, and retailers of antenna accessories. Current distribution consists
of several domestic and international distributors. The Wireless Communications
Solutions Division also markets our diversified proprietary designs to our
existing and potential customers in the commercial, government and retail market
places. Potential customers are identified through trade advertising, phone
contacts, trade shows, and field visits. We provide individual catalog and
specification brochures describing existing products. The same brochures are
utilized to demonstrate our capabilities to develop related products for OEM and
other commercial customers. Our web site, www.arcwireless.net, includes
information about our products and background as well as financial and other
shareholder-oriented information. The web site, among other things, is designed
to encourage both existing and potential customers to view us as a potential
source for diversified wireless solutions. Inquiries through the web site are
pursued by our in-house and outside sales personnel. To help customers get
answers quickly about our products, we have established a toll-free telephone
number administered by our customer service personnel from 8:00 a.m. to 5:00
p.m. Mountain Time. Many of our products are also marketed internationally.We
also have numerous international distributors marketing our products in several
countries. We are currently negotiating with various international manufacturers
to manufacture our proprietary products. This process can save duty and freight
costs making us more competitive.
 
 6
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 Winncom was a value added distributor
that supported distribution of products with internal sales, technical support,
system design and feasibility studies, installation and training.
 
 Production
 
 The
Wireless Communications Solutions Division produced most of the customized items
that we use to manufacture our products excluding cable, connectors and other
generic components. We believe that this control over the production process
allows us to be more competitive, efficient and more responsive to customers and
allows us to take advantage of more opportunities in the wireless communications
market.
 
 The
manufacturing of the majority of our products and components is currently in
China under the supervision of our wholly-owned subsidiary, ARC Wireless Hong
Kong Limited, and it is anticipated that a majority of all production of our
products and components will continue to be manufactured in China.
 
 Research And
Development
 
 Research
and development (“R&D”) costs are charged to operations when incurred and
are included in operating expenses. Except for salaries of engineering personnel
and contract engineering involved in R&D, other R&D costs have not been
material in 2008, 2007 and 2006. We spent approximately $499,000, $512,000
and $363,000 on R&D in 2008, 2007 and 2006, respectively. Our
R&D personnel develop products to meet specific customer, industry and
market needs that we believe compete effectively against products distributed by
other companies. Quality assurance programs are implemented into each
development and manufacturing project, and we enforce strict quality
requirements on components received from other manufacturing
facilities.
 
 Financial Information About
Industry Segments
 
 The Company had three reportable segments that were
separate business units that offered different products as follows: distribution
of wireless communication products, antenna manufacturing, and cable products.
Effective October 31, 2006, the distribution business was sold and is reported
as discontinued operations in the accompanying consolidated financial
statements. During the fourth quarter of 2008,management determined to
cease efforts to sell cableand as such the cable
products segment is reported as discontinued operations in the accompanying
consolidated financial statements. Please see Notes 2 and 12 to our consolidated
financial statements, included in this report.
 
 
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  Employees
 
 At
December 31, 2008, we had 18 full time employees including 3 in manufacturing
and distribution, 3 in sales and customer support, 6 in engineering and product
development, and 6 in management and administration. Our employees are not
represented by any collective bargaining agreement and we have never experienced
a work slowdown or strike.
 
 Competition
 
 The
market for wireless network components is highly competitive, and our current
and proposed products compete with products of larger companies that are better
financed, have established markets, and maintain larger sales organizations and
production capabilities In marketing our products, we have encountered
competition from other companies, both domestic and international. At the
present time, our market share of the overall wireless network component market
is small. Our antenna products are designed to be unique and in some cases are
patented. Our products normally compete with other products principally in the
areas of price and performance. However, we believe that our products work as
well as or better than competing products and usually sell for the same price or
less.
 
 Government
Regulations
 
 We are
subject to government regulation of our business operations in general, and the
telecommunications industry also is subject to regulation by federal, state, and
local regulatory and governmental agencies. Under current laws and the
regulations administered by the FCC, there are no federal requirements for
licensing antennas that only receive (and do not transmit) signals. We believe
that our antennas that are also used to transmit signals are in compliance with
current laws and regulations. Current laws and regulations are subject to change
and our operations may become subject to additional regulation by governmental
authorities. We can be significantly impacted by a change in either statutes or
rules.
 
 Patents
 
 We
currently hold 14 U.S. patents, which will remain valid until their individual
specific expiration dates. Kevin O. Shoemaker, our former Chief Scientist, is
the inventor of record for a patent for a serpentine planar broadband antenna
that expires in 2011. In addition, Mr. Shoemaker and Mr. Randall P. Marx, our
former Chief Executive Officer, are inventors of record for a patent covering
the process used to manufacture certain of our flat planar antennas, which
expires in 2016. Mr. Shoemaker is the inventor of record for a patent, which
expires in 2018, covering creating antennas from coaxial cable, and Mr.
Shoemaker and Mr. Marx are also the inventors of record for a patent for a
conformal antenna for a satellite dish, which expires in 2013, as well as for a
patent for conformal antenna assemblies, which expires in 2016. Mr. Shoemaker
and Mr. Marx each have permanently assigned to us all rights to these
patents.
 
 The
former president of our subsidiary Starworks, David E. McConnell, is the
inventor of record for a patent for a coaxial cable connector, which will expire
in 2017, all rights to which are owned by the Company as a result of the
acquisition of Starworks on September 29, 2000.
 
 In
addition, Dr. Mohamed Sanad, a former Principal Consulting Engineer, is the
inventor of record for a patent that was designed for remote wireless metering
and that will expire in 2019. He is also the inventor of another patent used for
remote wireless metering as well as mobile data collection, which will expire in
2019. Dr. Sanad has permanently assigned to us all of the rights to these
patents.
 
 8
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 Raymond
L. Lovestead, one of our former engineers, is the inventor of record for our low
cross-polarization microstrip patch radiator patent, which will expire in 2021.
Mr. Lovestead has permanently assigned to the Company all patent and other
rights in the products covered by this patent application and all other products
that have been developed while employed by us.
 
 Dr.
Donald A. Huebner, and Mr. Lovestead are the inventors of record for our
Ultra-Broadband Thin Planar antenna patent, which is used for our Freedom
Antenna® and will expire in 2022. Dr. Huebner was a former Director of the
Company.  Dr. Huebner has permanently assigned to the Company all
patent and other rights in the products covered by this utility
patent.
 
 Steven C.
Olson, our Chief Technology Officer, is the inventor of record for our Partially
Shared Antenna Aperture patent, which will expire in 2023 and which is currently
used in some of our fixed wireless access antennas.
 
 Per the
terms of the asset purchase agreement with BATC (see page 12), we have also
filed a utility patent application with Mr. Jeffrey A. Godard, currently an
engineer with BATC, and Mr. Olson as inventors of record, both of whom have
permanently assigned to us all patent and other rights to any commercial
products covered by this utility patent application. This patent application for
our Microstrip Fed Log antenna has been granted and will expire in
2022.
 
 Mr. Olson
is also the inventor for the technology used for our DUALBASETM antenna. Mr.
Olson has permanently assigned to us all patent and other rights in the products
covered by this utility patent, and all other products that have been and will
be developed while employed by us. This patent application for our Omni-Dual
Band Antenna & System has been granted and will expire in 2024.
 
 We also
have the exclusive commercial licensing rights to the following patents, which
were included as part of the asset purchase agreement to acquire certain
commercial assets from BATC in 2001: US6,121,929, US5,905,465, US6,239,751 and
US6,414,636.
 
 In
addition to the above referenced patents, we have filed one provisional patent
application.
 
 We
currently have seven trademarks, ANTENNAS AMERICA®, AIRBASE®, DUALBASE®,
UNIPAK®, FREEDOM ANTENNA®, EXSITE®, OMNIBASE® and PARITY® that are registered
marks. We also have in use the following trademarks, ARC VLPA, ARC ATLAS,
FREEDOM BLADE and FREEDOM CRUISE.
 
 We seek
to protect our proprietary products, information and technology through reliance
on confidentiality provisions, and, when practical, the application of patent,
trademark and copyright laws. We cannot assure that these applications will
result in the issuance of patents, trademarks, or copyrights of our products,
information or technology.
 
 History
 
 We were
organized under the laws of the State of Utah on September 30, 1987 for the
purpose of acquiring one or more businesses. Our prior name was Westflag
Corporation, which was formerly Westcliff Corporation. On April 12, 1989, we
merged with Antennas America, Inc., a Colorado corporation that had been formed
in September 1988 and had developed an antenna design technique that would
permit the building of flat (as compared to parabolic) antenna systems. In
October 2000, we changed our name to ARC Wireless Solutions, Inc. from Antennas
America, Inc. In February 2007, we effected a one-for-fifty reverse split so
that each fifty outstanding shares of common stock prior to the reverse split
became one share after the reverse split. Unless otherwise indicated, all
references in this Annual Report to the number or prices of shares of our common
stock or the units described above have been adjusted for the effect of the 2007
one-for-fifty reverse.
 
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 Disclosure Regarding
Forward-Looking Statements And Risk Factors
 
 Forward-Looking
Statements.
 
 This
Annual Report on Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements other
than statements of historical fact included in this Annual Report, including
without limitation under “Item 1: Business  Principal Products”, “Marketing and
Distribution”, “Production”, “Research and Development”, “Competition”,
“Governmental Regulations” and “Patents”, and “Item 7:  Management’s
Discussion and Analysis of Financial Condition and Results of Operation”,
regarding our financial position, business strategy, plans and objectives of our
management for future operations and capital expenditures, and other matters,
other than historical facts, are forward-looking statements.  Although
we believe that the expectations reflected in such forward-looking statements
and the assumptions upon which the forward-looking statements are based are
reasonable, we can give no assurance that such expectations will prove to have
been correct.
 
 Additional
statements concerning important factors that could cause actual results to
differ materially from our expectations are disclosed in the following “Risk
Factors” section and elsewhere in this Annual Report. In addition, the words “believe”, “may”, “will”, “when”,
“estimate”, “continue”, “anticipate”, “intend”, “expect” and similar
expressions, as they relate to us, our business or our management, are intended
to identify forward-looking statements.All written and oral
forward-looking statements attributable to us or persons acting on our behalf
subsequent to the date of this Annual Report are expressly qualified in their
entirety by the following Risk Factors.
 
 Item1A.
Risk Factors.
 
 In
addition to the other information contained in this Annual Report, the following
Risk Factors should be considered when evaluating the forward-looking statements
contained in this Annual Report:
 
 1.
              We have a history of prior
      losses and there is no assurance that our operations will be profitable in
      the future. From inception
      through December 31, 2008, we have primarily incurred losses from
      operations. Profits incurred in certain years were marginal, and we cannot
      be assured that our operations in the future will be profitable. See the
      financial statements included in Item 15 of this Annual Report on Form
      10-K.
  2.
              Our industry encounters rapid
      technological changesand there is no assurance that
      our research and development activities can timely lead to new and
      improved products when the market demands them.
      We do business in the wireless communications industries. This industry is
      characterized by rapidly developing technology. Changes in technology
      could affect the market for our products and necessitate additional
      improvements and developments to our products. We cannot predict that our
      research and development activities will lead to the successful
      introduction of new or improved products or that we will not encounter
      delays or problems in these areas. The cost of completing new technologies
      to satisfy minimum specification requirements and/or quality and delivery
      expectations may exceed original estimates that could adversely affect
      operating results during any financial
  period.
  3.
              We rely on the protection of
      patents and certain manufacturing practices to protect our product designs
      and there is no assurance that these measures will be
      successful.We attempt to protect
      our product designs by obtaining patents, when available, and by
      manufacturing our products in a manner that makes reverse engineering
      difficult. These protections may not be sufficient to prevent our
      competitors from developing products that perform in a manner that is
      similar to or better than our products. Competitors’ successes may result
      in decreased margins and sales of our
products.
  10
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 4.
              We face intense competition in
      our industry and there is no assurance that we will be able to adequately
      compete with our larger competitor. The communications and antenna
      industries are highly competitive, and we compete with substantially
      larger companies. These competitors have larger sales forces and more
      highly developed marketing programs as well as larger administrative
      staffs and more available service personnel. The larger competitors also
      have greater financial resources available to develop and market
      competitive products. The presence of these competitors could
      significantly affect any attempts to develop our
      business.
  5.
              The Company depends on
      third-party contract manufacturers for a majority of its manufacturing
      needs.
      We have transitioned a majority of our production to China and are
      dependent on efficient workers for these functions.If
      the Company’s manufacturers are unable to provide us with adequate
      supplies of high-quality products on a timely and cost-efficient basis,
      the Company’s operations would be disrupted and its net revenue and
      profitability would suffer. Moreover, if the Company’s third-party
      contract manufacturers cannot consistently produce high-quality products
      that are free of defects, the Company may experience a higher rate of
      product returns, which would also reduce its profitability and may harm
      the Company’s reputation and brand.
 
 The
Company does not currently have any agreements with any of its contract
manufacturers, and such manufacturers could stop manufacturing products for the
Company at any time. Although the Company believes that it could locate
alternate contract manufacturers if any of its manufacturers terminated their
business, the Company’s operations could be impacted until alternate
manufacturers are found.
 
 6.
              The success of our business is
      highly dependenton keyemployees.  We
      are highly dependent on the services of our executive management,
      including Steven C. Olson, our Chief Technology Officer. The loss of the
      services of any of our executive management could have a material adverse
      effect on us.
  7.
              We may incur significant costs
      in complying with new governmental regulations that affect our industry,
      and this may require us to divert funds we use for the development of our
      business and product.We are subject to
      government regulation of our business operations in general. Certain of
      our products are subject to regulation by the Federal Communications
      Commission (“FCC”) because they are designed to transmit signals. Because
      current regulations covering our operations are subject to change at any
      time, and despite our belief that we are in substantial compliance with
      government laws and regulations, we may incur significant costs for
      compliance in the future.
  8.
              We have not paid any cash
      dividends with respect to our shares, and it is unlikely that we will pay
      any cash dividends on our shares in the foreseeable future. We
      currently intend that any earnings that we may realize will be retained in
      the business for further development and
  expansion.
  11
 Table of Contents
 9.
              We have significant sales
      concentrated in a few customers.The concentration of the Company’s
      business with a relatively small number of customers may expose us to a
      material adverse effect if one or more of these large customers were to
      experience financial difficulty or were to cease being a customer for
      non-financial related issues. In November 2007, a significant customer
      filed bankruptcy and our revenues were adversely affected in 2008 and we
      expect revenues to continue to be adversely affected in the future. In
      addition to the loss of significant customers, our business is affected by
      general economic conditions and any extended weakness in the U.S. and the
      world economy could reduce our business prospects and could cause
      decreases in our revenues and operating cash
  flows.
 
 10.
              The
      Company may make future acquisitions, which will involve numerous
      risks.
 
 ·
              diversion
      of management’s attention;
 
 ·
              the
      effect on the Company’s financial statements of the amortization of
      acquired intangible assets;
 
 ·
              the
      cost associated with acquisitions and the integration of acquired
      operations; and
 
 ·
              assumption
      of unknown liabilities, or other unanticipated events or
      circumstances.
 
 Any of
these risks could materially harm the Company’s business, financial condition
and results of operations. There can be no assurance that any business that the
Company acquires will achieve anticipated revenues or operating
results.
 
 11.
              OtherRisks.In addition, there are other risks, which if
      realized, in whole or in part, could have a material adverse effect on our
      business, financial condition and/or results of operations, including, without
      limitation:
  •
                        
                        intense competition, regionally and
      internationally, including competition from alternative business models,
      such as manufacturer-to-end-user selling, which may lead to reduced
      prices, lower sales or reduced sales growth, lower gross margins, extended
      payment terms with customers, increased capital investment and interest
      costs, bad debt risks and product supply
  shortages;•
                        
                        termination of a supply or services agreement with
      a major supplier or customer or a significant change in supplier terms or
      conditions of sale;•
                        
                        the continuation or worsening of the severe
      downturn in economic conditions (particularly purchases of technology
      products) and failure to adjust costs in a timely fashion in response to a
      sudden decrease in demand;•
                        
                        losses resulting from significant credit exposure
      to reseller customers and negative trends in their
      businesses;•
                        
                        reductions in credit ratings and/or unavailability
      of adequate capital;•
                        
                        failure to attract new sources of business from
      expansion of products or services or entry into new
      markets;•
                        
                        inability to manage future adverse industry
      trends;•
                        
                        future periodic assessments required by current or
      new accounting standards resulting in additional charges;and•
                        
                        unstable economic and political conditions in
      China.Any adverse change
      in the economic conditions or government policies in China could have a
      material adverse effect on our
business.
  12
 Table of Contents
 Available Information.
  We make available free of charge on our website at
www.arcwireless.net, our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K (including exhibits and
supplementary schedules) and amendments to those reports, filed or furnished
under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as
reasonably practicable after these reports are electronically filed with, or
furnished to, the Securities Exchange Commission. In addition, our Amended and
Restated Code of Ethics, Compensation Committee Charter and Audit Committee
Charter are also available on our website.
 
 Item1B. Unresolved Staff Comments
 
 None
 
 Item2.
Properties
 
 Our
principal offices are located in Wheat Ridge, Colorado, where we lease
approximately 50,000 square feet of office, production and warehouse space for
our corporate office, engineering and limited manufacturing of antennas and for
use by each of our segments. This lease commenced on July 1, 2003 and expires on
June 30, 2010.
 
 In
addition, we lease warehouse space, as needed, in Hong Kong on a month to month
basis for our subsidiary ARC Wireless Hong Kong Limited.
 
 For
additional information, please see Note 8 to the audited consolidated
financial statements included elsewhere in this Form 10-K.
 
 Item3.  Legal Proceedings
 
 The
Company and its subsidiaries are involved in various legal proceedings of a
nature considered normal in the course of its operations, principally accounts
receivable collections. While it is not feasible to predict or determine the
final outcome of these proceedings, management has reserved as an allowance for
doubtful accounts for that portion of the receivable it estimates will be
uncollectible. No litigation exists at December 31, 2008 or at the date of this
report.
  13
 Table of Contents
 Item4.  Submission of Matters to a Vote of Security
Holders
 
 The
Company held its annual meeting of shareholders on December 16, 2008, and
1,408,990 shares were represented at the meeting. The following are the results
of the voting on matters submitted to the shareholders, all of which were
approved:
 
 (1)
              For
      election of the following nominees as
directors:
  Name
                                Number of Shares For
                                WithheldViktor
      Nemeth
                                1,385,520
                                23,470Marco
      Vega
                                1,316,070
                                92,920Jason
      Young
                                1,315,429
                                93,561
 
 (2)
              Proposal
      to ratify the selection of HEIN & Associates, LLP as the Company’s
      independent registered public accounting
firm.
 
 Number of Shares:
  1,407,521
      (For)
                  793
      (Against)
                  676
      (Abstain)
                  0
      (Not Voting)
  (3)
              In
      their discretion, the Proxies as authorized to vote upon such as other
      business as may properly come before the
  meeting.
 
 Number of Shares:
  1,307,629
      (For)
                  97,082
      (Against)
                  4,279
      (Abstain)
                  0
      (Not Voting)
  
 PART
II
 
 Item5.  Market for the Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
 
 Our
common stock was quoted on the OTC Bulletin Board (the “OTCBB”) under the
trading symbol “ARCS” until February 11, 2007. On February 12, 2007, our common
stock began trading under the symbol “ARCW” on the OTCBB pursuant to the
1–for-50 reverse stock split effected in February 2007. On April 10, 2007, our
common stock ceased trading on the OTCBB, and began trading on the NASDAQ
Capital Markets Exchange (the “NASDAQ–CM”). Because trading in our shares is so
limited, prices can be highly volatile.
 
 The table
below represents the high and low bid information during each of the quarters in
the past two fiscal years during which our common stock was traded on the OTCBB
(from January 1, 2007 to April 9, 2007 and the high and low sales process for
our common stock since it has been traded on the NASDAQ-CM (April 10, 2007
through the present). These over-the-counter
quotations for the period when our common stock was traded on the OTCBB (January
1, 2007 to April 9, 2007) reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
The prices have been adjusted for the one-for-fifty reverse stock split that was
effective on February 12, 2007.
 
 14
 Table of Contents
 Common
Stock
 
 Quarter Ended
                      High Bid
                      Low BidMarch
      31, 2007
                      $5.00
                      $4.51High Sales Price
                      Low Sales PriceJune
      30, 2007
                        September
      30, 2007
                        December
      31, 2007
                        March
      31, 2008
                        June
      30, 2008
                        September
      30, 2008
                        December
      31, 2008
                      $6.20
                        $5.71
                        $6.44
                        $5.30
                        $5.10
                        $4.65
                        $4.00
                      $4.67
                        $4.80
                        $4.31
                        $4.31
                        $4.31
                        $3.45
                        $2.37
 
 On
January 30, 2008, the closing sales price for our common stock was $2.93 and the
approximate number of our shareholders of record was 407. We have not declared
or paid any cash dividends on our common stock since our formation and do not
presently anticipate paying any cash dividends on our common stock in the
foreseeable future.
 
 Recent Sales Of Unregistered
Securities
 
 During
the year ended December 31, 2008, we recorded the issuance of 1,219 shares of
common stock to directors for outstanding obligations for directors’ fees in the
amount of $5,500.
 
 These issuances were granted based on exemptions from
registration under the Securities Act of 1933, as amended (the “Securities
Act”), and applicable state laws pursuant to Section 4(2) of the Securities Act
and Rule 506 of Regulation D. These issuances qualified for this exemption from
registration because (i) the Company did not engage in any general solicitation
or advertising to market the securities;  (ii) all the Company's
reports filed under the Securities Exchange Act of 1934 were made available to
the recipients; (iii) each recipient was provided the opportunity to ask
questions and receive answers from the Company regarding the offering; (iv) the
securities were issued to persons with knowledge and experience in financial and
business matters so that he or she is capable of evaluating the merits and risks
of an investment in the Company; and (v) the recipients received “restricted
securities” that include a restrictive legend on the
certificate.
 
 Equity Compensation Plan
Information.
 
 Securities
authorized for issuance under our equity compensation plans as of December 31,
2008 are as follows:
 
 Equity
Compensation Plan Table
 
 Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                      Weighted
      average exercise price of outstanding options, warrants and
      rights
                      Number
      of securities remaining available for future issuanceEquity
      compensation plans approved by security holders
                      47,500
                      $5.38
                      260,000Equity
      compensation plans not approved by security holders
                      0
                      -
                      -Total
                      47,500
                      $5.38
                      260,000
 
 15
 Table of Contents
 Share
Performance Graph
 
 The
following performance graph shall not be deemed incorporated by reference by any
general statement incorporating by reference in the Annual Report on Form 10-K
into any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934, except to the extent that we specifically incorporate this information
by reference, and shall not otherwise be deemed filed under such
Acts.
 
 The
following graph compares the total shareholder return, on our common stock for the five-year period from
December 31, 2003 through December 31, 2008 withthat of the NASDAQ Composite Index, and a peer
group (the “Peer Group”) of four companies selected by us in good faith, whose
primary business includes the manufacture and sale of antennas and distribution
of wireless communication products. The members of the Peer Group are Tech Data
Corp., PC Tel Inc., Phazar Corp. and EMS Technologies Inc. This graph assumes
that on December 31, 2003 $100 was invested in our common stock in the NASDAQ
Index and in the Peer Group, and assumes reinvestment of all dividends. Note
that historic stock price performance does not necessarily indicate future stock
price performance.
 
 
 
   16
 Table of Contents
  Item6.    Selected Consolidated Financial
Data
  The
following table sets forth selected consolidated financial data for each of the
Company’s last five fiscal years. The results of operations for any period are
not necessarily indicative of the results to be expected for any future
period.
 
 Selected
Annual Consolidated Data
 
 For
      the Years Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004Revenues
                    
                    
                    $7,257,000
                    
                    
                    
                    $7,931,000
                    
                    
                    
                    $6,087,000
                    
                    
                    
                    $6,443,000
                    
                    
                    
                    $6,220,000Gross
      profit
                    
                    
                    2,314,000
                    
                    
                    
                    2,739,000
                    
                    
                    
                    1,472,000
                    
                    
                    
                    2,785,000
                    
                    
                    
                    2,557,000Income
      (loss) from continuing operations
                    
                    
                    (1,752,000
                    )
                    
                    
                    (743,000
                    )
                    
                    
                    (1,575,000
                    )
                    
                    
                    640,000
                    
                    
                    
                    (225,000
                    )Income
      (loss) from discontinued operations
                    
                    
                    (91,000
                    )
                    
                    
                    40,000
                    
                    
                    
                    833,000
                    
                    
                    
                    653,000
                    
                    
                    
                    913,000Net
      income (loss)
                    
                    
                    $(1,843,000
                    )
                    
                    
                    $(703,000
                    )
                    
                    
                    $(742,000
                    )
                    
                    
                    $1,292,000
                    
                    
                    
                    $688,000Earnings
      (loss) per share:
                      Basic
      and diluted continuing operations
                    
                    
                    $(.57
                    )
                    
                    
                    $(.24
                    )
                    
                    
                    $(.51
                    )
                    
                    
                    $.21
                    
                    
                    
                    $(.07
                    )Earnings
      (loss) per share:
                      Basic
      and diluted discontinued operations
                    
                    
                    $(.03
                    )
                    
                    
                    $.01
                    
                    
                    
                    $.27
                    
                    
                    
                    $.21
                    
                    
                    
                    $.29Earnings
      (loss) per share:
                      Basic
      and diluted
                    
                    
                    $(.60
                    )
                    
                    
                    $(.23
                    )
                    
                    
                    $(.24
                    )
                    
                    
                    $.42
                    
                    
                    
                    $.222008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004Cash
      and cash equivalents
                    
                    
                    $12,943,000
                    
                    
                    
                    $14,931,000
                    
                    
                    
                    $15,719,000
                    
                    
                    
                    $63,000
                    
                    
                    
                    $71,000Working
      capital
                    
                    
                    13,154,000
                    
                    
                    
                    14,993,000
                    
                    
                    
                    15,679,000
                    
                    
                    
                    16,387,000
                    
                    
                    
                    7,289,000Total
      assets
                    
                    
                    15,520,000
                    
                    
                    
                    17,912,000
                    
                    
                    
                    17,975,000
                    
                    
                    
                    33,489,000
                    
                    
                    
                    22,493,000Total
      liabilities
                    
                    
                    1,904,000
                    
                    
                    
                    2,492,000
                    
                    
                    
                    1,888,000
                    
                    
                    
                    16,679,000
                    
                    
                    
                    7,031,000Stockholders'
      equity
                    
                    
                    $13,616,000
                    
                    
                    
                    $15,420,000
                    
                    
                    
                    $16,087,000
                    
                    
                    
                    $16,810,000
                    
                    
                    
                    $15,462,000
 
 17
 Table of Contents
 The
following table sets forth selected unaudited consolidated financial data for
each of the Company's last eight fiscal quarters:
 
 2008December 31
                        
                        
                        September 30
                        
                        
                        June 30
                        
                        
                        March 31Net
      sales
                        
                        
                        $1,379,000
                        
                        
                        
                        $2,270,000
                        
                        
                        
                        $1,727,000
                        
                        
                        
                        $1,881,000Gross
      profit
                        
                        
                        111,000
                        
                        
                        
                        811,000
                        
                        
                        
                        669,000
                        
                        
                        
                        723,000Income
      (loss) from continuing operations
                        
                        
                        (1,486,000
                        )
                        
                        
                        23,000
                        
                        
                        
                        (190,000
                        )
                        
                        
                        (99,000
                        )Loss
      from discontinued operations
                        
                        
                        (64,000
                        )
                        
                        
                        (12,000
                        )
                        
                        
                        (7,000
                        )
                        
                        
                        (8,000
                        )Net
      income (loss)
                        
                        
                        $(1,551,000
                        )
                        
                        
                        $11,000
                        
                        
                        
                        $(197,000
                        )
                        
                        
                        $(106,000
                        )Earnings
      (loss) per share:
                          Basic
      and diluted continuing operations
                        
                        
                        $(.48
                        )
                        
                        
                        -
                        
                        
                        
                        $(.06
                        )
                        
                        
                        $(.03
                        )Earnings
      (loss) per share:
                          Basic
      and diluted discontinued operations
                        
                        
                        (.02
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Net
      income (loss) per share
                        
                        
                        $(.51
                        )
                        
                        
                        -
                        
                        
                        
                        $(.06
                        )
                        
                        
                        $(.03
                        )2007December 31
                        
                        
                        September 30
                        
                        
                        June 30
                        
                        
                        March 31Net
      sales
                        
                        
                        $2,370,000
                        
                        
                        
                        $1,977,000
                        
                        
                        
                        $2,065,000
                        
                        
                        
                        $1,519,000Gross
      profit
                        
                        
                        873,000
                        
                        
                        
                        629,000
                        
                        
                        
                        810,000
                        
                        
                        
                        427,000Income
      (loss) from continuing operations
                        
                        
                        (331,000
                        )
                        
                        
                        (222,000
                        )
                        
                        
                        90,000
                        
                        
                        
                        (280,000
                        )Income
      (loss) from discontinued operations
                        
                        
                        (7,000
                        )
                        
                        
                        49,000
                        
                        
                        
                        16,000
                        
                        
                        
                        (18,000
                        )Net
      income (loss)
                        
                        
                        $(338,000
                        )
                        
                        
                        $(173,000
                        )
                        
                        
                        $106,000
                        
                        
                        
                        $(298,000
                        )Earnings
      (loss) per share:
                          Basic
      and diluted continuing operations
                        
                        
                        $(.11
                        )
                        
                        
                        $(.07
                        )
                        
                        
                        $.03
                        
                        
                        
                        $(.09
                        )Earnings
      (loss) per share:
                          Basic
      and diluted discontinued operations
                        
                        
                        -
                        
                        
                        
                        $.01
                        
                        
                        
                        -
                        
                        
                        
                        -Net
      income (loss) per share
                        
                        
                        $(.11
                        )
                        
                        
                        $(.06
                        )
                        
                        
                        $.03
                        
                        
                        
                        $(.09
                        )
 
 18
 Table of Contents
 Item7.  Management’s Discussion and Analysis of Financial Condition
and Results of Operations
 
 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.
 
 19
 Table of Contents
 
 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 PeriodTotal
                                
                                
                                Less
      than 1 Year
                                
                                
                                1-3
      Years
                                
                                
                                3-5
      Years
                                
                                
                                More
      than 5 YearsLines
      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.
 
 20
 Table of Contents
 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.
 
 21
 Table of Contents
 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,partiallyoffsetby 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.
 
 22
 Table of Contents
 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.
 
 23
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 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.
 
 24
 Table of Contents
 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
on Purchased Beneficial Interests and Beneficial Interests That Continue to Be
Held by a Transferor in Securitized Financial Assets,” (EITF 99-20), to achieve
more consistent determination of whether an other-than-temporary impairment has
occurred. FSP EITF 99-21-1 also retains and emphasizes the objective of an other
than-temporary impairment assessment and the related disclosure requirements in
SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities,” and other related guidance. FSP EITF 99-20-1 is effective for
interim and annual reporting periods ending after December 15, 2008, and is
required to be applied prospectively. The adoption of FSP EITF 99-20-1 did not
have a material impact on the Company’s results of operations, cash flows or
financial positions.
 
 
 25
 Table of Contents
 
 Item7A.  Quantitative and Qualitative Disclosures About Market
Risk
 
 We have
not used derivative financial instruments.
 
 We are
exposed to market risk through interest rates related to our line of credits
which have variable interest rates equal to the existing bank prime rate (3.25%
as of December 31, 2008) plus one and one-half percent. The prime interest rate
decreased from 7.25% to 3.25% in 2008. A decrease in the bank’s prime interest
rate on our line of credit would not have a material impact since the line of
credit carries a floor on 6% on the prime rate
 
 In
addition, we are exposed to market risk on interest rates earned on our cash and
short-term investments. Our short-term investments are invested in short term
money market securities and a reduction in the interest rate of 1% would reduce
our interest income by $150,000 based on the average amount invested in 2008.
Our management believes that fluctuation in interest rates in the near term will
not materially affect our consolidated operating results, financial position, or
cash flow.
 
 Item8.  Financial Statements and Supplementary
Data
 
 Information
regarding Financial Statements and Supplementary Data appears on pages F-1
through F-26 under the caption "Consolidated Balance Sheets," "Consolidated
Statements of Operations," "Consolidated Statements of Shareholders' Equity,"
"Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial
Statements."
 
 Item9.  Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
 
 None
 
 Item9A.  Controls and Procedures
 
 a)           Disclosure
Controls and Procedures.
 
 The
Company has established disclosure controls and procedures to ensure that
material information relating to the Company is made known to the officers who
certify the Company financial reports and to other members of senior management
and the Board of Directors. Based on their evaluation, the Company’s principal
executive officer and principal financial officer have concluded that disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) were effective as of December 31, 2008 to
ensure that information required to be disclosed in the reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
 
 Management’s
Annual Report on Internal Control Over Financial Reporting.
 
 The
Company's management is responsible for establishing and maintaining adequate
control over financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.
 
 Our
internal control over financial reporting includes those policies and procedures
that:
 ·
              Pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;·
              Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorizations of the Company’s management
      and directors; and·
              Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the financial
statements.
 
 26
 Table of Contents
 Under the
supervision and with the participation of the Company's management, including
our principal executive officer and our principal financial officer, the Company
conducted an evaluation of the effectiveness of its internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the “COSO Framework”). Based on this evaluation under the COSO
Framework, the Company's management concluded that its internal control
over financial reporting was effective as of December 31, 2008.
 
 This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
 
 (b)           Changes
in Internal Control over Financial Reporting.
 
 The
Company’s Chief Financial Officer resigned in November 2008. Due to the terms of
his separation agreement he continued in his previous role and duties as of
December 31, 2008. The Company will be outsourcing the accounting and financial
reporting controls and procedures beginning in the first quarter of 2009.
Therefore, there was no significant change in the Company’s internal control
over financial reporting that occurred during the quarter ended December 31,
2008 that has materially affected, or is reasonably likely to materially affect,
the Company’s control over financial reporting.
 
 The
evaluation of our disclosure controls included a review of whether there were
any significant deficiencies in the design or operation of such controls and
procedures, material weaknesses in such controls and procedures, any corrective
actions taken with regard to such deficiencies and weaknesses and any fraud
involving management or other employees with a significant role in such controls
and procedures.
 
 Our management does not expect that our
disclosure controls and procedures and our internal control over financial
reporting will prevent all error and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the controls system are met.  The
design of any system of controls is based in part upon assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions.
 
 Item9B  Other Information
 
 None
 
 
 27
 Table of Contents
  PART
III
 
 Item10.  Directors, Executive Officers and Corporate
Governance
 
 Directors and Executive
Officers.
 
 Our directors and executive
officers are as follows:
 
 Name
                    Age
                    Position with the Company
                    Director SinceJason
      T. Young
                    30
                    Chief
      Executive Officer, Chairman of the Board of Directors
                    2008Viktor
      Nemeth
                    33
                    Director
                    2008Marco
      Vega
                    39
                    Director
                    2008Steven
      C. Olson
                    51
                    Chief
      Technology Officer
                    -Randall
      P. Marx
                    56
                    Former
      Chief Executive Officer, Secretary and Director
                    1990Donald
      A. Huebner
                    63
                    Former
      Director
                    1998Robert
      E. Wade
                    62
                    Former
      Director
                    2005Sigmund
      A. Balaban
                    67
                    Former
      Director
                    1994Richard
      L. Anderson
                    60
                    Former
      Executive Vice President
                    -Monty
      R. Lamirato
                    53
                    Former
      Chief Financial Officer and Treasurer
                    -
  Jason T Young.Mr.
Young was appointed to the Board of Directors on October 2, 2008 and became
Chief Executive officer and Chairman of the Board of Directors in November 2008
upon the resignation of Randall P. Marx. Mr. Young has been a Managing Director
at Quadrant Management, Inc. since 2005, where he is responsible for making
investments in US and emerging market companies, and where he frequently serves
in active management- or director-level roles. He has been an Investment
Committee Member of the Carret Global India Fund of Hedge Funds since 2005. In
2008 Mr. Young became a member of the Investment Committee of the Vanterra
Advantage Fund. From 2000 to 2005, Mr. Young worked for Merrill Lynch in the
Investment Banking Group and later in the Global Principal Investment Group. In
1999, he was an Analyst at Helicon Capital Management, a hedge fund and private
equity investment firm. He holds a BA in International Economics from UCLA. Mr.
Young acts as a representative of Brean Murray Carret Group, Inc. ("Brean"),
which beneficially owns 429,352, or 13.9% of the Company's common stock, and of
Mr. Hassan Nemazee, who beneficially owns 419,837, or 13.6% of the Company's
common stock, in connection with their investment in the Company. Mr. Young
currently shares voting and investment power over the Company's common stock
beneficially owned by Brean and Mr. Nemazee.
 
 28
 Table of Contents
 Viktor Nemeth. Mr.
Nemeth was appointed as a Director of the Company in November 2008 and is
Chairman of the Audit and Compensation Committees of the Board. He was
previously the Chief Revenue Officer for Bid4Spots, Inc, an Encino, CA-based
company helping radio stations monetize their unsold and last minute
inventory. Bid4Spots is a privately funded company and, during Mr. Nemeth’s
tenure, was one of the fastest growing media companies in the greater Los
Angeles area. Prior to Bid4Spots, Mr. Nemeth spent nearly eight years at Yahoo
Inc (and predecessor companies GoTo.com and Overture Services), and joined the
Yahoo organization through the 2004 purchase of Overture for approximately $2.4
billion.GoTo.com originated the now-common "paid search" concept. While
with the company, Mr. Nemeth held a variety of corporate development, business
development, and sales & marketing responsibilities. In growing the Overture
Direct Sales organization, he helped steward the business unit's growth from
roughly $100 million in revenue to over $1 billion in a four-year period.
Overture was named the fastest growing company in the Los Angeles area for the
five-year period ending in 2002 in Deloitte & Touche's "Fast 50". Prior to
joining GoTo.com, Mr. Nemeth was an investment banker with Lehman Brothers' Los
Angeles office, specializing in the Internet & New Media sector. Mr.
Nemeth graduated from UCLA in 1997 with a degree in Business-Economics, and a
minor in Accounting.
 
 Marco Vega. Mr. Vega
was appointed as a Director of the Company in November 2008. Mr. Vega is
currently an employee of Carret Asset Management, LLC, an entity which is under
common control with the Brean Murray Carret Group, Inc. Mr. Vegaserves as theChief Operating Officer
to Carret Asset Management, LLC and Quadrant Management, Inc., and is
responsible for the accounting, operations and compliance functions of the SEC
registered investment advisor and the private investment company. Mr. Vega
has served in this capacity since 2004.  Mr. Vega served as the President
to Carret Securities LLC from 2003 through 2005 and now serves on the Board of
Advisors to Brean Murray Carret & Co., LLC a boutique investment bank. 
Mr. Vega also serves as a financial advisor to several portfolio companies
including Music Publishing Company of America, Inc., an independent music
publisher. Mr. Vega worked at Bear, Stearns & Co. Inc., prior to
joining Serfin Securities Inc. and Finamex Securities Inc., broker dealers
facilitating transactions for institutions and private clients in the emerging
markets arena. Mr. Vega holds a BS in accounting and an MBA from St. John’s
University.
 
 Randall P. Marx. Mr.
Marx became our Chief Executive Officer in February 2001 and had served as
Director from May 1990 until his resignation as Chief Executive Officer,
Director, and Secretary in November 2008. Mr. Marx served with the Company as
Chief Executive Officer from November 1991 until July 2000, as Treasurer from
December 1994 until June 30, 2000 and as Director of Acquisitions from July 2000
until February 2001. From 1983 until 1989, Mr. Marx served as President of THT
Lloyd’s Inc., Lloyd’s Electronics Corp. and Lloyd’s Electronics Hong Kong Ltd.,
international consumer electronics companies. Lloyd’s Electronics had domestic
revenues of $100 million and international revenues of $30 million with over 400
employees worldwide. As CEO and President of THT Lloyd’s Inc., a $10 million
electronics holding company, Mr. Marx supervised the purchase of the Lloyd’s
Electronics business from Bacardi Corp. in 1986. As CEO and President of Lloyd’s
Electronics, Mr. Marx was directly responsible for all domestic and
international operations including marketing, financing, product design and
manufacturing with domestic offices in New Jersey and Los Angeles and
international offices in Hong Kong, Tokyo and Taipei. Mr. Marx currently serves as a member of the Board of
Directors of InfoSonics Corporation, an entity subject to the reporting
requirements of the Securities Exchange Act of 1934.
 
 Donald A. Huebner.
Dr. Huebner was our Chief Scientist from July 2000 to January 2002 and has been
a consulting engineer to the Company from January 2002 to the present. He has
served as a Director of the Company from 1998 until his resignation in November
2008. Dr. Huebner served as Department Staff Engineer with Lockheed Martin
Astronautics in Denver, Colorado from 1986 to July 2000. In this capacity, Dr.
Huebner served as technical consultant for phased array and spacecraft antennas
as well as other areas concerning antennas and communications. Prior to joining
Lockheed Martin, Dr. Huebner served in various capacities with Ball
Communication Systems and Hughes Aircraft Company. Dr. Huebner also served as a
part-time faculty member in the electrical engineering departments at the
University of Colorado at Boulder, California State University at Northridge,
and University of California, Los Angeles (“UCLA”). Dr. Huebner also has served
as consultant to various companies, including as a consultant to the Company
from 1990 to the present. Dr. Huebner received his Bachelor of Science in
Electrical Engineering from UCLA in 1966 and his Masters of Science in
Electrical Engineering from UCLA in 1968. Dr. Huebner received his Ph.D. from
UCLA in 1972 and a Masters in Telecommunications from the University of Denver
in 1996. Dr. Huebner is a member of a number of professional societies,
including the Antennas and Propagation Society and Microwave Theory and
Technique Society of the Institute of Electrical and Electronic
Engineers.
 
 29
 Table of Contents
 Robert E. Wade. Mr.
Wade served as a Director of the Company from December 2005 until his
resignation in November 2008. A former bank director, Mr. Wade currently serves
as a member of the boards of directors of mutual funds: Franklin Mutual Series
Fund Inc. since 1996, Franklin Managed Trust and Franklin Value Investors Trust
since 2004, and the US Templeton Funds since 2006. In March of 2005, Mr. Wade
was named Chairman of the Board of Franklin Mutual Series Fund Inc., having
previously served as Chairman of its Audit Committee. He has also been a
director of El Oro and Exploration Co. plc. since 2003. Mr. Wade was a
practicing attorney in New Jersey.
 
 Sigmund A. Balaban.
Mr. Balaban served as Director of the Company from December 1994 until his
resignation in November 2008. Mr. Balaban had served as Senior Vice President /
Corporate Secretary, of Fujitsu General America, Inc. of Fairfield, New Jersey,
from 2000 until July of 2001 when he retired. Mr. Balaban was Vice President,
Credit of Teknika Electronics from 1986 to 1992 and was Senior Vice President
and General Manager of Teknika Electronics from 1992 to 2000. In October 1995,
Teknika Electronics changed its name to Fujitsu General America, Inc. Fujitsu
General America, Inc., which is a subsidiary of Fujitsu General, Ltd., a
Japanese multiline manufacturer. Mr. Balaban
currently serves as a member of the Board of Directors of Double Eagle Petroleum
Co., an entity subject to the reporting requirements of the Securities Exchange
Act of 1934.
 
 Richard L. Anderson.
Mr. Anderson served as our Executive Vice President since November, 2007 to his
resignation in November 2008. Mr. Anderson served as a director of the Company
from December, 1994 to June, 2000. Mr. Anderson served as Vice President of
Administration with the Company from January, 1996 to June, 2000. Prior to being
named Executive Vice President, Mr. Anderson held the position of Director
Corporate Development. Prior to joining the Company, from 1990 to 1995 Mr.
Anderson was an independent financial contractor underwriting residential and
commercial real estate first mortgage credit packages. From 1985 to 1990, Mr.
Anderson served as Senior Vice President, Administration of Westline Mortgage
Corporation, a subsidiary of BankWestern Federal Savings. Prior to 1985, Mr.
Anderson served as Vice President, Human Resources for Midland Federal
Savings.
 
 Monty R. Lamirato.
Mr. Lamirato had been our Chief Financial Officer and Treasurer from June 2001
to his resignation in November 2008. Prior to joining the Company Mr. Lamirato
served as the VP Finance for GS2.Net, Inc, an application service provider, from
November 2000 to May 2001, and from June 1999 to October 2000 he served as VP
Finance for an e-commerce retailer. From November 1993 to June 1999, Mr.
Lamirato was President and Shareholder of Monty R. Lamirato, PC, a business
consulting firm. Mr. Lamirato has been a certified public accountant in the
State of Colorado since 1978.
 
 Steven C. Olson. Mr.
Olson serves as our Chief Technology Officer. Prior to joining the Company in
August 2001, Mr. Olson was employed at Ball Aerospace for 14 years, including
the last five years as Director of Engineering for Ball’s Wireless
Communications Solutions Division. In this capacity Mr. Olson led the
development of new technologies, resulting in industry leading antenna solutions
for the wireless communications market. Before the Ball Wireless Communications
unit was formed, Mr. Olson developed Ball’s high performance, low cost AirBASE®
antenna technology, specifically for use in its future commercial wireless
business. He received his Bachelors and Masters of Science degrees in Electrical
Engineering from the University of Utah in 1984 and 1985,
respectively.
 
 Each of
our officers serves at the pleasure of the Board of Directors. There are no
family relationships among our officers and directors.
 
 30
 Table of Contents
 Board
Meetings
 
 The Board
of Directors met five times during the fiscal year ended December 31, 2008, and
each director participated in at least 75% of the meetings. The Board of
Directors does not maintain a formal policy regarding the manner in which
shareholders may communicate with the Board.
 
 The
Company encourages each member of the Board of Directors to attend the Annual
Meeting Of Shareholders, but does not require any member to do so. None of the
directors attended the Company’s last Annual Meeting of Shareholders, held on
December 16, 2008.
 
 Board
Independence
 
 We are currently subject to corporate governance
standards defining the independence of our directors imposed by the NASDAQ
Capital Market's requirements for independent directors (NASDAQ Marketplace Rule
4200). Under this definition, we have determined that prior to their resignation
in November 2008, Sigmund A. Balaban, Robert E. Wade and Dr. Donald A. Huebner
qualified as independent directors. For a description of Messrs. Balaban, Wade
and Huebner, please refer to Item 10 herein. On November 12, 2008, the
Company's Board elected Viktor Nemeth and Marco Vega to serve on the Boardof Directors and on January 21, 2009 Mr.Javier
Baz and Amit Chatwani were elected to serve on the Board of Directors. Mr.
Nemeth, Mr. Baz and Mr. Chatwani qualify as independent directors in accordance
with the standards imposed by the NASDAQ Capital
Market's requirements for independent directors (NASDAQ Marketplace Rule
4200).
 
 Audit Committee of the Board
of Directors
 
 Until
their resignations in November 2008, the audit committee consisted of three
independent directors, Mr. Sigmund A. Balaban, who was chairman of the
committee, Mr. Robert E. Wade and Dr. Donald A. Huebner. On January 21, 2009 Mr.
Viktor Nemeth was designated to serve as the Chairman of the Audit Committee. On
January 21, 2009 Mr. Javier Baz and Mr. Amit Chatwani were elected to the Board
of Directors and were appointed to serve on the Audit Committee. The
responsibilities of the audit committee include overseeing our financial
reporting process, reporting the results of the Committee’s activities to the
board, retaining and ensuring the independence of our auditors, approving
services to be provided by our auditors, reviewing our periodic filings with the
independent auditors prior to filing, and reviewing and responding to any
matters raised by the independent auditors in their management letter. The Audit
Committee met two times during fiscal 2008, which was attended by all committee
members.
 
 Audit Committee Financial
Expert
 
 Prior to
their resignations on November 12, 2008, the former board of directors had
determined that at least one member of the audit committee, who was also
independent, Mr. Sigmund A. Balaban, was an audit committee financial expert
prior to his resignation in November 2008. Mr. Javier Baz has been designated to
be the new audit committee financial expert.
 
 Audit Committee
Charter
 
 Our Board of Directors has adopted a written charter for
the Audit Committee. The Audit Committee will review and assess the adequacy of
the Audit Committee charter annually.
 
 31
 Table of Contents
 Compensation
Committee
  The Board of Directors currently had a Compensation
Committee, and until their resignations in November 2008 consisted of Mr. Robert
E. Wade, the chairman of the Compensation Committee, Dr. Donald A. Huebner and
Mr. Sigmund A. Balaban.On January
21, 2009 Mr. Viktor Nemeth was designated to serve as the Chairman of the
Compensation Committee. On January 21, 2009 Mr. Javier Baz and Mr. Amit Chatwani
were elected to the Board of Directors and were appointed to serve on the
Compensation Committee. TheCompensation
Committeehas a charter which is located on
the Company’s website at www.arcwireless.net. The Compensation Committee
held one formal meeting during fiscal 2008, which was attended by all committee
members.
 
 Nominating
Committee:
Nominating Policies and Procedures
 
 The Company does not currently have a standing
nominating committee of the Board of Directors because it believes that the
nominating functions should be relegated to the full Board of
Directors.
 
 On October 31, 2006, the Board of Directors adopted
certain Nominating Policies and Procedures (the “Nominating Policy”), which are
attached hereto as Exhibit 99.1. It is the policy of the Board of Directors that
each nominee for election to the Board, regardless of whether such nominee is
recommended by a shareholder of the Company, the Board or any other person,
shall be approved by a majority of the independent directors of the
Board.
 
 In general, the Board believes that certain minimum
qualifications must be met by each candidate for the Board, as well as meeting
any applicable independence standards required by the SEC and federal securities
laws. The Board believes that candidates and nominees must reflect a Board that
is comprised of directors (i) a majority of whom are independent (as determined
under any applicable director qualification standards); (ii) who are of high
integrity; (iii) who have qualifications that will increase the overall
effectiveness of the Board; and (iv) who meet other requirements as may be
required by applicable rules, such as financial literacy or financial expertise
with respect to Board members who sit on the audit committee.  In
evaluating the qualifications of the candidates, the Board considers many
factors, including issues of leadership ability, career success, character,
judgment, independence, background, age, expertise, diversity and breadth of
experience, length of service, other commitments and the
like.
 
 Under the
Nominating Policy, the Board shall consider recommendations for candidates to
the Board from shareholders holding no less than 1% of the Company’s common
stock, which stock has been continuously held by such shareholder for at least
twelve (12) months prior to the date of the submission of the recommendation (an
“Eligible Shareholder”). Candidate nominees recommended by Eligible Shareholders
(hereinafter referred to as “Shareholder Candidates”) will be evaluated by the
Board on the same basis as candidates that may be identified by the Board,
management or, if the Board permits, a search firm.For the
Shareholder Candidate to be considered by the Board, the Eligible Shareholder
and the Shareholder Candidate must comply with certain procedures as set forth
in the Nominating Policy. Recommendations for Shareholder Candidate(s) to the
Board of Directors from an Eligible Shareholder must be directed in writing to
ARC Wireless Solutions, Inc., Attn: Corporate Secretary, at the Corporation’s
principal offices at 10601 West 48th Avenue, I-70 Frontage Road North, Wheat
Ridge, Colorado 80033-2660. The specific recommendations should include the
information set forth in the adopted Nominating Policy, which are attached
hereto as Exhibit 99.1 and incorporated herein by
reference.
  32
 Table of Contents
 For a recommendation of a Shareholder Candidate to be
properly brought before the Board by an Eligible Shareholder, the Eligible
Shareholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, an Eligible Shareholder’s notice must be
delivered to the Corporate Secretary not less than one hundred and twenty (120)
days prior to the first (1st) anniversary of the preceding year’s annual
meeting. In the event that the date of the annual meeting is advanced by more
than thirty (30) days or delayed by more than sixty (60) days from the
anniversary date of the preceding year’s annual meeting, the notice by the
Eligible Shareholder must be delivered not later than the close of business on
the later of the sixtieth (60th) day prior to such annual meeting or the tenth
(10th) day following the day on which public announcement of the date of such
annual meeting is first made.
  The Secretary of the Corporation will provide a copy of
the Nominating Policies and Procedures upon a request in writing from the
Eligible Shareholder. The full description of the foregoing policies has also
been attached hereto as Exhibit 99.1, and is incorporated herein by
reference.
  Section 16(a) Beneficial
Ownership Reporting Compliance
 
 Section
16(a) of the Securities Act of 1934, as amended (the “Exchange Act”) requires
our directors, executive officers and holders of more than 10% of our common
stock to file with the Securities and Exchange Commission initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of ours. We believe that during the year ended December 31, 2008, our
officers, directors and holders of more than 10% of our common stock complied
with all Section 16(a) filing requirements. In making these statements, we have
relied upon the written representation of our directors and officers and our
review of the monthly statements of changes filed with us by our officers and
directors.
 
 Code of
Ethics
 
 The Company endeavors to adhere toprovide assurances to outside investors and interested
parties that the Company's officers,
directors,andemployeesadhere to
a reasonably responsible code of ethicsand
as such, we have adopted a Code of Ethics, which was
amended on November 7, 2006,that applies
toall officers, directors and employees of
the Company. The Code is posted on the Company’s website at
www.arcwireless.net/investor_relations.
 
 Corporate Governance Documents
 
 On the Company’s Corporate Governance Web site at
www.arcwireless.net/investor_relations, shareholders can access the Company’s
Audit Committee Charter, Compensation Committee Charter, and Code of Ethics for
members of the Board of Directors and officers. Copies of these documents, as
well as additional copies of this Annual Report on Form 10-K, are available to
shareholders without charge upon request to the Corporate Secretary at the
Company’s principal address.
 
 Item11.  Executive Compensation
 
 Compensation Discussion and
Analysis
 
 This Compensation Discussion and Analysis addresses the
aspects of our compensation programs and explains our compensation philosophy,
policies, and practices, with respect to our named executive officers, including
our chief executive officer, chief financial officer, executive vice-president,
and chief technology officer, which we collectively refer to as our named
executive officers, or NEOs.
 
 Oversight of Executive Compensation
Program
 
 The Compensation Committee of our Board of Directors
oversees our executive compensation programs. Each member of the Compensation
Committee is an “independent director” as defined by the federal securities laws
and in Rule 4200(a)(14) of the Nasdaq Stock Market, Inc. The Compensation
Committee met 3 times during 2008, and works closely with executive management,
primarily our chief executive officer (“CEO”), in assessing compensation levels.
The Compensation Committee is empowered to advise management and make
recommendations to the Board of Directors with respect to the compensation and
other employment benefits of executive officers and key employees of the
Company. The Compensation Committee also administers the Company's compensation
plans for executive officers and employees.
 
 33
 Table of Contents
 The Compensation Committee regularly reviews the
Company’s compensation programs to ensure that remuneration levels and incentive
opportunities are competitive and reflect performance. Factors taken into
account in assessing the compensation of individual officers include the
officer’s performance and contribution to the Company, experience, strategic
impact, external equity or market value, internal equity or fairness, and
retention priority.  The various components of the compensation
programs for executive officers are discussed below in Elements of Executive
Compensation Program.
 
 Objectives of Executive Compensation and What the
Programs are Designed to Reward
 
 The
Company’s executive compensation program is designed to integrate compensation
with the achievement of our short-term and long-term business objectives and to
assist us in attracting, motivating and retaining the highest quality executive
officers and rewarding them for superior performance. Different programs are
geared to short-term and longer-term performance with the goal of increasing
stockholder value over the long term.
 
 We
believe that the compensation of our executive officers should reflect their
success in attaining key operating objectives, such as growth or maintenance of
market position, development of new products and marketplaces, meeting
established goals for operating earnings and earnings per share, maintenance and
development of customer relationships and long-term competitive advantage. We
also believe that executive compensation should reflect achievement of
individual goals established for specific executive officers, as well as
specific achievements by such individuals over the course of the year such as
development of specific products or customer relationships or agreements or
executing or integrating acquisitions and strategic arrangements. We believe
that the performance of the executives in managing our Company, considered in
light of general economic and specific Company, industry and competitive
conditions, should be the basis for determining their overall compensation. We
also believe that their compensation should not generally be based on the
short-term performance of our stock, whether favorable or unfavorable, but
rather that the price of our stock will, in the long-term, reflect our operating
performance, and ultimately, the management of the Company by our
executives.
 
 Compensation
Consultants
 
 In
determining competitive levels of compensation, the Compensation Committee
considers publicly available information regarding the compensation of executive
officers of other comparable U.S. investor-owned companies and information
available from studies periodically performed by compensation consultants for
the Company. The Compensation Committee also considers recommendations made by
the CEO regarding compensation for other NEOs and key employees.
 
 Elements of Executive
Compensation Program
 
 Compensation
elements include:
 
 ·
              base
salary;
 ·
              annual cash or equity incentive
      awards;
 ·
              long-term equity incentive compensation; and
 ·
              other health, welfare and pension
      benefits.
 
 34
 Table of Contents
 
 Base
Salary
 
 Base salary is designed to provide competitive levels of
base compensation to our executives based on their experience, duties and scope
of responsibilities.  We pay base salaries because it provides a base
compensation that is required to recruit and retain executives of the quality
that we must employ to ensure the success of our Company.  Our
executive base salaries are typically adjusted in accordance with the NEO’s
employment agreement on an annual basis.
 
 Annual Cash or Equity
Incentive Awards
 
 Annual incentive compensation is designed to provide
competitive levels of compensation based on experience, duties and scope of
responsibilities.  Incentive awards are influenced by the Company’s
profitability and achievement of planned profitability, as well as other
factors. The Compensation Committee uses the annual incentive compensation to
motivate and reward the NEOs for the achievement and over-performance of our
critical financial and strategic goals.
 
 Long-Term Equity Incentive
Compensation
 
 Long-term equity awards were granted to our executives
from our 1997 Stock Option and Compensation Plan, (“1997 Plan”) until September 2007, when the shareholders
of the Company approved the new2007 Stock Incentive Plan (the "2007
Plan").The Compensation Committee granted awards
under the 1997 Plan and the 2007 Plan in order to align the interests of the
NEOs with our stockholders, and to motivate and reward the NEOs to increase the
stockholder value of the Company over the long term. The Compensation
Committee does not have a regular schedule for awarding equity-based
compensation and the timing of such awards is subject to the discretion of the
Compensation Committee but generally is awarded as part of entering into
employment agreements.We do not backdate options
or grant options retroactively or stock options with a so-called “reload”
feature. In addition, we do not plan to coordinate grants of options so that
they are made before the announcement of favorable information, or after the
announcement of unfavorable information.
 
 Compensation
paid to each executive officer, including a stock bonus, was based on the
Compensation Committee’s review and consideration of aggregate levels of
compensation paid to executives of comparable companies and the individual
qualitative contributions and performance of each executive officer. In 2007,
the Compensation Committee issued a stock option award of 40,000 shares to Steve
C. Olson, our Chief Technology Officer.
 
 Other Health, Welfare and
Retirement Benefits
 
 Health and Welfare Benefits
 
 All full-time employees, including our NEOs, may
participate in our health and welfare benefit programs, including medical,
dental and vision care coverage, disability insurance, and life insurance. We
provide these benefits to meet the health and welfare needs of employees and
their families.
 
 35
 Table of Contents
  Retirement
Benefits
 
 Our employees, including the NEO’s, are eligible to
participate in our 401(k) contributory defined contribution plan (“401(k)
Plan”). Each employee may make before-tax
contributions of up to 25% of their base salary up to current Internal Revenue
Service limits. We provide this plan to help our employees save some amount of
their cash compensation for retirement in a tax efficient manner. The Company
may make discretionary matching contributions, however in 2006 the
Company did not provide participants with a matching contribution.
Commencing January 1, 2007, the Company amended its 401(k) Plan to make a Safe
Harbor Contribution of 3% of a participant’s cash compensation.
 
 Pension Benefits andNonqualified Deferred
Compensation
 
 We do not
currently provide pension arrangements or post-retirement health
coverage for our executives or employees, although wemay consider such benefits in the future. In addition,
we do notprovide any nonqualified defined contribution or other deferred
compensation plans, although we may consider such benefits in the
future.
 
 Employment Agreements andOther Post-Employment
Payments
 
 All of
our NEOswere parties to employment agreements until
their resignations in November 2008, which
provided for salaries and certain bonus payments as well
as rights to certain payments upon termination for cause.These employment agreementsalso had change of control provisions that would require payments in the event of
termination of employment, which are described in
greater detail below. Only one NEO, Mr. Steve Olson, is still party to an
agreement which providesfor salaries
and certain bonus payments as well as rights to certain payments upon
termination for cause. Mr. Jason T. Young, is not party to an employment
agreement and has no current compensation arrangement with the
Company
 
 These employment agreementsalso have change of control provisions that would require payments in the event of
termination of employment, which are described in
greater detail below.
 
 Tax Implications of
Executive Compensation
 
 We do not currently intend to award compensation that
would result in a limitation on the deductibility of a portion of such
compensation pursuant to Section 162(m) of the Internal Revenue Code of 1986, as
amended, other than awards that may be made under the 1997 Plan; however, we may
in the future decide to authorize other compensation in excess of the limits of
Section 162(m) if it determines that such compensation is in the best interests
of the Company.
 
 Although deductibility of compensation is preferred, tax
deductibility is not a primary objective of our compensation programs. We
believe that achieving our compensation objectives set forth above is more
important than the benefit of tax deductibility and we reserve the right to
maintain flexibility in how we compensate our executive officers that may result
in limiting the deductibility of amounts of compensation from time to
time.
 
 36
 Table of Contents
  Compensation Committee
Report
 
 The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis with management and, based on the review and discussions, the
Compensation Committee recommended to the Board of Directors that the
Compensation Discussion and Analysis be included in the Company’s Annual Report
on Form 10-K.
 
 Viktor
Nemeth
 Javier
Baz
 Amit
Chatwani
 
 Summary
Compensation Table for 2008
 
 Name
      and Principal Position
              Year
              Salary
                ($)
              Bonus
                ($)
              Stock
                Awards
                ($)(2)
              Option
                Awards
                ($)(2)
              Non-Equity
      Incentive Plan Compensation
                ($)
              Change
      in
                Pension
                Value
      and
                Nonqualified
                Deferred
                Compensation
                Earnings
      ($)
              All
      Other Compensation
                ($)(3)
              Total
                ($)Jason
      T. Young, Chair, Chief Executive Officer, Secretary
              2008
              -
              -
              -
              -
              -
              -
              -
              -Randall
      P. Marx, former Chair, Chief Executive Officer, Secretary
              2008
                2007
                2006
              287,000
                250,000
                245,000
              -
                25,000
                -
              -
                -
                -
              -
                -
                -
              -
                -
                -
              -
                -
                -
              328,000
                8,250
                -
              615,000
                283,250
                245,000Monty
      R. Lamirato, former Chief Financial Officer, Treasurer
              2008
                2007
                2006
              154,000
                160,000
                155,000
              -
                -
                -
              -
                -
                -
              -
                -
                -
              -
                -
                -
              -
                -
                -
              115,000
                4,800
                -
              269,000
                164,800
                155,000Steven
      C. Olson, Chief Technology Officer
              2008
                2007
                2006
              215,000
                200,000
                175,000
              -
                7,500
                -
              -
                -
                -
              -
                6,000
                -
              -
                -
                -
              -
                -
                -
              -
                6,225
                -
              215,000
                219,725
                175,000Richard
      A. Anderson, former Executive Vice President
              2008
                2007
              110,000
                120,000
              -
              -
              -
              -
              -
              120,000
                3,750
              230,000
                123,750Gregory
      E. Raskin, former President (1)
              2006
              321,000
              -
              -
              -
              108,000
              -
              -
              429,000
  (1)
              Mr.
      Gregory E. Raskin resigned effective October 31, 2006, commensurate with
      the sale of our wholly-owned subsidiary, Winncom Technologies Inc. Under Mr. Raskin’s employment agreement, he was
      eligible to receive a cash bonus based upon certain pre-determined
      net-income objectives.  As a result of meeting these objectives,
      Mr. Raskin earned $108,000 as a cash bonus during fiscal year
      2006.
 (2)
              The
      amounts in columns (e) and (f) reflect the dollar amounts
      recognized in each of 2007 and 2006 for financial statement reporting
      purposes in accordance with FAS 123R with respect to stock awards and
      stock options granted in each such year, and the dollar amount required to
      be recognized in each such year in accordance with FAS 123R. These options
      were granted pursuant to the 2007 Stock Incentive Plan described
      above.
 (3)
              The
      amounts in the column titled “All Other Compensation” for 2008 include
      accrued severance obligations for Randall P. Marx, Monty R. Lamirato, and
      Richard A. Anderson, who resigned in November
  2008.
 
 37
 Table of Contents
 Grants
of Plan-Based Awards
  Name
      and Principal Position
                Grant
      Date
                Estimated
      Future Payouts Under
                  Equity
      Incentive Plan Awards
                All
                  Other
                  Stock
                  Awards:
                  Number of
                  Shares
      of
                  Stock
      or
                  Units4
                  (#)
                All
      Other
                  Option
      Awards:
                  Number
      of
                  Securities
                  Underlying
                  Options
                  (#)
                Exercise
      or Base Price of
                  Option
      Awards
                  ($/Sh)
                Grant
      Date
                  Fair
      Value
                  of
      Awards
                  ($)Threshold
                  $
                Target
                  $
                Maximum
                  $Jason
      T. Young, Chair, Chief Executive Officer, Secretary
                -
                -
                -
                -
                -
                -
                -
                -Randall
      P. Marx, Former Chair, Chief Executive Officer, Secretary
                -
                -
                -
                -
                -
                -
                -
                -Monty
      R. Lamirato, Former Chief Financial Officer, Treasurer
                -
                -
                -
                -
                -
                -
                -
                -Steven
      C. Olson, Chief Technology Officer
                9/21/07
                -
                -
                -
                -
                40,000(1)
                $5.40
                $134,000
 (1)These
options we granted pursuant to the 2007 Stock Incentive Plan.
 
 There
were no stock Equity Incentive Plan awards granted to the executive officers
with respect to the years ended December 31, 2008 and 2007 other than those
noted above. In addition, no options were
exercised by the executive officers during
the years ended December 31, 2008 and 2007.
 
 Outstanding Equity Awards at
Fiscal Year-End
 
 The following table sets forth information on
outstanding option and stock awards held by the named executive officers as of
December 31, 2008, including the number of shares underlying both exercisable
and unexercisable portions of each stock option as well as the exercise price
and the expiration date of each outstanding option.
  Option
      Awards
                Stock
      Awards(a)
                  Name
                (b)
                  Number
                  of
                  Securities
                  Underlying
                  Unexercised
                  Options
                  (#)
                  Exercisable
                (c)
                  Number
                  of
                  Securities
                  Underlying
                  Unexercised
                  Options
                  (#)
                  Unexercisable
                  (1)
                (d)
                  Equity
                  Incentive
                  Plan
                  Awards:
                  Number
                  of
                  Securities
                  Underlying
                  Unexercised
                  Unearned
                  Options
                  (#)
                (e)
                  Option
                  Exercise
                  Price
                  ($)
                (f)
                  Option
                  Expiration
                  Date
                (g)
                  Number
                  of
                  Shares
                  or
      Units
                  of
      Stock
                  That
                  Have
                  Not
                  Vested
                  (2)(3)
                (h)
                  Market
      Value
                  of
      Shares or Units of Stock That Have Not Vested
                  ($)
                (i)
                  Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      That Have Not Vested
                  (#)
                (j)
                  Equity
      Incentive
                  Plan
      Awards:
                  Market
      or Payout Value of Unearned Shares, Units or Other Rights That Have
      Not
                  Vested
                  ($)Jason
      T. Young
                -
                -
                -
                -
                -
                -
                -
                -
                -Steven
      C. Olson
                16,000
      (a)
                24,000(a)
                -
                $5.40
                9/21/2017
                
                -
                -
                -
 (a)
              These
      options were granted pursuant to the 2007 Equity Incentive Plan. The
      options vests at a rate of 20% per year with vesting dates of 12/31/07,
      12/31/08, 12/31/09, 12/31/10, 12/31/11. These total 40,000 options are
      reported in the Summary Compensation and the Grant of Plan Based Awards
      Table
 No
options were exercised and no stock vested in 2006.
 
 38
 Table of Contents
 Director
Compensation for the Year Ended December 31, 2008
 
 The table
below summarizes the compensation paid by the Company to non-employee directors
for the year ended December 31, 2008:
 
 Director
Compensation for the Year Ended December 31, 2008
  (a)
                (b)
                (c)
                (d)
                (e)
                (f)
                (g)
                (h)Name(1)
                Fees
      Earned or
                  Paid
      in Cash
                  ($)
                Stock
      Awards
                  ($)
      (2)
                Option
      Awards
                  ($)(3)
                Non-Equity
                  Incentive
      Plan
                  Compensation
                  ($)
                Change
      in
                  Pension
      Value
                  and
                  Nonqualified
                  Deferred
                  Compensation
                  Earnings
                All
      Other
                  Compensation
                  ($)
                Total
      ($)Randall
      P. Marx (1)
                -
                -
                -
                -
                -
                -
                -Sigmund
      A. Balaban (4)
                26,000
                -
                -
                -
                -
                -
                26,000Robert
      E. Wade(4)
                24,000
                2,000
                -
                -
                -
                -
                26,000Donald
      A. Huebner (4)
                11,000
                -
                -
                -
                -
                -
                11,000Jason
      T. Young (5)
                6,000
                -
                -
                -
                -
                -
                6,000Viktor
      Nemeth(6)
                5,000
                -
                -
                -
                -
                -
                5,000Marco
      Vega (6)
                3,000
                -
                -
                -
                -
                -
                3,000
 
 (1)
              Randall
      P. Marx was the Company’s Chairman of the Board, Chief Executive Officer
      and thus received no compensation for his services as a director. Mr. Marx
      resigned on November 18, 2008. The compensation received by Mr. Marx as an
      employee of the Company is shown in the Summary Compensation
      Table.
 (2)
              Reflects
      the dollar amount recognized and expensed for financial statement
      reporting purposes for the year ended December 31, 2008 in accordance
      with FAS 123R, and thus may include amounts from awards granted in and
      prior to 2008. For Mr. Wade, the amount represents the Director fees
      earned that were paid by issuance of common stock at fair market value
      rather than cash.(3)
              Reflects
      the dollar amount recognized for financial statement reporting purposes
      for the year ended December 31, 2008 in accordance with FAS 123R, and
      thus includes amounts from options granted in and prior to
      2008.(4)
              Mr.
      Marx, Mr. Balaban, Mr. Wade and Mr. Huebner resigned as directors in
      November 2008.(5)
              Mr.
      Young was appointed as a director in October 2008 and was appointed as the
      Company’s Chairman of the Board, Chief Executive Officer in November 2008.
      Mr. Young receives no compensation as an employee.(6)
              Mr.
      Nemeth and Mr. Vega were appointed as directors in November
      2008
  Compensation
Committee Interlocks and Insider Participation
  No member
of the Compensation Committee was an officer or former officer of the Company or
had any material relationship or transactions with the Company and no officer of
the Company sits on the compensation committee or other body that has the power
to establish the compensation of any member of the Compensation
Committee.
  39
 Table of Contents
 2007
Stock Incentive Plan
 
 The
following paragraphs provide a summary of the principal features of the 2007
Plan and its operation.
 
 Shares Available for
Issuance
 
 The 2007
Plan provides that no more than 300,000 shares of our common stock may be issued
for awards. If there is any change in the Company’s common stock by reason of
any stock exchange, merger, consolidation, reorganization, recapitalization,
stock dividend, reclassification, split-up, combination of shares or otherwise,
then the Board, or any Option Committee, shall make proportionate adjustments to
the maximum number and kind of securities (i) available for issuance under the
2007 Plan; (ii) available for issuance as incentive stock options or
non-qualified stock options; (iii) that may be subject to awards received by any
participant; (iv) that may be subject to different types of awards; (v) that are
subject to any outstanding award; and (vi) the price of each
security.
 
 The 2007
Plan provides that shares covered by an award will not count against the shares
available for issuance under the 2007 Plan until they are actually issued and
delivered to a participant.  If an award granted under the 2007 Plan
lapses, expires, terminates or is forfeited, surrendered or canceled without
having been fully exercised or without the issuance of all the shares subject to
the award, the shares covered by such award will again be available for use
under the 2007 Plan.
 
 Eligibility
 
 Awards
may be made to any employee, officer, director of the Company and its related
companies or other persons who provide services to the Company and its related
companies.
 
 Administration
 
 The 2007
Plan will be administered by the Option Committee, which shall consist of the
Board or a committee of the Board as the Board may from time to time
designate.
 
 Types of
Awards
 
 Stock Options.The Option
Committee may grant, either incentive stock options, which comply with Section
422 of the Internal Revenue Code, or nonqualified stock options. The Option
Committee sets option exercise prices and terms, except that the exercise price
of an incentive stock option may be no less than 100% of the fair market value
of the shares on the date of grant. At the time of grant, the Option Committee
in its sole discretion will determine when stock options are exercisable and
when they expire, except that the term of a stock option cannot exceed ten
years.
 
 Restricted Stock Awards. The
Option Committee may grant awards of restricted stock under the 2007 Plan. These
shares may be subject to restrictions on transferability, risk of forfeiture and
other restrictions as determined by the Option Committee. As a condition to a
grant of an award of restricted stock, the Option Committee may require or
permit a participant to elect that any cash dividends paid on a share of
Restricted Stock be automatically reinvested in additional shares of restricted
stock or applied to the purchase of additional awards under the 2007 Plan.
Unless otherwise determined by the Option Committee, stock distributed in
connection with a stock split or stock dividend, and other property distributed
as a dividend, shall be subject to restrictions and a risk of forfeiture to the
same extent as restricted stock with respect to which such stock or other
property has been distributed.
 
 Restricted Stock Unit Awards
The Option Committee may grant awards of Restricted Stock Units under the 2007
Plan. A “Restricted Stock Unit” is a grant valued in terms of common stock, but
common stock is not issued at the time of grant. After participants who receive
awards of Restricted Stock Units satisfy applicable vesting requirements, the
Company will distribute shares or the cash equivalent of the number of shares
used to value the Unit. If the participant does not meet the requirements prior
to the end of the vesting period, the Units will be forfeited to the Company.
Vesting requirements may be met by the passage of time or by either Company or
individual performance. Restricted Stock Units shall be subject to such
restrictions (which may include a risk of forfeiture) as determined by the
Option Committee, which restrictions may lapse at the expiration of the deferral
period or at other times determined by the Option Committee.
 
 40
 Table of Contents
 Amendment and Termination of
the 2007 Plan
 
 The Board
of Directors or the Option Committee may amend, alter or discontinue the 2007
Plan, except that if any applicable statute, rule or regulation requires
shareholder approval with respect to any amendment of the 2007 Plan, then to the
extent so required, shareholder approval will be obtained. No amendment may
impair the right of a participant under an outstanding agreement. As proposed,
the 2007 Plan would terminate on August 2, 2017.
 
 Federal Income Tax
Consequences
 
 The
following is a summary of the material United States federal income tax
consequences to us and to recipients of certain awards under the 2007 Plan. The
summary is based on the Internal Revenue Code and the U.S. Treasury regulations
promulgated thereunder in effect as of the date of this Proxy Statement, all of
which may change with retroactive effect. The summary is not intended to be a
complete analysis or discussion of all potential tax consequences that may be
important to recipients of awards under the 2007 Plan.
 
 Nonqualified Stock Options. A
recipient will not have any income at the time a nonqualified stock option is
granted, nor will the Company be entitled to a deduction at that
time.  When a nonqualified stock option is exercised, the recipient
generally will recognize ordinary income (whether the option price is paid in
cash or by surrender of shares of Company stock), in an amount equal to the
excess of the fair market value of the shares to which the option exercise
pertains over the option price.
 
 Incentive Stock
Options.  A recipient will not have any income at the time an
incentive stock option (“ISO”) is granted.  Furthermore, a recipient
will not have regular taxable income at the time the ISO is exercised. However,
the excess of the fair market value of the shares at the time of exercise over
the option price will be a preference item that could create an alternative
minimum tax liability for the recipient. If a recipient disposes of the shares
acquired on exercise of an ISO after the later of two years after the grant of
the ISO or one year after exercise of the ISO, the gain recognized by the
recipient (i.e., the excess of the proceeds received over the option price), if
any, will be long-term capital gain eligible for favorable tax rates under the
Internal Revenue Code. Conversely, if the recipient disposes of the shares
within two years of the grant of the ISO or within one year of exercise of the
ISO, the disposition will generally be a “disqualifying disposition”, and the
recipient will recognize ordinary income in the year of the disqualifying
disposition equal to the lesser of (i) the excess of the fair market value of
the stock on the date of exercise over the option price and (ii) the excess of
the amount received for the shares over the option price. The balance of the
gain or loss, if any, will be long-term or short-term capital gain, depending on
how long the shares were held.
 
 Restricted Stock and Restricted
Stock Units. With respect to a grant of restricted stock or Restricted
Stock Units. Instead, the participant will recognize ordinary income at the time
of vesting or payout equal to the fair market value (on the vesting or payout
date) of the shares or cash received minus any amount paid. For restricted stock
only, a participant instead may elect to be taxed at the time of
grant.
 
 The
Company generally will be entitled to a tax deduction in connection with an
award under the 2007 Plan in an amount equal to the ordinary income realized by
a participant at the time the participant recognizes such income, provided that
the deduction is not disallowed by Section 162(m) or otherwise limited by the
Internal Revenue Code.
 
 41
 Table of Contents
 In 2007,
options to purchase a total of 40,000 shares were granted to an officer at an
exercise price of $5.40. No options were granted to directors in 2007 from this
Plan and no options were granted in 2008.
 
 1997 Stock Option and
Compensation Plan
 
 In
November 1997, the Board of Directors approved our 1997 Stock Option and
Compensation Plan (the "Plan"). Pursuant to the Plan, options were authorized to
be granted to purchase an aggregate of 100,000 shares of our common stock to key
employees, directors, and other persons who have or are contributing to our
success. On November 9, 2004, the shareholders approved amendments to the 1997
Stock Option and Compensation Plan to allow for an aggregate of 200,000 options
to be granted under "the Plan". The options granted pursuant to the Plan could
have been incentive options qualifying for beneficial tax treatment for the
recipient or they could have been non-qualified options. The Plan was
administered by an option committee that determined the terms of the options
subject to the requirements of the Plan, except that the option committee did
not administer the Plan with respect to automatic grants of options to our
directors who were not our employees.  The option committee could have
been the entire Board or a committee of the Board. The 1997 Stock Option and
Compensation Plan expired in November 2007.
 
 Through
May 24, 2000, directors who were not also our employees ("Outside Directors")
automatically received options to purchase 5,000 shares pursuant to the Plan at
the time of their election as an Outside Director. These Outside Directors
options were not exercisable at the time of grant. Options to purchase 1,000
shares became exercisable for each meeting of the Board of Directors attended by
each Outside Director on or after the date of grant of the options to that
Outside Director, but in no event earlier than six months following the date of
grant. The exercise price for options granted to Outside Directors was equal to
the closing price per share of our common stock on the date of grant. All
options granted to Outside Directors expired five years after the date of grant.
On the date that all of an Outside Director’s options became exercisable,
options to purchase an additional 5,000 shares, which were exercisable no
earlier than six months from the date of grant, were automatically granted to
that Outside Director. On May 24, 2000, the Board of Directors voted to (1)
decrease the amount of options automatically granted to Outside Directors from
5,000 to 500 options, and (2) decrease the amount of exercisable options from
1,000 to 100 per meeting. The term of the Outside Director option granted in the
future was lowered from five years to two years. The other terms of the Outside
Director options did not change. On July 5, 2002, the Board of Directors voted
to (1) increase the amount of options automatically granted to Outside
Directors from 500 to 2,500 options, and (2) increase the amount of
exercisable options from 100 to 500 per meeting. The other terms of the Outside
Director options did not change.
 
 The
Company granted a total of 7,500 options to Outside Directors under the Plan
during 2007 at exercise prices ranging from $4.80 to $5.47 per share. The
Company granted a total of 5,000 options to Outside Directors under the Plan
during 2006 at an exercise price of $6.50 per share. The Company granted a total
of 5,000 options to Outside Directors under the Plan during 2005 at exercise
prices ranging from $5.50 to $7.50 per share.
 
 As of
December 31, 2008, there were 6,000 exercisable options outstanding related to
the grants to former Outside Directors. These options expired February 12,
2009.
 
 In
addition to Outside Directors grants, the Board of Directors may grant incentive
options to our key employees pursuant to the Plan. In 2007 and 2006, the Board did not grant any options to
employees under the Plan.In 2005, the Board granted a total of 2,000
options under the Plan to employees with an exercise price of $7.50. These
options expired in 2008.
 
 42
 Table of Contents
 Employment Contracts and
Termination of Employment and Change-In-Control Arrangements
 
 Effective
February 1, 2008, the Company’s Board of Directors approved an employment
agreement between the Company and Randall P. Marx, the Company’s Chief Executive
Officer (CEO), effective as of January 31, 2008. The employment agreement was
recommended to the Board by the Compensation Committee. The agreement provided
for annual compensation of $250,000 in 2007, $275,000 in 2008, and $300,000 in
2009. On November 18, 2008 Mr. Marx resigned his position as CEO. In connection
with Mr. Marx’s resignation, on November 18, 2008, the Company and Mr. Marx
reached an agreement for compensation of Mr. Marx that would replace the
compensation and other benefits to which Mr. Marx could be entitled under his
January 31, 2008 employment agreement with the Company. Pursuant to this new
agreement, Mr. Marx will be compensated $327,500 through December 31, 2009 as
payment in full for his salary and accrued vacation, and he will receive health
benefits from the Company through December 31, 2009. Under the terms of this
agreement, Mr. Marx is not entitled to receive any other compensation or
benefits to which he otherwise would have been entitled under his January 31,
2008 employment agreement. Mr. Marx also agreed to provide telephonic consulting
services to the Company.
 
 Effective
November 1, 2007, the Company entered into a two year employment agreement with
Mr. Monty R. Lamirato as the Company’s Chief Financial Officer, which he has
served since June 2001. The agreement provided for annual compensation of
$165,000 in the first year and $175,000 in the second year. On November 26,
2008, Monty R. Lamirato, the Company’s Chief Financial Officer and Treasurer,
resigned from his positions with the Company, effective immediately. In
connection with Mr. Lamirato’s resignation, Mr. Lamirato and the Company
executed a separation agreement pursuant to which Mr. Lamirato will be paid
$115,000 through May 26, 2009 for all compensation and other benefits to which
he otherwise would have been entitled under his November 7, 2007 employment
agreement. Under the terms of this agreement, Mr. Lamirato agreed to provide
reasonable consulting services to the Company through October 31,
2009.
 
 Effective
November 1, 2007, the Company entered into a three year employment agreement
with Mr. Richard A. Anderson, as the Company’s Executive Vice President. The
agreement provided for annual compensation of $125,000. On November 26, 2008,
Richard L. Anderson, the Company’s Executive Vice President, resigned from his
position with the Company, effective immediately. In connection with his
resignation, Mr. Anderson and the Company executed a separation agreement
pursuant to which Mr. Anderson will be paid $120,000 through May 26, 2009, and
he will receive health benefits from the Company through June 30, 2009, both as
payment for all compensation and other benefits to which he otherwise would have
been entitled under his November 7, 2007 employment agreement. Mr. Anderson also
agreed to provide reasonable consulting services to the Company through December
31, 2009.
 
 Effective
November 1, 2007, the Company entered into a five year employment agreement with
Mr. Steven C. Olson, as President and Chief Technology Officer of the Company’s
Wireless Communications Solutions Division. Mr. Olson has been with the Company
since 2001. The agreement provides for annual base compensation of $200,000 in
2007, increasing annually to $245,000 in 2011. Mr. Olson shall also be entitled
to bonuses ranging from $5,000 to $100,000 annually contingent upon the Wireless
Communications Solutions Division achieving certain net income targets. Mr.
Olson earned a bonus of $7,500 for 2007. We previously entered into a written
employment agreement with Mr. Olson, effective August 22, 2004. The employment
agreement was for the period August 22, 2004 through August 22, 2007 at an
annual base salary of $175,000. Mr. Olson also was eligible to earn bonuses,
upon achieving certain gross margin objectives, over the term of the agreement.
Mr. Olson did not receive a bonus in 2006. Mr. Olson also received options to
purchase 10,000 shares of our common stock at a price of $6.00 per share from
August 22, 2004 through August 22, 2007. Mr. Olson
also received options to purchase 40,000 shares of our common stock on August
21, 2007. These options vest at a rate of 20% per year with vesting dates of
12/31/07, 12/31/08, 12/31/09, 12/31/10, and 12/31/11.
 
 43
 Table of Contents
 The
following tables show the potential payments upon termination or a change of
control of the Company for each of the named executive officers.
 
 Scenario
                    Mr. OlsonIf
      early retirement occurred at December 31, 2008
                    -If
      termination for cause occurred at December 31, 2008
                    -If
      termination without cause occurred at December 31, 2008
                    $215,000If
      “change in control” occurred at December 31, 2008
                    $215,000If
      death or disability occurred as of December 31, 2008
                    -
 
 We have
no compensatory plan or arrangement that results or will result from the
resignation, retirement, or any other termination of an executive officer’s
employment with us or from a change-in-control or a change in an executive
officer’s responsibilities following a change-in-control, except that the 2008
Stock Incentive Plan and 1997 Stock Option and
Compensation Plan provides for vesting of all outstanding options in
the event of the occurrence of a change-in-control.
 
 Item12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
 
 The
following table summarizes certain information as of January 31, 2009 with
respect to the beneficial ownership of our common stock by each director, by all
executive officers and directors as a group, and by each other person known by
us to be the beneficial owner of more than five percent of our common stock
(as stated previously, the number of shares and
any exercise prices have been adjusted for a one-for-fifty reverse split
implemented on February 12, 2007):
 
 Name and Address of Beneficial
      Owner
              Number
      of Shares
                Beneficially Owned (1)
              Percent of
Class  Randall
      P. Marx
                ARC
      Wireless Solutions, Inc.
                10601
      West 48th
      Ave.
                Wheat
      Ridge, CO  80033
              167,165(6)
              5.4%Steven
      C. Olson
                ARC
      Wireless Solutions, Inc.
                10601
      West 48th
      Ave.
                Wheat
      Ridge, CO  80033
              17,751(3)
              *Paul
      J. Rini
                7376
      Johnnycake Rd
                Mentor,
      Ohio 44060
              308,922(7)
              9.99%Jason
      Young
                ARC
      Wireless Solutions, Inc.
                10601
      West 48th Ave.
                Wheat
      Ridge, CO  80033
              849,369(2)(8)
              27.48%   44
 Table of Contents
 Name and Address of Beneficial
      Owner
                  Number
      of Shares
                    Beneficially Owned (1)
                  Percent of
Class
 Brean
      Murray Carret Group, Inc.
                40
      West 57th Street, 20th Floor
                New
      York, NY  10019
              429,532
      (4) (8)
              13.9%Hassan
      Nemazee
                40
      West 57th Street, 20th Floor
                New
      York, NY  10019
              419,837
      (5) (9)
              13.6%Viktor
      Nemeth
                ARC
      Wireless Solutions, Inc.
                10601
      West 48th Ave.
                Wheat
      Ridge, CO  80033
              0
              *Marco
      Vega
                ARC
      Wireless Solutions, Inc.
                10601
      West 48th Ave.
                Wheat
      Ridge, CO  80033
              0
              *Javier
      Baz
                ARC
      Wireless Solutions, Inc.
                10601
      West 48th Ave.
                Wheat
      Ridge, CO  80033
              0
              *Amit
      Chatwani
                ARC
      Wireless Solutions, Inc.
                10601
      West 48th Ave.
                Wheat
      Ridge, CO  80033
              0
              *All
      officers and directors as a group (6 persons)
              867,120
      (2)(3)(8)(9)
              27.48%
 
 *  Less
than one percent.
 
 (1)
              “Beneficial
      ownership” is defined in the regulations promulgated by the U.S.
      Securities and Exchange Commission as having or sharing, directly or
      indirectly (1) voting power, which includes the power to vote or to direct
      the voting, or (2) investment power, which includes the power to dispose
      or to direct the disposition, of shares of the common stock of an issuer.
      The definition of beneficial ownership includes shares underlying options
      or warrants to purchase common stock, or other securities convertible into
      common stock, that currently are exercisable or convertible or that will
      become exercisable or convertible within 60 days. Unless otherwise
      indicated, the beneficial owner has sole voting and investment
      power.
 (2)
              Consists
      of 429,532 shares beneficially owned by the Brean Murray Carret Group,
      Inc., and 419,837 shares beneficially owned by Hassan Nemazee as reported
      as of November 3, 2008. Mr. Young shares voting and investment power over
      the shares beneficially owned by the Brean Murray Carret Group,Inc. and
      Mr. Nemazee.
  45
 Table of Contents
  (3)
              Consists
      of 1,751 shares in Mr. Olson's ARC Wireless 401(k) account and options to
      purchase 16,000 shares at $5.41 per share until September 21, 2017,
      granted under the 2007 Stock Incentive Plan which are currently
      exercisable.
 (4)
              Consists
      of 429,532 shares beneficially owned by Brean. Mr. Young, the Company's
      Chief Executive Officer and Chairman of the Board, serves as a
      representative of Brean and he holds voting and investment power over
      these shares.
 (5)
              Consists
      of 242,134 shares owned by Mr. Nemazee individually, 173,653 shares owned
      by NCC Limited, 2,950 shares held by Telnem Holdings LLC and 1,100 shares
      held by Nemazee Capital Corporation. Mr. Nemazee is the sole shareholder,
      sole director, and sole officer of each of NCC Limited and Nemazee Capital
      Corporation, and the sole managing member of Telnem Holdings LLC. Mr.
      Young, the Company's Chief Executive Officer and Chairman of the Board,
      serves as a representative of Mr. Nemazee and he holds voting and
      investment power over these shares
 (6)
              Includes
      163,816 shares directly held by Randy Marx, the Company's former Chief
      Executive Officer and Chairman of the Board, 1,980 shares in his ARC
      Wireless 401(k) account, 800 shares held by his spouse's IRA and 570
      shares owned beneficially through a 50% ownership of an LLC. This does not
      include 2,170 shares owned by the Harold and Theora Marx Living Trust, of
      which Mr. Marx's father is the trustee, as Mr. Marx disclaims beneficial
      ownership of these shares. This also does not include 3,100 shares owned
      by Warren E. Spencer Living Trust, of which Mr. Marx's mother-in-law is
      trustee, as Mr. Marx disclaims beneficial ownership of these
      shares.
 (7)
              Consists
      of shares owned by Mr. Paul J. Rini as reported on October 10,
      2008.
 (8)
              The
      shares owned by Brean are included three times in the table. In addition
      to being shown as owned by Brean, these shares are included as being
      beneficially owned by Jason Young and by all officers and directors as a
      group.
 (9)
              The
      shares owned by Hassan Nemazee are included three times in the table. In
      addition to being shown as owned by Mr. Nemazee, these shares are included
      as being beneficially owned by Jason Young and by all officers and
      directors as a group.
 
 Please refer to Item 5 herein for a description of
Equity Compensation Plan Information
 
 Item13.  Certain Relationships and Related
Transactions
 
 We do not
employ specific written procedures for the review, approval or ratification of
related party transactions involving our directors, officers and employees or
their family members, but we consider such transactions on a case-by-case
basis.
  On
January 23, 2009 ARC Wireless Solutions, Inc. ("ARC") entered into a financial
advisory engagement (the "Agreement") with Quadrant Management, Inc. (the
"Advisor"). Quadrant Management, Inc. is under common control with Brean, an
entity that, together with Mr. Hassan Nemazee ("Nemazee"), beneficially owns
849,369, or 27.48%, of the Company's common stock. Mr. Young, the Company’s
current Chief Executive Officer,  has been a Managing Director at
Quadrant Management, Inc. since 2005, where he is responsible for making
investments in US and emerging market companies, and where he frequently serves
in active management- or director-level roles.
  Pursuant
to the Agreement, the Advisor will provide to ARC financial advisory and
business consulting services, including restructuring services.
  In
consideration for the restructuring services having been provided by the Advisor
since November 2008 and for the ongoing services to be provided, ARC will pay
the following: 1) an initial cash fee of $250,000 upon signing the Agreement; 2)
an annual fee of the greater of (i) $250,000, or (ii) 20% of any increase in
reported earnings before interest, taxes, depreciation and amortization after
adjusting for one-time and non-recurring items ("EBITDA") for the current
financial year over preceding year, or (iii) 20% of reported EBITDA for the
current financial year, and; 3) all reasonable out-of-pocket expenses incurred
by Advisor in performing services under the Agreement.
  46
 Table of Contents
 The
Agreement will expire on December 31, 2013.
  We are currently subject to corporate governance
standards defining the independence of our directors imposed by the NASDAQ
Capital Market's requirements for independent directors (NASDAQ Marketplace Rule
4200). Under this definition, we have determined that prior to their resignation
in November 2008, Sigmund A. Balaban, Robert E. Wade and Dr. Donald A. Huebner
qualified as independent directors. For a description of Messrs. Balaban, Wade
and Huebner, please refer to Item 10 herein. On November 12, 2008, the
Company's Board elected Viktor Nemeth and Marco Vega to serve on the Boardof Directors and on January 21, 2009 Mr.Javier
Baz and Amit Chatwani were elected to serve on the Board of Directors. Mr.
Nemeth, Mr. Baz and Mr. Chatwani qualify as independent directors in accordance
with the standards imposed by the NASDAQ Capital
Market's requirements for independent directors (NASDAQ Marketplace Rule
4200).
 
 Item14.
Principal Accountant Fees and Services
 
 The Audit
Committee reviews and determines whether specific projects or expenditures with
our independent registered public accounting firm (auditor), HEIN &
ASSOCIATES LLP potentially affect their independence. The Audit Committee’s
policy requires that all services the Company's independent registered public
accounting firm (auditor) may provide to the Company, including audit services
and permitted audit-related services, be pre-approved in advance by the Audit
Committee. In the event that an audit or non-audit service requires approval
prior to the next scheduled meeting of the Audit Committee, the auditor must
contact the Chairman of the Audit Committee to obtain such approval. Any
approval will be reported to the Audit Committee at its next scheduled
meeting.
  Audit
Fees
 
 The
following table sets forth the aggregate fees billed to us by HEIN &
ASSOCIATES LLP for the years ended December 31, 2008, 2007 and
2006:
  2008
                  
                  2007
                  
                  2006Audit
      fees
                  $91,000
                  (1)
                  $78,000
                  (1)
                  $140,000
                  (1)Audit-related
      fees
                  -
                  (2)
                  --
                  (2)
                  --
                  (2)Tax
      fees
                  18,000
                  (3)
                  22,000
                  (3)
                  14,000
                  (3)All
      other fees
                  
                  
                  --Total
      audit and non-audit fees
                  $109,000
                  
                  $100,000
                  
                  $154,000
 
 (1)
              Includes
      fees for professional services rendered for the audit of our annual
      financial statements and review of our Annual Report on Form 10-K for the
      year 2008, 2007 and 2006 and for reviews of the financial statements
      included in our quarterly reports on Form 10-Q for the first three
      quarters of fiscal 2008, 2007 and 2006 and related SEC registration
      statements.
 
 (2)
              Includes
      fees billed for professional services rendered in fiscal 2008, 2007 and
      2006, in connection with acquisition planning and due
      diligence.
 
 (3)
              Includes
      fees billed for professional services rendered in fiscal 2008, 2007 and
      2006, in connection with tax compliance (including U.S. federal and state
      returns) and tax consulting.
 
 47
 Table of Contents
 Item15.  Exhibits, Financial Statement
Schedules
  (a)
              The
      following documents are filed as a part of this
  report:
 
 (1)
              Financial
      Statements
 
 Report
      of Independent Registered Public Accounting
      Firm
              F-1
 
 Consolidated
      Balance Sheets at December 31, 2008 and
      2007
              F-2
 
 Consolidated
Statements
of Operations for the Years Ended
 December 31, 2008, 2007 and 2006
              F-3
 
 Consolidated
Statements
of Changes in Stockholders’ Equity
 for the Years Ended December 31, 2008, 2007 and 2006
              F-4
 
 Consolidated
Statements
of Cash Flows for the Years Ended
 December 31, 2008, 2007 and 2006
              F-5
 
 Notes
      to Consolidated Financial Statements
              F-6
 
 (2)
              Financial
      Statement Schedules
 
 Report of
Independent Registered Public Accounting Firm on Schedule
 
 Schedule
II
 
 Consolidated
Valuation Accounts
 
 Balance,
                          Beginning
      of
                          Year
                        
                        
                        Charges
      to
                          Cost
      and
                          Expenses
                        
                        
                        Write-offs,
                          Net
      of
                          Recoveries
                        
                        Sale
      of
                          Winncom
                        
                        Balance,
                          End
      of YearAllowance
      for Doubtful AccountsYears
      Ended December 31,2008
                        
                        $
                        453,000
                        
                        
                        
                        57,000
                        
                        
                        
                        (50,000
                        )
                        
                        
                        $
                        460,0002007
                        
                        $
                        31,000
                        
                        
                        
                        422,000
                        
                        
                        
                        
                        
                        
                        
                        $
                        453,0002006
                        
                        $
                        385,000
                        
                        
                        
                        558,000
                        
                        
                        
                        (51,000
                        )
                        (861,000)
                        
                        $
                        31,000
 
 
 Balance,
                        Beginning
      of
                        Year
                      
                      
                      Charges
      to
                        Cost
      and
                        Expenses
                      
                      
                      Write-offs
                      
                      Sale
      of
                        Winncom
                      
                      Balance,
                        End
      of YearInventory
      ValuationYears
      Ended December 31,2008
                      
                      $
                      653,000
                      
                      
                      
                      
                      
                      
                      (653,000
                      )
                      
                      
                      $
                      -2007
                      
                      $
                      633,000
                      
                      
                      
                      20,000
                      
                      
                      
                      
                      
                      
                      
                      $
                      653,0002006
                      
                      $
                      725,000
                      
                      
                      
                      266,000
                      
                      
                      
                      
                      
                      (358,000)
                      
                      $
                      633,000
  48
 Table of Contents
 (3)
              Exhibits.
 
 EXHIBIT
INDEX
  Exhibit
                          Number
                        Description3.1
                        Amended
      and Restated Articles of Incorporation dated October 11, 2000
      (1)3.2
                        Bylaws
      of the Company as amended and restated on March 25, 1998
    (2)10.1
                        Agreement
      between and among Winncom Technologies Inc., Winncom Technologies Corp.
      and the Company dated May 24, 2000 (3)10.2
                        Stock Purchase Agreement, by and among Bluecoral
      limited, Winncom Technologies Corp. and the Company dated as of July 28,
      2006 (4)10.3
                        Escrow Agreement, dated July 28, 2006, by and
      among the Company, Bluecoral Limited and Consumer Title Services, LLC
      (4)10.4
                        Employment
      Agreement effective January 31, 2008 between the Company and Randall P.
      Marx (5)10.5
                        Employment
      Agreement effective November 1, 2007 between the Company and Monty R.
      Lamirato (6)10.6
                        Employment
      Agreement effective November 1, 2007 between the Company and Steve C.
      Olson (6)10.7
                        Employment
      Agreement effective November 1, 2007 between the Company and Richard L.
      Anderson (6)10.8
                        Seperation
      Agreeement effective November 18, 2008 between the Company and Randall P.
      Marx10.9
                        Seperation
      Agreeement effective November 26, 2008 between the Company and Monty R.
      Lamirato10.10
                        Seperation
      Agreeement effective November 26, 2008 between the Company and Richard L.
      Anderson14.1
                        Amended
      and Restated Code of Ethics (7)21.1
                        Subsidiaries
      of the Registrant31.1
                        Officers’
      Certifications of Periodic Report pursuant to Section 302 of
      Sarbanes-Oxley Act of 200232.1
                        Officers’
      Certifications of Periodic Report pursuant to Section 906 of
      Sarbanes-Oxley Act of 200299.1
                        Nominating Policies and
      Procedures
 
 (1)
              Incorporated
      by reference from the Company’s Form 10-KSB
      for December 31, 2000 filed on April 2,2001.
 (2)
              Incorporated
      by reference from the Company’s Form 10-KSB for December 31, 1997 filed on
      March 31, 1998.
 (3)
              Incorporated
      by reference from Exhibit 2.1 of the
      Company’s Form 8-K filed on June 8,
      2000.
 (4)
              Incorporated
      by reference from the Company’s Form 8-K/A filed on August 2,
      2006.
 (5)
              Incorporated
      by reference from the Company’s Form 8-K filed on February 7,
      2008.
 (6)
              Incorporated
      by reference from the Company’s Form 8-K filed on November 8,
      2007.
 (7)
              Incorporated by reference from the Company’s Form
      8-K filed on November13,
      2006
 
 
 49
 Table of Contents
  SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  ARC
      Wireless Solutions, Inc.Date:  March
      30, 2009
                                By:
                                /s/ Jason
      T. YoungJason
      T. Young, Chief Executive OfficerDate:  March
      30, 2009
                                By:
                                /s/
      Monty R. LamiratoMonty
      R. Lamirato, Acting Principal Financial Officer
  In
accordance with the Exchange Act, this report has been signed by the following
persons on behalf of the registrant in the capacities and on the dates
indicated.
 
 Date
                          SignaturesMarch
      30, 2009
                          /s/ Viktor Nemeth
                            Viktor
      Nemeth, DirectorMarch
      30, 2009
                          /s/ Marco Vega
                            Marco
      Vega, DirectorMarch
      30, 2009
                          /s/ Javier Baz
                            Javier
      Baz, DirectorMarch
      30, 2009
                          /s/ Amit Chatwani
                            Amit
      Chatwani,
Director
 
 50
 Table of Contents
 Report of
Independent Registered Public Accounting Firm
 
 
 The Board
of Directors
 ARC
Wireless Solutions, Inc.
 Wheat
Ridge, Colorado
 
 We have
audited the consolidated balance sheets of ARC Wireless Solutions, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations, changes in stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2008. Our audits also
included the consolidated financial statement schedule listed in the index at
Item 15. These consolidated financial statements and the consolidated financial
statement schedule, are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements and consolidated financial statement schedule based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of ARC Wireless Solutions, Inc.
and subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
 
 We were
not engaged to examine management’s assertions about the effectiveness of ARC
Wireless Solutions, Inc internal control over financial reporting as of December
31, 2008 included in management’s Annual Report on Internal Control over
Financial Reporting included in Item 9A of this Report on Form 10-K and,
accordingly, we do not express an opinion thereon.
 
 /s/ Hein
& Associates LLP
 
 Denver,
Colorado
 March 30,
2009
 
 
 F-1
 Table of Contents
  ARC
Wireless Solutions, Inc.
 Consolidated
Balance Sheets
  December
      31,
                        
                        
                        December
      31,2008
                        
                        
                        2007AssetsCurrent
      assets:Cash and cash
      equivalents
                        
                        $
                        12,943,000
                        
                        
                        $
                        14,931,000Accounts receivable – trade,
      net
                        
                        
                        867,000
                        
                        
                        
                        1,160,000Inventory, net
                        
                        
                        1,107,000
                        
                        
                        
                        1,097,000Net
      assets of discontinued operations (Note 2)
                        
                        
                        16,000
                        
                        
                        
                        107,000Other current
    assets
                        
                        
                        49,000
                        
                        
                        
                        108,000Total
      current assets
                        
                        
                        14,982,000
                        
                        
                        
                        17,403,000Property
      and equipment, net
                        
                        
                        381,000
                        
                        
                        
                        365,000Other
      assets:Intangible assets,
    net
                        
                        
                        124,000
                        
                        
                        
                        106,000Deposits
                        
                        
                        33,000
                        
                        
                        
                        38,000Total
      assets
                        
                        $
                        15,520,000
                        
                        
                        $
                        17,912,000Liabilities
      and stockholders’ equityCurrent
      liabilities:Accounts
      payable
                        
                        $
                        832,000
                        
                        
                        $
                        623,000Bank debt –
current
                        
                        
                        -
                        
                        
                        
                        1,436,000Accrued
      severance (Note 11)
                        
                        
                        451,000
                        
                        
                        
                        -Accrued expenses
                        
                        
                        450,000
                        
                        
                        
                        286,000Net
      liabilities of discontinued operations (Note 2)
                        
                        
                        8,000
                        
                        
                        
                        8,000Current portion of capital lease
      obligations
                        
                        
                        86,000
                        
                        
                        
                        56,000Total
      current liabilities
                        
                        
                        1,827,000
                        
                        
                        
                        2,409,000Capital
      lease obligations, less current portion
                        
                        
                        77,000
                        
                        
                        
                        83,000Total
      liabilities
                        
                        
                        1,904,000
                        
                        
                        
                        2,492,000Commitments(Notes 7, 8,9 and
      11)Stockholders’
      equity:Preferred
      stock, $.001 par value, 2,000,000 authorized, none issued and
      outstanding
                        
                        
                        -
                        
                        
                        
                        -Common
      stock, $.0005 par value, 250,000,000 authorized, 3,091,000 issued and
      outstanding in 2008 and 3,090,000 issued in 2007,
      respectively.
                        
                        
                        2,000
                        
                        
                        
                        2,000Additional
      paid-in capital
                        
                        
                        20,735,000
                        
                        
                        
                        20,696,000Accumulated
deficit
                        
                        
                        (7,121,000
                        )
                        
                        
                        (5,278,000
                        )Total
      stockholders’ equity
                        
                        
                        13,616,000
                        
                        
                        
                        15,420,000Total
      liabilities and stockholders’ equity
                        
                        $
                        15,520,000
                        
                        
                        $
                        17,912,000
 
 See
accompanying notes to consolidated financial statements.
  F-2
 Table of Contents
 ARC
Wireless Solutions, Inc.
 Consolidated
Statements of Operations
 
 Years
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Sales,
      net
                      
                      $
                      7,257,000
                      
                      
                      $
                      7,931,000
                      
                      
                      $
                      6,087,000Cost
      of sales
                      
                      
                      4,943,000
                      
                      
                      
                      5,192,000
                      
                      
                      
                      4,615,000Gross
      profit
                      
                      
                      2,314,000
                      
                      
                      
                      2,739,000
                      
                      
                      
                      1,472,000Operating
      expenses:Selling,
      general and administrative expenses
                      
                      
                      4,404,000
                      
                      
                      
                      4,169,000
                      
                      
                      
                      3,104,000Loss
      from continuing operations
                      
                      
                      (2,090,000
                      )
                      
                      
                      (1,430,000
                      )
                      
                      
                      (1,632,000
                      )Other
      income (expense):Interest expense
                      
                      
                      (45,000
                      )
                      
                      
                      (24,000
                      )
                      
                      
                      (124,000
                      )Other income
                      
                      
                      383,000
                      
                      
                      
                      705,000
                      
                      
                      
                      101,000Loss
      on sale of Winncom
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (187,000
                      )Total
      other income (expense)
                      
                      
                      338,000
                      
                      
                      
                      681,000
                      
                      
                      
                      (210,000
                      )Loss
      from continuing operation before income taxes
                      
                      
                      (1,752,000
                      )
                      
                      
                      (749,000
                      )
                      
                      
                      (1,842,000
                      )(Provision)
      benefit for income taxes
                      
                      
                      -
                      
                      
                      
                      6,000
                      
                      
                      
                      267,000Loss
      from continuing operation
                      
                      
                      (1,752,000
                      )
                      
                      
                      (743,000
                      )
                      
                      
                      (1,575,000
                      )Income
      (loss) from operations of the discontinued component
                      
                      
                      (91,000
                      )
                      
                      
                      40,000
                      
                      
                      
                      1,037,000(Provision)
      for income taxes, discontinued component
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (204,000
                      )Income
      (loss) from discontinued operations
                      
                      
                      (91,000
                      )
                      
                      
                      40,000
                      
                      
                      
                      833,000Net
      loss
                      
                      $
                      (1,843,000
                      )
                      
                      $
                      (703,000
                      )
                      
                      $
                      (742,000
                      )Net
      income (loss) per share – continuing operations – Basic and
      Diluted
                      
                      $
                      (.57
                      )
                      
                      $
                      (.24
                      )
                      
                      $
                      (.51
                      )Net
      income per share – discontinued operations – Basic and
    Diluted
                      
                      $
                      (.03
                      )
                      
                      $
                      .01
                      
                      
                      $
                      .27Net
      income (loss) per share – Basic and Diluted
                      
                      $
                      (.60
                      )
                      
                      $
                      (.23
                      )
                      
                      $
                      (.24
                      )Weighted
      average shares – Basic
                      
                      
                      3,091,000
                      
                      
                      
                      3,090,000
                      
                      
                      
                      3,086,000Weighted
      average shares – Diluted
                      
                      
                      3,091,000
                      
                      
                      
                      3,090,000
                      
                      
                      
                      3,086,000
  See accompanying notes to
consolidated financial statements.
  F-3
 Table of Contents
 ARC
Wireless Solutions, Inc.
 Consolidated
Statements of Changes in Stockholders’ Equity
 
 Additional
                  
                  
                  TreasuryCommon
      Stock
                  
                  
                  Paid-in
                  
                  
                  Stock
                  
                  
                  AccumulatedShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  DeficitBalances,
      January 1, 2006
                  
                  
                  3,125,000
                  
                  
                  $
                  2,000
                  
                  
                  $
                  21,836,000
                  
                  
                  
                  (39,000
                  )
                  
                  $
                  (1,195,000
                  )
                  
                  $
                  (3,833,000
                  )Share
      based compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  11,000Common
      stock issued for directors’ fees
                  
                  
                  1,000
                  
                  
                  
                  
                  
                  
                  
                  8,000Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (742,000
                  )Balances,
      December 31, 2006
                  
                  
                  3,126,000
                  
                  
                  
                  2,000
                  
                  
                  
                  21,855,000
                  
                  
                  
                  (39,000
                  )
                  
                  
                  (1,195,000
                  )
                  
                  
                  (4,575,000
                  )Cancellation
      of Treasury shares
                  
                  
                  (39,000
                  )
                  
                  
                  
                  
                  
                  
                  (1,195,000
                  )
                  
                  
                  39,000
                  
                  
                  
                  1,195,000Share
      based compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  21,000Common
      stock issued for directors’ fees
                  
                  
                  3,000
                  
                  
                  
                  
                  
                  
                  
                  15,000Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (703,000
                  )Balances,
      December 31, 2007
                  
                  
                  3,090,000
                  
                  
                  $
                  2,000
                  
                  
                  $
                  20,696,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  (5,278,000
                  )Share
      based compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  33,000Common
      stock issued for directors’ fees
                  
                  
                  1,000
                  
                  
                  
                  
                  
                  
                  
                  6,000Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,843,000
                  )Balances,
      December 31, 2008
                  
                  
                  3,091,000
                  
                  
                  $
                  2,000
                  
                  
                  $
                  20,735,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  (7,121,000
                  )
 
 See accompanying notes to
consolidated financial statements.
  F-4
 Table of Contents
 
 ARC
Wireless Solutions, Inc.
 Consolidated
Statements of Cash Flows
  Years
      ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006Operating
      activitiesLoss
      from continuing operations
                          
                          $
                          (1,752,000
                          )
                          
                          $
                          (743,000
                          )
                          
                          $
                          (1,575,000
                          )Adjustments
      to reconcile loss from continuing operations to net cash provided by (used
      in) operating activities:Depreciation and
      amortization
                          
                          
                          223,000
                          
                          
                          
                          181,000
                          
                          
                          
                          162,000Provision
      for doubtful receivables
                          
                          
                          57,000
                          
                          
                          
                          395,000
                          
                          
                          
                          7,000Non-cash expense for issuance of
      stock and options
                          
                          
                          36,000
                          
                          
                          
                          36,000
                          
                          
                          
                          19,000Loss
      on sale of discontinued operations
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          187,000Changes in operating assets and
      liabilities:Accounts receivable,
      trade
                          
                          
                          236,000
                          
                          
                          
                          (972,000
                          ))
                          
                          
                          277,000Inventory
                          
                          
                          (10,000
                          )
                          
                          
                          (458,000
                          )
                          
                          
                          131,000Prepaids and other current
      assets
                          
                          
                          59,000
                          
                          
                          
                          277,000
                          
                          
                          
                          (315,000
                          )Other
      assets
                          
                          
                          5,000
                          
                          
                          
                          (3,000
                          )
                          
                          
                          7,000Accounts payable and accrued
      expenses
                          
                          
                          827,000
                          
                          
                          
                          (58,000
                          )
                          
                          
                          320,000Net
      cash  (used in) continuing operations
                          
                          
                          (319,000
                          )
                          
                          
                          (1,345,000
                          )
                          
                          
                          (780,000
                          )Net
      cash provided by discontinued operations
                          
                          
                          -
                          
                          
                          
                          124,000
                          
                          
                          
                          1,366,000Net
      cash provided by (used in) operating activities
                          
                          
                          (319,000
                          )
                          
                          
                          (1,221,000
                          )
                          
                          
                          586,000Investing
      activitiesNet
      proceeds from sale of discontinued operations
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          16,397,000Patent
      acquisition costs
                          
                          
                          (34,000
                          )
                          
                          
                          (23,000
                          )
                          
                          
                          (10,000
                          )Purchase
      of plant and equipment
                          
                          
                          (120,000
                          )
                          
                          
                          (99,000
                          )
                          
                          
                          (80,000
                          )Net
      cash provided by (used in) investing activities, continuing
      operations
                          
                          
                          (154,000
                          )
                          
                          
                          (122,000
                          )
                          
                          
                          16,307,000Purchase
      of plant and equipment, discontinued operations
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (58,000
                          )Net
      cash used in investing activities, discontinued operations
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (58,000
                          )Net
      cash provided by (used in) investing activities
                          
                          
                          (154,000
                          )
                          
                          
                          (122,000
                          )
                          
                          
                          16,249,000Financing
      activitiesNet
      advances from line of credit
                          
                          
                          3,304,000
                          
                          
                          
                          4,978,000
                          
                          
                          
                          276,000Net
      repayment of line of credit and capital lease obligations
                          
                          
                          (4,819,000
                          )
                          
                          
                          (4,423,000
                          )
                          
                          
                          (73,000
                          )Net
      cash provided by(used in) financing activities, continuing
      operations
                          
                          
                          (1,515,000
                          )
                          
                          
                          555,000
                          
                          
                          
                          203,000Net
      advances (repayment) of line of credit and bank debt, discontinued
      operations
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,382,000
                          )Net
      cash provided by (used in) financing activities, discontinued
      operations
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,382,000
                          )Net
      cash provided by (used in) financing activities
                          
                          
                          (1,515,000
                          )
                          
                          
                          555,000
                          
                          
                          
                          (1,179,000
                          )Net
      change in cash
                          
                          
                          (1,988,000
                          )
                          
                          
                          (788,000
                          )
                          
                          
                          15,656,000Cash
      and cash equivalents, beginning of year
                          
                          
                          14,931,000
                          
                          
                          
                          15,719,000
                          
                          
                          
                          63,000Cash
      and cash equivalents, end of year
                          
                          $
                          12,943,000
                          
                          
                          $
                          14,931,000
                          
                          
                          $
                          15,719,000Supplemental
      cash flow information:Cash paid for interest,
      continuing operations
                          
                          $
                          45,000
                          
                          
                          $
                          24,000
                          
                          
                          $
                          124,000Cash
      paid for interest, discontinued operations
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          109,000Cash
      paid for taxes, discontinued operations
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          220,000Equipment
      acquired under capital lease, continuing operations
                          
                          $
                          103,000
                          
                          
                          $
                          135,000
                          
                          
                          $
                          22,000
 
 See
accompanying notes to consolidated financial statements.
  F-5
 Table of Contents
 1.  Organization
and Summary of Significant Accounting Policies
 
 Organization
 
 The
Company (NASDAQ: ARCW)was organized under the laws of the State of Utah on September 30,
1987  and is a provider of high
quality, timely, cost effective wireless network component and wireless network
solutions.
 
 Principles
of Consolidation
 
 The
accompanying consolidated financial statements include the accounts of ARC
Wireless Solutions, Inc. ("ARC"), and its wholly-owned subsidiary corporations,
Winncom Technologies Corp. ("Winncom"), through October 31, 2006, the date of
its sale, Starworks Wireless Inc. ("Starworks or Kit") and ARC Wireless Hong
Kong Limited, ("ARCHK"), since their respective acquisition dates. All material
intercompany accounts, transactions, and profits have been eliminated in
consolidation.
 
 Basis
of Presentation
 
 The
Company has experienced recurring losses, and has accumulated a deficit of
approximately $7.1 million since inception in 1989. There can be no assurance
that the Company will achieve the desired result of net income and positive cash
flow from operations in future years. Management believes that current working
capital and available borrowings on existing bank line of credit will be
sufficient to allow the Company to maintain its operations through December 31,
2009.
 
 Use
of Estimates
 
 The
preparation of the Company’s consolidated financial statements in accordance
with generally accepted accounting principles of the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates.
 
 Cash
and Cash Equivalents
 
 The
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. From time to time the
Company has cash balances in excess of federally insured amounts. The Company
maintains its cash balances with several financial institutions. As of December
31, 2008, the balance exceeded the Federal Deposit Insurance Corporation
limitation for coverage of $250,000, effective October 3, 2008 to December 31,
2009, by approximately $12.6 million. The Company reduces its exposure to credit
risk by maintaining such balances with financial institutions that have high
credit ratings.
 
 Fair
Value of Financial Instruments
 
 The
Company’s short-term financial instruments consist of cash, money market
accounts, accounts receivable, and accounts payable, accrued expenses and bank
debt. The carrying amounts of these financial instruments approximate fair value
because of their short-term maturities. Financial instruments that potentially
subject the Company to a concentration of credit risk consist principally of
cash and accounts receivable. The Company does not hold or issue financial
instruments for trading purposes nor does it hold or issue interest rate or
leveraged derivative financial instruments.
 
 F-6
 Table of Contents
  1.  Organization
and Summary of Significant Accounting Policies, continued
 
 Accounts
Receivable
 
 Trade
receivables consist of uncollateralized customer obligations due under normal
trade terms requiring payment usually within 30 days of the invoice date.
Management reviews trades receivables periodically and reduces the carrying
amount by a valuation allowance that reflects management's best estimate of the
amount that may not be collectible. The allowance for doubtful accounts,
continuing operations, was $460,000 and $453,000 at December 31, 2008 and 2007,
respectively. Bad debt expense, continuing operations, was $57,000, $395,000 and
$0 for the years ended December 31, 2008, 2007 and 2006,
respectively.
 
 Inventory
 
 Inventory
is valued at the lower of cost or market using standard costs that approximate
average cost.  Inventories are reviewed periodically and items
considered to be slow moving or obsolete are reduced to estimated net realizable
value through an appropriate reserve. In 2008, inventory previously reserved for
was disposed of.  Inventory, which includes allocated overhead,
consists of the following at December 31:
 
 2008
                  
                  
                  2007Raw
      materials
                  
                  $
                  267,000
                  
                  
                  $
                  830,000Work
      in progress
                  
                  
                  32,000
                  
                  
                  
                  105,000Finished
      goods
                  
                  
                  808,000
                  
                  
                  
                  815,0001,107,000
                  
                  
                  
                  1,750,000Inventory
      reserve
                  
                  
                  -
                  
                  
                  
                  (653,000
                  )Net
      inventory
                  
                  $
                  1,107,000
                  
                  
                  $
                  1,097,000
 
 Property
and Equipment
 
 Property
and equipment are stated at acquired cost. The Company uses the straight-line
method over estimated useful lives of three to seven years to compute
depreciation for financial reporting purposes and accelerated methods for income
tax purposes.Leasehold
improvements and leased equipment are amortized over the lesser of the estimated
useful lives or over the term of the leases. Upon sale or retirement, the cost
and related accumulated depreciation of disposed assets are eliminated from the
respective accounts and the resulting gain or loss is included in the statements
of operations.Property
and equipment consist of the following at December 31:
 
 2008
                  
                  
                  2007Machinery
      and equipment
                  
                  $
                  1,538,000
                  
                  
                  $
                  1,350,000Computer
      equipment and software
                  
                  
                  535,000
                  
                  
                  
                  514,000Furniture
      and fixtures
                  
                  
                  163,000
                  
                  
                  
                  162,000Leasehold
      improvements
                  
                  
                  39,000
                  
                  
                  
                  32,0002,275,000
                  
                  
                  
                  2,058,000Accumulated
      depreciation
                  
                  
                  (1,894,000
                  )
                  
                  
                  (1,693,000
                  )$
                  381,000
                  
                  
                  $
                  365,000
 
 Depreciation
expense, which includes amortization of fixed assets acquired through capital
leases, amounted to $207,000, $166,000 and $147,000 during the years ended
December 31, 2008, 2007 and 2006, respectively.
 
 F-7
 Table of Contents
  1.  Organization
and Summary of Significant Accounting Policies, continued
 
 Patent
Costs
 
 Patent
costs are stated at cost and amortized over ten years using the straight-line
method. Patent amortization expense amounted to $16,000, $15,000 and $15,000 for
the years ended December 31, 2008, 2007 and 2006, respectively.
 
 Long-lived
Assets
 
 The
carrying value of long-lived assets are reviewed annually; if at any time the
facts or circumstances at any of the Company's individual subsidiaries indicate
impairment of long-lived asset values, as a result of a continual decline in
performance or as a result of fundamental changes in a subsidiary's market, a
determination is made as to whether the carrying value of the property's
long-lived assets exceeds estimated realizable value.
 
 Intangible
Assets
 
 Intangible
assets consist principally of purchased intangible assets and the excess
acquisition cost over the fair value of tangible and identified intangible net
assets of businesses acquired (goodwill). Purchased intangible assets include
developed technology, trademarks and trade names, assembled workforces and
distribution network. The Company continually evaluates whether later events and
circumstances have occurred that indicate the remaining estimated useful life of
goodwill may warrant revision or that the remaining balance of goodwill may not
be recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of future cash flows expected
to result from the use of the assets in comparison with the assets carrying
amount in deciding whether the goodwill is recoverable. Intangible assets,
except goodwill, are being amortized using the straight-line method over
estimated useful lives ranging from 5 to 15 years.
 
 2008
                  
                  
                  2007Patents
                  
                  $
                  308,000
                  
                  
                  $
                  275,000Accumulated
      amortization
                  
                  
                  (184,000
                  )
                  
                  
                  (169,000
                  )Intangible
      assets, net
                  
                  $
                  124,000
                  
                  
                  $
                  106,000
  Pursuant
to SFAS No. 142, goodwill and other indefinite lived intangible assets are no
longer amortized, but must be tested for impairment at least annually. The
Company has performed both the transitional impairment test and annual
impairment test required by SFAS No. 142, using certain valuation techniques,
and has determined that no impairment exists at this time. It is possible but
not predictable that a change in the Company’s wireless business, market
capitalization, operating results or other factors could affect the carrying
value of goodwill or other intangible assets and cause an impairment write-off.
Goodwill was eliminated upon the sale of Winncom effective October 31,
2006.
 
 
 F-8
 Table of Contents
  1.
Organization and Summary of Significant Accounting Policies,
continued
 
 Revenue
Recognition
 
 Revenue
is recorded when goods are shipped. The Company has established reserves for
anticipated sales returns based on historical return percentages as well as
specific identification and reserve of potential problem accounts. The Company
has several major commercial customers who incorporate the Company’s products
into other manufactured goods, and returns from these customers have not been
significant. Additionally, returns related to retail sales have been immaterial
and within management’s expectations.
 
 The
Company followed the percentage-of-completion method of accounting for contract
revenue for segments included in discontinued operations in 2006. As such the
Company no longer uses this method of contract revenue accounting.
 
 Shipping
and Handling Costs
 
 The
Company classifies shipping and handling costs as a component of cost of
sales.
 
 Research
and Development
 
 Research
and development costs are charged to expense as incurred. Such expenses were
$499,000, $512,000, and $363,000, respectively, for the years ended
December 31, 2008, 2007 and 2006.
 
 Advertising
Costs
 
 Advertising
costs are charged to operations in the year incured. Advertising costs charged
to operations were $15,000, $13,000, and $20,000 in 2008, 2007 and 2006,
respectively.
 
 Product
Warranty
 
 The
Company’s vendors generally warrant the products distributed by the Company and
allow the Company to return defective products, including those that have been
returned to the Company by its customers. The Company does not independently
warrant the products it distributes. The Company does warranty products it
manufactures and records a provision for estimated warranty costs at the time of
the sale and periodically adjusts the provision to reflect actual experience.
Warranty expense was not material to the Company’s consolidated statements of
operations for the years ended December 31, 2008, 2007 and 2006.
 
 
 F-9
 Table of Contents
  1.
Organization and Summary of Significant Accounting Policies,
continued
 
 Income
Taxes
 
 The
Company accounts for income taxes pursuant to 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 the members of the consolidated group on the
separate income tax return basis.
 
 Effective
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109, or FIN 48. FIN 48 provides detailed guidance for the
financial statement recognition, measurement and disclosure of uncertain tax
positions recognized in the financial statements in accordance with SFAS
No. 109. Tax positions must meet a “more-likely-than-not” recognition
threshold at the effective date to be recognized upon the adoption of
FIN 48 and in subsequent periods. Upon the adoption of FIN 48, we had
no unrecognized tax positions. During the year ended December 31, 2008, we
recognized no adjustments for uncertain tax positions.
 
 We
recognize interest and penalties related to uncertain tax positions in income
tax expense. No interest and penalties related to uncertain tax positions were
accrued at December 31, 2008.
 
 The tax
years 2003 through 2007 remain open to examination by the major taxing
jurisdictions in which we operate. We expect no material changes to unrecognized
tax positions within the next twelve months.
 
 Reclassifications
 
 Certain
balances in the prior year consolidated financial statements have been
reclassified in order to conform to the current year presentation. The
reclassifications had no effect on financial condition, gross profit, income
(loss) from operations or net income (loss).
 
 Stock
Based Compensation
 
 On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123(R) ("SFAS 123(R)") related to accounting for share-based payments and,
accordingly, the Company is now recording compensation expense for share-based
awards based upon an assessment of the grant date fair value for stock options
and restricted stock awards. Prior to 2006, share based compensation was
accounted for in accordance with Accounting Principles Board Opinion No. 25. We
are using the modified prospective method of adoption, which allows us to apply
SFAS 123(R) on a going-forward basis rather than restating prior
periods.
 
 Stock
compensation expense for stock options is recognized on a straight-line basis
over the vesting period of the award. The Company accounts for stock options as
equity awards.
 
 
 F-10
 Table of Contents
  1.
Organization and Summary of Significant Accounting Policies,
continued
 
 Stock
Based Compensation, continued
 
 The
following table summarizes share-based compensation expense recorded in general
and administrative expenses during each period presented:
 
 Year
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Stock
      options
                      
                      $
                      33,000
                      
                      
                      $
                      21,000
                      
                      
                      $
                      11,000Total
      share-based compensation expense
                      
                      $
                      33,000
                      
                      
                      $
                      21,000
                      
                      
                      $
                      11,000
  Pro forma
information regarding net loss is required by SFAS 123, which also requires that
the information be determined as if the Company had accounted for grants
subsequent to December 31, 1994 under a method specified by SFAS 123.
Options granted were estimated using the Black-Scholes valuation
model.
 
 Stock
option activity was as follows:
 
 Number
      of
                        Shares
                      
                      
                      Weighted
      Average
                        Exercise
      Price ($)Balance
      at January 1, 2006
                      
                      
                      52,000
                      
                      
                      
                      $7.50Granted
                      
                      
                      5,000
                      
                      
                      
                      $6.50Exercised
                      
                      
                      -Forfeited
      or expired
                      
                      
                      (5,000
                      )
                      
                      
                      $7.50Balance
      at December 31, 2006
                      
                      
                      52,000
                      
                      
                      
                      $7.30Granted
                      
                      
                      47,500
                      
                      
                      
                      $5.38Exercised
                      
                      
                      -Forfeited
      or expired
                      
                      
                      (45,000
                      )
                      
                      
                      $7.40Balance
      at December 31, 2007
                      
                      
                      54,500
                      
                      
                      
                      $5.56Granted
                      
                      
                      -Exercised
                      
                      
                      -Forfeited
      or expired
                      
                      
                      (7,000
                      )
                      
                      
                      $6.79Balance
      at December 31, 2008
                      
                      
                      47,500
                      
                      
                      
                      $5.38
  The
following table presents information regarding options outstanding as of
December 31, 2008:
 
 Weighted
      average contractual remaining term - options outstanding
                    7.4
      yearsAggregate
      intrinsic value - options outstanding
                    -Options
      exercisable
                    22,000Weighted
      average exercise price – options exercisable
                    $5.36Aggregate
      intrinsic value - options exercisable
                    -Weighted
      average contractual remaining term - options exercisable
                    6.43
      years
 
 No
options were exercised during the years ended December 31, 2008, 2007 and
2006.
 
 F-11
 Table of Contents
  1.
Organization and Summary of Significant Accounting Policies,
continued
 
 Stock
Based Compensation, continued
 
 The
following weighted average assumptions were used:
 
 Years
      Ended December 31,2007
                    2006Volatility
                    
                    .518
      - .782
                    .751Expected
      life of options (in years)
                    
                    2-4
                    2Dividend
      Yield
                    
                    0.00%
                    0.00%Risk
      free interest rate
                    
                    4.60-5.25%
                    6.00%Per
      share value of options granted
                    
                    $.44
                    $3.00
 
 No
options were issued in 2008.
 
 As of
December 31, 2008, future compensation costs related to nonvested stock options
was $96,000. Management anticipates that this cost will be recognized over a
weighted average period of 3 years.
 
 Net
Income (Loss) Per Common Share
 
 Basic
earnings per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of the entity. For the
years ended December 31, 2008, 2007 and 2006, the Company incurred a net loss,
and stock options totaling 47,500, 54,250 and 52,000, respectively, were not
included in the computation of diluted loss per share because their effect was
anti-dilutive; therefore, basic and fully diluted loss per share are the same
for 2008 and 2007 and for 2006 the effect was minimal.
 
 
 F-12
 Table of Contents
  1.
Organization and Summary of Significant Accounting Policies,
continued
 
 Net
Income (Loss) Per Common Share, continued
 
 The
following table represents a reconciliation of the shares used to calculate
basic and diluted earnings per share for the respective periods
indicated:
 
 Years
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Net
      loss from continuing operations
                  
                  
                  $(1,752,000
                  )
                  
                  
                  $(743,000
                  )
                  
                  
                  $(1,575,000
                  )Net
      income (loss) for discontinued operations
                  
                  
                  (91,000
                  )
                  
                  
                  40,000
                  
                  
                  
                  833,000Net
      loss
                  
                  
                  $(1,843,000
                  )
                  
                  
                  $(703,000
                  )
                  
                  
                  $(742,000
                  )Continuing
      Operations:Denominator
      for basic earnings per share – weighted average shares
                  
                  
                  3,091,000
                  
                  
                  
                  3,090,000
                  
                  
                  
                  3,086,000Effect
      of dilutive securitiesEmployee
      stock options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Common
      stock warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Denominator
      for diluted earnings per   share – adjusted weighted
      average shares and assumed conversion
                  
                  
                  3,091,000
                  
                  
                  
                  3,090,000
                  
                  
                  
                  3,086,000Basic
      and diluted earnings per share, continuing operations
                  
                  
                  $(.57
                  )
                  
                  
                  $(.24
                  )
                  
                  
                  $(.51
                  )Discontinued
      Operations:Denominator
      for basic earnings per share – weighted average shares
                  
                  
                  3,091,000
                  
                  
                  
                  3,090,000
                  
                  
                  
                  3,086,000Effect
      of dilutive securitiesEmployee
      stock options
                  
                  
                  -
                  
                  
                  
                  --
                  
                  
                  
                  2,000Common
      stock warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Denominator
      for diluted earnings per   share – adjusted weighted
      average shares and assumed conversion
                  
                  
                  3,091,000
                  
                  
                  
                  3,090,000
                  
                  
                  
                  3,088,000Basic
      earnings per share, discontinued operations
                  
                  
                  $(.03
                  )
                  
                  
                  $.01
                  
                  
                  
                  $.27Diluted
      earnings per share, discontinued operations
                  
                  
                  $(.03
                  )
                  
                  
                  $.01
                  
                  
                  
                  $.27Net
      income (loss):Denominator
      for basic earnings per share – weighted average shares
                  
                  
                  3,091,000
                  
                  
                  
                  3,090,000
                  
                  
                  
                  3,086,000Effect
      of dilutive securitiesEmployee
      stock options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Common
      stock warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Denominator
      for diluted earnings per   share – adjusted weighted
      average shares and assumed conversion
                  
                  
                  3,091,000
                  
                  
                  
                  3,144,000
                  
                  
                  
                  3,138,000Basic
      and diluted earnings per share, discontinued operations
                  
                  
                  $(.60
                  )
                  
                  
                  $(.23
                  )
                  
                  
                  $(.24
                  )
 
  F-13
 Table of Contents
  1.
Organization and Summary of Significant Accounting Policies,
continued
 
 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
did not 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.
 
 
 F-14
 Table of Contents
  1.
Organization and Summary of Significant Accounting Policies,
continued
 
 Recent
Accounting Pronouncements, continued
 
 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.
   F-15
 Table of Contents
 1.
Organization and Summary of Significant Accounting Policies,
continued
 
 Recent
Accounting Pronouncements, continued
 
 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
on Purchased Beneficial Interests and Beneficial Interests That Continue to Be
Held by a Transferor in Securitized Financial Assets,” (EITF 99-20), to achieve
more consistent determination of whether an other-than-temporary impairment has
occurred. FSP EITF 99-21-1 also retains and emphasizes the objective of an other
than-temporary impairment assessment and the related disclosure requirements in
SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities,” and other related guidance. FSP EITF 99-20-1 is effective for
interim and annual reporting periods ending after December 15, 2008, and is
required to be applied prospectively. The adoption of FSP EITF 99-20-1 did not
have a material impact on the Company’s results of operations, cash flows or
financial positions.
 
 Note
2. Discontinued Operations
 
 In 2008
management determined it was no longer profitable to operate Starworks and
operations were terminated, therefore, Starworks has been accounted for as a
discontinued operation for all periods presented.
 
 In July
2006, ARC executed an agreement for the sale of its wholly-owned subsidiary,
Winncom Technologies Corp. ("Winncom") for $17 million in cash.
  The net
loss on the sale of Winncom is computed as follows:
  Gross
      proceeds from the sale of Winncom
                  
                  $
                  17,000,000Net
      assets
                  
                  
                  (17,187,000
                  )Loss
      on sale of Winncom
                  
                  $
                  (187,000
                  )
 
 Starworks
and Winncom have been accounted for as a discontinued operation, and the results
of operations have been excluded from continuing operations in the accompanying
consolidated financial statements of operations and cash flows for all periods
presented.
  
 
 F-16
 Table of Contents
  Note
2. Discontinued Operations, continued
 
 Information
related to the discontinued operations for the years ended December 31, 2008,
2007 and 2006 are as follows:
 
 2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2006
                  
                  
                  2006Starworks
                  
                  
                  Starworks
                  
                  
                  Starworks
                  
                  
                  Winncom
                  
                  
                  TotalSales,
      net
                  
                  $
                  25,000
                  
                  
                  $
                  117,000
                  
                  
                  $
                  383,000
                  
                  
                  $
                  28,773,000
                  
                  
                  $
                  29,156,000Contract
      revenue
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  20,555,000
                  
                  
                  
                  20,555,000Total
      revenue
                  
                  
                  25,000
                  
                  
                  
                  117,000
                  
                  
                  
                  383,000
                  
                  
                  
                  49,328,000
                  
                  
                  
                  49,711,000Cost
      of sales
                  
                  
                  114,000
                  
                  
                  
                  75,000
                  
                  
                  
                  406,000
                  
                  
                  
                  25,077,000
                  
                  
                  
                  25,483,000Cost
      of contract revenue
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  19,236,000
                  
                  
                  
                  19,236,000Total
      cost of goods sold
                  
                  
                  114,000
                  
                  
                  
                  75,000
                  
                  
                  
                  406,000
                  
                  
                  
                  44,313,000
                  
                  
                  
                  44,719,000Gross
      profit (loss)
                  
                  
                  (89,000
                  )
                  
                  
                  42,000
                  
                  
                  
                  (23,000
                  )
                  
                  
                  5,015,000
                  
                  
                  
                  4,992,000Operating
      expenses:Selling,
      general and administrative expenses
                  
                  
                  1,000
                  
                  
                  
                  2,000
                  
                  
                  
                  8,000
                  
                  
                  
                  3,996,000
                  
                  
                  
                  4,004,000Income(loss)
      from operations
                  
                  
                  (90,000
                  )
                  
                  
                  40,000
                  
                  
                  
                  (31,000
                  )
                  
                  
                  1,019,000
                  
                  
                  
                  988,000Other
      income (expense):Interest expense,
    net
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (110,000
                  )
                  
                  
                  (110,000
                  )Other income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  159,000
                  
                  
                  
                  159,000Total
      other income (expense)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  49,000
                  
                  
                  
                  49,000Income
      (loss) before income taxes
                  
                  
                  (90,000
                  )
                  
                  
                  40,000
                  
                  
                  
                  (31,000
                  )
                  
                  
                  1,068,000
                  
                  
                  
                  1,037,000Provision
      for income taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (204,000
                  )
                  
                  
                  (204,000
                  )Net
      income (loss)
                  
                  $
                  (90,000
                  )
                  
                  $
                  40,000
                  
                  
                  $
                  (31,000
                  )
                  
                  $
                  864,000
                  
                  
                  $
                  833,000
 
 
 3.
Revolving Bank Loan Agreements and Notes Payable
 
 On May
10, 2005, the Company entered into a new $1.5 million revolving line-of-credit
agreement (the "Credit Facility") with Citywide Banks, which has been renewed
annually. The new Credit Facility has a maturity of one year (matures May 1,
2009), with interest at 1.5% over prime (4.75% at December 31, 2008), contains
covenants to maintain certain financial statement ratios, and is collateralized
by essentially all of the assets of the Company. The borrowing base is
calculated on a percentage of trade accounts receivable and inventory for the
Company and Starworks combined. As of December 31, 2008, the Company was in
compliance with these covenants. The weighted average interest rate for 2008 and
2007 was 6.75%.
  Revolving
bank line of credit at December 31, 2008 and 2007 consist of:
  2008
                
                
                2007Line
      of credit, current and long term
                
                
                -
                
                
                $
                1,436,000
 
 
 F-17
 Table of Contents
  4.
Stockholders’ Equity
 
 The
Company has authorized preferred shares which may be issued in such series and
preferences as authorized by the Board of Directors.
 
 In
February 2007, the Company effected a one-for-fifty reverse stock split of its
issued and outstanding common stock. Pursuant to the reverse stock split, each
fifty shares of the Company’s issued and outstanding common stock were
reclassified and combined into one share of the Company’s common stock as of the
Effective Date. The number of shares of the Company’s common stock authorized
remained at 250 million shares, without any change in par value per common
share, and the number of shares of the Company’s preferred stock authorized
remained at 2 million.
 
 The 2007
Stock Incentive Plan ("the 2007 Plan") was approved by the Board of Directors on
August 2, 2007 and was also approved by the shareholders on September 17, 2007.
The 2007 Plan provides that no more than 300,000 shares of our common stock may
be issued for awards. If there is any change in the Company’s common stock by
reason of any stock exchange, merger, consolidation, reorganization,
recapitalization, stock dividend, reclassification, split-up, combination of
shares or otherwise, then the Board, or any Option Committee, shall make
proportionate adjustments to the maximum number and kind of securities (i)
available for issuance under the 2007 Plan; (ii) available for issuance as
incentive stock options or non-qualified stock options; (iii) that may be
subject to awards received by any participant; (iv) that may be subject to
different types of awards; (v) that are subject to any outstanding award; and
(vi) the price of each security.
 
 The 2007
Plan provides that shares covered by an award will not count against the shares
available for issuance under the 2007 Plan until they are actually issued and
delivered to a participant. If an award granted under the 2007 Plan lapses,
expires, terminates or is forfeited, surrendered or canceled without having been
fully exercised or without the issuance of all the shares subject to the award,
the shares covered by such award will again be available for use under the 2007
Plan.
 
 In 2007,
options totaling 40,000 were granted from the 2007 Plan to an officer at an
exercise price of $5.40. No options were granted to directors in 2007 from the
2007 Plan. No options were granted in 2008 from the 2007 Plan.
 
 The
Company granted a total of 7,500 options to Outside Directors under the
previously outstanding 1997 Plan during 2007 at exercise prices ranging from
$4.80 to $5.47 per share. The Company granted a total of 5,000 options to
Outside Directors under the 1997 Plan during 2006 at an exercise price of $6.50
per share. The Company granted a total of 5,000 options to Outside Directors
under the Plan during 2005 at exercise prices ranging from $5.50 to $7.50 per
share.
 
  
 F-18
 Table of Contents
  4.
Stockholders’ Equity, continued
  The
following table summarizes the option activity for 2008, 2007 and
2006:
 
 Number
      of
                    Shares
                  
                  
                  Weighted
      Average
                    Exercise
      Price ($)2006
      Activity:Outstanding
      at beginning of year
                  
                  
                  52,000
                  
                  
                  
                  $7.50Granted
                  
                  
                  5,000
                  
                  
                  
                  $6.50Exercised
                  
                  
                  -Forfeited
      or expired
                  
                  
                  (5,000
                  )
                  
                  
                  $8.00Outstanding
      at end of year
                  
                  
                  52,000
                  
                  
                  
                  $7.30Exercisable
      at end of year
                  
                  
                  49,500
                  
                  
                  
                  $7.352007
      Activity:Outstanding
      at beginning of year
                  
                  
                  52,000
                  
                  
                  
                  $7.30Granted
                  
                  
                  47,500
                  
                  
                  
                  $5.38Exercised
                  
                  
                  -Forfeited
      or expired
                  
                  
                  (45,000
                  )
                  
                  
                  $7.40Outstanding
      at end of year
                  
                  
                  54,500
                  
                  
                  
                  $5.56Exercisable
      at end of year
                  
                  
                  21,000
                  
                  
                  
                  $5.822008
      Activity:Outstanding
      at beginning of year
                  
                  
                  54,500
                  
                  
                  
                  $5.56Granted
                  
                  
                  -Exercised
                  
                  
                  -Forfeited
      or expired
                  
                  
                  (7,000
                  )
                  
                  
                  $6.79Outstanding
      at end of year
                  
                  
                  47,500
                  
                  
                  
                  $5.38Exercisable
      at end of year
                  
                  
                  22,000
                  
                  
                  
                  $5.36
 
 At
December 31, 2008, there are 22,000 options exercisable from $4.82 to $5.47.
These options expire between 2009 and 2017. The weighted average grant date fair
value of the options granted in 2007 is $3.09.
 
 All
option exercise prices were granted at market. The weighted average remaining
contractual life of options outstanding at the end of 2008, 2007 and 2006 were
7.4 years, 7.43 years and .43 years, respectively.
   F-19
 Table of Contents
 5.
Income Taxes
 
 The
Company records the income tax effect of transactions in the same year that the
transactions enter into the determination of income, regardless of when the
transactions are recognized for tax purposes.  Income tax credits are
used to reduce the provision for income taxes in the year in which such credits
are allowed for tax purposes.  Deferred taxes are provided to reflect
the income tax effects of amounts included for financial purposes in different
periods than for tax purposes, principally valuation allowances for inventory
and trade receivables for financial reporting purposes and accelerated
depreciation for income tax purposes.  Income tax expense (benefit)
for the years ended December 31, 2008, 2007 and 2006 is as follows:
 
 2008
                  
                  
                  2007
                  
                  
                  2006Current
                  
                  $
                  -
                  
                  
                  $
                  (6,000
                  )
                  
                  $
                  (93,000
                  )Deferred
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  30,000Total
      benefit
                  
                  $
                  -
                  
                  
                  $
                  (6,000
                  )
                  
                  $
                  (63,000
                  )Total
      benefit, continuing operations
                  
                  $
                  -
                  
                  
                  $
                  (6,000
                  )
                  
                  $
                  (267,000
                  )Total
      expense, discontinued operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  204,000Total
      benefit expense
                  
                  $
                  -
                  
                  
                  $
                  (6,000
                  )
                  
                  $
                  (63,000
                  )
 
 As a
result of net losses for the years ended December 31, 2008 and 2007, management
believes a valuation allowance on its deferred tax assets is
necessary.  The components of the deferred taxes asset as of December
31 are as follows:
 
 2008
                    
                    
                    2007Deferred
      tax assets(liabilities) (current):Inventory
      reserve
                    
                    
                    -
                    
                    
                    
                    268,000Deferred
      revenue
                    
                    
                    (2,000
                    )
                    
                    
                    (17,000
                    )Bad
      debt reserves
                    
                    
                    173,000
                    
                    
                    
                    172,000171,000
                    
                    
                    
                    423,000Deferred
      tax assets (liabilities) (long-term):Net
      operating loss carry-forwards
                    
                    $
                    1,207,000
                    
                    
                    $
                    271,000Property
      and equipment
                    
                    
                    (16,000
                    )
                    
                    
                    2,000Intangibles
                    
                    
                    19,000
                    
                    
                    
                    21,0001,210,000
                    
                    
                    
                    294,000Deferred
      tax assets
                    
                    
                    1,381,000
                    
                    
                    
                    717,000Valuation
      allowance
                    
                    
                    (1,381,000
                    )
                    
                    
                    (717,000
                    )Net
      deferred tax assets
                    
                    $
                    -
                    
                    
                    $
                    -
 
 As of
December 31, 2008, we had total net operating loss carry-forwards of
approximately $3,200,000, which begin expiring in 2023.
  F-20
 Table of Contents
 5.
Income Taxes, continued
 
 A
reconciliation of federal income taxes computed by multiplying pretax net loss
by the statutory rate of 35% to the provision for income taxes is as follows at
December 31:
 
 2008
                  
                  
                  2007
                  
                  
                  2006Tax
      benefit computed at statutory rate
                  
                  $
                  (645,000
                  )
                  
                  $
                  (248,000
                  )
                  
                  $
                  (190,000
                  )State
      income tax
                  
                  
                  (49,000
                  )
                  
                  
                  (21,000
                  )
                  
                  
                  42,000Valuation
      allowance
                  
                  
                  664,000
                  
                  
                  
                  272,000
                  
                  
                  
                  445,000Effect
      of permanent differences
                  
                  
                  56,000
                  
                  
                  
                  16,000
                  
                  
                  
                  (5,000
                  )Other
      (primarily net operating losses)
                  
                  
                  (26,000
                  )
                  
                  
                  (25,000
                  )
                  
                  
                  (355,000
                  )Provision
      for income taxes benefit
                  
                  $
                  -
                  
                  
                  $
                  (6,000
                  )
                  
                  $
                  ( 63,000
                  )
 
 As of
December 31, 2008, 2007 and 2006, an evaluation of the allowance determined that
it was more likely than not that the net operating loss asset may not be
realized, and therefore a valuation allowance for the full amount was recorded.
The valuation allowance increased $625,000 in 2008, increased by $272,000 in
2007, $445,000 in 2006.
  6.
Sales to Major Customers
 
 The
Company had sales from continuing operations to two customers in 2008 that
represented approximately 13% and 12%, respectively, of our annual sales. The
Company had sales from continuing operations to two customers in 2007 that
represented approximately 17% and 15%, respectively, of our annual sales. The
Company had sales from continuing operations to two customers in 2006 that
represented approximately 33% and 16%, respectively, of our annual sales. The
concentration of the Company’s business with a relatively small number of
customers may expose us to a material adverse effect if one or more of these
large customers were to experience financial difficulty or were to cease being
customer for non-financial related issues. At December 31, 2008 two customers
represented approximately 26%, 13%, respectively, of our net trade accounts
receivable. At December 31, 2007 three customers represented approximately 31%,
11% and 11%, respectively, of our net trade accounts receivable.
 
 7.
Significant Suppliers
 
 With
regard to continuing operations during 2008 and 2007 the Company purchased a
majority of its product from three vendors all located in China, and during 2006
the Company purchased approximately 39% of its product from two vendors. The
loss of any of these vendors could have a material adverse impact on the
operations of the Company.
 
 8.  Leasing
Activities
 
 The
Company leases its facilities under non-cancellable operating leases through
2010. Minimum future rentals payable under the leases are as
follows:
  2009
                  
                  $
                  271,0002010
                  
                  
                  163,000$
                  434,000
  Rent
expense from continuing operations was $261,000, $289,000 and $245,000 for the
years ended December 31, 2008, 2007 and 2006, respectively.
 
 
 F-21
 Table of Contents
 8.  Leasing
Activities, continued
 
 Certain
of the Company’s office space leases are structured to include scheduled and
specified rent increases over the lease term. The Company has recognized the
effect of these rent escalations and periods of free rent on a straight-line
basis over the lease terms.
 
 Property
and equipment included the following amounts for leases that have been
capitalized at December 31, 2008 and December 31, 2007.
 
 2008
                  
                  
                  2007Machinery
      and Equipment
                  
                  $
                  238,000
                  
                  
                  $
                  240,000Computers
      and Software
                  
                  
                  239,000
                  
                  
                  
                  133,000Furniture
      and Fixtures
                  
                  
                  13,000
                  
                  
                  
                  13,000490,000
                  
                  
                  
                  386,000Less
      accumulated amortization
                  
                  
                  (311,000
                  )
                  
                  
                  (234,000
                  )$
                  179,000
                  
                  
                  $
                  152,000
 
 The
Company recorded amortization expense of $76,000, $96,000, and $50,000,
respectively, on assets recorded under capitalized leases for 2008, 2007 and
2006.
 
 Future
minimum lease payments under capital leases, which include bargain purchase
options, are as follows at December 31, 2008:
 
 2009
                    
                    $
                    99,0002010
                    
                    
                    69,0002011
                    
                    
                    12,000Total
      minimum lease payments
                    
                    
                    180,000Amount
      representing interest
                    
                    
                    (17,000
                    )Present
      value of lease payments
                    
                    $
                    163,000Less
      current portion
                    
                    
                    (86,000
                    )Non-current
      portion
                    
                    $
                    77,000
 
 9.
Defined Contribution Plan
 
 In
November 1999, the Board of Directors approved the establishment of the Antennas
America, Inc. 401(k) Plan for employee contributions effective January 1, 2000.
The name of the Plan was subsequently changed to the ARC Wireless Solutions,
Inc. 401(k) Plan. The Plan allows for discretionary matching in Company common
stock of employee contributions by the Company if the Company has a profit for
the preceding year. Effective January 1, 2007 the Plan was amended to elect a
Safe Harbor Contribution of 3% of a participant’s compensation. For the year
ended December 31, 2008 and 2007 the Company’s Safe Harbor Contribution was
$60,000 and $87,000, respectively.
 
 F-22
 Table of Contents
  10.
Related Party Transaction – Subsequent Events
  On
January 23, 2009 the Company entered into a financial advisory engagement (the
"Agreement") with Quadrant Management, Inc. (the "Advisor"). Quadrant
Management, Inc. is under common control with Brean Murray Carret Group, Inc.
("Brean"), an entity that, together with a current director of the Company,
beneficially owns approximately 849,000 shares, or approximately 27%, of the
Company's common stock. The Company’s current Chief Executive Officer, has been
a Managing Director at Quadrant Management, Inc. since 2005.
  Pursuant
to the Agreement, the Advisor will provide to ARC financial advisory and
business consulting services, including restructuring services.
  In
consideration for the restructuring services having been provided by the Advisor
since November 2008 and for the ongoing services to be provided, ARC will pay
the following: 1) an initial cash fee of $250,000 upon signing the Agreement; 2)
and commencing in 2009 an annual fee of the greater of (i) $250,000, or (ii) 20%
of any increase in reported earnings before interest, taxes, depreciation and
amortization after adjusting for one-time and non-recurring items ("EBITDA") for
the current financial year over preceding year, or (iii) 20% of reported EBITDA
for the current financial year, and; 3) all reasonable out-of-pocket expenses
incurred by Advisor in performing services under the Agreement. The initial
restructuring fee of $250,000 is included in trade accounts payable at December
31, 2008.
  The
Agreement will expire on December 31, 2013.
 
 11.
Commitments
 
 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. At
December 31, 2008, non-cancellable purchase obligations totaled approximately
$327,000.
 
 Effective
February 1, 2008, the Company’s Board of Directors approved an employment
agreement between the Company and Randall P. Marx, the Company’s Chief Executive
Officer (CEO), effective as of January 31, 2008. The employment agreement was
recommended to the Board by the Compensation Committee. The agreement provided
for annual compensation of $250,000 in 2007, $275,000 in 2008, and $300,000 in
2009. On November 18, 2008 Mr. Marx resigned his position as CEO. In connection
with Mr. Marx’s resignation, on November 18, 2008, the Company and Mr. Marx
reached an agreement for compensation of Mr. Marx that would replace the
compensation and other benefits to which Mr. Marx could be entitled under his
January 31, 2008 employment agreement with the Company. Pursuant to this new
agreement, Mr. Marx will be compensated $327,500 through December 31, 2009 as
payment in full for his salary and accrued vacation, and he will receive health
benefits from the Company through December 31, 2009. Under the terms of this
agreement, Mr. Marx is not entitled to receive any other compensation or
benefits to which he otherwise would have been entitled under his January 31,
2008 employment agreement. Mr. Marx also agreed to provide telephonic consulting
services to the Company.
 
 F-23
 Table of Contents
  11.
Commitments, continued
 
 Effective
November 1, 2007, the Company entered into a two year employment agreement with
Mr. Monty R. Lamirato as the Company’s Chief Financial Officer, which he has
served since June 2001. The agreement provided for annual compensation of
$165,000 in the first year and $175,000 in the second year. On November 26,
2008, Monty R. Lamirato, the Company’s Chief Financial Officer and Treasurer,
resigned from his positions with the Company, effective immediately. In
connection with Mr. Lamirato’s resignation, Mr. Lamirato and the Company
executed a separation agreement pursuant to which Mr. Lamirato will be paid
$115,000 through May 26, 2009 for all compensation and other benefits to which
he otherwise would have been entitled under his November 7, 2007 employment
agreement. Under the terms of this agreement, Mr. Lamirato agreed to provide
reasonable consulting services to the Company through October 31,
2009.
 
 Effective
November 1, 2007, the Company entered into a five year employment agreement with
Mr. Steven C. Olson, as President and Chief Technology Officer of the Company’s
Wireless Communications Solutions Division. Mr. Olson has been with the Company
since 2001. The agreement provides for annual base compensation of $200,000 in
2007 increasing annually to $245,000 in 2011. Mr. Olson shall also be entitled
to bonuses ranging from $5,000 to $100,000 annually contingent upon the Wireless
Communications Solutions Division achieving certain net income targets. Mr.
Olson earned a bonus of $7,500 for 2007.
 
 Effective
November 1, 2007, the Company entered into a three year employment agreement
with Mr. Richard A. Anderson, as the Company’s Executive Vice President. The
agreement provided for annual compensation of $125,000. On November 26, 2008,
Richard L. Anderson, the Company’s Executive Vice President, resigned from his
position with the Company, effective immediately. In connection with his
resignation, Mr. Anderson and the Company executed a separation agreement
pursuant to which Mr. Anderson will be paid $120,000 through May 26, 2009, and
he will receive health benefits from the Company through June 30, 2009, both as
payment for all compensation and other benefits to which he otherwise would have
been entitled under his November 7, 2007 employment agreement. Mr. Anderson also
agreed to provide reasonable consulting services to the Company through December
31, 2009.
 
 All
severance benefits for Mr. Marx, Mr. Lamirato, and Mr. Anderson have been
accrued as of December 31, 2008.
 
 12.
Segment Information
 
 SFAS No.
131 “Disclosure about Segments of an Enterprise and Related Information”
requires that the Company disclose certain information about its operating
segments where operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. Generally, financial information is
required to be reported on the basis that is used internally for evaluating
segment performance and deciding how to allocate resources to
segments.
 
 The
Company has one reportable segment, antenna products, that is a separate
business unit that offers different products. Each segment consists of a single
operating unit and the accounting policies of the reporting segments are the
same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are recorded at cost plus an agreed upon
intercompany profit on intersegment sales and transfers. In 2008 management
determined it was no longer profitable to operate Starworks and operations were
terminated and due to the sale of Winncom on October 31, 2006, which was the
Distribution segment, distribution and cable are no longer classified as an
operating segment but are classified as discontinued operations in the
accompanying consolidated financial statements for all periods
presented.
 
 F-24
 Table of Contents
 12.
Segment Information, continued
 
 For the
years ended December 31, 2008, 2007 and 2006, approximately 20%, 13% and 7%,
respectively, of our sales from continuing operations were from customers
outside North America.
 
 Financial
information regarding the Company’s two operating segments, which includes the
elimination of intersegment sales, for the years ended December 31, 2008, 2007
and 2006 are as follows:
 
 Manufacturing
                  Corporate
                  TotalNet
      Sales
                  2008
                    2007
                    2006
                  $7,257,000
                    7,931,000
                    6,087,000
                  -
                    -
                  $7,257,000
                    7,931,000
                    6,087,000Net
      income (loss) from continuing operations
                  2008
                    2007
                    2006
                  (186,000)
                    (131,000)
                    (443,000)
                  (1,566,000)
                    (612,000)
                    (1,132,000)
                  (1,752,000)
                    (743,000)
                    (1,575,000)Income
      (loss) before income taxes, continuing operations
                  2008
                    2007
                    2006
                  (186,000)
                    (137,000)
                    (710,000)
                  (1,566,000)
                    (612,000)
                    (1,132,000)
                  (1,752,000)
                    (749,000)
                    (1,842,000)Identifiable
      assets, continuing operations
                  2008
                    2007
                    2006
                  2,679,000
                    3,249,000
                    3,082,000
                  12,825,000
                    14,555,000
                    14,673,000
                  15,504,000
                    17,804,000
                    17,755,000Capital
      expenditures, continuing operations
                  2008
                    2007
                    2006
                  120,000
                    99,000
                    80,000
                  -
                    -
                    -
                  120,000
                    99,000
                    80,000Depreciation
      and amortization, continuing operations
                  2008
                    2007
                    2006
                  223,000
                    181,000
                    162,000
                  -
                    -
                    -
                  223,000
                    181,000
                    162,000Interest
      expense, continuing operations
                  2008
                    2007
                    2006
                  45,000
                    24,000
                    124,000
                  -
                    -
                    -
                  45,000
                    24,000
                    124,000
  Corporate
represents the operations of the parent Company, excluding segment
eliminations.
  F-25
 Table of Contents
 EXHIBIT
INDEX
 
 Exhibit
                          Number
                        Description3.1
                        Amended
      and Restated Articles of Incorporation dated October 11, 2000
      (1)3.2
                        Bylaws
      of the Company as amended and restated on March 25, 1998
    (2)10.1
                        Agreement
      between and among Winncom Technologies Inc., Winncom Technologies Corp.
      and the Company dated May 24, 2000 (3)10.2
                        Stock Purchase Agreement, dated as of July 28,
      2006, by and among Bluecoral Limited, Winncom Technologies Corp. and The
      Company (4)10.3
                        Escrow Agreement, dated July 28, 2006, by and
      among the Company, Bluecoral Limited and Consumer Title Services, LLC
      (4)10.4
                        Employment
      Agreement effective January 31, 2008 between the Company and Randall P.
      Marx (5)10.5
                        Employment
      Agreement effective November 1, 2007 between the Company and Monty R.
      Lamirato (6)10.6
                        Employment
      Agreement effective November 1, 2007 between the Company and Steve C.
      Olson (6)10.7
                        Employment
      Agreement effective November 1, 2007 between the Company and Richard L.
      Anderson (6)14.1
                        Amended
      and Restated Code of Ethics (7)10.8
                        Seperation
      Agreeement effective November 18, 2008 between the Company and Randall P.
      Marx10.9
                        Seperation
      Agreeement effective November 26, 2008 between the Company and Monty R.
      Lamirato10.10
                        Seperation
      Agreeement effective November 26, 2008 between the Company and Richard L.
      Anderson21.1
                        Subsidiaries
      of the Registrant31.1
                        Officers’
      Certifications of Periodic Report pursuant to Section 302 of
      Sarbanes-Oxley Act of 200232.1
                        Officers’
      Certifications of Periodic Report pursuant to Section 906 of
      Sarbanes-Oxley Act of 200299.1
                        Nominating Policies and
      Procedures
 
 (1)
              Incorporated
      by reference from the Company’s Form 10-KSB
      for December 31, 2000 filed on April 2,2001.
 (2)
              Incorporated
      by reference from the Company’s Form 10-KSB for December 31, 1997 filed on
      March 31, 1998.
 (3)
              Incorporated
      by reference from Exhibit 2.1 of the
      Company’s Form 8-K filed on June 8,
      2000.
 (4)
              Incorporated
      by reference from the Company’s Form 8-K/A filed on August 2,
      2006.
 (5)
              Incorporated
      by reference from the Company’s Form 8-K filed on February 7,
      2008.
 (6)
              Incorporated
      by reference from the Company’s Form 8-K file November 8,
      2007.
 (7)
              Incorporated
      by reference from the Company’s Form 8-K filed on November 13,
      2006.