<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                               -----------------

                                   FORM 10-K

          [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                                 EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                        COMMISSION FILE NUMBER: 0-30757

                               -----------------

                         SUNRISE TELECOM INCORPORATED
            (Exact name of Registrant as specified in its charter)

                      DELAWARE                 77-0291197
                   (State or other          (I.R.S. Employer
                   jurisdiction of         Identification No.)
                  incorporation or
                    organization)

                  302 ENZO DRIVE, SAN JOSE, CALIFORNIA 95138
         (Address of principal executive offices, including zip code)

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 363-8000

                               -----------------

          Securities registered pursuant to Section 12(g) of the Act:

                   COMMON STOCK, PAR VALUE $0.001 PER SHARE
                               (Title of class)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, 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. [_]

As of March 1, 2002, the aggregate market value of the Common Stock of the
Registrant held by non-affiliates was $45,468,715.

As of March 1, 2002, there were 50,514,209 shares of the Registrant's Common
Stock outstanding, par value $0.001.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the 2002 Annual Meeting of Shareholders are
incorporated by reference in Part III.

<PAGE>

                         SUNRISE TELECOM INCORPORATED

                      Index to Annual Report on Form 10-K

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

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                                                                                                    PAGE
                                                                                                   NUMBER
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<C>      <S>                                                                                       <C>
                                                  Part I.

Item 1.  Business.................................................................................    3

Item 2.  Properties...............................................................................   15

Item 3.  Legal Proceedings........................................................................   15

Item 4.  Submission of Matters to a Vote of Security Holders......................................   15

                                                 Part II.

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters....................   16

Item 6.  Selected Financial Data..................................................................   17

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations....   18

Item 7A. Quantitative and Qualitative Disclosures About Market Risk...............................   37

Item 8.  Financial Statements and Supplementary Data..............................................   39

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....   61

                                                 Part III.

Item 10. Directors and Executive Officers of the Registrant.......................................   62

Item 11. Executive Compensation...................................................................   62

Item 12. Security Ownership of Certain Beneficial Owners and Management...........................   62

Item 13. Certain Relationships and Related Transactions...........................................   62

                                                 Part IV.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.........................   63
</TABLE>

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                          Forward-Looking Statements

   This report on Form 10-K contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934, including, without limitation, statements
regarding possible growth in the market for telecommunications test equipment
and new product development. Except for historical information, the matters
discussed in this report on Form 10-K are forward-looking statements that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected due to certain factors, including those
discussed below in "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operation--Factors Affecting Future Operating Results"
and elsewhere in this report. You should not rely on forward-looking statements
in this report or in the pages from our Proxy Statement incorporated by
reference into this report. The following discussion should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this Report on Form 10-K.

                                    Part I.

ITEM 1.  BUSINESS

OVERVIEW

   We manufacture and market service verification equipment that enables
service providers to pre-qualify facilities for services, verify newly
installed services, and diagnose problems relating to telecommunications, cable
TV, and Internet networks. Our products offer broad functionality, leading edge
technology, and compact size to test the variety of new broadband services;
these include wire line access services (including DSL), fiber optics, cable TV
networks, and signaling networks. We design our products to maximize
technicians' effectiveness in the field and to provide realistic network
simulations for equipment manufacturers to test their products. Our customers
include incumbent local exchange carriers, competitive local exchange carriers,
and other service providers, network infrastructure suppliers, and installers
throughout North America, Latin America, Europe, and the Asia/Pacific region.

   In October 1991, we were incorporated in California as Sunrise Telecom, Inc.
In July 2000, we reincorporated in Delaware and changed our name to Sunrise
Telecom Incorporated ("Sunrise"). "Sunrise Telecom," "SunSet," and "SunLite"
are trademarks of Sunrise Telecom Incorporated. This Report on Form 10-K also
includes references to registered service marks and trademarks of other
entities.

RECENT DEVELOPMENTS

Acquisition of the CaLan Cable TV Test Business from Agilent Technologies

   In February 2002, we acquired the CaLan Cable TV test business from Agilent
Technologies for approximately $7.2 million in cash. CaLan products incorporate
DigiSweep technology, the industry's fastest, high resolution, digital
services-compatible sweep. CaLan products are designed to support a complete
range of remote and field maintenance activities, from forward and return path
alignment, to signal measurement and ingress troubleshooting.

INDUSTRY BACKGROUND

High-Speed Data Access

   Data traffic in the United States and Canada has surpassed the amount of
voice traffic carried on the existing telephone network. Consumers are seeking
higher-speed access to bandwidth intensive content and services, such as highly
graphical Web sites, audio, video, and software downloads. As an increasing
number of Internet users access more and different content, the ability to
connect to and receive data from the Internet at high speeds has become and
will continue to become more important.

                                      3

<PAGE>

   One primary investment area is the redesign of the access network to support
broadband access to end users. This portion of the network between the
customer's premise and the service provider's central office is also known as
the "last-mile." The last mile typically consists of copper wires that operate
at substantially lower transmission speeds than those offered in the long-haul
segment of a network or by some available broadband alternatives. These copper
wires were originally intended to carry only analog circuit-switched, low-speed
voice signals and, as a result, have become a bottleneck that limits high-speed
data transmission. Several access technologies are being deployed to support
higher-speed Internet access in the networks, including digital subscriber
lines, digital cable TV/MODEM, fiber optics, and broadband wireless. In
addition, the signaling portion of the network is essential to the integration
of new broadband services into the existing telecommunications network. We
summarize some of these technologies below.

   Wire line Access Technology.  Wire line access technology, including DSL
technology, transmits data up to 50 times faster than a conventional dial-up
modem using existing copper telephone wires. The early adoption of high speed
transmission included technologies such as T-carrier, E-carrier, ISDN, and most
recently DSL.

   Digital Subscriber Line Technology.  Digital subscriber line technology,
commonly known as DSL, today transmits data up to 50 times faster than a
conventional dial-up modem using the existing copper telephone wires. Various
implementations of DSL are being developed and deployed, including asymmetric
DSL, known as ADSL, symmetric DSL, know as SDSL, high bit-rate DSL, know as
HDSL, and integrated services digital network DSL, known as IDSL. Service
providers deploying DSL technology include incumbent local exchange carriers,
such as SBC Communications, Inc., Verizon Communications, Inc., and Sprint
Corporation.

   Cable TV Networks.  Cable TV operators use two-way cable, cable modems
installed in the home, cable modem termination systems installed at major cable
concentration points, and network headend equipment designed to interface their
cable TV networks to video feeds and other networks. Several cable companies
are currently offering broadband access services across two-way cable,
including AT&T Broadband, Charter Communications, Cox, and TimeWarner Cable.

   Fiber Optics.  Fiber optic cables use pulses of light to transmit digital
information. Because fiber optic cables support thousands of high-speed, local
digital connections onto a single higher-speed connection to the central office
or the central side of the cable TV network where the video signals emanate,
they offer virtually unlimited bandwidth capacity. Due to their high capacity,
fiber optic cables are being used increasingly in the access network in both
telecommunications and cable TV applications.

   Signaling.  Telephone systems require a signaling mechanism to set up and
end phone calls. These signals serve three basic functions: supervising or
monitoring the status of a line on circuit to see if it is busy, idle, or
requesting service; alerting or indicating the arrival of an incoming call; and
addressing or transmitting routing and destination signals over the network.
Signaling Systems 7, or SS7, is the standard signaling system used by telecom
networks worldwide. Signaling networks must support new access technologies to
ensure interoperability with the existing telephone network.

The Need for Service Verification Equipment

   In order to deploy and maintain successfully broadband networks, service
providers rely on sophisticated service verification equipment. This equipment
allows service providers to pre-qualify facilities for services, verify proper
operation of newly installed services, and diagnose problems. In addition,
equipment manufacturers use service verification equipment to test simulated
networks during equipment development and verify the successful production of
equipment. Service verification equipment can be grouped into the following
three types: field verification, remote testing, and alarm and surveillance.

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   Field Verification Equipment.  Field verification equipment is used by
service providers to probe the actual wires, cables, or airwaves to verify that
a service works. In the case of a service malfunction, a field technician can
use the equipment to locate the exact fault so that repairs can be made.
Research and development labs, manufacturing departments, and central office
technicians also use field verification equipment in their day-to-day
operations. Of the three types of service verification equipment, field
verification equipment delivers the most detailed service information. Service
providers have found field verification to be an effective method to ensure
that the lines operate properly.

   Remote Test Equipment.  Remote test equipment can help verify services and
identify certain types of service malfunctions from a centralized location. The
equipment is typically controlled by a centralized test system that automates
much of the remote testing process. It is commonly used to determine which
section within a 3,000 mile circuit has malfunctioned and to diagnose quickly
the nature of a customer's complaint. Due to its centralized and automated
nature, remote test equipment is an efficient way to complement field test
equipment in the deployment and maintenance of broadband networks.

   Alarm and Surveillance Equipment.  Alarm and surveillance equipment
constantly monitors the telephone network, searching for facility or service
degradations, including outages. When a problem is noticed, a report may be
sent immediately to an automated trouble diagnostic system or to a human
operator who interprets the message and decides what further action is
required. Corrective action typically involves field verification or remote
test equipment to identify and correct specific problems.

   Because the competition for subscribers for high-speed bandwidth access is
intense, the quality and reliability of network service has become critical to
service providers because of the expense, loss of customers, and negative
publicity resulting from poor service. Field technicians who use service
verification equipment allow service providers to verify and repair service
problems effectively and, thus, increase the quality and reliability of the
network. We believe that as broadband services are deployed further and as
competition for subscribers proliferates, service providers will increasingly
depend on advanced field test and monitoring solutions.

THE SUNRISE SOLUTION

   We design and manufacture service verification equipment that enables
service providers to pre-qualify facilities for services, verify newly
installed services, and diagnose problems relating to wire line access
services, including DSL services, fiber optic, cable TV, and signaling
networks. Our products also enable equipment manufacturers to test simulated
networks during equipment development and verify the successful production of
equipment. Our field products offer the following features:

  .   Design Flexibility.  We design our products to be flexible and to evolve
      as customer needs change. Our CM 1000, SunSet MTT and SunSet xDSL product
      lines, for example, allow field technicians the ability to upgrade their
      equipment easily through a variety of plug-in hardware modules. This
      flexible design allows the customer to adapt the test set to new services
      and applications as network standards evolve.

  .   Customer Driven Features.  Each of our products is tailored to our
      customers' needs. Our marketing engineers interact with our customers
      during the design process to ensure that our products are the best
      available solution for them.

  .   Handheld Design.  We design most of our products to be used in the field.
      The compact, lightweight design of these products enhance field
      technicians' ability to access problems and verify line operation. The
      SunSet OCx for example, is the first asynchronous transfer mode fiber
      optic field testset small enough to be grasped in the palm of the
      technician's hand.

                                      5

<PAGE>

      Because of the design and functionality of our products, we provide the
following benefits to our customers:

  .   Rapid and Efficient Deployment.  Our products allow field and office
      technicians to test lines rapidly and efficiently to ensure that they are
      properly connected to the central office and that they can support a
      specific type and speed of service. In a single device, our products can
      be used to pre-qualify facilities for services, identify the source of
      problems, and verify the proper operation of newly installed service
      before handing service over to customers.

  .   Improved Network Quality and Reliability.  Our products diagnose and
      locate a variety of problems and degradations in established broadband
      networks allowing service providers to identify and repair problems and
      to restore service efficiently.

PRODUCTS

   We currently offer two main categories of service verification products:
broadband access service verification products and signaling testing products.

Broadband Access Service Verification Products

   Our broadband access service verification products support a wide range of
access technologies, including DSL, cable TV, and fiber optics, for both U.S.
and international standards.

   Our products enable technicians to verify if a broadband service has been
properly installed and to identify and correct problems in case of an error.
Our products are designed to be carried into the field by a technician and have
a large graphical display, menu-driven functionality, an easy-to-use interface,
and in most cases weigh less than three pounds. Many of our models support
plug-in hardware modules that enable technicians to upgrade the test sets
quickly and easily.

   Sales of our wire line access products accounted for 62% of our net sales in
2001, 80% in 2000, and 98% in 1999. Although we have introduced or acquired
fiber optic, cable TV, and signaling products, we expect that sales of wire
line access products may continue to account for a significant percentage of
our net sales for the coming year and foreseeable future, yet contribution of
revenue from our other product segments may continue to represent a larger
percentage of our revenue reflecting a more diversified product revenue base.

                                      6

<PAGE>

   Within our broadband access testing products, we manufacture service
verification equipment for three main technologies: wire line access, cable TV,
and fiber optics. We describe our major products in each product category below.

<TABLE>
<C>                <S>
WIRE LINE ACCESS PRODUCTS
--------------------------------------------------------------------------------------------------------------------

Global Wire Line Access and DSL

                   Global DSL products allow worldwide telecommunications service providers to install
                   and troubleshoot digital copper-based circuits and services. The xDSL series finds data
                   transmission rates and noise margins that can be supported by the line. This series
                   employs modules to test DSL and other digital transmission types, such as T1 which is
                   used by large businesses for broadband access. Our modular architecture allows
                   technicians to use a single unit to test a variety of DSL services. In addition, the flexibility
                   of the modular architecture protects a customer's investment in the test equipment.

SunSet MTT Family  .     This Modular Test Toolkit features a handheld test chassis and supports
                         20 different test modules for a variety of special service, DSL, and physical
                         layer twisted pair test applications. The MTT is based on the SunSet xDSL
                         family but includes optional next generation twisted pair measurements and
                         high resolution color screen.

SunSet xDSL Family .     The original handheld unit for DSL service verification. This product supports
                         all Sunrise DSL modules to allow field technicians to test various types of DSL
                         technologies

Oculist            .     The Oculist puts our DSL technology into a variety of central office and
                         laboratory test applications.

SunSet ISDN,       .     These products support analysis and service verification for the integrated
SunLite BRI              services digital network, known as ISDN. ISDN is an enhanced digital network
                         that offers more bandwidth than the traditional telephone network.
--------------------------------------------------------------------------------------------------------------------

North American Wire Line Access

                   We design our North American wire line access products specifically for the North
                   American market and support applications common to this market such as T1, a
                   standard for digital transmission in North America used by large businesses for
                   broadband access.

SunSet T1          .     Handheld unit that supports transmission testing for T1, including service
                         verification for voice services.

SunSet T10         .     Handheld unit that supports transmission testing for T1, with service
                         verification and diagnostics for multiple data protocols and voice services.

SunSet T3          .     Handheld unit that offers the versatility to test multiple transmission types in a
                         single unit and support areas that have international and North American
                         standards. It also offers service verification and diagnostics for integrated
                         services digital network, known as ISDN, and voice services.
</TABLE>

                                      7

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<TABLE>
<C>                  <S>

International Wire Line Access

                     We design international wire line access products specifically for testing lines outside the
                     North American market and to support protocols common to the international market
                     such as E1, a standard for international digital transmission used by large businesses for
                     broadband access.

SunLite E1           .     Handheld unit that supports transmission testing in a small test set for E1.

SunSet E1, E8        .     Handheld unit that supports transmission testing and service verification for E1
                           and voice services.

SunSet E10, E20      .     Handheld unit that supports transmission testing for E1, and service
                           verification for data protocols, voice, and other signaling protocols.

SunSet PDH           .     Handheld unit that supports transmission testing for E1 and higher
                           transmission rates.
-----------------------------------------------------------------------------------------------------------------
CABLE TV PRODUCTS
-----------------------------------------------------------------------------------------------------------------

CR1200R              .     Portable unit for field transmission analysis of digital and analog cable TV
                           networks including both inbound and outbound signals. The CR1200R also
                           looks for common transmission problems in cable TV digital networks that
                           could inhibit Internet services. The unit is water resistant, portable, and can be
                           used without additional equipment.

CM-1000              .     Handheld units for installation and troubleshooting of DOCSIS Cable Modem
CE-4000                    installations. The CM1000 has a built-in cable modem to communicate with
                           the Cable Modem Termination System to characterize the digital performance
                           in both the upstream and downstream paths.

AT-2000R             .     Lightweight, portable, rugged, full-featured CATV Spectrum Analyzer that
                           performs advanced field testing which includes finding fast transient ingress,
                           measuring carrier to noise ratios up to 60 dB at low levels, accurately
                           measuring digital carriers, and performing complex proof of performance
                           testing.

AT-2000HM            .     Headend Spectrum Analyzer that provides remote headend testing and return
                           path monitoring. Allows monitoring of signals from 1 MHz to 1 GHz, allowing
                           the forward path to be monitored in addition to the reverse path.
-----------------------------------------------------------------------------------------------------------------
FIBER OPTIC PRODUCTS
-----------------------------------------------------------------------------------------------------------------

SunSet OCx           .     Handheld unit that supports transmission testing for multiple varieties of
SunSet 10G                 SONET. It includes both electrical and optical signal testing and performs
                           service verification for various services such as asynchronous transfer mode.
                           The SunSet OCx is currently the smallest multi-rate optical test set available.

SunSet SDH           .     Handheld unit that supports fiber optic transmission types, such as SONET
SunSet 10G                 and synchronous digital hierarchy, for traditional North American and
                           international digital transmission types. The SunSet also supports testing for
                           asynchronous transfer mode.
</TABLE>

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<TABLE>
<C>      <S>
SIGNALING TESTING PRODUCTS
-------------------------------------------------------------------------------------------------

Ghepardo .     Central office unit to analyze major signaling protocols, including SS7, and
               standard data communication protocols. Open platform design with hardware
               and software that users can customize easily. Web-based user interface allows
               users to control our products, including customization of test functions, from
               anywhere in the world through standard web-browser software.
</TABLE>

CUSTOMERS

   Our customers include telecommunications service providers, network
infrastructure suppliers and installers, technicians and engineers in North
America, Latin America, Europe, Africa, the Middle East, and the Asia/Pacific
region. The following is a selected list of our customers in 2001.

             AT&T Corporation           SBC Communications Inc.
             AOL Time Warner, Inc.       (consisting of Ameritech
             Bell Canada Enterprises,    Corporation, Nevada
              Inc.                       Bell, Pacific Bell,
             BellSouth Telecom, Inc.     Southern New England
             Charter Communications,     Telephone, Advanced
              Inc.                       Solutions, Inc., and
             Chunghwa Telecom Co., Ltd.  Southwestern Bell
             Cox Communications, Inc.    Telephone Company)
             Korea Telecom              Sprint Corporation
             Lucent Technologies        Telecom Italia Mobile
             Qwest Communications        S.p.A.
              International, Inc.       Telephonos de Mexico, S.A.
                                        Telkom SA, Ltd
                                        Verizon Communications,
                                         Inc.

   As of December 31, 2001, we had sold versions of our products to over 2,000
customers in over 60 countries. Affiliates of SBC Communications accounted for
approximately 5% of our net sales in 2001, 16% in 2000, and 41% in 1999.
Additionally, 8% of our net sales in 2001 and 17% of our net sales in 2000 were
generated from an OEM product sold to Lucent Technologies or to Solectron, a
contract manufacturer that integrates this product into the Stinger DSLAM that
it manufactures for Lucent Technologies. The initial order from Lucent
Technologies for the Copper Loop Test Head was completed during the second
quarter of 2001. Significant future orders of this Copper Loop Test Head
product remains uncertain. Besides SBC Communications and Lucent
Technologies/Solectron, no individual customer accounted for 10% or more of our
net sales in 2001, 2000, and 1999. We expect, however, that we will continue to
depend upon a relatively limited number of customers for substantially all of
our revenues in future periods. See "Item 7--Factors Affecting Future Operating
Results--Customer Concentration."

SALES, MARKETING AND CUSTOMER SERVICE

   Sales.  We sell our products to telecommunications service providers,
network infrastructure suppliers and installers, technicians, and engineers
through manufacturer's representatives, independent distributor organizations,
and our direct sales force.

   In the United States, we sell our products through 15 manufacturer's
representatives who are supported by our in-house direct sales force.
Manufacturer's representatives are paid on a commission basis and have
exclusive rights in their respective regions. Our manufacturer's
representatives solicit orders from the customer, and we ship our products
directly to the customer. We pay commissions once we have received payment from
the customer. Our direct sales force consists of 19 employees who focus on
sales in the United States, including a team of regional sales managers who
direct the efforts of our manufacturer's representatives, regional account
managers who focus on specific accounts within a region, and our Vice President
of North American Sales, who directs the sales effort in North America.

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   Outside the United States, we sell our products through 90 independent
distributor organizations, which are directed by our regional directors of
marketing and sales. We sell our products to the distributor who then resells
the products to the end user. We sell our products to our independent
distributor organizations at a discount from our list price. International
sales, including North American sales to Canada, were $29.7 million or 38% in
2001, $30.1 million or 27% in 2000 and $12.2 million or 20% in 1999. We expect
that international sales will continue to account for a significant portion of
our net sales in future periods. In addition to our network of international
distributors, we have sales people located in Anjou, Canada; Beijing, China;
Tokyo, Japan; Seoul, Korea; and Modena, Italy. See "Item 7--Factors Affecting
Future Operating Results--Risks of International Operations." For information
regarding export sales and international operations, see Note 14 of the notes
to consolidated financial statements of Sunrise.

   We sell our products predominantly to large telecommunications service
providers. These prospective customers generally commit significant resources
to an evaluation of our and our competitors' products and require each vendor
to expend substantial time, effort, and money educating the prospective
customer about the value of the vendor's solutions. Consequently, sales to this
type of customer generally require an extensive sales effort throughout the
prospective customer's organization and final approval by an executive officer
or other senior level employee. The result is lengthy sales and implementation
cycles, which make sales forecasting difficult. In addition, even after a large
telecommunications service provider has approved our product for purchase,
their future purchases are uncertain because we do not enter into long-term
supply agreements or requirements contracts with those parties. Delays
associated with potential customers' internal approval and contracting
procedures, procurement practices, and testing and acceptance processes are
common and may cause potential sales to be delayed or foregone. As a result of
these and related factors, the sales cycle of new products for large customers
typically ranges from six to twenty-four months. Over the past year, our major
customers have decreased the volume of orders, implemented longer purchase
cycles, and decreased capital expenditures for telecom and cable equipment.

   Marketing.  We market and promote sales of our products by the following
activities:

  .   Our product marketing group researches new opportunities, prepares
      product definitions with our research and development group, and defines
      new features to create new products;

  .   The overall marketing group hosts a variety of seminars several times a
      year in the United States, Asia, Europe, and Latin America to improve the
      sales effectiveness of our manufacturers' representatives and
      international distributors;

  .   Our product marketing engineers, regional sales managers, and account
      managers travel extensively with our manufacturers' representatives and
      international distributors to develop new product opportunities with
      customers and to support their presentations;

  .   The marketing communications group maintains a public Web site, publishes
      brochures and specification sheets, and generates press releases and
      publicity to increase our recognition in the telecommunications industry;

  .   Our technical publications group prepares user's manuals, field manuals,
      quick reference guides, and product operation videos to serve the needs
      of our users;

  .   Our training department prepares customer training presentations and
      sponsors Sunrise University, a factory-based training program for our
      customers.

   Customer Service.  We believe that customer service following the sale of
   our products is a critical ingredient to our success. We provide customer
   service in numerous ways, including the following:

  .   providing rapid instrument repair services;

                                      10

<PAGE>

  .   operating a 24 hour per day telephone support line to help customers who
      are having difficulty using our products in their particular application;

  .   maintaining a proprietary Web site containing on-line, up-to-the-minute
      product repair information for our distributors' international repair
      centers, with a factory-certified technician training program for our
      distributors' international repair center technicians; and

  .   measuring the satisfaction of our customers and communicating this
      information to our quality group.

RESEARCH AND DEVELOPMENT

   We have assembled a team of highly skilled engineering professionals who are
experienced at designing telecommunications and cable TV service verification
test equipment. Our engineering personnel have expertise in a number of fields,
including interfacing test equipment with digital loop carrier, voice and data
switching technology, local loop equipment, and operations support systems. We
spent approximately $18.5 million on research and development in 2001, $17.6
million in 2000, and $10.7 million in 1999. Research and development represents
our largest direct employment expense. At December 31, 2001, we had a total of
136 employees engaged in research and development in San Jose, California;
Norcross, Georgia; Anjou, Canada; Modena, Italy; Taipei, Taiwan; and Seoul,
Korea.

   We believe that our continued success depends on our ability to anticipate
and respond to changes in the telecommunications industry and anticipate and
satisfy our customers preferences and requirements. Accordingly, we continually
review and evaluate technological and regulatory changes affecting the
telecommunications industry and seek to offer products and capabilities that
solve customers' operational challenges and improve their efficiency. In
general, we spend anywhere from two months to four years developing a new
product.

REGULATIONS AND INDUSTRY STANDARDS

   Our products are designed to comply with a significant number of industry
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, our products must comply with various
regulations defined by the Federal Communications Commission and Underwriters
Laboratories as well as industry standards established by Telcordia
Technologies, Inc., formerly Bellcore, and the American National Standards
Institute. Internationally, our products must comply with standards established
by the European Committee for Electrotechnical Standardization, the European
Committee for Standardization, the European Telecommunications Standards
Institute, telecommunications authorities in various countries, and with
recommendations of the International Telecommunications Union. The failure of
our products to comply, or delays in compliance, with the various existing and
evolving standards could negatively impact our ability to sell our products.

MANUFACTURING

   Our production process consists of planning, procurement, fabrication,
rework, system assembly, system final test, software option customization, and
shipping. We purchase substantially all parts, including resistors, integrated
circuit boards, LCDs, and printed circuit boards, from distributors and
manufacturers worldwide. We package these parts into kits and send them to
contract manufacturers to assemble them into printed circuit boards. We perform
substantially all remaining manufacturing operations. We maintain sourcing and
manufacturing operations in San Jose, California; Norcross, Georgia; Anjou,
Canada; Taipei, Taiwan; and Modena, Italy. In 2001, we performed the majority
of sourcing, contract manufacturing, and final assembly in San Jose, California
and Taipei, Taiwan. We have obtained ISO-9001 certification for our San Jose,
California and Modena, Italy operations. In 2002, we plan to increase Taiwan
manufacturing capacity while reducing San Jose capacity to increase overall
production cost effectiveness.

                                      11

<PAGE>

   In 1998, we formed a subsidiary in Taiwan, Taiwan Sunrise Telecom Company
Limited, as a turn-key manufacturer and local procurement operation. We also
own an equity interest of 9% in Top Union, a manufacturing company located in
Taipei, Taiwan that has performed board level manufacturing as part of the
Taiwan Sunrise Telecom Company Limited turn-key operation. We intend to
increase the use of our Taiwan subsidiary for complete turn-key manufacturing.
We believe that increased use of our Taiwan manufacturing plant will lower our
manufacturing costs, particularly our labor costs, provide us with more
flexibility to scale our operations to meet changing demand, and allow us to
focus our engineering resources on new product development and product
enhancements.

   In our manufacturing process, we purchase many key products, such as
microprocessors, bus interface chips, optical components, and oscillators, from
a single source or from that product's sole supplier. We rely exclusively on
third-party subcontractors to manufacture certain sub-assemblies, and we have
retained, from time to time, third party design services in the development of
our products. We do not have long-term supply agreements with these vendors. In
general, we make advance purchases of some products and components to ensure an
adequate supply, particularly for products that require lead times of up to
nine months to manufacture. For a discussion of the risks associated with our
reliance on these third parties, see "Item 7--Factors Affecting Future
Operating Results--Dependence on Sole and Single Source Suppliers."

COMPETITION

   The market for field verification test equipment is fragmented and intensely
competitive, both inside and outside the United States, and is subject to rapid
technological change, evolving industry standards, regulatory developments, and
varied and changing customer preferences and requirements. We compete with a
number of United States and international suppliers that vary in size and in
the scope and breadth of the products and services offered. The following table
sets forth our principal competitors in each of our product categories:

<TABLE>
<CAPTION>
PRODUCT CATEGORY       PRINCIPAL COMPETITORS
----------------       ---------------------
<S>                    <C>
Wire Line Access       Acterna Corporation; Agilent Technologies, Inc.
Fiber Optics SONET/SDH Digital Lightwave, Inc.; Acterna Corporation; Agilent Technologies, Inc.
Cable TV               Acterna Corporation; Agilent Technologies, Inc.
Signaling              Inet Technologies, Inc.; GN Nettest
</TABLE>

   We expect that, as our industry and market evolves, new competitors or
alliances among competitors could emerge and acquire significant market share.
We anticipate that competition in our markets will increase with the result
that we will face greater threats to our market share, price pressure on our
products, and the likelihood that, over time, our profitability may decrease.

   We believe that the principal competitive factors in our market include the
following:

  .   a continued high level of investment in research and development and
      marketing;

  .   speed of new product introductions to market;

  .   depth of product functionality;

  .   ease of installation, integration, and use;

  .   system reliability and performance;

  .   price and financing terms;

  .   technical support and customer service;

  .   size and stability of the vendor's operations; and

  .   compliance with government and industry standards.

                                      12

<PAGE>

INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY

   Our intellectual property, including our proprietary technology, processes
and know-how, trade secrets, patents, trademarks, and copyrights, is important
to our business and to our continued success. We have two patents relating to
communications testers, and we have filed several applications for additional
patents with the U.S. Patent and Trademark Office and with foreign patent
offices. Our research and development and manufacturing process as typically
involve the use and development of a variety of forms of intellectual property
and proprietary technology, although no one form of this intellectual property
and proprietary technology is material to our business. In addition, we
incorporate software, some of which we may license from several third party
sources. These licenses generally renew automatically on an annual basis. We
believe that alternative technologies for this licensed software are available
both domestically and internationally.

   We protect our proprietary technology by the following means:

  .   relying on intellectual property law, including patent, trade secret,
      copyright, and trademark law and by initiating litigation when necessary
      to enforce our rights;

  .   limiting access to our software, documentation, and other proprietary
      information; and

  .   entering into confidentiality agreements with our employees.

   In the future, we may receive notices from holders of patents that raise
issues as to possible infringement by our products. As the number of
telecommunications test, measurement, and network management products increases
and the functionality of these products further overlap, we believe that we may
become subject to allegations of infringement given the nature of the
telecommunications industry and the high incidence of these kinds of claims.
Questions of infringement and the validity of patents in the field of
telecommunications technologies involve highly technical and subjective
analyses. These kinds of proceedings are time consuming and expensive to defend
or resolve, result in substantial diversion of management resources, cause
product shipment delays, and could force us to enter into royalty or license
agreements rather than dispute the merits of the proceeding initiated against
us. For more information regarding the risks to our intellectual property, see
"Item 7--Factors Affecting Future Operating Results--Intellectual Property
Risks."

EMPLOYEES

   At December 31, 2001, we had a total of 390 full-time employees, consisting
of 248 in the United States, 32 in Taiwan, 44 in Italy, 43 in Canada, 14 in
Korea, 6 in China, and 3 in Japan. We also had 4 temporary employees at
December 31, 2001. Of the total full-time employees, 136 were engaged in
research and development, 114 were engaged in sales, marketing and customer
support, 87 were engaged in operations, and 53 were engaged in administration
and finance. None of our employees is subject to a collective bargaining
agreement. The employees of our Pro.Tel subsidiary are protected by certain
provisions of Italian law. We believe that our relations with our employees are
good. See "Item 7--Factors Affecting Future Operating Results--Need for New
Personnel" and "--Dependence on Key Employees."

                                      13

<PAGE>

EXECUTIVE OFFICERS

   The names and ages of our executive officers as of December 31, 2001 are as
follows:

<TABLE>
<CAPTION>
NAME                          AGE POSITION(S)
----                          --- -----------
<S>                           <C> <C>
Paul Ker-Chin Chang.......... 43  Chief Executive Officer, President, and Director
Paul A. Marshall............. 44  Chief Operating Officer, Vice President Marketing, and Director
Peter L. Eidelman............ 35  Chief Financial Officer and Treasurer
Raffaele Gerbasi............. 40  Vice President and General Manager Cable Broadband Group
Jeong E. Joo................. 37  Chief Technology Officer
</TABLE>

   Paul Ker-Chin Chang co-founded Sunrise in October 1991 and has served as
Chief Executive Officer, President, and Chairman since that time. From 1984 to
1991, Mr. Chang was employed as Engineering Supervisor for the Wiltron division
of Anritsu Corporation, a manufacturer of communications test equipment. Mr.
Chang holds an M.S. in Electrical Engineering from the University of Kansas at
Lawrence and a B.S. in Physics from Tunghai University in Taiwan.

   Paul A. Marshall co-founded Sunrise in October 1991 and has served as Chief
Operating Officer since December 1999, as Vice President of Marketing since
March 1992, and as a director since October 1991. Mr. Marshall also served as
Chief Financial Officer of Sunrise until December 1999. From 1980 to 1992, Mr.
Marshall held various positions with the Wiltron division of Anritsu
Corporation, most recently as Marketing Staff Engineer. Mr. Marshall holds an
M.B.A. from the Harvard Business School and a B.S. in Mechanical Engineering
from the University of California at Davis.

   Peter L. Eidelman joined Sunrise in July 1997 and has served as Chief
Financial Officer and Treasurer since December 1999. Mr. Eidelman served as
Sunrise's Treasurer and Director of Finance and Administration from January
1999 to December 1999 and as Director of Tax, Finance, and Accounting from July
1997 to January 1999. Mr. Eidelman was employed as a Manager of Tax,
Accounting, and Compliance for Amdahl Corporation, an enterprise solution
company, from July 1994 to July 1997. From November 1988 to July 1993, Mr.
Eidelman was employed as a Tax Manager at Coopers & Lybrand, an international
accounting firm. Mr. Eidelman holds a B.B.A. in Accounting from the University
of Massachusetts at Amherst. Mr. Eidelman is a member of the A.I.C.P.A. and the
Tax Executive Institute.

   Raffaele Gerbasi joined Sunrise in January 2001 and has served as Vice
President and General Manager Cable Broadband Group since September 1, 2001.
Mr. Gerbasi served as President of the Sunrise Telecom subsidiary Avantron
since January 8, 2001 following the acquisition of Canada-based Avantron
Technologies, Inc. a manufacturer of advanced test equipment for the cable
broadband industry. Mr. Gerbasi formed Avantron Technologies in 1989 as a
wholly owned division of Dynastie Electronics and held the position of
President. A graduate of the Radio Electronic Television School, Mr. Gerbasi
started his career in the cable broadband industry in 1979. From 1979 to 1984,
Mr. Gerbasi was employed as Technical Services Manager for Incospec
Electronics, a Canadian cable broadband equipment company. In 1984, Mr. Gerbasi
joined Dynastie, a cable broadband service and engineering company and became
President and sole owner in 1987.

   Jeong E. Joo joined Sunrise in March 1994 and has served as Chief Technology
Officer since July 2001. Mr. Joo served as Director of Engineering-New
Technologies from December 2000 to July 2001. Since joining Sunrise in 1994,
Mr. Joo has held lead engineering development and management positions in the
Engineering Department, contributing most recently to our fiber optics
products. Mr. Joo held Engineering Management positions with Taihan Electric
Wire, Co. Ltd., a telecom electronics company in Korea, from 1988 to March
1994. Mr. Joo holds a BSEE from Chungang University, Seoul, Korea.

                                      14

<PAGE>

ITEM 2.  PROPERTIES

   Our current headquarters and manufacturing facility occupies approximately
91,700 square feet in San Jose, California. We also lease approximately 17,784
square feet of office and manufacturing space in San Jose, California;
approximately 10,000 square feet of office and manufacturing space in Montreal,
Canada; approximately 16,500 square feet of office and manufacturing space in
Norcross, Georgia; approximately 10,000 square feet of office and manufacturing
space in Modena, Italy; 26,290 square feet of office space in Taipei, Taiwan; a
liaison office in Beijing, China; and sales offices in Seoul, Korea and Tokyo,
Japan. Additionally, as a result of our acquisition of CaLan Cable TV test
business from Agilent Technologies in February 2002, we now lease an additional
6,742 square feet of office space in Santa Rosa, California.

ITEM 3.  LEGAL PROCEEDINGS

   None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   None.

                                      15

<PAGE>

                                   Part II.

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

INFORMATION ABOUT OUR COMMON STOCK

   Our common stock has been traded on the Nasdaq National Market under the
symbol SRTI since our initial public offering on July 13, 2000. The following
table sets forth, for the periods indicated, the highest and lowest closing
sale prices for our common stock, as reported by the Nasdaq National Market.

<TABLE>
<CAPTION>
 2001                       HIGH   LOW  2000                       HIGH   LOW
 ----                      ------ ----- ----                      ------ ------
 <S>                       <C>    <C>   <C>                       <C>    <C>
 First Quarter............ $14.00 $3.25 First Quarter............ $   -- $   --
 Second Quarter........... $ 9.21 $5.40 Second Quarter........... $   -- $   --
 Third Quarter............ $ 6.60 $4.47 Third Quarter............ $61.00 $27.50
 Fourth Quarter........... $ 5.15 $3.51 Fourth Quarter........... $26.00 $ 3.25
</TABLE>

   As of December 31, 2001, there were approximately 118 holders of record of
our common stock.

   We did not declare or pay any cash dividend on our common stock in 2001 and
2000. In the future, our board of directors will determine whether we will pay
dividends on our common stock. Our line of credit restricts the payment of
dividends on our common stock to dividends payable in common stock and to a
maximum of $1.0 million payable in any one fiscal year.

USE OF OUR INITIAL PUBLIC OFFERING PROCEEDS

   Our registration statement (Registration No. 333-32070) under the Securities
Act of 1933, as amended, for our initial public offering became effective on
July 12, 2000. A total of 4,600,000 shares of common stock were registered and
3,817,428 shares of our common stock were sold to an underwriting syndicate.
JPMorgan H&Q (formerly Chase H&Q), CIBC World Markets and U.S. Bancorp Piper
Jaffray were the managing underwriters of the offering. An additional 782,572
shares of common stock were sold on behalf of selling stockholders as part of
the same offering. All shares were sold to the public at a price of $15.00 per
share.

   In connection with the offering, we paid approximately $4.0 million in
underwriting discounts and commissions to the underwriters. Offering proceeds,
net of aggregate expenses to us of approximately $1.6 million, were
approximately $51.6 million. None of the net proceeds from the offering were
paid directly or indirectly to any director, officer, general partner of the
Company or its associates, persons owning 10 percent or more of any class of
equity securities of the Company or an affiliate of the Company.

   We have used $2.4 million of the net proceeds from the offering to repay
amounts drawn under our line of credit and $979,000 to repay notes payable.
Additionally, we used $11.9 million of the net proceeds for the acquisition of
Avantron Technologies, $7.2 million for the acquisition of CaLan Cable TV test
business from Agilent Technologies, and $14.4 million for the construction of
our new facility. Funds that have not been used have been invested in money
market funds, auction rate securities and marketable debt securities. None of
the costs and expenses related to the offering were paid directly or indirectly
to any director, officer, general partner of the Company or its associates,
persons owning 10 percent or more of any class of equity securities of the
Company or an affiliate of the Company.

   We intend to use the remaining net proceeds of the offering for working
capital and general corporate purposes and capital expenditures made in the
ordinary course of our business. We may also apply a portion of the proceeds of
the offering to acquire businesses or products and technologies that are
complementary to our business and product offerings.

                                      16

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

   The table below sets forth summary consolidated financial information for
the periods indicated. It is important that you read this information together
with the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our audited consolidated financial
statements and the notes thereto included elsewhere in this Report on Form 10-K.

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                        -----------------------------------------
                                                          2001     2000    1999    1998    1997
                                                        -------- -------- ------- ------- -------
                                                          (in thousands, except per share data)
<S>                                                     <C>      <C>      <C>     <C>     <C>
CONSOLIDATED STATEMENTS OF NET INCOME:
    Net sales.......................................... $ 79,059 $113,481 $61,465 $28,535 $29,064
    Cost of sales......................................   25,509   32,994  14,736   7,590   7,652
                                                        -------- -------- ------- ------- -------
       Gross profit....................................   53,550   80,487  46,729  20,945  21,412
                                                        -------- -------- ------- ------- -------
    Operating expenses:
       Research and development........................   18,490   17,555  10,694   6,203   5,892
       Sales and marketing.............................   20,329   22,694  15,215   7,764   7,645
       General and administrative......................   13,779    9,790   3,912   2,243   1,632
                                                        -------- -------- ------- ------- -------
       Total operating expenses........................   52,598   50,039  29,821  16,210  15,169
                                                        -------- -------- ------- ------- -------
       Income from operations..........................      952   30,448  16,908   4,735   6,243
    Other income, net..................................    2,569    1,909     327     224     112
                                                        -------- -------- ------- ------- -------
       Income before income taxes......................    3,521   32,357  17,235   4,959   6,355
    Income taxes.......................................      704   11,972   6,291   1,588   1,899
                                                        -------- -------- ------- ------- -------
          Net income................................... $  2,817 $ 20,385 $10,944 $ 3,371 $ 4,456
                                                        ======== ======== ======= ======= =======
    Dividends.......................................... $     -- $     -- $   223 $    89 $    89
                                                        ======== ======== ======= ======= =======
    Earnings per share: (1)
          Basic........................................ $   0.06 $   0.43 $  0.25 $  0.08 $  0.10
                                                        ======== ======== ======= ======= =======
          Diluted...................................... $   0.05 $   0.41 $  0.24 $  0.07 $  0.10
                                                        ======== ======== ======= ======= =======
    Shares used in computing earnings per share: (1)
          Basic........................................   50,195   47,374  44,667  44,537  44,645
                                                        ======== ======== ======= ======= =======
          Diluted......................................   51,325   49,610  45,824  45,003  44,896
                                                        ======== ======== ======= ======= =======

                                                                      DECEMBER 31,
                                                        -----------------------------------------
                                                          2001     2000    1999    1998    1997
                                                        -------- -------- ------- ------- -------
                                                                     (in thousands)
CONSOLIDATED BALANCE SHEET DATA:
    Cash and cash equivalents.......................... $ 48,713 $ 56,298 $ 8,615 $ 5,030 $ 2,409
    Working capital....................................   64,862   81,967  16,360  10,164   8,087
    Total assets.......................................  126,621  125,556  38,266  17,193  14,678
    Notes payable, less current portion................    1,065    1,047     638      --      --
    Total stockholders' equity.........................  111,753  105,644  25,471  13,570  10,462
</TABLE>
--------
(1)See Note 1 of the notes to consolidated financial statements for a detailed
   explanation of the determination of the number of shares used to compute
   basic and diluted earnings per share.

                                      17

<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

   In addition to the other information in this report, certain statements in
the following Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) are forward-looking statements. When used in this
report, the word "expects," "anticipates," "estimates," and similar expressions
are intended to identify forward-looking statements. Such statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties are set forth
below under "Factors Affecting Future Operating Results." The following
discussion should be read in conjunction with our consolidated financial
statements and notes thereto included elsewhere in this report.

OVERVIEW

   We manufacture and market service verification equipment to pre-qualify,
verify, and diagnose telecommunications, cable, and Internet networks. We
design our products to increase technicians' effectiveness in the field and to
provide realistic network simulations for equipment manufacturers to test their
products. Our customers include incumbent local exchange carriers, competitive
local exchange carriers, other service providers, and network infrastructure
suppliers and installers throughout North America, Latin America, Europe,
Africa, the Middle East, and the Asia/Pacific region.

Sources of Net Sales

   We sell our products predominantly to large telecommunications and cable TV
service providers. These prospective customers generally commit significant
resources to an evaluation of our and our competitors' products and require
each vendor to expend substantial time, effort, and money educating the
prospective customer about the value of the proposed solutions. Delays
associated with potential customers' internal approval and contracting
procedures, procurement practices, and testing and acceptance processes are
common and may cause potential sales to be delayed or foregone. As a result of
these and related factors, the sales cycle of new products for large customers
typically ranges from six to twenty-four months. During the past year, we have
observed a decline in capital spending in the telecommunications industry,
which may lengthen the sales cycle further. Substantially all of our sales are
made on the basis of purchase orders rather than long-term agreements or
requirements contracts. As a result, we commit resources to the development and
production of products without having received advance or long-term purchase
commitments from customers.

   Historically, a significant portion of our net sales has resulted from a
small number of relatively large orders from a limited number of customers. In
2001 and 2000, we sold $4.2 million and $18.0 million, respectively, of our
products to affiliates of SBC Communications, which represented 5% and 16%,
respectively, of our net sales. In 2001, sales to SBC Communications affiliates
decreased from the prior year primarily due to a decrease in capital spending,
a slow down in the deployment of services, and acceptable levels of DSL test
equipment on hand. As a percentage of sales, sales to SBC Communications
affiliates have also decreased due to our expanding customer base and the
diversification of our business. Additionally, in 2001 and 2000, $6.3 million
and $19.6 million or 8% and 17%, respectively, of our sales were generated from
our Copper Loop Test Head to Lucent Technologies or Solectron, a contract
manufacturer for Lucent Technologies. Solectron integrated this product into
the Stinger DSLAM that it manufactured for Lucent Technologies. The initial
order from Lucent Technologies for the Cooper Loop Test Head was completed
during the second quarter of 2001. Significant future orders of this Copper
Loop Test Head product remains uncertain. No customers comprised more than 10%
of our sales in 2001. We anticipate that our operating results for any given
period will continue to be dependent to a significant extent on large purchase
orders, which can be delayed or cancelled by our customers without penalty. In
addition, we anticipate that our operating results for a given period will
continue to be dependent on a small number of customers.

                                      18

<PAGE>

   Currently, competition in the telecommunications and cable equipment market
is intense and is characterized by declining prices due to increased
competition and new products. Due to competition and potential pricing
pressures from large customers in the future, we expect that the average
selling price for our products will decline over time. If we fail to reduce our
production costs accordingly, our gross margins will correspondingly decline.
See "Factors Affecting Future Operating Results--Competition" and "--Risks of
the Telecommunications Industry."

   During the last three years, a substantial portion of our net sales have
come from customers located outside of the United States, and we believe that
growth may require expansion of our sales in international markets. Currently,
we maintain a procurement support and manufacturing facility in Taipei, Taiwan;
manufacturing, research, development, and sales facilities in Modena, Italy;
and research, development, and sales facilities in Anjou, Canada. We also have
a representative liaison office in Beijing, China, a foreign sales corporation
in Barbados, and sales offices in Tokyo, Japan and Seoul, Korea.

   Prior to our acquisition of Pro.Tel. S.r.l. ("Pro.Tel") in February 2000,
international sales were denominated solely in U.S. dollars and, accordingly,
we have not historically been exposed to fluctuations in non-U.S. currency
exchange rates related to these sales activities. Since our acquisition of
Pro.Tel in February 2000, and then Avantron in January 2001, we have had a
small amount of sales denominated in Euros and the Canadian dollar and have at
certain times used derivative financial instruments to hedge our foreign
exchange risks. As of December 31, 2001, we had no derivative financial
instruments. To date, foreign exchange exposure from sales has not been
material to our operations. We have also been exposed to fluctuations in
non-U.S. currency exchange rates related to our procurement activities in
Taiwan. In the future, we expect that a growing portion of international sales
may be denominated in currencies other than U.S. dollars, thereby exposing us
to gains and losses on non-U.S. currency transactions. We may choose to limit
such exposure by using hedging strategies. See "Factors Affecting Future
Operating Results--Risks of International Operations."

   We recognize product sales at the time of shipment unless we have future
obligations or customer acceptance is required, in which case revenue is
recognized when these obligations have been met or the customer accepts the
product. We offer a three-year warranty covering parts and labor on our wire
line access (including DSL) products and fiber optic products sold in the
United States and generally offer a one-year warranty covering parts and labor
for our products sold overseas, with a two-year extended warranty option at
time of sale. Our cable TV and signaling products are covered by a one-year
warranty. Revenue from sales of extended warranties is deferred and recognized
over the extended warranty term, which is generally two years. We charge
estimated warranty costs to cost of sales when the related sales are
recognized. We recognize revenue for out-of-warranty repairs when we ship the
repaired product.

Cost of Sales

   Our cost of sales consist primarily of the following:

  .   direct material costs of product components, manuals, product
      documentation, and product accessories;

  .   production wages, taxes, and benefits;

  .   production allocated overhead costs;

  .   warranty costs;

  .   the costs of board level assembly by third party contract manufacturers;
      and

  .   scrapped material used in the production process.

   We recognize direct cost of sales, wages, taxes, benefits, and allocated
overhead costs as we ship product. We expense scrapped materials as incurred.

                                      19

<PAGE>

   Our industry is characterized by limited supply chains and long lead times
for the materials and components that we use in the manufacture of our
products. If we underestimate our requirements, we may have inadequate
inventory, resulting in additional product costs for expediting delivery of
long lead time components. An increase in the cost of components could result
in lower margins.

   Additionally, these long lead times have in the past, and may in the future,
cause us to purchase large quantities of some parts, increasing our investment
in inventory and the risk of the parts' obsolescence. Any subsequent write-off
of inventory could also result in lower margins. See "Factors Affecting Future
Operating Results--Dependence on Sole and Single Source Suppliers."

Operating Costs

   We classify our operating expenses into three general operational
categories: selling and marketing, research and development, and general and
administrative. Our operating expenses include stock-based compensation and
amortization of goodwill and other intangible assets. We classify charges to
the selling and marketing, research and development, and general and
administrative expense categories based on the nature of the expenditures.
Although each of these three categories includes expenses that are unique to
the category type, there are commonly recurring expenditures that typically
appear in all of these categories, such as salaries, amortization of
stock-based compensation, employee benefits, travel and entertainment costs,
allocated communication costs, rent and facilities costs, and third party
professional service fees. The selling and marketing category of operating
expenses also includes expenditures specific to the selling and marketing
group, such as commissions, public relations and advertising, trade shows, and
marketing materials.

   We allocate the total cost of overhead and facilities to each of the
functional areas that use overhead and facilities based upon the square footage
of facilities used by each of these areas or the headcount in each of these
areas. These allocated charges include facility rent and utilities for the
corporate office, communications charges, and depreciation expenses for our
building and for office furniture and equipment.

   In 2001 and 2000, we recorded amortization of deferred stock-based
compensation expense of $2,125,000 and $1,954,000, respectively, related to the
grant of pre-IPO options to purchase our common stock at exercise prices
subsequently determined to be below fair market value. Total compensation
expense related to these options, which were granted in 1999 and the first
quarter of 2000, will be amortized on a straight-line basis, over the four-year
vesting periods of the options, to the departments of the employees who
received these below market option grants. In 2001 and 2000, we allocated
amortization of deferred stock-based compensation expense of $291,000 and
$264,000, respectively, to cost of sales, $815,000 and $773,000, respectively,
to research and development expense, $648,000 and $586,000, respectively, to
selling and marketing expense and $371,000 and $331,000, respectively, to
general and administrative expense. Also, we recorded amortization of goodwill
and other intangible assets of $5,064,000 and $2,471,000, respectively, in
general and administrative expense. At December 31, 2001, $4,304,000 of
deferred stock-based compensation remained to be amortized, at a rate not
exceeding $545,000 per quarter.

Acquisitions

   In July 1999, we acquired Hukk Engineering ("Hukk"), a manufacturer of
digital cable testing equipment. We accounted for the Hukk Engineering
acquisition using the purchase method and, accordingly, recorded goodwill and
other intangibles of approximately $2.5 million to be amortized on a
straight-line basis over the next five years until the end of 2001. At December
31, 2001, we had $1.2 million (including work-force in place) in unamortized
goodwill remaining from the Hukk Acquisition. We will periodically review this
asset for impairment, as required by SFAS No. 142. In addition, we recorded
deferred stock-based compensation for stock options granted to employees of
Hukk during 1999, in the amount of $2.1 million, to be amortized on a
straight-line basis over their four-year vesting period

                                      20

<PAGE>

and non-compete amortization of $0.5 million to be amortized on a straight-line
basis over the next two to five years, based on the expected life of the
underlying assets.

   In February 2000, we acquired Pro.Tel. S.r.l. and subsidiaries ("Pro.Tel"),
an Italian manufacturer of distributed network signaling analysis equipment,
its U.S. affiliate, and the assets of an unrelated U.S. distributor. We
accounted for this acquisition using the purchase method of accounting and,
accordingly, recorded goodwill of $8.9 million, to be amortized on a
straight-line basis over its original estimated useful life of two to five
years, until the end of 2001. At December 31, 2001, we had $5.6 million
(including work-force in place) in unamortized goodwill remaining from the Pro.
Tel. acquisition. In accordance with SFAS No. 142, we will no longer amortize
this goodwill, which will be periodically reviewed for impairment. In addition,
we recorded deferred stock-based compensation for stock options granted to
employees of Pro.Tel in the first quarter of 2000 in the amount of $6.5
million, to be amortized on a straight-line basis over their four-year vesting
periods and non-compete agreements of $0.5 million, to be amortized on a
straight-line basis over the next two to five years, based on the expected life
of the underlying assets.

   In January 2001, we acquired Avantron Technologies, Inc. ("Avantron"), a
Canadian company that specializes in the design and manufacture of cable
TV/modem spectrum analyzers and performance monitoring systems. The purchase
price was $11.9 million in cash and short-term notes payable. We accounted for
this acquisition using the purchase method of accounting, and, accordingly,
recorded goodwill of $10.3 million, to be amortized on a straight-line basis
over its original estimated useful life of two to five years, until the end of
2001. In accordance with SFAS No. 142, we will no longer amortize goodwill
resulting from the Avantron acquisition. At December 31, 2001, we had $8.2
million (including work-force in place) in unamortized goodwill remaining from
the Avantron acquisition. We will periodically review this asset for
impairment, as required by SFAS No. 142.

   In February 2002, we acquired the CaLan Cable TV test business from Agilent
Technologies, Inc. for approximately $7.2 million in cash. CaLan products
incorporate DigiSweep technology, the industry's fastest, high resolution,
digital services-compatible sweep. CaLan products are designed to support a
complete range of remote and field maintenance activities, from forward and
return path alignment, to signal measurement and ingress troubleshooting.

   We believe that acquisitions and joint ventures may be an important part of
our growth and competitive strategy. "Factors Affecting Future Operating
Results--Acquisitions."

Salary Reductions

   In response to a slowdown in our customers' telecom spending patterns and
softening demand for telecom equipment generally, we implemented a salary
reduction throughout the Company ranging from 5% at the lowest paid employee
level up to 25% at the founder executive management level. This reduction
commenced during the second quarter of 2001. A salary freeze was also
implemented along with this base salary reduction.

   During the first quarter of 2002, the Company implemented additional
reductions in workforce as well as additional salary adjustments. These salary
adjustments in the first quarter of 2002 were as high as 25%. The overall cost
savings of the workforce reductions and salary adjustments will average a 10%
savings in payroll costs for the Company.

Critical Accounting Policies

   Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, and
we have prepared our discussion and analysis of our financial condition and
results of operations based upon these financial statements. The preparation of
these financial statements requires us to apply accounting policies using
estimates and judgments that affect the reported amounts of assets, liabilities,

                                      21

<PAGE>

revenues, and expenses. We consider "critical" those accounting policies that
meet both of the following criteria: They must require our most difficult,
subjective, or complex judgments, which often result from a need to make
estimates about the effect of matters that are inherently uncertain, and they
must be among the most important of our accounting policies to the portrayal of
its financial condition and results of operations. These critical accounting
policies include determination of our allowance for doubtful accounts
receivable, reserves for excess and obsolete inventory, reserves for future
costs of meeting obligations under our standard product warranty agreements,
deferred tax assets and liabilities, and the valuation of our minority interest
investment in another company.

   We determine our allowance for doubtful accounts receivable by making our
best estimate considering our historical accounts receivable collection
experience and the information that we have about the status of its accounts
receivable balances. If future conditions cause our collection experience to
change or if we later obtain different information about the status of any or
all of our accounts receivable, additional allowances for doubtful accounts
receivable may be required.

   We determine our reserve for excess and obsolete inventory by making our
best estimate considering the current quantities of inventory on hand and our
forecast of the need for this inventory to support future sales of our
products. We often have only limited information on which to base our
forecasts, and if future sales differ from these forecasts, additional reserves
for excess and obsolete inventory may be required.

   We generally offer standard warranties on our products ranging from one to
three years. At the time we recognize a product's sale, we determine the
reserve for the future cost of meeting our obligations under these warranties
by considering our historical experience with warranty costs. If the future
costs of meeting these obligations differ from the historical experience,
additional reserves for warranty obligations may be required.

   We account for income taxes using the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and for the future tax consequences attributable to operating loss and
tax credit carryforwards. In assessing the recoverability of deferred tax
assets, we consider whether it is more likely than not that some portion or
that all of the deferred tax assets will be realized. The ultimate realization
of certain deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. If we obtain information that causes our forecast of future taxable
income to change or if actual future taxable income differs from our forecast,
we may have to revise the carrying value of our deferred tax assets, which
would affect our net income in the period in which the change was made. The
ultimate realization of certain deferred tax assets is dependent on our ability
to carry forward or back operating losses and tax credits. If changes in the
tax laws occur that inhibit its ability to carry forward or back operating
losses or tax credits, we will recognize the effect on our deferred tax assets
in the results of operations of the period that includes the enactment date of
the change. Furthermore, we measure our deferred tax assets and liabilities
using the enacted tax laws expected to apply to taxable income in the years in
which temporary differences are expected to be recovered or settled. If tax
laws change, we will recognize the effect on its deferred tax assets and
liabilities in the results of operations of the period that includes the
enactment date of the change.

   The preparation of our consolidated financial statements also requires us to
apply accounting policies related to revenue recognition. We recognize revenue
when earned. We recognize revenue from product sales upon shipment, based on
the assumption that collectibility of the resulting receivable is reasonably
assured. When the arrangement with the customer includes future obligations or
is contingent on obtaining customer acceptance, we recognize revenue when those
obligations have been met or customer acceptance has been received.

                                      22

<PAGE>

RESULTS OF OPERATIONS

   The following table sets forth certain operating data as a percentage of net
sales for the periods indicated:

<TABLE>
<CAPTION>
                                                       PERCENTAGE OF NET SALES
                                                       ----------------------
                                                       YEAR ENDED DECEMBER 31,
                                                       ----------------------
                                                        2001      2000   1999
                                                       -----     -----  -----
<S>                                                    <C>       <C>    <C>
Net sales............................................. 100.0%    100.0% 100.0%
Cost of sales.........................................  32.3      29.1   24.0
                                                       -----     -----  -----
   Gross profit.......................................  67.7      70.9   76.0
Operating expenses:
   Research and development...........................  23.4      15.5   17.4
   Selling and marketing..............................  25.7      20.0   24.7
   General and administrative.........................  17.4       8.6    6.4
                                                       -----     -----  -----
   Total operating expenses...........................  66.5      44.1   48.5
                                                       -----     -----  -----
   Income from operations.............................   1.2      26.8   27.5
Other income, net.....................................   3.3       1.7    0.5
                                                       -----     -----  -----
   Income before income taxes.........................   4.5      28.5   28.0
Income taxes..........................................   0.9      10.5   10.2
                                                       -----     -----  -----
   Net income.........................................   3.6%     18.0%  17.8%
                                                       =====     =====  =====
</TABLE>

COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000

   Net Sales.  Net sales decreased $34.4 million, or 30%, to $79.1 million in
2001 from $113.5 million in 2000. Sales of our wire line access products,
including DSL products, accounted for $41.7 million of the net sales decrease
and sales of our signaling products accounted for $0.5 million of the net sales
decrease. These decreases were offset by an increase of $6.9 million in sales
of our cable TV products and an increase of $0.9 million in sales of our fiber
optics products. Of the $6.9 million cable TV products sales increase, $5.7
million came from sales by our Avantron subsidiary, which we acquired in 2001,
and $1.2 million came from increased sales of our existing product lines.

   Sales in 2001 as compared to 2000 decreased $35.9 million, or 41%, in North
America, increased $0.8 million, or 8%, in Europe/Africa/Middle East, increased
$1.4 million, or 14%, in Asia Pacific, and decreased $0.7 million, or 17%, in
Latin America.

   The decrease in North American sales from 2000 to 2001 is due to lower sales
of our wire line access products, including DSL, and lower sales of our
protocol and fiber optics products. Our wire line access product sales
decreased $37.1 million in North America from 2000 to 2001. Of this decrease,
$13.2 million was from reduced Copper Loop Test Head sales for Lucent
Technologies' stinger DSLAM product, which decreased from $19.6 million in 2000
to $6.3 million in 2001. Significant future orders of the Copper Loop Test Head
product remains uncertain. North American sales of our protocol products
decreased $2.0 million and our fiber optics products decreased $2.0 million
from 2000 to 2001. The decreases in our North American sales were primarily the
result of decreased capital spending by our telecommunications customers. In
addition, over the past year some DSL providers have encouraged customer
self-installation and have reported that up to 90% of their customers perform
self-installation. If the self-installation procedure reduces the need for
technicians to test for DSL service, demand for our DSL wire line access
products may decline further as our equipment may be used primarily for
troubleshooting rather than installation. Sales of our cable TV products
increased by $5.3 million in North America from 2000 to 2001. Of this increase,
$4.1 million was the result of the Avantron acquisition which occurred in the
first quarter of 2001 and the remaining $1.2 million came from our existing
product lines.

                                      23

<PAGE>

   International sales, including North American sales to Canada, decreased to
$29.7 million, or 38% of net sales, in 2001 from $30.1 million, or 27% of net
sales, in 2000. The decrease in international sales is primarily due to
decreased sales of our wire line access product lines, including DSL, which
were partially offset by increased sales of our fiber optics products.

   Cost of Sales.  Cost of sales consists primarily of direct material,
warranty, and personnel costs related to the manufacturing of our products and
allocated overhead. Cost of sales decreased 23% to $25.5 million in 2001 from
$33.0 million in 2000. This decrease is primarily due to the decrease in net
sales from 2000 to 2001. Cost of sales were 32% of net sales in 2001 versus 29%
of net sales in 2000. The increase as a percentage of net sales resulted
primarily from an increased presence in our sales mix of cable TV products,
lower margin wire line access products, and international sales, which tend to
carry lower margins than North American sales because they often go through
distributor networks. We expect that cost of sales may continue to increase as
a percentage of sales for the foreseeable future as our light chassis DSL
products and cable TV products increase as a percentage of our overall product
mix, if international sales continue to grow as a percentage of total sales, or
if pricing pressures increase.

   Research and Development.  Research and development expenses consist
primarily of the costs of payroll and benefits for engineers, equipment, and
consulting services. Research and development expenses increased 5% to $18.5
million in 2001 from $17.6 million in 2000. This increase is primarily due to
costs associated with increased staffing dedicated to research and development
activities. Research and development expenses were 23% of net sales in 2001 and
15% of net sales in 2000. The increase as a percentage of net sales in 2001 is
primarily due to decreased product sales while research and development
expenditures increased, as we continue to invest in product development and
expansion of our product lines. Research and development expenses may increase
in absolute dollars as we continue to invest in product development and expand
our product lines.

   Selling and Marketing.  Selling and marketing expenses consist primarily of
the costs of payroll and benefits for selling and marketing personnel,
manufacturers' representatives and direct sales commissions, travel and
facilities expenses related to selling and marketing, and trade show and
advertising expenses. Selling and marketing expenses decreased 10% to $20.3
million in 2001 from $22.7 million in 2000. This decrease is primarily due to a
49% decrease in commissions expense. Commission expense decreased primarily due
to the decrease in our sales, particularly North American sales, for which we
make the preponderance of our commission payments. Selling and marketing
expenses were 26% of net sales in 2001 and 20% of net sales in 2000. The
increase as a percentage of net sales in 2001 is primarily due to decreased OEM
sales, which led to lower commission, occupancy, and salary and related
expenses as a percentage of sales than in 2000. Selling and marketing expenses
may increase in absolute dollars as we continue to invest in our selling and
marketing capabilities.

   General and Administrative.  General and administrative expenses consist
primarily of payroll and benefits, facilities, other costs of our finance and
administrative departments, legal and accounting expenses, and amortization
expenses for goodwill and other intangible assets related to our business
acquisitions. General and administrative expenses increased 41% to $13.8
million in 2001 from $9.8 million in 2000. General and administrative expenses
were 17% of net sales in 2001 and 9% of net sales in 2000. The increase in both
absolute dollars and as a percentage of net sales is primarily due to increased
amortization of goodwill and other intangible assets related to recent business
acquisitions, amortization of deferred stock-based compensation, and increased
staffing and related costs associated with the growth of our business as a
public company for the full year of 2001. General and administrative expenses
may increase in absolute dollars to accommodate the growth of our business, to
add related infrastructure, and to pursue our acquisition strategy.

   Other Income, Net.  Other income, net represents primarily interest earned
on cash and investment balances net of interest expense on notes payable and
short-term borrowings under our line of credit. Other income, net increased

                                      24

<PAGE>

to $2.6 million in 2001 from $1.9 million in 2000. The increase in 2001
resulted primarily from increased interest earned on higher balances of cash
and cash equivalents resulting from increased cash flow from operations,
interest income earned for a full year in 2001 on the net proceeds received
from our initial public offering in July 2000, and income earned from a grant
from the Italian government.

   Income Taxes.  Income taxes consist of federal, state, and international
income taxes. We recorded income tax expense of $0.7 million in 2001 and $12.0
million in 2000. Our effective income tax rates were 20% in 2001 and 37% in
2000. Our income tax expense and effective income tax rate are lower in 2001
than in 2000 primarily due to lower levels of income.

COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999

   Net Sales.  Net sales increased approximately 85% to $113.5 million in 2000
from $61.5 million in 1999. Sales of our wire line access products, including
DSL products, accounted for $30.4 million of the net sales increase, our new
fiber optics products accounted for $14.0 million of the net sales increase,
our new signaling products accounted for $4.7 million of the net sales
increase, and our cable TV products accounted for $2.9 million of the net sales
increase over the prior year.

   Sales in 2000 as compared to 1999 increased $38.2 million, or 76%, in North
America, $6.0 million, or 138%, in Europe, $4.5 million, or 80%, in Asia and
$3.3 million, or 275%, in Latin America. The strong increase in North American
sales is primarily due to sales of our DSL and fiber optic products. Our DSL
products accounted for $19.7 million of the increase in North American sales
for the year in part due to sales of our new customized Copper Loop Test Head
for Lucent Technologies' Stinger DSLAM, which totaled $19.6 million or 17% of
net sales for 2000. Sales of our new fiber optics products accounted for $11.8
million of the increase in North American sales for the year. Our new signaling
products accounted for $3.8 million of the increase in North American sales for
the year, and sales of our cable TV products accounted for $2.9 million of the
increase in North American sales for the year.

   International sales, including North American sales to Canada, increased to
$30.1 million, or 27% of net sales, in 2000 from $12.2 million, or 20% of net
sales, in 1999. The increase in international sales is primarily due to
increased sales of our DSL product line and our expanded international
operations.

   Cost of Sales.  Cost of sales increased 124% to $33.0 million in 2000 from
$14.7 million in 1999. Cost of sales represented 29% of net sales in 2000 and
24% of net sales in 1999. The increase as a percentage of net sales resulted
primarily from a higher sales volume of light chassis DSL products, which have
lower average selling prices than full chassis DSL products and the
introduction of our new fiber optics and cable TV product lines which generated
lower gross margins than the mix of products sold during the prior year.

   Research and Development.  Research and development expenses increased 64%
to $17.6 million in 2000 from $10.7 million in 1999. This increase is primarily
due to costs associated with increased staffing dedicated to research and
development activities. Research and development expenses represented 15% of
net sales during 2000 and 17% of net sales in 1999. The decrease as a
percentage of net sales in 2000 was primarily attributable to increased product
sales relative to research and development expenditures.

   Selling and Marketing.  Selling and marketing expenses increased 49% to
$22.7 million in 2000 from $15.2 million in 1999. This increase is primarily
due to increased staffing to support expanded product offerings and increased
marketing and promotional activities. Selling and marketing expenses
represented 20% of net sales in 2000 and 25% of net sales in 1999. The decrease
as a percentage of net sales during 2000 was primarily due to increased OEM
sales, which have led to lower commission, occupancy, and salary and related
expenses as a percentage of sales.

                                      25

<PAGE>

   General and Administrative.  General and administrative expenses increased
150% to $9.8 million in 2000 from $3.9 million in 1999. General and
administrative expenses represented 9% of net sales in 2000 and 6% in 1999. The
increase in both absolute dollars and as a percentage of net sales was
primarily related to increased staffing and related costs associated with the
growth of our business, amortization of goodwill and other intangible assets
related to recent business acquisitions, and amortization of deferred
stock-based compensation.

   Other Income, Net.  In 2000, we also recorded a $0.4 million gain on a
forward contract. Other income, net increased to $1.9 million in 2000 from $0.3
million in 2000. The increase in 2000 resulted primarily from increased
interest earned on higher balances of cash and cash equivalents resulting from
increased cash flow from operations, a gain on a forward contract, and interest
income earned on the net proceeds received from our initial public offering in
July 2000.
   Income Taxes.  We recorded income tax expense of $12.0 million in 2000 and
$6.3 million in 1999. Our effective income tax rates were 37% in 2000 and 32%
in 1999. The effective income tax rate is higher in 2000 than in 1999 primarily
due to higher levels of income, charges from non-cash amortization of goodwill
and deferred stock-based compensation, and an increased concentration of sales
in local jurisdictions with higher tax rates.

BACKLOG

   Our backlog of customer orders at December 31, 2001 was approximately $1.5
million compared to approximately $8.0 million at December 31, 2000. Variations
in the size and delivery schedules of purchase orders that we receive, as well
as changes in customers' delivery requirements may result in substantial
fluctuations in the amount of backlog orders for our products from quarter to
quarter.

SEASONALITY

   Our sales have been seasonal in nature and tied to the buying patterns of
our customers. Prior to 2000, the largest quarterly sales had usually been
during the last calendar quarter of the year, as customers spent the unused
portions of their annual budgets. In 2001 and 2000, there was a change in this
fourth quarter seasonality with no significant remaining unused budget dollars
available for an increase in the fourth quarter seasonal sales. Prior to 2001,
the first quarter of any given year had historically been a light period of
orders due to the delayed release mid first quarter of the current year's
budget. We expect that our quarterly operating results may fluctuate
significantly and will be difficult to predict given the nature of our
business. Many factors could cause our operating results to fluctuate from
quarter to quarter in the future, including the lengthy and unpredictable
buying patterns of our customers, the degree to which our customers allocate
and spend their yearly budgets, and the timing of our customers' budget
processes.

LIQUIDITY AND CAPITAL RESOURCES

   Historically, we have financed our operations and satisfied our capital
expenditure requirements primarily through cash flow from operations and
borrowings under our line of credit. Additionally, in July of 2000, we received
net proceeds totaling $51.6 million from our initial public offering. As of
December 31, 2001 and 2000, we had working capital of $64.9 million and $82.0
million, respectively, and cash and cash equivalents of $48.7 million and
$56.3 million, respectively. As of December 31, 2001 and 2000, we also had $3.5
million and $6.3 million, respectively, in investments in marketable securities.

   Cash provided by operating activities was $19.8 million in 2001, $13.4
million in 2000, and $10.1 million in 1999. Operating cash flows increased
during 2001 as compared to 2000 primarily as a result of net collections of
accounts receivable and a net reduction in inventory purchases. Also, the
amount of non-cash charges against net income increased significantly in 2001
from 2000. This was primarily the result of increased goodwill amortization
from the

                                      26

<PAGE>

acquisition of Avantron Technologies, Inc. in the first quarter of 2001 and
increased depreciation resulting from the completion of our new corporate
headquarters building in San Jose, CA, also in the first quarter of 2001.
Therefore, the decline in the net income from 2000 to 2001 was not associated
with a proportional decline in operating cash flow. The factors increasing
operating cash flow were partially offset by decreases in accounts payable and
accrued expenses and income taxes payable.

   Cash used in investing activities was $27.8 million in 2001, $16.9 million
in 2000, and $6.2 million in 1999. In 2001, cash used in investing activities
included $11.3 million for acquisitions, $19.6 million for purchases of
marketable securities, and $19.4 million for capital expenditures. This was
offset by $22.5 million generated from the sale of marketable securities. Cash
used for capital expenditures increased during 2001 over 2000 primarily due to
the completion of our new facility in San Jose, California. Cash outlays for
the facility during 2001 were $8.8 million for the land and $5.6 million for
construction. Cash used for capital expenditures during 2001 also included
research and development laboratory equipment, general office equipment to
support the new facility, and demonstration equipment to support our selling
and marketing programs. In 2000, cash used in investing activities included
$4.7 million for acquisitions, $6.3 million for purchases of marketable
securities, $5.6 million for capital expenditures, and $0.2 million for the
purchase of a long-term investment.

   Cash provided by financing activities was $0.6 million in 2001 and $51.3
million in 2000, and cash used in financing activities was $0.3 million in
1999. In 2001, cash provided by financing activities was net proceeds of
$1.3 million from common stock issued pursuant to our employee stock purchase
plan, $0.6 million from notes payable, and $0.4 million from stock options
exercised. This was offset by $0.9 million repurchase common stock,
$0.6 million to repay notes payable, and $0.2 million to repay short-term
borrowings. In 2000, cash provided by financing activities was primarily net
proceeds of $51.6 million from our initial public offering in July 2000, net
proceeds of $0.5 million received from stock issued pursuant to our employee
stock purchase plan, and $0.8 million received from the exercise of stock
options. These were partially offset by $1.6 million used for repayments of
notes payable.

   Currently, we have a line of credit from Bank of America, N.A. for up to
$9.0 million in borrowings at the bank's prime rate less 0.25% (4.50% at
December 31, 2001). The line of credit expires on August 1, 2002. At December
31, 2001 and 2000, there were no balances outstanding under the line of credit.
Borrowings under the line of credit are secured by our inventory and accounts
receivable. The agreement governing the line of credit contains covenants, with
which we were in compliance at December 31, 2001 and 2000, that, among other
things:

  .   require us to maintain various financial covenants, including
      profitability and current ratios;

  .   limit capital expenditures;

  .   restrict the payment of dividends on our common stock to dividends
      payable in common stock and to $1.0 million payable in any one fiscal
      year; and

  .   restrict our ability to redeem our common stock beyond 20% of our net
      income for the prior fiscal year.

   We also have credit facilities from various Italian financial institutions
with limits ranging from $0.2 million up to $1.0 million, which bear interest
at variable rates ranging from 6.675% to 9.6875% at December 31, 2001, based on
the ABI prime rate. At December 31, 2001 $56,000 had been drawn down under
these facilities.

   The remaining borrowings consist of a loan from the Italian government,
which bears interest at 2% a year. At December 31, 2001, the outstanding
balance on this loan was $0.6 million. Interest payments are to be paid
starting in 2002 and principal payments in 2004.

   We believe that the net proceeds received by us from our initial public
offering, together with current cash balances, cash flows from operations and
available borrowings under our line of credit will be sufficient to meet our

                                      27

<PAGE>

anticipated cash needs for working capital, capital expenditures, acquisitions,
and other activities for at least the next 12 months. After that, if current
sources are not sufficient to meet our needs, we may seek additional equity or
debt financing. In addition, any material acquisition of complementary
businesses, products or technologies, or material joint ventures could require
us to obtain additional equity or debt financing. We cannot assure you that
such additional financing would be available on acceptable terms, if at all.

FACTORS AFFECTING FUTURE OPERATING RESULTS

Quarterly Fluctuations--Because our quarterly operating results have fluctuated
 significantly in the past and are likely to fluctuate significantly in the
 future, our stock price may decline and may be volatile.

   In the past, we have experienced significant fluctuations in our quarterly
results due to a number of factors beyond our control. In the future, our
quarterly operating results may fluctuate significantly and may be difficult to
predict given the nature of our business. Many factors could cause our
operating results to fluctuate from quarter to quarter in the future, including
the following:

  .   the size and timing of orders from our customers, which may be
      exacerbated by the increased length and unpredictability of our
      customers' buying patterns, and our ability to ship these orders on a
      timely basis;

  .   the degree to which our customers have allocated and spent their yearly
      budgets;

  .   the uneven pace of technological innovation, the development of products
      responding to these technological innovations by us and our competitors,
      and customer acceptance of these products and innovations;

  .   the varied degree of price, product, technology competition, and our
      customers' and competitors' responses to these changes;

  .   the relative percentages of our products sold domestically and
      internationally;

  .   the mix of the products we sell and the varied margins associated with
      these products; and

  .   the timing of our customers' budget processes.

   The factors listed above may affect our business and stock price in several
ways. Given the high fixed costs related to overhead, research and development,
and advertising and marketing, among others, if our net sales are below our
expectations in any quarter, we may not be able to adjust spending accordingly.
As a result of the above, our stock price may decline and may be volatile,
particularly if public market analysts and investors perceive these factors to
exist, whether or not that perception is accurate. Furthermore, the above
factors, taken together may make it more difficult for us to issue additional
equity in the future or raise debt financing to fund future acquisitions and
accelerate growth.

   These risks may be exacerbated by, or may be in addition to, the risk of a
general economic slowdown that affects the economy as a whole or the
telecommunications industry in particular.

Dependence on DSL--THE MAJORITY OF OUR SALES HAVE BEEN FROM OUR DSL PRODUCTS.
 DEMAND FOR OUR DSL PRODUCTS HAS RECENTLY DECLINED AND MAY DECLINE FURTHER.

   In fiscal 2001 and 2000, sales of our DSL and other wire line access
products represented approximately 62% and 80% of our net sales, respectively.
Currently, our DSL products are primarily used by a limited number of incumbent
local exchange carriers, including the regional Bell operating companies, and
competitive local exchange carriers who offer DSL services. A competitive local
exchange carrier is a company that, following the Telecommunications Act of
1996, is authorized to compete in a local communications services market. These
parties, and other Internet service providers and users, are continuously
evaluating alternative high-speed data access technologies, including cable
modems, fiber optics, wireless technology, and satellite technologies, and may
at any time adopt these competing

                                      28

<PAGE>

technologies. These competing technologies may ultimately prove to be superior
to DSL services and reduce or eliminate the demand for our DSL products.

   In addition, the availability and quality of DSL service may be impaired by
technical limitations and problems of the existing copper wire network on which
DSL service runs, such as:

  .   the distance of end users from the central office of the incumbent local
      exchange carrier, which is typically limited to between 12,000 and 18,000
      feet;

  .   the quality and degree of interference within the copper wire network;

  .   the configuration of the copper wire network, which may degrade or
      prevent DSL service;

  .   the ability of DSL networks and operational support systems of service
      providers to connect and manage a substantial number of online end users
      at high speeds, while achieving reliable and high quality service; and

  .   the vulnerability of the copper wire network to physical damage from
      natural disasters and other unanticipated telecommunications failures and
      problems.

   During 2001, the business prospects of many competitive local exchange
carriers declined significantly. Some competitive local exchange carriers filed
for bankruptcy or went out of business. Due to these and other factors, we have
seen a decline in DSL deployment and a significant decline in demand for our
DSL products. If DSL deployment rates continue to decrease or remain flat,
demand for our DSL products may decline further. It is not possible to predict
whether any decline would be temporary or sustained. Accordingly, our future
success is partially dependent upon whether DSL technology continues to gain
growing and widespread market acceptance by exchange carriers, end users of
their services, and other Internet service providers and users.

   In the past, our customers have deployed DSL equipment, including our
products, in substantially larger volumes than their subscriber count. Over the
past year to eighteen months, some of our customers have leveled or decreased
the rate at which they deploy DSL equipment. This decrease has lead to a
decrease in demand for our products. In addition, the inability of our current
or future customers to acquire and to retain subscribers as planned, or to
respond to competition for their services or reduced demand for their services,
could cause them to further reduce or to eliminate entirely their DSL
deployment plans.

Risks of the Telecommunications Industry--WE FACE SEVERAL RISKS REGARDING THE
 TELECOMMUNICATIONS INDUSTRY, INCLUDING THE POSSIBLE EFFECTS OF ITS
 UNPREDICTABLE GROWTH OR DECLINE, THE POSSIBLE EFFECTS OF CONSOLIDATION AMONG
 OUR PRINCIPAL CUSTOMERS, AND THE RISK THAT DEREGULATION WILL SLOW.

   Since the passage of the Telecommunications Act of 1996, the
telecommunications industry has experienced rapid growth. The growth has led to
great innovations in technology, intense competition, short product life
cycles, and, to some extent, regulatory uncertainty inside and outside the
United States. The course of the development of the telecommunications industry
is, however, difficult to predict. Companies operating in this industry have a
difficult time forecasting future trends and developments and forecasting
customer acceptance of competing technologies. One possible effect of this
uncertainty is that there is, and may continue to be, a delay or a reduction in
these companies' investment in their business and purchase of related
equipment, such as our products, and a reduction in their and our access to
capital. In addition, deregulation may result in a delay or a reduction in the
procurement cycle because of the general uncertainty involved with the
transition period of businesses.

   The growth that has occurred since the passage of the Telecommunications Act
of 1996 has slowed, and it is unknown whether or when it will resume. This
slowdown includes reduced investment in the telecommunications industry in
general and delayed purchase orders for service verification equipment such as
our products in particular. It is not possible to predict whether this slowdown
will be temporary, or sustained.

                                      29

<PAGE>

   In addition, the telecommunications industry has been experiencing
consolidation among its primary participants, such as incumbent local exchange
carriers and competitive local exchange carriers, several of whom are our
primary customers. For example, in recent years, GTE merged with Bell Atlantic
to create Verizon Communications, Inc., both of which were customers of ours.
Continued consolidation may cause delay or cancellation of orders for our
products. The consolidation of our customers will likely provide them with
greater negotiating leverage with us and may lead them to pressure us to lower
the prices of our products.

   If deregulation in international markets or in the United States were to
slow or to take an unanticipated course, the telecommunications industry might
suffer, among other effects, the following:

  .   a continued general slowdown in economic activity relating to the
      telecommunications industry and a consequent multiplier effect on the
      general economy;

  .   continued reduced investment in the telecommunications industry in
      general, and in DSL technology in particular, due to increased
      uncertainty regarding the future of the industry and this technology;

  .   greater consolidation of providers of high-speed access technologies,
      which may not favor the development of DSL technology and which might
      provide these companies with greater negotiating leverage regarding the
      prices and other terms of the DSL products and services they purchase;

  .   uncertainty regarding judicial and administrative proceedings, which may
      affect the pace at which investment and deregulation continue to occur;
      and

  .   continued delay in purchase orders of service verification equipment,
      such as our products, if customers were to reduce their investment in new
      high-speed access technologies.

Customer Concentration--A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH
 PERCENTAGE OF OUR NET SALES, AND ANY ADVERSE FACTOR AFFECTING THESE CUSTOMERS
 OR OUR RELATIONSHIP WITH THESE CUSTOMERS COULD CAUSE OUR NET SALES TO DECREASE.

   Our customer base is concentrated, and a relatively small number of
companies have accounted for a large percentage of our net sales. Net sales
from our top five customers in the United States represented approximately 23%
in 2001, 42% in 2000, and 49% in 1999. Our largest customers over this period
have been affiliates of SBC Communications Inc., which include Pacific Bell
Telephone Company, Southwestern Bell Telephone Company, Ameritech Corporation,
Nevada Bell, Advanced Solutions, Inc., and Southern New England Telephone and
which in total accounted for less than 6% of net sales in fiscal 2001, and
approximately 16% in fiscal 2000. Additionally, sales to both Lucent
Technologies and Solectron, a contract manufacturer for Lucent Technologies'
Stinger DSLAM products, represented approximately 8% of sales in 2001 and 17%
in 2000. As of the end of the second quarter of 2001, our initial contract
orders from Lucent Technologies for the Copper Loop Test Head came to a
negotiated completion.In general, our customers are not obligated to purchase a
specific amount of products or to provide us with binding forecasts of
purchases for any period.

   As a result of the general slowdown in the United States economy, our net
sales declined significantly in 2001 and we anticipate that future sales may
continue to decline from our fiscal 2001 net sales. Our future sales to Lucent
Technologies and Solectron may be immaterial. Sales of our DSL related
equipment, in particular, have declined and may continue to decline further in
2002 compared to 2001. The loss of a major customer or the reduction, delay, or
cancellation of orders from one or more of our significant customers could
cause our net sales and, therefore, profits to decline. In addition, many of
our customers are able to exert substantial negotiating leverage over us. As a
result, they may cause us to lower our prices and to negotiate other terms and
provisions that may negatively affect our business and profits.

                                      30

<PAGE>

Use of Field Technicians--IF SERVICE PROVIDERS REDUCE THEIR USE OF FIELD
 TECHNICIANS AND CONTINUE SUCCESSFUL IMPLEMENTATION OF A SELF-SERVICE
 INSTALLATION MODEL, DEMAND FOR OUR PRODUCTS COULD DECREASE.

   To ensure quality service, our major service provider customers have
historically sent a technician, who uses our products, into the field to verify
service for installations. SBC Communications, Qwest Communications, Bell South
Corporation, and Verizon Communications each encourage their customers to
install DSL themselves. Over the past year, some DSL providers have reported
that up to 90% of their customers perform self-installation. Additionally, AT&T
has begun a self- installation program for cable modem devices. By encouraging
customers to install DSL and cable access themselves, these companies intend to
reduce their expenses and expedite installation for their customers. To
encourage self-installation, these companies offer financial incentives. If
service providers continue successful implementation of these plans or choose
to send technicians into the field only after a problem has been reported, or
if alternative methods of verification become available, such as remote
verification, the need for field technicians and the need for our products
would decrease.

Product Development--IF WE ARE UNABLE TO ENHANCE OUR EXISTING PRODUCTS AND TO
 MANAGE SUCCESSFULLY THE DEVELOPMENT OF NEW PRODUCTS, OUR FUTURE SUCCESS MAY BE
 THREATENED.

   The market for our products is characterized by rapid technological
advances, changes in customer requirements and preferences, evolving industry
and customer-specific protocol standards, and frequent new product enhancements
and introductions. Our existing products and our products currently under
development could be rendered obsolete by the introduction of products
involving competing technologies, by the evolution of alternative technologies
or new industry protocol standards, or by rival products by our competitors.
These market conditions are more complex and challenging because of the
introduction of the high degree to which the telecommunications industry is
fragmented.

   We believe our future success will depend, in part, upon our ability, on a
timely and cost-effective basis, to continue to do the following:

  .   anticipate and respond to varied and rapidly changing customer
      preferences and requirements, a process made more challenging by our
      customers' buying patterns;

  .   anticipate and develop new products and solutions for networks based on
      emerging technologies, such as the asynchronous transfer mode protocol
      that packs digital information into cells to be routed across a network,
      and Internet telephony, which comprises voice, video, image, and data
      across the Internet, that are likely to be characterized by continuing
      technological developments, evolving industry standards, and changing
      customer requirements;

  .   invest in research and development to enhance our existing products and
      to introduce new verification and diagnostic products for the
      telecommunications, Internet, cable network, and other markets; and

  .   support our products by investing in effective advertising, marketing,
      and customer support.

We cannot ensure that we will accomplish these objectives, and our failure to
do so could have a material adverse impact on our market share, business and
financial results.

Sales Implementation Cycles--THE LENGTH AND UNPREDICTABILITY OF THE SALES AND
 IMPLEMENTATION CYCLES FOR OUR PRODUCTS MAKES IT DIFFICULT TO FORECAST REVENUES.

   Sales of our products often entail an extended decision-making process on
the part of prospective customers. We frequently experience delays following
initial contact with a prospective customer and expend substantial funds and
management effort pursuing these sales. Our ability to forecast the timing and
amount of specific sales is therefore limited. As a result, the uneven buying
patterns of our customers may cause fluctuations in our operating results,
which could cause our stock price to decline.

                                      31

<PAGE>

   Other sources of delays that lead to long sales cycles, or even a sales
loss, include current and potential customers' internal budgeting procedures,
internal approval and contracting procedures, procurement practices, and
testing and acceptance processes. Recently, our customers' budgeting procedures
have lengthened. The sales cycle for larger deployment now typically ranges
from six to twenty-four months and up to six or more months. The deferral or
loss of one or more significant sales could significantly affect operating
results in a particular quarter, especially if there are significant selling
and marketing expenses associated with the deferred or lost sales.

Electrical Blackouts in California--POSSIBLE SHUTDOWNS IN OUR MANUFACTURING
 OPERATIONS COULD OCCUR.

   Beginning in 2000 and continuing into 2001, California experienced
restricted supplies of electrical power. These restricted supplies resulted in
blackouts and higher electricity costs. Since we do not have back up
generators, should we experience blackouts, our business will be negatively
affected by slowed production, slowed research and development, slowed
marketing, slowed sales efforts, and a general loss of productivity. In
addition, increased electrical rates will increase our costs and lower our
margins.

Managing Growth and Slowdowns--WE MAY HAVE DIFFICULTY MANAGING OUR EXPANSIONS
 AND CONTRACTIONS IN OPERATIONS, WHICH COULD REDUCE OUR CHANCES OF MAINTAINING
 OUR PROFITABILITY.

   We experienced rapid growth in revenues and in our business in 2000 and 1999
followed by a significant slowdown in 2001 that has placed, and may continue to
place, a significant strain on our management and operations. For example, our
revenues increased from $113.5 million in 2000 from $61.5 million in 1999. Yet
revenues have slowed to $79.1 million in 2001, and our number of employees has
increased to 390 at December 31, 2001 from 169 at December 31, 1999. To date,
we have acquired four significant companies or lines of business, Hukk
Engineering in July 1999, Pro.Tel. S.r.l. and subsidiaries in February 2000,
Avantron Technologies, Inc. in January 2001, and the CaLan cable TV test
business from Agilent Technologies, Inc. in February 2002. As a result of our
historical growth and future growth, or slowdowns, we face several risks,
including the following:

  .   the need to improve our operational, financial, management,
      informational, and control systems;

  .   the need to hire, train, and retain highly skilled personnel in a market
      in which there may be severe shortages of these kinds of personnel, as we
      discuss below;

  .   the possibility that our management's attention will be diverted from
      running our business to the needs of managing a public company; and

  .   the challenge to manage expense reductions as rapidly as revenue
      slowdowns without impacting development strategies.

We cannot ensure that we will be able to manage growth or slowdowns profitably.

Acquisitions--WE HAVE ACQUIRED THREE SIGNIFICANT COMPANIES, ONE BUSINESS LINE,
 AND INTEND TO PURSUE FURTHER ACQUISITIONS IN THE FUTURE. THESE ACTIVITIES
 INVOLVE NUMEROUS RISKS, INCLUDING THE USE OF CASH, AMORTIZATION OF GOODWILL,
 AND THE DIVERSION OF MANAGEMENT ATTENTION.

   As discussed in the previous section, we have acquired four significant
companies or lines of business to date, Hukk Engineering, Pro.Tel. S.r.l., and
Avantron Technologies, Inc., and the CaLan Cable TV test business line from
Agilent Technologies, Inc. As a result of these and other smaller acquisitions,
we face numerous risks, including the following:

  .   integrating the existing management, sales force, technicians, and other
      personnel into one culture and business;

                                      32

<PAGE>

  .   integrating manufacturing, administrative, and management information and
      other control systems into our existing systems;

  .   developing and implementing an integrated business strategy over what had
      previously been three independent companies; and

  .   developing compatible or complementary products and technologies from
      previously independent operations.

The risks stated above will be made more difficult because Hukk Engineering is
located in Norcross, Georgia; Avantron is located in Anjou, Canada; and Pro.Tel
is located in Modena, Italy. In addition, if we make future acquisitions, these
risks will be exacerbated by the need to integrate additional operations at a
time when we may not have fully integrated all of our previous acquisitions.

   If we pursue further acquisitions, we will face similar risks as those above
and additional risks, including the following:

  .   the diversion of our management's attention and the expense of
      identifying and pursuing suitable acquisition candidates, whether or not
      consummated;

  .   negotiating and closing these transactions;

  .   the potential need to fund these acquisitions by dilutive issuances of
      equity securities and by incurring debt; and

  .   the potential negative effect on our financial statements from the
      increase in goodwill and other intangibles, the write-off of research and
      development costs, and the high cost and expenses of completing
      acquisitions.

We cannot ensure that we will locate suitable acquisition candidates or that,
if we do, we will be able to acquire them and then integrate them successfully
and efficiently into our business.

Competition--COMPETITION COULD REDUCE OUR MARKET SHARE AND DECREASE OUR NET
 SALES.

   The market for our products is fragmented and intensely competitive, both
inside and outside the United States, and is subject to rapid technological
change, evolving industry standards, regulatory developments, and varied and
changing customer preferences and requirements. We compete with a number of
United States and international suppliers that vary in size and in the scope
and breadth of the products and services offered. The following table sets
forth our principal competitors in each of our product categories.

<TABLE>
<CAPTION>
PRODUCT CATEGORY       PRINCIPAL COMPETITORS
----------------       ---------------------
<C>                    <S>
Wire Line Access       Acterna Corporation; Agilent Technologies, Inc.
Fiber Optics SONET/SDH Digital Lightwave, Inc.; Acterna Corporation; Agilent Technologies, Inc.
Cable TV               Acterna Corporation; Agilent Technologies, Inc.
Signaling              Inet Technologies, Inc.; GN Nettest
</TABLE>

Many of these competitors have longer operating histories, larger installed
customer bases, longer relationships with customers, wider name recognition and
product offerings, and greater financial, technical, marketing, customer
service, and other resources than we have.

   We expect that, as our industry and markets evolve, new competitors or
alliances among competitors with existing and new technologies may emerge and
acquire significant market share. We anticipate that competition in our markets
will increase, and we will face greater threats to our market share, price
pressure on our products, and the likelihood that, over time, our profitability
may decrease. Over the past year, we have recorded lower revenue and gross
margins. In addition, it is difficult to assess accurately the market share of
our products or of Sunrise overall because of the high

                                      33

<PAGE>

degree of fragmentation in the market for DSL service verification equipment,
in particular, and for high-speed data access technology, in general. As a
result, it may be difficult for us to forecast accurately trends in the
markets, which of our products will be the most competitive over the longer
term, and therefore, what is the best use of our human and other forms of
capital. We cannot ensure that we will be able to compete effectively.

Dependence on Key Employees--IF ONE OR MORE OF OUR SENIOR MANAGERS WERE TO
 LEAVE, WE COULD EXPERIENCE DIFFICULTIES IN REPLACING THEM AND OUR OPERATING
 RESULTS COULD SUFFER.

   Our success depends to a significant extent upon the continued service and
performance of a relatively small number of key senior management, technical,
sales, and marketing personnel. In particular, the loss of either of two of our
founders, Paul Ker-Chin Chang and Paul A. Marshall, would likely harm our
business. Neither of these individuals is bound by an employment agreement with
us, and we do not carry key man life insurance on them. In addition,
competition for senior level personnel with telecommunications knowledge and
experience is intense. If any of our senior managers were to leave Sunrise, we
would need to devote substantial resources and management attention to replace
them. As a result, management attention may be diverted from managing our
business, and we may need to pay higher compensation to replace these employees.

Dependence on Sole and Single Source Suppliers--BECAUSE WE DEPEND ON A LIMITED
 NUMBER OF SUPPLIERS AND SOME SOLE AND SINGLE SOURCE SUPPLIERS THAT ARE NOT
 CONTRACTUALLY BOUND IN THE LONG-TERM, OUR FUTURE SUPPLY OF PARTS IS UNCERTAIN.

   We purchase many key products, such as microprocessors, field programmable
gate arrays, bus interface chips, optical components, and oscillators, from a
single source or sole suppliers, and we license certain software from third
parties. We rely exclusively on third-party subcontractors to manufacture some
sub-assemblies, and we have retained, from time to time, third party design
services in the development of our products. We do not have long-term supply
agreements with these vendors. In general, we make advance purchases of some
products and components to ensure an adequate supply, particularly for products
that require lead times of up to nine months to manufacture. In the past, we
have experienced supply problems as a result of financial or operational
difficulties of our suppliers, shortages, and discontinuations resulting from
component obsolescence or other shortages or allocations by suppliers. Our
reliance on these third parties involves a number of risks, including the
following:

  .   the unavailability of critical products and components on a timely basis,
      on commercially reasonable terms, or at all;

  .   the unavailability of products or software licenses, resulting in the
      need to qualify new or alternative products or develop or license new
      software for our use and/or to reconfigure our products and manufacturing
      process, each of which could be lengthy and expensive;

  .   the likelihood that, if these products are not available, we would suffer
      an interruption in the manufacture and shipment of our products until the
      products or alternatives become available;

  .   reduced control over product quality and cost, risks that are exacerbated
      by the need to respond, at times, to unanticipated changes and increases
      in customer orders; and

  .   the unavailability of, or interruption in, access to some process
      technologies.

In addition, the purchase of these components on a sole source basis subjects
us to risks of price increases and potential quality assurance problems. This
dependence magnifies the risk that we may not be able to ship our products on a
timely basis to satisfy customers' orders. We cannot ensure that one or more of
these factors will not cause delays or reductions in product shipments or
increases in product costs, which in turn could have a material adverse effect
on our business.

                                      34

<PAGE>

Risks of International Operations--OUR PLAN TO EXPAND SALES IN INTERNATIONAL
 MARKETS COULD LEAD TO HIGHER OPERATING EXPENSES AND MAY SUBJECT US TO
 UNPREDICTABLE REGULATORY AND POLITICAL SYSTEMS.

   Sales to customers located outside of the United States represented 38% of
our net sales in 2001, 27% in 2000, and 20% in 1999, and we expect
international revenues to continue to account for a significant percentage of
net sales for the foreseeable future. In addition, an important part of our
strategy calls for further expansion into international markets. As a result,
we will face various risks relating to our international operations, including
the following:

  .   potentially higher operating expenses, resulting from the establishment
      of international offices, the hiring of additional personnel, and the
      localization and marketing of products for particular countries'
      technologies;

  .   the need to establish relationships with government-owned or subsidized
      telecommunications providers and with additional distributors;

  .   fluctuations in foreign currency exchange rates and the risks of using
      hedging strategies to minimize our exposure to these fluctuations, which
      have been heightened by our acquisition of Pro.Tel and Avantron, whose
      revenues have been and are likely to continue to be in Euros and Canadian
      dollars, respectively; and

  .   potentially adverse tax consequences related to acquisitions and
      operations, including the ability to claim goodwill deductions and a
      foreign tax credit against U.S. federal income taxes, especially since
      Italy has a higher tax rate.

We cannot ensure that one or more of these factors will not materially and
adversely affect our ability to expand into international markets or our
revenues and profits.

   In addition, the Asia/Pacific and Latin America regions have experienced
instability in many of its economies and significant devaluations in local
currencies. 19% of our sales in 2001, 13% of our sales in 2000, and 11% of our
sales in 1999 were derived from customers located in these regions. These
instabilities may continue or worsen, which could have a materially adverse
effect on our results of operations. If international revenues are not adequate
to offset the additional expense of expanding international operations, our
future growth and profitability could suffer.

Concentration of Control--OUR EXECUTIVE OFFICERS AND DIRECTORS RETAIN
 SIGNIFICANT CONTROL OVER US, WHICH ALLOWS THEM TO DECIDE THE OUTCOME OF
 MATTERS SUBMITTED TO STOCKHOLDERS FOR APPROVAL. THIS INFLUENCE MAY NOT BE
 BENEFICIAL TO ALL STOCKHOLDERS.

   As of December 31, 2001, Paul Ker-Chin Chang, Paul A. Marshall, and Robert
C. Pfeiffer beneficially owned 26%, 23%, and 13%, respectively, of our
outstanding shares of common stock. Consequently, these three individuals,
acting together, are able to control the election of our directors and the
approval of significant corporate transactions that must be submitted to a vote
of stockholders. In addition, Mr. Chang, Mr. Marshall, and Mr. Pfeiffer
constitute three of the six members of the board of directors and have
significant influence in directing the actions taken by the directors. The
interests of these persons may conflict with the interests of other
stockholders, and the actions they take or approve may be contrary to those
desired by other stockholders. This concentration of ownership and control of
the management and affairs of our company may also have the effect of delaying
or preventing a change in control of our company that other stockholders may
consider desirable.

Potential Product Liability--OUR PRODUCTS ARE COMPLEX, AND OUR FAILURE TO
 DETECT ERRORS AND DEFECTS MAY SUBJECT US TO COSTLY REPAIRS AND PRODUCT RETURNS
 UNDER WARRANTY AND PRODUCT LIABILITY LITIGATION.

   Our products are complex and may contain undetected defects or errors when
first introduced or as enhancements are released. These errors may occur
despite our testing and may not be discovered until after a product has been
shipped and used by our customers. Many of the products that we ship contain
known imperfections that we consider

                                      35

<PAGE>

to be insignificant at the time of shipment. We may misjudge the seriousness of
a product imperfection and allow it to be shipped to our customers. These risks
are compounded by the fact that we offer many products, with multiple hardware
and software modifications, which makes it more difficult to ensure high
standards of quality control in our manufacturing process. The existence of
these errors or defects could result in costly repairs and/or returns of
products under warranty and, more generally, in delayed market acceptance of
the product or damage to our reputation and business.

   In addition, the terms of our customer agreements and purchase orders, which
provide us with protection against unwarranted claims of product defect and
error, may not protect us adequately from unwarranted claims against us, unfair
verdicts if a claim were to go to trial, settlement of these kinds of claims,
or future regulation or laws regarding our products. Our defense against these
claims in the future, regardless of their merit, could result in substantial
expense to us, diversion of management time and attention, and damage to our
business reputation and our ability to retain existing customers or attract new
customers.

Need For Highly Trained Personnel--WE MAY NOT BE ABLE TO RETAIN FOR CERTAIN
 POSITIONS THE R&D, MANUFACTURING, SALES, AND MARKETING PERSONNEL WE NEED TO
 SUPPORT OUR BUSINESS.

   Our business requires engineers, technicians, and other highly trained and
experienced personnel. In particular, because our products require a
sophisticated selling effort targeted at several key people within our
prospective customers' organizations, we have a special need for experienced
sales personnel. In addition, the complexity of our products and the difficulty
of configuring and maintaining them require certain highly trained customer
service and support personnel. Although competition for such persons has
decreased recently, it remains strong, especially in the San Francisco Bay
Area. Therefore, we may not be successful in retaining these individuals. Our
failure to keep these kinds of employees could impair our ability to grow or
maintain profitability.

Reliance On Non-U.S. Workers--IF U.S. IMMIGRATION POLICIES PREVENT US FROM
 HIRING OR RETAINING THE WORKERS WE NEED, OUR GROWTH MAY BE LIMITED.

   In the past, we have filled a significant portion of our new personnel
needs, particularly for our engineers, with non-U.S. citizens holding temporary
work visas that allow these people to work in the United States for a limited
period of time. We rely on these non-U.S. workers because of the shortage of
engineers, technicians, and other highly skilled and experienced workers in the
telecommunications industry in the United States, in general, and in the San
Francisco Bay Area, in particular. Regulations of the Immigration and
Naturalization Service permit non-U.S. workers a limited number of extensions
for their visas and also set quotas regarding the number of non-U.S. workers
U.S. companies may hire. As a result, we face the risk that a portion of our
existing employees may not be able to continue to work for us, thereby
disrupting our operations, and that we may not be able to hire the number of
engineers, technicians, and other highly skilled and experienced workers that
we need to grow our business. Furthermore, changes in these regulations and
local workforce availability could exacerbate these risks.

Intellectual Property Risks--POLICING ANY UNAUTHORIZED USE OF OUR INTELLECTUAL
 PROPERTY BY THIRD PARTIES AND DEFENDING ANY INTELLECTUAL PROPERTY INFRINGEMENT
 CLAIMS AGAINST US COULD BE EXPENSIVE AND DISRUPT OUR BUSINESS.

   Our intellectual property and proprietary technology is an important part of
our business, and we depend on the development and use of various forms of
intellectual property and proprietary technology. As a result, we are subject
to several related risks, including the risks of unauthorized use of our
intellectual property and the costs of protecting our intellectual property.

   Much of our intellectual property and proprietary technology is not
protected by patents. If unauthorized persons were to copy, obtain, or
otherwise misappropriate our intellectual property or proprietary technology
without our

                                      36

<PAGE>

approval, the value of our investment in research and development would
decline, our reputation and brand could be diminished, and we would likely
suffer a decline in revenue. We believe these risks, which are present in any
business in which intellectual property and proprietary technology play an
important role, are exacerbated by the difficulty in finding unauthorized use
of intellectual property in our business, the increasing incidence of patent
infringement in our industry in general, and the difficulty of enforcing
intellectual property rights in some foreign countries.

   In addition, litigation has in the past been, and may in the future be,
necessary to enforce our intellectual property rights. This kind of litigation
is time-consuming and expensive to prosecute or resolve, and results in
substantial diversion of management resources. We cannot ensure that we will be
successful in that litigation, that our intellectual property rights will be
held valid and enforceable in any litigation or that we will otherwise be able
to protect our intellectual property and proprietary technology.

Anti-takeover Provisions--ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS
 COULD PREVENT OR DELAY A CHANGE OF CONTROL AND, AS A RESULT, NEGATIVELY IMPACT
 OUR STOCKHOLDERS.

   Some provisions of our certificate of incorporation and bylaws may have the
effect of discouraging, delaying, or preventing a change in control of our
company or unsolicited acquisition proposals that you, as a stockholder, may
consider favorable. These provisions provide for:

  .   authorizing the issuance of "blank check" preferred stock;

  .   a classified board of directors with staggered, three-year terms;

  .   prohibiting cumulative voting in the election of directors;

  .   requiring super-majority voting to effect certain amendments to our
      certificate of incorporation and by-laws;

  .   limiting the persons who may call special meetings of stockholders;

  .   prohibiting stockholder action by written consent; and

  .   establishing advance notice requirements for nominations for election to
      the board of directors or for proposing matters that can be acted upon at
      stockholders meetings.

Some provisions of Delaware law and our stock incentive plans may also have the
effect of discouraging, delaying, or preventing a change in control of our
company or unsolicited acquisition proposals. These provisions also could limit
the price that some investors might be willing to pay in the future for shares
of our common stock.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   We sell our products in North America, Asia, Latin America, Africa, the
Middle East, and Europe. As a result, our financial results could be affected
by factors such as changes in foreign currency exchange rates. Prior to our
acquisition of Pro.Tel. S.r.l. ("Pro.Tel") in February 2000, international
sales were denominated solely in U.S. dollars and, accordingly, we had not
historically been exposed to fluctuations in non-U.S. currency exchange rates
related to these sales activities. Since our acquisitions of Pro.Tel in
February 2000 and Avantron in January 2001, we now have a small amount of sales
denominated in Euros and Canadian dollars, and we have at certain times used
derivative financial instruments to hedge our foreign exchange risks. As of
December 31, 2001, we had no derivative financial instruments. To date, foreign
exchange risks from these sales have not been material to our operations.

   We are exposed to the impact of interest rate changes and changes in the
market values of our investments. Our exposure to market rate risk for changes
in interest rates relates primarily to our investment portfolio. We have not
used derivative financial instruments in our investment portfolio. We invest
our excess cash in debt instruments of the

                                      37

<PAGE>

U.S. Government and its agencies and in high-quality corporate issuers, and, by
policy, we limit the amount of credit exposure to any one issuer. We protect
and preserve our invested funds by limiting default, market, and reinvestment
risk.

   Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest
rates, while floating rate securities may produce less income than expected if
interest rates fall. Due in part to these factors, our future investment income
may fall short of expectations due to changes in interest rates, or we may
suffer losses in principal if forced to sell securities that have declined in
market value due to changes in interest rates. Due to the nature of our
investments, we anticipate no material market risk exposure.

                                      38

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         Index to Financial Statements

<TABLE>
<CAPTION>
                                                                                                    PAGE
                                                                                                    ----
<S>                                                                                                 <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF SUNRISE TELECOM INCORPORATED

  Independent Auditors' Report.....................................................................  40

  Consolidated Balance Sheets as of December 31, 2001 and 2000.....................................  41

  Consolidated Statements of Net Income for the Years Ended December 31, 2001, 2000 and 1999.......  42

    Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years Ended
     December 31, 2001, 2000 and 1999..............................................................  43

  Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999.......  44

  Notes to Consolidated Financial Statements.......................................................  45
</TABLE>


                                      39

<PAGE>

                         Independent Auditors' Report

The Board of Directors and Stockholders
Sunrise Telecom Incorporated

   We have audited the accompanying consolidated balance sheets of Sunrise
Telecom Incorporated and subsidiaries (the Company) as of December 31, 2001 and
2000, and the related consolidated statements of net income, stockholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 Sunrise
Telecom Incorporated and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.

                                          KPMG LLP

Mountain View, California
January 23, 2002, except as to Note 14,
  which is as of February 28, 2002

                                      40

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

                          Consolidated Balance Sheets

                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                          DECEMBER 31,
                                                                                       ------------------
                                                                                         2001      2000
                                                                                       --------  --------
<S>                                                                                    <C>       <C>
                                       ASSETS
Current assets:
  Cash and cash equivalents........................................................... $ 48,713  $ 56,298
  Investment in marketable securities.................................................    3,472     6,300
  Accounts receivable, net of allowance of $675 and $982, respectively................   13,997    18,419
  Inventories.........................................................................    8,036    13,330
  Prepaid expenses and other assets...................................................      714     1,748
  Deferred tax asset..................................................................    3,135     4,245
                                                                                       --------  --------
       Total current assets...........................................................   78,067   100,340
Property and equipment, net...........................................................   28,850     8,580
Intangible assets, net of accumulated amortization of $7,765 and $2,696, respectively.   16,805    11,725
Deferred tax asset....................................................................    1,484       799
Other assets..........................................................................    1,415     4,112
                                                                                       --------  --------
       Total assets................................................................... $126,621  $125,556
                                                                                       ========  ========
                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable.................................................................... $  1,703  $  2,578
  Short-term borrowings and current portion of notes payable..........................      453       780
  Other accrued expenses..............................................................    9,767    12,581
  Income taxes payable................................................................    1,002     1,888
  Deferred revenue....................................................................      280       546
                                                                                       --------  --------
       Total current liabilities......................................................   13,205    18,373
Notes payable, less current portion...................................................    1,065     1,047
Other liabilities.....................................................................      598       492
                                                                                       --------  --------
       Total liabilities..............................................................   14,868    19,912
                                                                                       --------  --------
Commitments

Stockholders' equity:
  Preferred stock, $0.001 par value per share; 10,000,000 authorized shares;
   none issued and outstanding........................................................       --        --
  Common stock, $0.001 par value per share; 175,000,000 shares authorized;
   50,424,964 and 49,940,838 shares issued as of December 31, 2001 and 2000,
   respectively; 50,424,738 and 49,940,838 shares outstanding as of December 31, 2001
   and 2000, respectively.............................................................       50        50
  Additional paid-in capital..........................................................   69,943    68,317
  Deferred stock-based compensation...................................................   (4,304)   (6,611)
  Retained earnings...................................................................   46,244    43,961
  Accumulated other comprehensive loss................................................     (180)      (73)
                                                                                       --------  --------
       Total stockholders' equity.....................................................  111,753   105,644
                                                                                       --------  --------
       Total liabilities and stockholders' equity..................................... $126,621  $125,556
                                                                                       ========  ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      41

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

                     Consolidated Statements of Net Income

                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                  YEARS ENDED DECEMBER 31,
                                                  ------------------------
                                                   2001     2000    1999
                                                  ------- -------- -------
     <S>                                          <C>     <C>      <C>
     Net sales................................... $79,059 $113,481 $61,465
     Cost of sales...............................  25,509   32,994  14,736
                                                  ------- -------- -------
         Gross profit............................  53,550   80,487  46,729
                                                  ------- -------- -------
     Operating expenses:
         Research and development................  18,490   17,555  10,694
         Sales and marketing.....................  20,329   22,694  15,215
         General and administrative..............  13,779    9,790   3,912
                                                  ------- -------- -------
         Total operating expenses................  52,598   50,039  29,821
                                                  ------- -------- -------
         Income from operations..................     952   30,448  16,908
     Other income, net...........................   2,569    1,909     327
                                                  ------- -------- -------
         Income before income taxes..............   3,521   32,357  17,235
     Income taxes................................     704   11,972   6,291
                                                  ------- -------- -------
         Net income.............................. $ 2,817 $ 20,385 $10,944
                                                  ======= ======== =======
     Earnings per share:
         Basic................................... $  0.06 $   0.43 $  0.25
                                                  ======= ======== =======
         Diluted................................. $  0.05 $   0.41 $  0.24
                                                  ======= ======== =======
     Shares used in computing earnings per share:
         Basic...................................  50,195   47,374  44,667
                                                  ======= ======== =======
         Diluted.................................  51,325   49,610  45,824
                                                  ======= ======== =======
</TABLE>


         See accompanying notes to consolidated financial statements.

                                      42

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

   Consolidated Statements of Stockholders' Equity and Comprehensive Income

                                (in thousands)

<TABLE>
<CAPTION>
                                                                                         ACCUMULATED
                                         COMMON STOCK  ADDITIONAL   DEFERRED                OTHER         TOTAL
                                        --------------  PAID-IN   STOCK-BASED  RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
                                        SHARES  AMOUNT  CAPITAL   COMPENSATION EARNINGS     LOSS         EQUITY        INCOME
                                        ------  ------ ---------- ------------ -------- ------------- ------------- -------------
<S>                                     <C>     <C>    <C>        <C>          <C>      <C>           <C>           <C>
Balances, December 31, 1998............ 44,519   $45    $   481     $    --    $13,044      $  --       $ 13,570
                                        ------   ---    -------     -------    -------      -----       --------
Exercise of common stock options.......    229    --        177          --         --         --            177
Repurchase of common stock.............   (135)   --        (13)         --       (189)        --           (202)
Issuance of stock in connection with
 Hukk acquisition......................    300    --      1,000          --         --         --          1,000
Deferred stock-based compensation......     --    --      2,270      (2,270)        --         --             --
Amortization of deferred stock-based
 compensation..........................     --    --         --         205         --         --            205
Cash dividend of $.015 per share.......     --    --         --          --       (223)        --           (223)
Net income.............................     --    --         --          --     10,944         --         10,944       $10,944
                                        ------   ---    -------     -------    -------      -----       --------       -------
Comprehensive income...................                                                                                $10,944
                                                                                                                       =======
Balances, December 31, 1999............ 44,913    45      3,915      (2,065)    23,576         --         25,471
                                        ------   ---    -------     -------    -------      -----       --------
Exercise of common stock options.......    671     1        797          --         --         --            798
Common stock issued under Employee
 Stock Purchase Plan...................     40    --        501          --         --         --            501
Issuance of stock in connection with
 Pro.Tel acquisition...................    500    --      5,000          --         --         --          5,000
Common stock issued in Initial Public
 Offering..............................  3,817     4     51,604          --         --         --         51,608
Deferred stock-based compensation......     --    --      6,500      (6,500)        --         --             --
Amortization of deferred stock-based
 compensation..........................     --    --         --       1,954         --         --          1,954
Change in unrealized gain on available-
 for-sale investments, net.............     --    --         --          --         --          3              3       $     3
Cumulative translation adjustment......     --    --         --          --         --        (76)           (76)          (76)
Net income.............................     --    --         --          --     20,385         --         20,385        20,385
                                        ------   ---    -------     -------    -------      -----       --------       -------
Comprehensive income...................                                                                                $20,312
                                                                                                                       =======
Balances, December 31, 2000............ 49,941    50     68,317      (6,611)    43,961        (73)       105,644
                                        ------   ---    -------     -------    -------      -----       --------
Exercise of common stock options.......    446    --        398          --         --         --            398
Common stock issued under Employee
 Stock Purchase Plan...................    264    --      1,273          --         --         --          1,273
Repurchase of common stock.............   (226)   --       (319)         --       (534)        --           (853)
Deferred stock-based compensation......     --    --       (182)        182         --         --             --
Amortization of deferred stock-based
 compensation..........................     --    --         --       2,125         --         --          2,125
Tax benefit of stock option plans......     --    --        456          --         --         --            456
Change in unrealized gain on available-
 for-sale investments, net.............     --    --         --          --         --         19             19       $    19
Cumulative translation adjustment......     --    --         --          --         --       (126)          (126)         (126)
Net income.............................     --    --         --          --      2,817         --          2,817         2,817
                                        ------   ---    -------     -------    -------      -----       --------       -------
Comprehensive income...................                                                                                $ 2,710
                                                                                                                       =======
Balances, December 31, 2001............ 50,425   $50    $69,943     $(4,304)   $46,244      $(180)      $111,753
                                        ======   ===    =======     =======    =======      =====       ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      43

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

                                (in thousands)

<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                     ---------------------------
                                                                                       2001      2000     1999
                                                                                     --------  --------  -------
<S>                                                                                  <C>       <C>       <C>
Cash flows from operating activities:
  Net income........................................................................ $  2,817  $ 20,385  $10,944
  Adjustments to reconcile net income to net cash provided by operating activities:
    Depreciation and amortization...................................................    8,427     4,271    1,205
    Amortization of deferred stock-based compensation...............................    2,125     1,954      205
    Loss on the sale of property and equipment......................................      199        87      156
    Deferred income taxes...........................................................      368    (3,183)  (1,055)
    Changes in operating assets and liabilities:
     Accounts receivable............................................................    5,185    (8,205)  (4,721)
     Inventories....................................................................    5,695    (5,775)  (4,536)
     Prepaid expenses and other assets..............................................      156    (1,640)    (259)
     Accounts payable and accrued expenses..........................................   (4,580)    6,090    6,112
     Income taxes payable...........................................................     (635)     (977)   2,107
     Deferred revenue...............................................................       (6)      365      (32)
                                                                                     --------  --------  -------
       Net cash provided by operating activities....................................   19,751    13,372   10,126
                                                                                     --------  --------  -------
Cash flows from investing activities:
  Purchase of long-term investment..................................................       --      (241)     (39)
  Purchases of marketable securities................................................  (19,628)   (6,298)      --
  Sales of marketable securities....................................................   22,475        --       --
  Capital expenditures..............................................................  (19,375)   (5,614)  (2,734)
  Acquisitions of Hukk, Pro.Tel, and Avantron, net of cash acquired.................  (11,274)   (4,717)    (782)
  Deposit on land and building......................................................       --        --   (2,675)
                                                                                     --------  --------  -------
       Net cash used in investing activities........................................  (27,802)  (16,870)  (6,230)
                                                                                     --------  --------  -------
Cash flows from financing activities:
  Proceeds from short-term borrowings...............................................       --     2,890       --
  Payment of short-term borrowings..................................................     (177)   (2,890)      --
  Proceeds from notes payable.......................................................      577        --       --
  Payments on notes payable.........................................................     (626)   (1,649)     (63)
  Repurchase of common stock........................................................     (853)       --     (202)
  Cash dividends....................................................................       --        --     (223)
  Net proceeds from issuance of common stock........................................    1,273    52,108       --
  Proceeds from exercise of stock options...........................................      398       798      177
                                                                                     --------  --------  -------
       Net cash provided by (used in) financing activities..........................      592    51,257     (311)
                                                                                     --------  --------  -------
Effect of exchange rates on cash....................................................     (126)      (76)      --
                                                                                     --------  --------  -------
Net increase (decrease) in cash and cash equivalents................................   (7,585)   47,683    3,585
Cash and cash equivalents, beginning of year........................................   56,298     8,615    5,030
                                                                                     --------  --------  -------
Cash and cash equivalents, end of year.............................................. $ 48,713  $ 56,298  $ 8,615
                                                                                     ========  ========  =======
Supplemental disclosures of cash flow information:
  Cash paid during the year:
    Interest........................................................................ $     44  $    125  $     2
                                                                                     ========  ========  =======
    Income taxes.................................................................... $    808  $ 15,958  $ 5,365
                                                                                     ========  ========  =======
Noncash investing and financing activities:
    Stock issued for acquisitions of Hukk and Pro.Tel............................... $     --  $  5,000  $ 1,000
                                                                                     ========  ========  =======
    Unrealized gain on marketable securities and investments........................ $     19  $      3  $    --
                                                                                     ========  ========  =======
    Promissory note issued in connection with acquisition........................... $     --  $  1,000  $    --
                                                                                     ========  ========  =======
    Deferred stock-based compensation............................................... $     --  $  6,500  $ 2,270
                                                                                     ========  ========  =======
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      44

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

(1)  BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

(a)  Business

   Sunrise Telecom Incorporated and subsidiaries (the "Company") was
incorporated as Sunrise Telecom, Inc. in California in October 1991. In July
2000, the Company reincorporated in Delaware and changed its name to Sunrise
Telecom Incorporated (see Note 8). The Company manufactures and markets service
verification equipment to pre-qualify, verify, and diagnose telecommunications,
cable TV, and Internet networks. The Company markets and distributes its
products on six continents through a worldwide network of manufacturers, sales
representatives, distributors, and direct sales people. The Company has wholly
owned subsidiaries in Norcross, Georgia; Taipei, Taiwan; Modena, Italy; Tokyo,
Japan; Seoul, Korea; and Anjou, Canada. It also has a representative liaison
office in Beijing, China and a foreign sales corporation in Barbados.

(b)  Principles of Consolidation

   The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.

(c)  Revenue Recognition

   The Company recognizes revenue when earned. It recognizes revenue from
product sales upon shipment, assuming collectibility of the resulting
receivable is probable. When the arrangement with the customer includes future
obligations or obtaining customer acceptance, the Company recognizes revenue
when those obligations have been met or customer acceptance has been received.
The Company defers revenue from services and support provided under its
extended warranty programs and recognizes it on a straight-line basis over the
warranty period. Deferred revenue represents amounts received from customers in
advance of services and support to be provided or prior to customer acceptance.
Provisions are recorded at the time of sale for estimated product returns,
standard warranty obligations, and customer support.

(d)  Warranty Cost

   The Company provides standard warranties covering parts and labor on all its
hardware products. Estimated warranty costs for such standard warranties are
charged to cost of sales when the related sales are recognized.

(e)  Research and Development

   Costs incurred in the research and development of new products and
enhancements to existing products are expensed as incurred until the product
has been completed and tested and is ready for commercial manufacturing. To
date, hardware and software development projects have been completed
concurrently with the establishment of commercial manufacturing and
technological feasibility in the form of a working model. Accordingly, no
development costs have been capitalized.

(f)  Cash Equivalents and Short-term Investments

   The Company considers all highly liquid investments with a maturity of 90
days or less when acquired to be cash equivalents. Cash equivalents as of
December 31, 2001 and 2000 consist primarily of cash on deposit with banks,
money market funds, auction rate securities, and marketable debt securities.
The Company determines the appropriate

                                      45

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(Continued)

classification of debt and equity securities at the time of purchase and
reevaluates this designation as of each balance sheet date. Investments
classified as available for sale are reported at market value, with the
unrealized gains and losses, net of tax, reported as a separate component of
other comprehensive income (loss) in stockholders' equity. Realized gains and
losses on sales of investments and declines in value determined to be other
than temporary are included in other income (expense).

(g)  Fair Value of Financial Instruments

   For certain financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, notes payable, and accrued expenses,
recorded amounts approximate fair value due to the relatively short maturity
period.

(h)  Inventories

   Inventories are stated at the lower of cost or market. Cost is determined
using the weighted-average method.

(i)  Property and Equipment

   Property and equipment are carried at cost. Depreciation and amortization is
computed using the straight-line method over the shorter of the estimated
useful life of the asset or the lease term. Useful lives range from three to
thirty-nine years for buildings and improvements and to five years for
machinery and equipment.

   The Company reviews property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of property and equipment is measured by
comparison of its carrying amount to the future net cash flows the property and
equipment are expected to generate. If such assets are considered to be
impaired, the impairment to be recognized is measured as the amount by which
the carrying amount of the property and equipment exceeds its fair value. To
date, the Company has made no adjustments to the carrying values of its
property and equipment.

(j)  Intangible Assets

   Intangible assets include the fair value of issued and pending patents,
technology, noncompete agreements, and goodwill. The Company amortizes such
intangibles on a straight-line basis over two to five years based on expected
lives of patents, technology, noncompete agreements, and goodwill. Starting
January 1, 2002, goodwill will not be amortized pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets.

   The Company reviews intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may
not be recoverable. Impairment is determined based on a comparison between the
undiscounted future cash flows of the intangible assets, and their carrying
value.

(k)  Income Taxes

   The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using the enacted tax laws
expected to apply to

                                      46

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(Continued)

taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax laws is recognized in the results of operations in the
period that includes the enactment date.

(l)  Business and Concentrations of Credit Risk

   Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash equivalents and accounts receivable.
The Company's cash equivalents are primarily in highly liquid money market
funds with various major financial institutions. The Company believes no
significant concentrations of credit exist with respect to these financial
instruments.

   Concentrations of credit risk with respect to trade receivables are limited
as the majority of the Company's sales are derived from large telephone
operating companies and other established telecommunication companies located
throughout the world. The Company performs ongoing credit evaluations of its
customers. Based on management's evaluation of potential credit losses, the
Company believes its allowances for doubtful accounts is adequate. The Company
had one customer that accounted for 16% and 41%, of its net sales for the years
ended December 31, 2000 and 1999, respectively, and $361,000 of its accounts
receivable as of December 31, 2000. A second customer accounted for 17% of
sales for the year ended December 31, 2000, and $3,155,000 of the Company's
accounts receivable as of December 31, 2000. The Company had no one customer
that accounted for more than 10% of its sales for the year ended December 31,
2001.

   The Company's customers are concentrated in the telecommunications industry.
Accordingly, the Company's future success depends on the buying patterns of
these customers and the continued demand by these customers for the Company's
products. Additionally, the telecommunications equipment market is
characterized by rapidly changing technology, evolving industry standards,
changes in end user requirements, and frequent new product introductions and
enhancements. Furthermore, the telecommunications industry has experienced and
is expected to continue to experience consolidation. The Company's continued
success will depend upon its ability to enhance existing products and to
develop and introduce, on a timely basis, new products and features that keep
pace with technological developments and emerging industry standards.
Furthermore, as a result of its international sales, the Company's operations
are subject to risks of doing business abroad, including but not limited to,
fluctuations in the value of currency, longer payment cycles, and greater
difficulty in collecting accounts receivable.

(m)  Earnings per Share

   Basic earnings per share ("EPS") is computed using the weighted-average
number of common shares outstanding during the period. Diluted EPS is computed
using the weighted-average number of common and dilutive common equivalent
shares outstanding during the period. Dilutive common equivalent shares consist
of common stock issued in the Pro.Tel acquisition and common stock issuable
upon exercise of stock options using the treasury stock method.

                                      47

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(Continued)


   The following is a reconciliation of the shares used in the computation of
basic and diluted EPS (in thousands):

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                              ------------------------
                                                                2001    2000    1999
                                                               ------  ------  ------
<S>                                                           <C>      <C>     <C>
Basic EPS--weighted-average number of common shares
 outstanding................................................. 50,195   47,374  44,667
Effect of dilutive common equivalent shares:
    Stock options outstanding................................  1,130    2,111   1,157
    Stock issued in acquisition subject to put arrangement...     --      125      --
                                                               ------  ------  ------
Diluted EPS--weighted-average number of common shares and
 common equivalent shares outstanding........................ 51,325   49,610  45,824
                                                               ======  ======  ======
</TABLE>

   Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
98, convertible preferred stock and common stock granted for nominal
consideration prior to the anticipated effective date of an initial public
offering (IPO) must be included in the calculation of basic and diluted net
income per share as if they had been outstanding for all periods presented. To
date, the Company has not had any such issuances or grants for nominal
consideration.

(n)  Stock-Based Compensation

   The Company accounts for employee stock-based compensation using the
intrinsic-value method, in accordance with Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock-Issued to Employees. Accordingly,
compensation cost is recorded on the date of grant to the extent that the fair
value of the underlying share of common stock exceeds the exercise price for a
stock option or the purchase price for a share of common stock. During 1999,
the Company recorded deferred stock-based compensation cost for stock options
issued to employees at exercise prices that were subsequently determined to
have been issued below the fair value of the stock on the date of grant. In
addition, the Company recorded deferred stock-based compensation cost for stock
options granted to employees of Pro.Tel in the first quarter of 2000. The
compensation cost associated with both of these stock option grants is
amortized as a charge against operating results on a straight-line basis over
the four year vesting period of the options. The Company has allocated the
amortization of deferred stock-based compensation to the departments in which
the related employees' services are charged. Pursuant to SFAS No. 123,
Accounting for Stock-Based Compensation, the Company discloses the pro forma
effect of using the fair value method of accounting for employee stock-based
compensation arrangements.

(o)  Use of Estimates

   The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.

(p)  Foreign Currency Translation

   The functional currency for the Company's foreign subsidiary located in
Taiwan is the U.S. dollar. Accordingly, the Company remeasures the monetary
assets and liabilities of this foreign subsidiary at year-end exchange rates
while remeasuring nonmonetary items at historical rates. Income and expense
accounts are remeasured at the weighted average rates in effect during the
year, except for depreciation which is remeasured at historical rates.
Remeasurement adjustments and transaction gains and losses are recognized in
income in the year of occurrence.

                                      48

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(Continued)


   The functional currencies for the Company's other foreign subsidiaries are
the local currencies, including the Lira for the subsidiary located in Italy.
Accordingly, the Company applies the current exchange rate to translate the
subsidiary's assets and liabilities and the weighted average exchange rate to
translate the subsidiary's revenues, expenses, gains and losses into U.S.
dollars. Translation adjustments are included as a separate component of
comprehensive income within stockholders' equity in the accompanying
consolidated financial statements.

   In December 2000, the Company recorded a $381,000 gain on a forward contract
used to hedge the purchase price of the then pending acquisition of Avantron,
the Company's Canadian subsidiary.

(q)  Advertising Expense

   The Company recognizes the cost of advertising as incurred. Such costs are
included in selling and marketing expense and totaled approximately $1,258,000,
$1,866,000, and $1,023,000 during the years ended December 31, 2001, 2000, and
1999, respectively.

(r)  Recent Accounting Pronouncements

   In July 2001, the Financial Accounting Standards Board ("FASB") issued two
new pronouncements, SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 141, which required immediate
adoption, prohibits the use of the pooling-of-interest method for business
combinations initiated after June 30, 2001 and also applies to all business
combinations accounted for by the purchase method that are completed after June
30, 2001. There are also transitional provisions that apply to business
combinations completed before July 1, 2001, which were accounted for by the
purchase method. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001 and applies to all goodwill and other intangible assets
reported on an entity's balance sheet at that date, regardless of when those
assets were initially recognized. The Company's adoption of SFAS No. 141 did
not have a significant impact on its financial position and results of
operations. At December 31, 2001, the Company had unamortized goodwill in the
amount of approximately $13.5 million, and unamortized identifiable intangible
assets in the amount of approximately $1.5 million. These amounts will be
subject to the transition provisions of SFAS No. 141 and 142, and as a result,
beginning January 1, 2002, goodwill will no longer be amortized. Amortization
expense related to goodwill and intangible assets was approximately $4.6
million and $2.1 million, for the years ended December 31, 2001 and 2000,
respectively.

   In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which is effective for financial statements
issued for fiscal years beginning after December 15, 2001. SFAS No. 144
develops one accounting model for long-lived assets that are to be disposed of
by sale and requires that these assets be measured at the lower of book value
or fair value less costs to sell. Additionally, SFAS No. 144 expands the scope
of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and will be
eliminated from the ongoing operations of the entity in a disposal transaction.
The adoption of SFAS No. 144 is not expected to have a material impact on the
Company's financial position or results of operations.

(2)  RELATED PARTY TRANSACTIONS

   One of the significant stockholders of the Company is also the owner of
Telecom Research Center. During 2001, 2000, and 1999, the Company purchased
equipment used in its manufacturing process totaling $59,000, $143,000, and
$58,000, respectively, from Telecom Research Center. The Company's accounts
payable to Telecom Research

                                      49

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(Continued)

Center were $2,115 and $35,000 at December 31, 2001 and 2000, respectively. The
terms of the Company's transactions with Telecom Research Center were similar
to those with unrelated parties.

   As of December 31, 2001, the Company has employee loans outstanding balances
of approximately $25,000. The loans are supported by promissory notes, bear
interest at rates up to 7.75% per annum, and are payable monthly with the final
payment due in December 2004.

(3)  FINANCIAL STATEMENT DETAILS

Inventories

   Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                            --------------
                                                             2001   2000
                                                            ------ -------
     <S>                                                    <C>    <C>
     Raw materials......................................... $4,089 $ 8,987
     Work in process.......................................  1,603   2,070
     Finished goods........................................  2,344   2,273
                                                            ------ -------
                                                            $8,036 $13,330
                                                            ====== =======
</TABLE>

Property and Equipment

   Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                            ---------------
                                                             2001    2000
                                                            ------- -------
     <S>                                                    <C>     <C>
     Land.................................................. $ 8,821 $    --
     Building..............................................   9,243      --
     Equipment.............................................  15,811  11,786
     Furniture and fixtures................................   2,137     937
     Leasehold improvements................................     618     307
                                                            ------- -------
                                                             36,630  13,030
     Less accumulated depreciation and amortization........   7,780   4,450
                                                            ------- -------
                                                            $28,850 $ 8,580
                                                            ======= =======
</TABLE>

Other Accrued Expenses

   Other accrued expenses consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                            --------------
                                                             2001   2000
                                                            ------ -------
     <S>                                                    <C>    <C>
     Accrued compensation and other related benefits....... $5,399 $ 5,988
     Commissions payable...................................  1,334   2,052
     Sales tax payable.....................................    356     222
     Accrued warranty......................................  1,398   1,459
     Other accrued expenses................................  1,280   2,860
                                                            ------ -------
                                                            $9,767 $12,581
                                                            ====== =======
</TABLE>

                                      50

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(Continued)


(4)  VALUATION AND QUALIFYING ACCOUNTS

   A summary of valuation and qualifying accounts is as follows (in thousands):

<TABLE>
<CAPTION>
                                    BALANCE AT CHARGED TO            BALANCE
                                    BEGINNING  COSTS AND             AT END
                                     OF YEAR    EXPENSES  DEDUCTIONS OF YEAR
                                    ---------- ---------- ---------- -------
   <S>                              <C>        <C>        <C>        <C>
   Allowance for doubtful accounts:
   2001............................    $982       $844      $1,151    $675
   2000............................     252        852         122     982
   1999............................     220         32          --     252
</TABLE>

(5)  OTHER ASSETS

   During 1998, the Company acquired 1,666,667 shares (approximately 16.4%) of
the common stock of Top Union Electronics ("Top Union"), a Taiwan R.O.C.
corporation, for a purchase price of $607,000. Top Union is a subcontract
manufacturer utilized by the Company for the manufacture of certain products.
During 2000 and 1999, the Company invested an additional $241,000 and $39,000,
respectively, in Top Union as part of two of three external rounds of
third-party financing obtained by Top Union. These investments by the Company
were less than 16.4% of the total financing raised by Top Union and, thus,
diluted the Company's ownership of Top Union to 13.4%. In 2001, the Company did
not invest in the one external round of financing offered by Top Union. As of
December 31, 2001, the Company's ownership of Top Union declined to
approximately 9.3%. The Company accounts for this investment using the cost
method of accounting, and evaluates impairment based on a comparison between
the carrying value of the investment, and its fair value based on the valuation
associated with third-party external rounds of financing. To date, the Company
has not recognized any impairment charges for this investment.

   Other assets as of December 31, 2001 consisted primarily of the Top Union
investment. Other assets as of December 31, 2000 consisted primarily of a
deposit in the amount of $2,842,000 for the Company's new facility, which was
completed in March 2001, and the Company's investment in Top Union.

(6)  NOTES PAYABLE AND LINE OF CREDIT

   In connection with various acquisitions completed during 2000 and 1999, the
Company had ten non-interest bearing notes payable outstanding at December 31,
2001. Annual amounts to be repaid under these notes total $397,000, $347,000,
and $141,000 for 2002, 2003, and 2004, respectively.

   The Company has a $9,000,000 revolving line of credit with a financial
institution that expires on August 1, 2002, bearing interest at the bank's
prime rate less 0.25% (4.50% at December 31, 2001). The agreement, which is
collateralized by the receivables and inventories of the Company, contains
certain financial covenants and restrictions. As of December 31, 2001, there
were no balances outstanding under the line of credit.

   The Company also had short-term borrowings from various Italian financial
institutions, which bear interest at variable rates, ranging from 6.675% to
9.6875% at December 31, 2001, based on the ABI prime rate. At December 31,
2001, $56,000 had been drawn down under these facilities. Generally, these
foreign credit lines do not require commitment fees or compensating balances
and are cancelable at the option of the Company or the financial institutions.

   The remaining borrowings consist of a loan from the Italian government,
which bears interest at 2% a year. At December 31, 2001, the outstanding
balance on this loan was $577,000. Principal payments to start in 2004.

                                      51

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(Continued)


(7)  LEASES

   The Company leases facilities under several operating lease agreements which
require the Company to pay property taxes and normal maintenance. Future
minimum lease payments, under these agreements, as of December 31, 2001, are as
follows (in thousands):

<TABLE>
       <S>                                                         <C>
       Year Ending December 31,
          2002.................................................... $  728
          2003....................................................    462
          2004....................................................    401
          2005....................................................    130
          2006....................................................     77
          Thereafter..............................................     36
                                                                   ------
                                                                   $1,834
                                                                   ======
</TABLE>

   Rent expense for the years ended December 31, 2001, 2000 and 1999 was
approximately $1,321,000, $931,000, and $511,000, respectively.

(8)  CAPITAL STOCK

Common Stock

   In April 2000, the Company's Board of Directors authorized a three-for-one
stock split of its common stock. All share amounts in the accompanying
consolidated financial statements have been retroactively adjusted to reflect
the stock split.

   Prior to its initial public offering, the Company established a program of
repurchasing common stock in order to offer liquidity to its stockholders.
Repurchases were offered based on valuations performed by the Company of the
fair value of its stock at the time of repurchase. During 1999, the Company
repurchased approximately 135,000 shares of common stock for $202,000 for this
program. In 2001, the Company's Board of Directors authorized the repurchase of
up to $5.0 million of the Company's common stock on the open market. During
2001, the Company repurchased approximately 217,000 shares of common stock for
an aggregate of $0.8 million for this program. In addition, the Company
repurchased approximately 9,000 shares of common stock for an aggregate of
$18,000 from former employees as stated in the Stock Option Plan.

Recapitalization

   On July 10, 2000, the Company was reincorporated in Delaware with the
authorization of 175,000,000 shares of $0.001 par value per share common stock
and 10,000,000 shares of $0.001 par value preferred stock.

Initial Public Offering

   On July 12, 2000, the Company completed its initial public offering of 4.6
million shares at $15 per share, including 600,000 over-allotment shares, of
which 782,572 shares were sold by selling stockholders. Net proceeds to the
Company from the offering after underwriters' fees and expenses of
approximately $5.7 million totaled approximately $51.6 million.

                                      52

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(Continued)


(9)  STOCK COMPENSATION PLANS

2000 Employee Stock Purchase Plan

   In April 2000, the Company's Board of Directors approved the adoption of the
2000 Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan
became effective upon the Company's initial public offering. As of December 31,
2001, the total number of shares reserved for issuance under the Purchase Plan
equals 850,000 shares of common stock. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions of up to 15% of
the employee's total base compensation, excluding bonuses, commissions, and
overtime and not to exceed $25,000 in any plan year, at a price equal to 85% of
the lower of the fair market value of the common stock on the first day of the
offering period or on the last day of the purchase period.

Stock Option Plan

   In April 2000, the Company's Board of Directors approved the adoption of the
2000 Stock Plan (the "Stock Plan"). The Stock Plan became effective upon the
Company's initial public offering. The total number of shares reserved for
issuance under the Stock Plan equals 4,750,000 shares of common stock plus
5,250,000 that remained reserved for issuance under the 1993 stock option plan
as of the date the stock plan became effective, for a total of
10,000,000 shares. All outstanding options under the 1993 stock option plan
will be administered under the 2000 Stock Plan but will continue to be governed
by their existing terms.

   Options may be granted as incentive stock options or nonstatutory stock
options at the fair market value of such shares on the date of grant as
determined by the Board of Directors. Options granted subsequent to 1996 vest
over a 4-year period, and expire at the end of 10 years from the date of grant,
or sooner, if terminated by the Board of Directors.

   The options granted under the 1993 stock option plan include a provision
whereby the option holder may elect at any time to exercise the option prior to
the full vesting of the option. Unvested shares so purchased are subject to a
repurchase right by the Company at the original purchase price. Such right
shall lapse at a rate equivalent to the vesting period of the original option.
As of December 31, 2001, 2000, and 1999 shares issued and subject to repurchase
were 56,250, 144,525, and 25,161, respectively.

                                      53

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(Continued)


   Option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31,
                                          --------------------------------------------------------------
                                                  2001                 2000                 1999
                                          -------------------- -------------------- --------------------
                                                     WEIGHTED-            WEIGHTED-            WEIGHTED-
                                                      AVERAGE              AVERAGE              AVERAGE
                                          NUMBER OF  PRICE PER NUMBER OF  PRICE PER NUMBER OF  PRICE PER
                                           OPTIONS     SHARE    OPTIONS     SHARE    OPTIONS     SHARE
                                          ---------  --------- ---------  --------- ---------  ---------
<S>                                       <C>        <C>       <C>        <C>       <C>        <C>
Outstanding at beginning of period....... 2,921,360    $3.28   2,453,100   $ 1.46   1,811,145    $1.09
Granted at market value.................. 1,109,708     5.09     627,437    11.66          --       --
Granted at less than market value........        --       --     650,001       --   1,079,100     1.88
Exercised................................  (445,951)    0.89    (671,150)    1.19    (229,095)    0.77
Canceled.................................  (280,353)    8.14    (138,028)    3.83    (208,050)    1.14
                                          ---------    -----   ---------   ------   ---------    -----
Options at end of period................. 3,304,764    $3.80   2,921,360   $ 3.28   2,453,100    $1.46
                                          =========    =====   =========   ======   =========    =====
Weighted-average fair value of options
 granted during the period with exercise
 prices at fair value....................              $3.75               $ 5.89                $  --
                                                       =====               ======                =====
Weighted-average fair value of options
 granted during the period with exercise
 prices less than market value at date of
 grant...................................              $  --               $10.00                $2.58
                                                       =====               ======                =====
</TABLE>

   Information regarding stock options outstanding as of December 31, 2001 is
summarized in the table below.

<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING              VESTED OPTIONS
                            ------------------------------------ ----------------------
                              WEIGHTED-AVERAGE      WEIGHTED-              WEIGHTED-
    RANGE OF      SHARES    REMAINING CONTRACTUAL    AVERAGE     VESTED     AVERAGE
EXERCISE PRICES OUTSTANDING     LIFE (YEARS)      EXERCISE PRICE SHARES  EXERCISE PRICE
--------------- ----------- --------------------- -------------- ------- --------------
<S>             <C>         <C>                   <C>            <C>     <C>
       $0.00       487,501          8.16              $ 0.00          --     $ 0.00
        0.60        86,600          4.28                0.60      86,600       0.60
   1.10-1.50       823,724          6.58                1.42     501,974       1.39
        2.17       436,207          7.79                2.17     204,770       2.17
   4.75-4.94       860,100          9.05                4.94          --       0.00
   5.40-8.54       136,508          9.48                6.01          --       0.00
       10.00       357,297          8.21               10.00      88,196      10.00
       11.00        68,626          8.51               11.00      17,156      11.00
       15.00         5,001          8.53               15.00       1,767      15.00
       20.38        43,200          8.80               20.38      12,596      20.38
                 ---------                                       -------
                 3,304,764                                       913,059
                 =========                                       =======
</TABLE>

                                      54

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(Continued)


   The Company uses the intrinsic-value based method to account for its
stock-based compensation plans. With respect to options granted in 2000 and
1999, the Company recorded unearned stock-based compensation of $6,500,010 and
$2,270,000, respectively, for the difference at the grant date between the
exercise price and the fair value. For options granted in 2001, the Company has
not recorded any deferred compensation cost since the exercise price of each
option equaled the fair value of the underlying common stock on the grant date.
During 2001, deferred stock-based compensation was reduced by $182,000 due to
forfeitures of the underlying unvested options.

   The remaining unamortized deferred stock-based compensation amount, for all
options granted through December 31, 2001, is expected to be amortized as
charges against operating results as follows for the years ending December 31:
2002, $2,098,000; 2003, $1,925,000; and 2004, $238,000. These charges may be
reduced as a result of future forfeitures of options to which the unamortized
deferred stock-based compensation balance pertains.

   If compensation for the Company's stock-based compensation plans had been
determined in a manner consistent with the fair value approach described in
SFAS No. 123, the Company's net income and earnings per share, as reported,
would have been reduced to the pro forma amounts indicated below (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                     YEARS ENDED DECEMBER 31,
                                                     ------------------------
                                                      2001     2000    1999
                                                     ------  -------  -------
   <S>                                               <C>     <C>      <C>
   Net income applicable to common stock:
    As reported..................................... $2,817  $20,385  $10,944
    Adjusted pro forma..............................  1,862   20,450   10,883

   Basic earnings per share:
    As reported.....................................   0.06     0.43     0.25
    Adjusted pro forma..............................   0.04     0.43     0.24

   Diluted earnings per share:
    As reported.....................................   0.05     0.41     0.24
    Adjusted pro forma..............................   0.04     0.41     0.24
</TABLE>

   The provisions of SFAS No. 123 are effective for options granted beginning
January 1, 1996. Options vest over several years and new options are generally
granted each year. Because of these factors, the pro forma effect shown above
may not be representative of the pro forma effect of SFAS No. 123 in future
years.

   For the purposes of computing pro forma net income, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model. The assumptions used to value the option grant are as follows:

<TABLE>
<CAPTION>
                                                     YEARS ENDED DECEMBER 31,
                                                     ------------------------
                                                       2001    2000    1999
                                                     -------  ------- -------
   <S>                                               <C>      <C>     <C>
   Dividend yield...................................    None     None    None
   Expected term.................................... 4 years  4 years 4 years
   Risk-free interest rate..........................   5.06%    4.90%   5.66%
   Volatility rate..................................  1.0638    0.602    None
</TABLE>

                                      55

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(Continued)


(10)  ACQUISITIONS

Hukk

   In July 1999, the Company acquired all of the outstanding stock of Hukk
Engineering ("Hukk"), a developer of cable TV service verification equipment.
The Company paid approximately $800,000 in cash and acquisition costs, $900,000
in notes payable, and 300,000 shares of the Company's common stock valued at
$1,000,000 based on an independent valuation. The transaction has been
accounted for using the purchase method of accounting. The results of Hukk and
the estimated fair value of assets acquired and liabilities assumed are
included in the Company's financial statements from the date of acquisition. In
connection with the Hukk acquisition, the purchase price has been allocated to
the assets and liabilities assumed based on the fair values on the date of
acquisition as follows (in thousands):

<TABLE>
      <S>                                                         <C>
      Current assets............................................. $  349
      Property and equipment, net................................     65
      Intangibles and goodwill associated with acquisition.......  2,495
      Current liabilities........................................   (209)
                                                                  ------
                                                                  $2,700
                                                                  ======
</TABLE>

   Intangibles include the fair value of technology and noncompete agreements,
with the remaining excess purchase price allocated to goodwill. The Company
amortizes the intangibles on a straight-line basis over four to five years
based on expected lives of technologies, noncompete agreements, and goodwill.
If the identified technologies are not successfully developed, the Company may
not utilize the value assigned to intangible assets. Effective January 1, 2002,
the Company will implement SFAS No. 142, and accordingly, goodwill resulting
from the Hukk Acquisition will no longer be amortized. At December 31, 2001,
the Company had $1.2 million (including work-force in place) in unamortized
goodwill remaining from the Hukk Acquisition. The Company will periodically
review this asset for impairment, as required by SFAS No. 142.

Pro.Tel

   On February 22, 2000, the Company acquired all the outstanding shares of
Pro.Tel. S.r.l. ("Pro.Tel") and subsidiaries, an Italian manufacturer of
distributed network signal analysis equipment. The Company paid approximately
$4,100,000 in cash and acquisition costs, notes payable related to non-compete
agreements for $500,000, payable over four years, and 500,001 shares of the
Company's stock valued at $5,000,000.

   The transaction has been accounted for using the purchase method of
accounting. The results of Pro.Tel and the estimated fair value of assets
acquired and liabilities assumed are included in the Company's financial
statements from the date of acquisition. In connection with the Pro.Tel
acquisition, the purchase price has been allocated to the assets and
liabilities assumed based on the fair values on the date of acquisition as
follows (in thousands):

<TABLE>
      <S>                                                         <C>
      Current assets............................................. $1,068
      Property and equipment, net................................    177
      Goodwill and other intangible assets.......................  9,340
      Other long term assets.....................................     29
      Current liabilities........................................   (998)
                                                                  ------
                                                                  $9,616
                                                                  ======
</TABLE>

                                      56

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(Continued)


   The Company amortizes the intangibles on a straight-line basis over two to
five years based on expected lives of technologies, non-compete agreements,
acquired workforce, and goodwill. If the identified technologies are not
successfully developed, the Company may not utilize the value assigned to
intangible assets. Effective January 1, 2002, the Company will implement SFAS
No. 142, and accordingly, goodwill resulting from the Pro.Tel Acquisition will
no longer be amortized. At December 31, 2001, the Company had $5.6 million
(including work-force in place) in unamortized goodwill remaining from the Pro.
Tel. acquisition. The Company will periodically review this asset for
impairment, as required by SFAS No. 142.

Pro.Tel USA

   On February 4, 2000, the Company acquired all of the assets of Pro.Tel USA
for $400,000 cash and a $100,000 note repayable in May 2000. The transaction
has been accounted for using the purchase method of accounting. The results of
this acquired entity are included in the Company's financial statements from
the date of acquisition and are not material to the Company's results of
operations.

Avantron

   On January 8, 2001, the Company acquired all of the outstanding shares of
Avantron Technologies, Inc. ("Avantron"), a Canadian company that specializes
in the design and manufacture of Cable TV/modem spectrum analyzers and
performance monitoring systems. The Company paid $11.9 million in cash and
short-term notes payable.

   The acquisition was accounted for using the purchase method of accounting,
and, accordingly, goodwill and other intangible assets of $10.2 million was
recorded, to be amortized on a straight-line basis over its original estimated
useful life of two to five years. Effective January 1, 2002, the Company will
implement SFAS No. 142, and accordingly, goodwill resulting from the Avantron
acquisition will no longer be amortized. At December 31, 2001, the Company had
$8.2 million (including work-force in place) in unamortized goodwill remaining
from the Avantron acquisition. The Company will periodically review this asset
for impairment, as required by SFAS No. 142.

   In connection with the Avantron acquisition, the purchase price has been
allocated to the assets and liabilities assumed based on the fair values on the
date of acquisition as follows (in thousands):

<TABLE>
      <S>                                                         <C>
      Current assets............................................. $ 2,524
      Property and equipment, net................................     477
      Goodwill and other intangible assets.......................  10,156
      Current liabilities........................................  (1,306)
                                                                  -------
                                                                  $11,851
                                                                  =======
</TABLE>

                                      57

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(Continued)


Pro Forma Results of Operations

   The following summary prepared on an unaudited pro forma basis reflects the
condensed consolidated results of operations for the years ended December 31,
2000 and 2001, assuming Pro.Tel and Avantron had been acquired at the beginning
of the periods presented (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                              YEAR ENDED
                                                             DECEMBER 31,
                                                           ----------------
                                                            2001     2000
                                                           ------- --------
    <S>                                                    <C>     <C>
    Net sales............................................. $79,059 $119,725
    Net income............................................ $ 2,659 $ 19,063
    Basic earnings per share.............................. $  0.05 $   0.40
    Shares used in pro forma per share computation........  50,195   47,374
</TABLE>

   The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the periods presented. In
addition, they are not intended to be a projection of future results and do not
reflect the synergies that might be achieved from combined operations.

(11)  401(K) PLAN

   In 1996, the Company adopted a 401(k) Plan (the Plan). Participation in the
Plan is available to all full-time employees. Each participant may elect to
contribute up to 15% of his or her annual salary, but not to exceed the
statutory limit as prescribed by the Internal Revenue Code. The Company may
make discretionary contributions to the Plan. These contributions vest annually
over seven years. Contributions to the Plan of $1,104,000, $639,000, and
$747,000 were made by the Company in 2001, 2000, and 1999, respectively.

(12)  INCOME TAXES

   The provision for income taxes consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                2001    2000     1999
                                                -----  -------  -------
        <S>                                     <C>    <C>      <C>
        Current expense:
           Federal............................. $ 334  $13,218  $ 6,394
           State...............................     2    1,937      952
                                                -----  -------  -------
                                                  336   15,155    7,346
                                                -----  -------  -------
        Deferred expense (benefit):
           Federal.............................   783   (2,692)    (960)
           State...............................  (415)    (491)     (95)
                                                -----  -------  -------
                                                  368   (3,183)  (1,055)
                                                -----  -------  -------
                                                $ 704  $11,972  $ 6,291
                                                =====  =======  =======
</TABLE>

                                      58

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(Continued)


   Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate (34% for the year ended December 31, 2001, and 35% for
each of the years ended December 31, 2000 and 1999) to pretax income, as a
result of the following (in thousands):

<TABLE>
<CAPTION>
                                                      2001    2000     1999
                                                     ------  -------  ------
   <S>                                               <C>     <C>      <C>
   Computed "expected" tax.......................... $1,197  $11,325  $6,032
   State taxes, net of federal income tax benefit...   (272)     940     557
   Research credit..................................   (685)    (691)   (480)
   Foreign sales corporation benefit................   (112)    (288)   (109)
   Tax-exempt interest..............................   (132)    (126)     --
   Nondeductible compensation.......................    170      199      87
   Nondeductible goodwill amortization..............    145      143      44
   Nondeductible meals and entertainment............     44       38      12
                                                     ------  -------  ------
   Tax rate change..................................    184       --      --
                                                     ------  -------  ------
   Other, net.......................................    165      432     148
                                                     ------  -------  ------
                                                     $  704  $11,972  $6,291
                                                     ======  =======  ======
</TABLE>

   The types of temporary differences that give rise to significant portions of
the Company's deferred tax assets and liabilities are set out below (in
thousands):

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              ---------------
                                                               2001     2000
                                                              -------  ------
  <S>                                                         <C>      <C>
  Deferred tax assets:
     Inventory reserves and additional costs capitalized..... $   805  $  480
     Accrued compensation and vacation.......................     977   1,945
     Allowance for doubtful accounts.........................     269     408
     Other accruals and reserves.............................     978   1,292
     Net operating losses and start-up costs.................      23       3
     Tax credits.............................................     441      --
     Intangible amortization.................................   2,469   1,011
     State income taxes......................................      --     678
                                                              -------  ------
        Total gross deferred tax assets......................   5,962   5,817
                                                              -------  ------
  Deferred tax liabilities:
     Property and equipment..................................    (929)   (512)
     Unrealized exchange gains...............................     (39)    (20)
     Federal tax cost of net state deferred assets...........    (375)   (241)
                                                              -------  ------
     Total deferred tax liabilities..........................  (1,343)   (773)
                                                              -------  ------
        Net deferred tax assets.............................. $ 4,619  $5,044
                                                              =======  ======
</TABLE>

   In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Based on the level of
historical taxable income and projections for future taxable income over the
periods,

                                      59

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(Continued)

which the deferred tax assets are deductible, management believes it is more
likely than not that the Company will realize the benefits of such deferred
assets.

   As of December 31, 2001, the Company has a research and experimental credit
carryforward for California income tax purposes of $440,884 available to reduce
future income taxes. The California research credit carries forward
indefinitely until utilized.

(13)  SEGMENT INFORMATION

   SFAS No. 131, Disclosure About Segments of an Enterprise and Related
Information, establishes standards for the manner in which public companies
report information about operating segments, products, services, geographic
areas, and major customers in annual and interim financial statements. The
method of determining what information to report is based on the way that
management organizes the operating segments within the enterprise for making
operating decisions and assessing financial performance.

   The Company's chief operating decision-maker is considered to be the
Company's Chief Executive Officer ("CEO"). The CEO reviews financial
information presented on a consolidated basis accompanied by disaggregated
information about revenue by geographic region for purposes of making operating
decisions and assessing financial performance. The consolidated financial
information reviewed by the CEO is the same as the information presented in the
accompanying consolidated statements of net income. In addition, as the
Company's assets are primarily located in its corporate offices in the United
States and not allocated to any specific segment, the Company does not produce
reports for, or measure the performance of, its segments based on any
asset-based metrics. Therefore, the Company operates in a single operating
segment, which includes the design, manufacture, and sale of digital test
equipment for telecommunications, transmission, cable, and signaling
applications.

   Revenue information regarding operations in the different geographic regions
is as follows (in thousands):

<TABLE>
<CAPTION>
                                                     YEARS ENDED DECEMBER 31,
                                                     ------------------------
                                                      2001     2000    1999
                                                     ------- -------- -------
   <S>                                               <C>     <C>      <C>
   Net sales:
   North America (United States and Canada)......... $52,612 $ 88,469 $50,168
   Europe/Africa/Middle East........................  11,189   10,407   4,364
   Asia/Pacific.....................................  11,547   10,144   5,742
   Latin America....................................   3,711    4,461   1,191
                                                     ------- -------- -------
                                                     $79,059 $113,481 $61,465
                                                     ======= ======== =======
</TABLE>

   Revenue information by product category is as follows (in thousands):

<TABLE>
<CAPTION>
                                                     YEARS ENDED DECEMBER 31,
                                                     ------------------------
                                                      2001     2000    1999
                                                     ------- -------- -------
   <S>                                               <C>     <C>      <C>
   Wire Line Access................................. $48,648 $ 90,317 $59,895
   Fiber Optics.....................................  15,094   14,236     236
   Cable TV.........................................  11,213    4,273   1,334
   Signaling........................................   4,104    4,655      --
                                                     ------- -------- -------
                                                     $79,059 $113,481 $61,465
                                                     ======= ======== =======
</TABLE>

                                      60

<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(Continued)


(14)  SUBSEQUENT EVENTS

   In February 2002, the Company acquired the CaLan Cable TV test business from
Agilent Technologies for approximately $7.2 million in cash. CaLan products
incorporate DigiSweep technology, the industry's fastest, high resolution,
digital services-compatible sweep. CaLan products are designed to support a
complete range of remote and field maintenance activities, from forward and
return path alignment, to signal measurement and ingress troubleshooting.

   In February 2002, the Company loaned $1.05 million to its President and
Chief Executive Officer Paul Ker-Chin Chang. The Board of Directors and the
Compensation Committee both approved the loan. The note requires Mr. Chang to
pay interest each month at an annual percentage rate of 4.0%. Mr. Chang must
repay the principal amount no later than February 18, 2005. The loan is secured
by 3.0 million shares of the Company's common stock.

(15)  QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                      QUARTER ENDED
                                        -------------------------------------------------------------------------
                                        MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
                                          2001     2001     2001      2001     2000     2000     2000      2000
                                        -------- -------- --------- -------- -------- -------- --------- --------
                                                          (in thousands, except per share data)
<S>                                     <C>      <C>      <C>       <C>      <C>      <C>      <C>       <C>
Net sales.............................. $22,453  $21,078   $17,952  $17,576  $19,791  $27,485   $35,085  $31,120
Gross profit...........................  15,449   13,849    12,000   12,252   14,203   19,503    25,051   21,730
Income (loss) from operations..........   1,464     (262)     (343)      93    4,334    7,332    10,992    7,791
Net income.............................   1,529      425        90      773    2,773    4,575     7,325    5,712
Earnings per share:
   Basic............................... $  0.03  $  0.01   $  0.00  $  0.02  $  0.06  $  0.10   $  0.15  $  0.11
   Diluted............................. $  0.03  $  0.01   $  0.00  $  0.02  $  0.06  $  0.10   $  0.14  $  0.11
Shares used in per share computation:
   Basic...............................  49,868   50,147    50,351   50,406   45,060   45,451    49,178   49,761
   Diluted.............................  51,277   51,582    51,319   51,115   47,032   47,638    51,855   51,874
</TABLE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

   None.

                                      61

<PAGE>

                                   Part III.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   The information required by this Item with respect to our executive officers
is incorporated herein by reference from the information under Item 1 of Part I
of this Report. Reference is made to the information responsive to Items 401
and 405 of Regulation S-K contained in our definitive Proxy Statement relating
to our 2002 Annual Meeting of Shareholders which will be filed with the U.S.
Securities and Exchange Commission within 120 days after the close of the
Company's fiscal year ended December 31, 2001, pursuant to Rule 14a-6(b) under
the Securities and Exchange Act of 1934, as amended; said information is
incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

   Reference is made to the information responsive to Item 402 of Regulation
S-K contained in our definitive Proxy Statement relating to our 2002 Annual
Meeting of Shareholders which will be filed with the U.S. Securities and
Exchange Commission within 120 days after the close of our fiscal year ended
December 31, 2001, pursuant to Rule 14a-6(b) under the Securities Exchange Act
of 1934, as amended; said information is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   Reference is made to the information responsive to Item 403 of Regulation S-
K contained in our definitive Proxy Statement relating to our 2002 Annual
Meeting of Shareholders which will be filed with the U.S. Securities and
Exchange Commission within 120 days after the close of our fiscal year ended
December 31, 2001, pursuant to Rule 14a-6(b) under the Securities Exchange Act
of 1934, as amended; said information is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   Reference is made to the information responsive to Item 404 of Regulation
S-K contained in our definitive Proxy Statement relating to our 2002 Annual
Meeting of Shareholders which will be filed with the U.S. Securities and
Exchange Commission within 120 days after the close of our fiscal year ended
December 31, 2001, pursuant to Rule 14a-6(b) under the Securities Exchange Act
of 1934, as amended; said information is incorporated herein by reference.

                                      62

<PAGE>

                                   Part IV.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

  (a) The following documents are filed as part of this report:

     (1) Our Consolidated Financial Statements are included in Part II, Item 8:

            Independent Auditors' Report

            Consolidated Balance Sheets

            Consolidated Statements of Net Income

            Consolidated Statements of Shareholders' Equity and Comprehensive
         Income

            Consolidated Statements of Cash Flows

            Notes to Consolidated Financial Statements

     (2) Supplementary Consolidated Financial Statement Schedule as of and for
         the years ended December 31, 2001, 2000 and 1999:

            None.

            All other schedules are omitted because of the absence of
         conditions under which they are required or because the required
         information is included in the consolidated financial statements or
         notes thereto.

     (3) Exhibits:

            See attached Exhibit Index.

  (b) Reports on Form 8-K

      There were no reports on Form 8-K filed during the last quarter of the
   year ended December 31, 2001.

                                      63

<PAGE>

                                  Signatures

   Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of San Jose, State of California on
March 15, 2002.

                                          SUNRISE TELECOM INCORPORATED

                                          By:  /s/   PAUL KER-CHIN CHANG
                                            -----------------------------------
                                                    PAUL KER-CHIN CHANG
                                               President and Chief Executive
                                                          Officer

   Pursuant to the requirements of the Securities Act of 1934, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

        SIGNATURE                          TITLE                      DATE
        ---------                          -----                      ----

 /s/  PAUL KER-CHIN CHANG  President and Chief Executive Officer March 15, 2002
-------------------------- (Principal Executive Officer)
   PAUL KER-CHIN CHANG

  /s/  PETER L. EIDELMAN   Chief Financial Officer (Principal    March 15, 2002
-------------------------- Financial and Accounting Officer)
      PETER EIDELMAN

  /s/  PAUL A. MARSHALL    Director                              March 15, 2002
--------------------------
     PAUL A. MARSHALL

 /s/  ROBERT C. PFEIFFER   Director                              March 15, 2002
--------------------------
    ROBERT C. PFEIFFER

/s/  PATRICK PENG-KOON ANG Director                              March 15, 2002
--------------------------
  PATRICK PENG-KOON ANG

    /s/  HENRY P. HUFF     Director                              March 15, 2002
--------------------------
      HENRY P. HUFF

  /s/  JENNIFER J. WALT    Director                              March 15, 2002
--------------------------
     JENNIFER J. WALT

                                      64

<PAGE>

                                 Exhibit Index

   Set forth below is a list of exhibits that are being filed or incorporated
by reference into this Form 10-K:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                                      DESCRIPTION
------                                                      -----------
<C>     <S>
 2.1    Asset Purchase Agreement dated January 23, 2002 among between Agilent Technologies, Inc. and Sunrise Telecom
        Incorporated and Amendment #1 to Asset Purchase Agreement dated February 28, 2002.

 3.1    Amended and Restated Certificate of Incorporation (Incorporated by reference from Exhibit 3.1 to Sunrise's Report
        on Form 10-K dated March 16, 2001).

 3.2    Amended and Restated Bylaws (Incorporated by reference from Exhibit 3.2 to Sunrise's Report on Form 10-K dated
        March 16, 2001).

 4.1    Specimen Stock Certificate (Incorporated by reference from Exhibit 4.1 to Registration Statement No. 333-32070).

10.1    Lease Agreement dated June 22, 1999 between Sunrise and Great Oaks Properties (Incorporated by reference from
        Exhibit 10.1 to Registration Statement No. 333-32070).

10.1.1  Amendment to the Lease Agreement dated November 20, 2001 between Sunrise and Great Oaks Properties.

10.2    Purchase and Sale Agreement and Escrow Instructions dated November 5, 1999 between Sunrise and Enzo Drive,
        LLC (Incorporated by reference from Exhibit 10.2 to Registration Statement No. 333-32070).

10.3    Loan Agreement dated April 21, 2000 between Sunrise and Bank of America (Incorporated by reference from
        Exhibit 10.3 to Registration Statement No. 333-32070).

10.3.1  Amendment #2 to the Loan Agreement dated August 1, 2001 between Sunrise and Bank of America (Incorporated
        by reference from Exhibit 10.3.1 to Sunrise's Report on Form 10-Q dated August 10, 2001).

10.3.2  Amendment #3 to the Loan Agreement dated November 30, 2001 between Sunrise and Bank of America.

10.4    Stock Purchase Agreement dated July 30, 1999 between Sunrise, Hukk Engineering, Inc., Clifford D. Brown,
        Robert L. Richards and James A. Barker (Incorporated by reference from Exhibit 10.4 to Registration Statement
        No. 333-32070).

10.5    Master Agreement dated February 22, 2000 between Sunrise and Franco Messori, Franco Corradini, Angelo
        Baccarani and Lucia Barbara Silvani and Master Agreement dated February 22, 2000 between Sunrise and Giuliano
        Sala, Gian Piero Brandolini, Pietro Zucchini, Aldo Baccarani and Franco Montanari (Incorporated by reference from
        Exhibit 10.5 to Registration Statement No. 333-32070).

10.6    Share Purchase Agreement dated January 8, 2001 among each of the shareholders of Avantron Technologies Inc.
        and Sunrise Telecom Avantron Division Corp., a Nova Scotia unlimited liability company and wholly-owned
        subsidiary of Sunrise (Incorporated by reference from Exhibit 2.1 to Sunrise's Report on Form 8-K dated February 1,
        2001).

10.7    Form of Indemnification Agreement between Sunrise and each of its Officers and Directors (Incorporated by
        reference from Exhibit 10.6 to Registration Statement No. 333-32070).+

10.8    2000 Stock Option Plan (Incorporated by reference from Exhibit 10.7 to Registration Statement No. 333-32070).+

10.9    2000 Employee Stock Purchase Plan (Incorporated by reference from Exhibit 10.8 to Registration Statement
        No. 333-32070).+

10.10   2002 Executive Officer Bonus Plan.*+

10.11   Employee Agreement dated January 8, 2001 between Avantron Technologies, Inc. and Raffaele Gerbasi and
        Amendment #1 dated March 12, 2002.+

21.1    List of Subsidiaries.

23.1    Consent of KPMG LLP.
</TABLE>
--------
*  Material has been omitted pursuant to a request for confidential treatment.
+  Indicates management contract or compensatory plan, contract or arrangement.